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The impact of ethical sourcing on supply chains

What are the ethical issues with some of our supply chains?

It is easy to live our busy lives and take for granted all the products at our disposal every day without ever considering where they come from, how they were made and under what conditions. So, let’s look at a few examples that should be close to home for all of us.

There are not many people who do not have a smart phone these days. These marvels of modern technology can be used check the news, the weather, watch a film, have a video conversation and sometimes even to make an old-fashioned phone call. Many people would have no idea where their beautiful new smart phone comes from but of course someone somewhere has put this advanced piece of technology together. It was most likely someone who works for Foxconn, one of the largest contract manufacturers of electronic devices as well as one of the largest employers in the world with plants in many countries. They make well-known smart phones brands such as Apple, Huawei and Blackberry. What many people may not be aware of is that in between 2010 and 2012 the company was embroiled in controversy around poor working conditions, low pay, excessive overtime and even use of child labour at one of its factories in China. Allegedly some of this even resulted in employees tragically taking their own lives. Alarmed by the negative publicity and prompted by its high profile customers, Foxconn took steps to improve conditions, reduce overtime and address other concerns at the plants.

Of course no smart phone can do without good battery life and an important mineral used in the lithium-ion batteries is cobalt. Electric vehicles such as Tesla also rely on cobalt. Some of the biggest reserves of this mineral can be found in the Democratic Republic of Congo (DRC) and much of the cobalt is mined in so-called artisanal mines. There has been much concern raised by NGOs about artisanal mining of cobalt in the DRC, due to child labour, dangerous mining practices and environmental damage. There are other sources of cobalt such as Australia, but that is more expensive due to the much safer and better working conditions. At the same time, artisanal mining can be a much needed source of income for many poor families in Africa so it is not a straightforward issue to resolve.

These are just two examples that illustrate the many ethical pitfalls that a company can face in their supply chain. The potential damage to brands from consumers learning more about the true source of the products they buy can be huge and many companies big and small have started to take a greater interest in where their products, components or ingredients come from and the conditions under which they are produced.

What are companies doing about it?

Increasingly, companies are setting up processes to better assess the supply chains which they use to source their products and to make changes where necessary to eliminate poor and unsafe working conditions, environmental impact and even the use of slave labour which is a much bigger issue than most people realise.

International Justice Mission (IJM) estimates that there are 40 million people worldwide who have been enslaved in some way to provide cheap labour. Walmart, one of the largest retail companies in the world, has been assisting IJM with financial grants to address the issue of slavery. IJM is the largest international anti-slavery organization working in 19 program offices in 11 countries across the developing world to combat slavery, trafficking, and other forms of violence against the poor.

Many other companies are working to improve their supply chains as well. Kmart and Target Australia for instance, both part of the Wesfarmers Group, have established a combined Department Stores Ethical Sourcing Program. The program is supported by an Ethical Sourcing Code (ESC), which includes minimum requirements and expectations that all suppliers must meet such as respecting the core labour standards established by the International Labour Organization (ILO), protecting and respecting human rights as set out in the United Nations Universal Declaration of Human Rights and promoting environmental sustainability.

Global fashion retailers and on-line businesses such as Tesco, Next and ASOS, as well as Australian companies such as Cotton-On Group, Target and Kmart have joined ACT which is an agreement between global brands and retailers and trade unions to transform garment, textile and footwear industry and achieve living wages for workers through collective bargaining at industry level linked to purchasing practices.

The global nature of modern supply chains can make it difficult to know what is really going on, so data sharing between companies can make a real difference. Sedex is one of the world’s largest collaborative platforms for sharing responsible sourcing data on supply chains, used by more than 50,000 members in over 150 countries. Its members include Coles and Woolworths in Australia as well as many fast-moving consumer goods companies such as Kelloggs, Colgate-Palmolive and Coca-Cola.

The challenge for companies is of course to ensure that all these processes actually result in the elimination of unethical practices in their supply chain rather than just lots of paperwork and ticks in boxes.

What is the cost of doing the right thing?

When companies start addressing some of the ethical problems in their supply chains, substantial changes invariably need to be made to achieve an acceptable outcome. In some cases this will mean that providing better working conditions or paying fairer wages will simply increase the purchase price of products, components or ingredients. In other cases the situation can only be improved by changing the source of supply completely, to a different location with a very different and often more expensive cost structure. These increased costs cannot always be passed onto the consumer.

According to Steve Polski, senior director of responsible supply chains and sustainability at Cargill, consumers consistently say they want more sustainable products and services but are often unwilling to pay a premium. Polski has spent years researching this topic, and he has found that consumers care about a company’s sustainability and ethical sourcing efforts and may reward it with brand loyalty, but they generally don’t want to pay more for the products. So, while consumers are generally supportive of companies doing the right thing, they will still expect value for money and may vote with their wallet if the product is too expensive.

What can be done to off-set the increased cost of ethical sourcing?

Providing workers worldwide with a living wage, the freedom to leave and the freedom to be organised, safe working conditions and taking care of the environment all come at a cost and much of this cost cannot be passed onto the consumer without a loss of sales. This means that there is pressure to ensure that a more ethical supply chain is also a more efficient supply chain. In order to neutralise some of the cost increases from ethical sourcing, an intelligent and holistic approach to the end-to-end supply chain is required. Supply chains often develop over longer periods of time requiring periodic reviews to ensure that they remain effective and efficient. Major changes to sourcing locations or production costs are compelling reasons to take a fresh look at a supply chain.

Over the last 5 years alone, XAct Solutions have performed over 60 network strategy reviews in Australia, New Zealand and the Asia-Pacific region, delivering warehousing and distribution savings as high as 30% to clients in retail, wholesale, apparel, industrial, agribusiness, food, beverage and other fast-moving consumer goods. XAct Solutions employ a proven methodology using proprietary data driven tools and the most extensive benchmarking database in the industry to design a network strategy that is tailor-made for a specific business. After developing the supply chain strategy, XAct Solutions can design and procure distribution centres and overseas consolidation hubs, negotiate international and domestic freight and logistics contracts and manage large supply chain transformation programs on behalf of its clients.

Much can be done to make supply chains more efficient and this can go a long way to offsetting the increased costs of ethical sourcing. Ideally there should be nothing stopping you from doing the right thing and XAct Solutions is ready to be your supply chain consulting partner in this endeavour.

Please check out our website for more information. https://www.xactsolutions.com/

Eric Willemse
Director at XAct Solutions

Eric Willemse is responsible for the Sydney office and also for company-wide resource planning and the warehouse solutions function. He is a logistics executive with extensive experience in all areas of the end-to-end supply chain from strategy development through transportation management, national distribution centre management, industrial relations, change project management, business development and turn-around with a strong commercial focus. He has over 20 years experience in a variety of senior management roles in both Europe and Australia for P&O, Unilever, Woolworths and CocaCola Amatil. In Woolworths he ran all of transport and distribution for the Supermarkets Division and was also responsible for developing Woolworths’ successful Primary Freight business. Within XAct Solutions Eric has overseen projects for clients in retail, fast moving consumer goods, building materials and airports both in Australia and the region.

Eric has a Masters’ Degree in Transport & Logistics Management from the University of Tilburg in The Netherlands.

Eric is passionate about identifying the big issues in your business that need to be addressed for long-term success and implementing change quickly. Eric develops a structured and focused approach in executing the major change required in strategy, operating models, organizational structure, target setting and reward systems, building strong teams with a cross-functional focus.