The Cost Of Social Noncompliance
When Factory Working Conditions Suffer, We All Pay The Price
A strawberry grower recently was fined $2.4 million and ordered to repay kickbacks and rent he demanded from Mexican workers he had hired. Where could this have possibly happened? Location: Watsonville, California.
Working conditions are at the core of paid work and employment relationships. Generally speaking, working conditions cover a broad range of topics and issues, from working time (hours of work, rest periods and work schedules) to remuneration, as well as the physical conditions and mental demands that exist in the workplace.
For more than a century, the Democratic Republic of the Congo has been plagued by regional conflict and a deadly scramble for its vast natural resources. In fact, greed for the Congo’s natural resources has been a principal driver of atrocities and conflict throughout the Congo’s tortured history.
The four most commonly mined conflict minerals (known as 3TGs, from their initials) are cassiterite (for tin), wolframite (for tungsten), coltan (for tantalum) and gold ore, which are extracted from Eastern Congo, and passed through a variety of intermediaries before being purchased by multinational companies for products including electronics, like cellphones, or as solder for use in buttons, zippers and other fasteners or as composite material in shoelace grommets.
A couple years ago, an apparel factory in Bangladesh supplying to a major U.S. retailer had a catastrophic fire that killed more than 100 people. The cause of the fire was attributed to poor working conditions. Unfortunately, stories such as these are not uncommon.
People respond predictably to positive and negative incentives. Acting as consumers, producers, workers and investors, people respond to incentives in order to allocate their scarce resources in ways that provide the highest possible returns to them.
When we as distributors or suppliers are presented with a project with limited spending capacity by the client, we try to find ways to drive the price down so we can win projects and maintain decent profitability. The issue becomes that when price is the factor that drives a sale, we forget that it trickles down to all aspects of the supply chain. Every company within a supply chain has different goals and faces different rules and constraints. These goals, rules and constraints influence the benefits and costs of those who work with or for those companies and, therefore, affects their behavior. Because of this, when price is a large factor, factories look at their investments and allocate their scarce resources in ways that provide the best return on investment. Unfortunately, in cases such as this, companies don’t make investments to benefit their workers or to improve the conditions the workers have to endure to produce these price- driven products.
In the promotional industry in particular, price is a huge factor that drives how suppliers behave when they source products. The larger suppliers have greater buying power so they may be able to make up in volume in order to drive down price, but the smaller companies, unfortunately, are often not in the same position. They cannot drive price reductions because their factories are unable to invest in all aspects of supply chain, especially working conditions.
The danger here is that you move to factories that are able to meet price by compromising working conditions. The International Labour Organization estimates that 20.9 million people are victims of forced labor globally and their labor is estimated to generate $150 billion in profits per year. Larger corporations are more likely to have factory audit policies in place to monitor and minimize their brands being caught up in any social compliance issues. Even then, transparency down the supply chain remains a big challenge especially when it comes to raw materials suppliers and other subcontractors that work with primary factories.
Actions You Can Take
When you are bidding on a project, the first question you should ask yourself or the supplier is this: Is the factory capable of manufacturing my product at the capacity at a given schedule? Understand how and where the product is being manufactured and whether or not that work is being subcontracted. If so, are those subcontractors compliant and what is their relationship with your initial supplier? Understand how and where the products are being manufactured, whether the work is being subcontracted and, if so, whether those factories are compliant and how that relationship works.
Even the most progressive of approaches to auditing will not suffice if auditing is all you do—social compliance is a two-way street. Building partnerships and ensuring continuous improvements, ongoing training and educating factories about your company’s specific tolerances to working conditions at factory levels are all investments that need to be made. The message has to be consistent throughout the process and there should be no disconnect between sourcing and compliance. What can you do when sourcing to ensure social compliance? Supplier vetting is by far one of the most important tools in supplier management. Knowing a supplier’s sourcing criteria is something every distributor should take the time to understand. Following are eight key questions to ask:
- How long has the factory been in business?
- When was the supplier’s last order with this factory?
- Does the factory have any social compliance accreditation such as SMETA 4 pillar, BSCI, SA8000 SEDEX, etc.?
- Does your supplier visit the factory prior to making a decision to work with them?
- Does the supplier perform a capability audit to verify if the factory can handle production, or does it subcontract out to other parties that may operate under questionable working conditions?
- Does the supplier use a third-party accredited agency or have an internal auditor who verifies information pertaining to working conditions at the factory?
- Does the supplier belong to a third-party organization that validates their sourcing practices and processes?
- Are audits the only tool that the supplier uses to verify factory conditions?
Social compliance is always evolving so continuously engage your suppliers in open dialogue about their practices in regards to onboarding factories. The responsibility is not only on suppliers but on every party benefiting financially throughout the supply chain.
Shamini Peter is director of product safety and compliance for New York, New York-based distributor Axis Promotions. She serves on the PPAI Product Responsibility Action Group and was named a PPB Rising Star in 2013.
Best Practices And Case Studies
PPAI provides a number of resources to help member companies maintain transparency in supply chain management. These are available at www.ppai.org under the Inside PPAI tab. Click on Social Responsibility and see the link on the right.
Distributor Best Practices
Social Responsibility Policy for Distributors
Supplier Best Practices
Social Responsibility Policy for Suppliers
Industry Best Practices for Both Distributors and Suppliers