Auditing Working Conditions in the Supply Chain

Stephen DeAngelis

September 4, 2012

Mindy S. Lubber, president of Ceres and director of Ceres’ Investor Network on Climate Risk (INCR), writes, “A supply chain is only as strong as its weakest link.” [“U.S. Companies Must Raise The Bar On Supply Chain Conditions,” Forbes, 17 May 2012] While that may not be a profound statement, Lubber believes that some companies don’t recognize that poor working conditions in supplier factories or natural disaster risks to those factories represent some very weak links. She continues:

“In the modern economy, supply chains stretch across the globe, creating both efficiencies and risks. Severe weather spurred by climate change, human rights abuses, worker health and safety, or environmental degradation – any of these can trigger disruption and financial losses for corporations and their investors.”

The staff at PCB Design 007 agrees with Lubber. They report that “companies that experience supply-chain disruptions show a 40% decline in shareholder value compared to their non-disrupted competitors.” [“Supply Chain Intelligence: The ‘Last Mile’,” 6 August 2012] The article continues:

“And regulations are getting more stringent: California now has a law requiring companies to report on their Tier 1 and 2 suppliers regarding slavery and human trafficking. The Dodd-Frank Act requires assurance that conflict minerals have not been used. The current system relies on self-reporting or various types of inspections, neither of which is satisfactorily reliable or accurate.”

Maggie Slowik agrees that current system is not necessarily reliable or accurate. She writes, “I typically take the stance that inspections and audit, no matter how they are conducted, are only providing a snapshot of a supplier’s operations. And how truthful this snapshot is, is an entirely new question. Let’s not forget the role that bribery could play in changing the outcome of an audit report.” [“Does third-party auditing have a role to play in improving working conditions in low-cost countries?” Procurement Leaders Blog, 5 April 2012] Lubber also agrees that the current system of auditing conditions and monitoring risks requires improvement. She states, “In this environment, companies must shift from mere ‘supply chain management’ to corporate supply chain improvements. But the data show there is still a long way to go.” To support her assertion, Lubber discusses the findings of a Ceres and Sustainalytics report entitled Road to 2020. For that report, 600 major U.S. companies were analyzed. Lubber continues:

“While 43 percent of the firms surveyed have supplier codes of conduct, only 25 percent perform even minimal monitoring to determine if suppliers are abiding by those codes, and only 10 percent have codes that reference International Labor Organization conventions. In the 21st century global economy, we can – and should – do better.”

A company call LaborVoices believes it has a better way — crowdsourcing. The staff at PCB Design 007 explains:

“LaborVoices offers a new type of supply-chain intelligence. Rather than relying on experts such as factory managers or 3rd-party inspectors, it utilizes the crowd-sourced intelligence of many factory workers. Laborers can submit direct, real-time information about the working conditions and practices over their cell phone, supplying the critical ‘last mile’ of data that has so far gone untapped.”

Normally, the “last mile” in the supply chain refers to getting a product or service to the ultimate customer. Connecting the factory worker to the supply chain is a bit of twist on that notion. The article continues:

“Although LaborVoices’ reports can serve as social and environmental tools, they offer far more because they can also address real operational issues. For example, suppose it is revealed that workers are not being paid on time at a certain factory. This could indicate a cash flow issue that supply-chain executives would want to know about. It is even possible that the factory manager was not aware of the payment delays and is hence alerted to some internal problems.”

The LaborVoices website claims that its products “solve two big problems facing global workers and corporate brands, with a single, elegant solution.” The company states:

“Corporate brands need visibility into their global supply chains. They need to manage their risks, with data on the labor, environmental and operational conditions among their suppliers. We provide corporate brands with a real-time supply chain monitoring tool enabling them to drive success among their suppliers—better working conditions producing higher quality products. We do this by gathering intelligence directly from supply chain workers. Global workers can’t fact-check prospective recruiters or employers. This leaves them vulnerable to abuses like wage-theft and human trafficking. We support transparent labor networks with accountability for recruiters and employers. We do this by sharing information among workers, helping them help each other find the best work available. We guide workers to best-in-class employers. We guide brands to best-in-class suppliers. We’re revolutionizing accountability and transparency in supply chains and labor markets.”

