Perspectives in Responsible Sourcing

Going Narrow and Deep – Trends in Root Cause Analysis

      When I discuss supply chain labor standards, I like to talk about two ways of assessing the supply chain: (1) shallow and wide analysis, and (2) narrow and deep analysis.  When companies begin looking at their supply chain for the first time, it is important to do the former, to assess the largest possible sample of the global supply chain in order to understand the range of issues and challenges that exist around the world.  This is normally done via the traditional one-day audit model used to assess a snapshot of labor conditions across a large number of suppliers. Once that is done and a company has begun to engage suppliers to drive improvement in labor standards, it may be appropriate to supplement the wide and shallow analysis with more focused, deeper assessments that center in regions with the biggest challenges and focus on the root causes of non-compliance. This often takes the form of 2-5 day engagements with suppliers, coupled with consistent follow-up throughout the year.

      I've been reviewing some recent social responsibility reports and new information on leading corporate websites and would like to share what some industry leaders are doing to "go deep." Here are a few interesting cases:

      H&M began doing social audits in 1998. In 2004, they decided to "move to the next level and begin to address the more complex issues and - equally important - to ensure that the improvements are sustained..." To do this, H&M developed what they call the Full Audit Programme. This FAP consists of in-depth audits, rather than 1-day audits. The FAP audit takes 2-7 working days and serves as the departure point for improvement efforts with a supplier. Follow-up visits are used to check on progress with suppliers. It may be up to 2 years before another FAP audit is done, as the improvements are carried out over a timeline developed with the supplier. H&M believes that by conducting fewer but more comprehensive audits, the suppliers have more time to concentrate on making improvements. Having done over 12,000 audits in the past, H&M now uses the FAP to work with specific suppliers identified through a prioritization process considering (a) country of production, (b) number of factory employees, (c) commercial significance of supplier to H&M.

      Levi has supplemented a strong supplier audit program with participation in multi-stakeholder groups such as the Fair Labor Association (FLA) and the ETI. Their approach includes work at the (a) factory level, (b) community level, (c) and government level. Similar to H&M's FAP program, Levi has developed a "Supplier Ownership Program" intended to help suppliers take ownership of the policies and practices they have agreed to uphold in the code of conduct. To do this, Levi has taken a number of steps to establish "supplier ownership" as the next-generation program for their code of conduct, including a two-day training program to introduce management systems to factory managers and development of an assessment tool to help factories identify where they need to improve their code of conduct management systems.

      Marks & Spencer's 2005 CSR Report states that in 2005, they introduced "a new way of reviewing potential problems at our suppliers so that our assessments can be concentrated where they are most needed." While they are not as specific in their report about their approach, they do act an example of companies that are including "focused assessments" or "targeted interactions" with their suppliers in addition to regular social audits in order to enhance social compliance efforts and drive more sustained improvement.

Wal-mart Releases 2005 Ethical Sourcing Report

I was interested to see last week that Wal-mart quietly released their 2005 Ethical Sourcing Report. There has not been a wide amount of news coverage thus far, but if you’re interested you can check out an AP story that has made it to a few sites: http://www.forbes.com/business/services/feeds/ap/2006/09/27/ap3050431.html

I don’t intend to duplicate any of the information or discussion presented in this article and to ensure full disclosure, I will first mention that CSCC is named on page 11 as an audit firm used by Wal-mart in 2005. What I would like to discuss here are some of the unique points in the Wal-mart report that drew my interest.

First point of interest: Wal-mart is increasing the amount of unannounced audits in their program. According to the report, while recognizing that announced audits ensure suppliers are prepared, including having all required documents to demonstrate compliance, Wal-mart also recognizes the value of unannounced visits, which ensure a more realistic view of workplace practices. While they will continue to use announced audits for first-time visits, Wal-mart is shifting to unannounced audits for many follow-up visits, or re-audits. As someone who has conducted over 1,000 social compliance audits, I think that mixing announced and unannounced audits is a good practice. It’s important not to compromise the integrity of the audit, and at the same time, it’s necessary to ensure the right people are present and you get access to the necessary documents and mixing both practices helps provide a balance. Another good practice is to use a two week "window" to announce the first audit, where the supplier gets a two week time frame for the visit but not a specific date or time.

Second, I was interested to see that Wal-mart has increased the grading penalty for intentional deception by means of faked books or falsified record keeping. I think it is important to send a message to suppliers that intentional deception is not tolerated, so I’m glad to see Wal-mart setting a higher penalty for this practice.

Finally, it was interesting to read about their follow-up with workers after the audit is over. Two efforts Wal-mart has reported in this regard are (1) their Global Ethics Hotline, with 38 local numbers and local language support, and (2) a special follow-up program for pregnant workers and maternity benefits. The former is important, in my opinion, because it allows workers to contact Wal-mart after the auditor has left to report any potential repercussions or issues that have arisen after the auditor’s visit. The latter practice involves verifying the receipt of maternity benefits. At the first supplier visit, the auditor obtains a list of all pregnant workers with their expected dates of delivery. At the subsequent audit visit, the auditor then verifies that these specific women are still employed and receiving their benefits as required by law. It is a good practice to verify women are receiving these benefits and the fact that Wal-mart has formalized this specific practice in their program will hopefully ensure improved access to maternity benefits for many women in their supply chain.