If not revolutionary, LaborVoice’s approach is certainly novel. The staff at PCB Design 007 explains how it works:

“A company (such as an electronics or apparel vendor) presents LaborVoices (LV) with its thorniest issue, such as a particular factory or region that is of concern. Within about a month, LV ramps up its technology and creates a social infrastructure of partners in the region (NGOs, trade unions, etc.). Then LV starts collecting data from workers and, with the customer, co-creating a useful intelligence flow in the form of a dashboard. Data arrives in real time, is analyzed by LV, and presented to the customer in a report. This creates benefits for all parties:

  • Supply-chain executives get high-quality intelligence on existing supply chains.
  • Suppliers (local employers) get unprecedented visibility into their own operations and human resources, gaining an edge over competitors who are cutting corners.
  • Workers gain a channel to raise concerns in a safe, anonymous way.”

I have noted in some past posts that there is a beneficial social dimension to big data analytics that is not often appreciated by those who view such efforts as intrusive and harmful. Analyzing big data to ensure that working conditions meet minimum international standards is a great example of how big data can be used to improve quality of life. The PCB Design 007 article reports that “pilot operations have been set up in South India, proving the effectiveness of the technology.” According to the article LaborVoices is focusing on the “electronics, apparel, and toy industries.” Dr. Kohl Gill, founder and CEO of LaborVoices, told the PCB Design 007 staff, “We want to set ourselves up as the gold standard in intelligence. We are primarily concerned with supplying accurate and useful data about what is actually happening in factories.” The staff concluded:

“It is clear that this detailed level of data-gathering offers something radically new for the electronics supply chain. One can’t help but wonder whether it might have averted some difficult and tragic supply chain disruptions, such as those emerging from problems at Foxconn.”

My only concern is the fact that social media can be manipulated. For example, an unfounded rumor could be spread by an unhappy employee that stirs a bunch of social chatter that later proves to be untrue. It was unclear from the article how LV is going with that kind of false intelligence. Lubber notes that other companies are also focusing on how to ensure that corporate standards and codes of conduct are being followed. She writes:

“Levi Strauss & Co. was one of the first companies to adopt a supplier code of conduct more than 20 years ago. Last month, after a Ceres-led dialogue with labor and human rights groups, NGOs, suppliers and other companies, Levi Strauss released a new blueprint for supply chain engagement that promises deeper efforts to improve the lives and well-being of its supply chain workers, and challenges and inspires other companies to do the same. The blueprint, Improving Worker’s Well-Being: A New Approach to Supply Chain Engagement, signals a shift away from a one-dimensional, compliance-driven model in which companies periodically police supplier factories to see if they are complying with minimal standards. Instead, this new effort involves workers, suppliers and companies as active partners in efforts to improve child and maternal health, promote gender equality and empower women, combat disease, strengthen local communities and protect the environment wherever they do business. It’s a profoundly ambitious goal, and its large-scale success requires the commitment of a large cohort of major companies, NGOs, suppliers, workers and local governments. For Levi Strauss, that road to success begins with listening to workers to identify their needs and aspirations at five pilot locations, in Bangladesh, Cambodia, Egypt, Haiti and Pakistan.”

The obvious similarity between LaborVoice’s approach and that of Levi Strauss is that both involve listening to workers. The thing I like about the Levi Strauss approach is that it goes beyond just listening to the workers to involve an array of stakeholders. Lubber concludes:

“In today’s highly integrated global economy, no company can afford a ‘hear-no-evil, see-no-evil’ approach to problems in its supply chain. Levi Strauss should be applauded for its approaching corporate sustainability with its eyes wide open. Other firms now must join them at the vanguard.”

Good supply chain risk management processes rely on constant monitoring of conditions from an array of sources. The reason is simple. Supply chain disruptions can be caused by any number of events. One of these events, of course, could be a labor dispute. By ensuring that factory conditions are meeting accepted standards and codes of conduct, companies are in a much less vulnerable position.