To view the entire report, access the following link:
http://walmartstores.com/GlobalWMStoresWeb/navigate.do?catg=336

Africa: Challenges and Opportunities

I recently returned from a lengthy trip to Africa. Kenya was one stop on my itinerary, a country that has reaped benefits from the African Growth and Opportunity Act (AGOA). I met with some garment workers in Nairobi and asked them what they like about their jobs and also what challenges or difficulties they face. It was interesting to hear their responses: "I am proud to have a job and take care of my family." "I enjoy learning new skills." "I’m glad to work and earn a salary." Of course, with gross monthly wages around $100 USD, nearly all workers volunteered their desire to have a higher salary. At least these particular workers are affiliated with a local union that in January negotiated a pay increase on their behalf; local minimum wage rates for different garment jobs range from just 35-75 USD per month.

These workers in Kenya seem relatively fortunate. Arguably, Kenya hasn’t been as hard hit as other countries in the region following the end of quota in 2005. Even while AGOA is still an incentive for some foreign investors, many countries have seen exports drop as Africa struggles to compete with China, leaving many workers unemployed.

In Zimbabwe, workers have been coping with hyperinflation and ongoing fuel shortages that have driven up the cost of public transportation, leaving many workers no option but to walk 14 miles each day to get to work and back. The transportation subsidy negotiated by the nationwide industry union was so quickly outpaced by inflation that it was decided it should be raised two more times during the last 4 months of the year, which even then will cover just 60% of the estimated transport cost to workers.

Other countries have more challenges to overcome. Cote d’Ivoire is still hindered by the 2002 civil war, with the resulting internal instability creating challenges for export industries. When I visited Abidjan, I found factories operating at 25% of capacity. One place I visited was working primarily for the United Nations Development Program, producing t-shirts as part of an arms exchange program. I watched as t-shirts of all sizes passed on the drying belt, large, medium, small, and very, very small – small enough to fit the child soldiers known to have been conscripted to fight with the rebels.

With challenges like these, what does the future hold for sub-Saharan Africa? Is there good news for Africa? I think so, yes. Commitment to source from Africa seems to be on the rise, from companies like those affiliated with the MFA Forum, who see sourcing as an opportunity to act as responsible global citizens as much as getting good products at good prices. With sourcing commitments from major brands, Lesotho, one of those harder hit after 2005, is now seeking to develop a competitive advantage related to ethical workplace practices. The government is working with brands to advance HIV/AIDS programs and supervisor training to combat issues of abuse, historically problematic in southern Africa. Now the MFA Forum is looking to expand their projects to other African countries, as are USAID and the IFC.

A little responsible sourcing may just make a big difference for Africa. For more on this topic, see my article on responsible sourcing in Ethical Corp magazine. http://www.ethicalcorp.com/content.asp?ContentID=4499

What is Going On In Bangladesh?

Riots, riots, and more riots. What progress has been made in Bangladesh since the initial outburst of worker protests in May, which culminated in hundreds of factory closures, building and equipment damage in the millions of dollars, rampant physical injury to hundreds of protesters, and even a few reported deaths?

Following the riots, a wage board was formed with a mandate to implement the first wage hike for workers in over 12 years. With the 90-day deadline for the wage hike fast approaching, the latest news from Dhaka is that factory owners have not reached a consensus on the proposed minimum wage increase.

This week, several thousand workers have again taken to the streets to protest poor working conditions and low wage rates. Among the specifics, workers are incensed that wages have not yet increased, overtime work is not compensated, they are harassed when seeking leave time, and toilets are not separated for men and women.

What is going on in Bangladesh? It’s a tough business, especially in the apparel industry where margins are often tight. On top of that, the Bangladesh industry sector was slated for complete demise following the end of quota and the freeing of the China export tiger. Yet some buyers and retailers decided to stay in Bangladesh in order to prevent the whole-scale collapse of one of the cornerstones of the Bangladesh economy. Yet every few months there is another news report about factory fires, panicked and stampeding workers, and collapsing buildings. In addition, there are recurring riots that delay production, potentially damaging goods and scaring buyers away. The lack of follow-through on international commitments to allow freedom of association in Export Processing Zones underscores the confusion of how to balance business interests and worker rights. This inaction even earned the government a public scolding from the International Labor Organization. What is Bangladesh waiting for before they decide to commit to whole-scale change?

In the meantime, neighboring Cambodia has become the poster-child of social compliance as a competitive advantage, touting the ILO Better Factories Cambodia program. Sri Lanka proved years ago it was willing to push laws through Parliament to ensure working conditions coincided with buyer compliance programs. Yet the Bangladesh wage board is sending workers to riot in the streets because they are not prepared to increase wages from TK900 (13 USD / 11 EUR), set about 12 years ago, to TK1800, which is the compromise position put forward by the wage board.

Granted, it does seem daunting to increase wages by 100%. Yet Bangladesh literally has some of the lowest basic wage rates in the entire world. The hourly wage for many of these workers translates to $00.04 - $00.06 USD per hour (this does reach up to $00.09 - $00.11 USD per hour for more senior or technical workers). The only wages lower than these belong to Kyrgyzstan and Laos, coming in at $00.01 and $00.02 USD per hour, respectively.

The reality is, after 12 years without wage increases in one of the most impoverished countries on the planet, Bangladesh is overdue for a wage increase. Employers should bite the bullet and work on meeting worker needs, both in compensation and in humane and safe working conditions. While they’re at it, they should glance around at their neighborhood competition and realize that providing good working conditions is the name of the game in today’s market. A little Better Factories Bangladesh program might be just what the doctor ordered to remedy the labor ills in this country.