Forgot your password?
Please enter your email & we will send your password to you:
My Account:
Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Guillermo C. Jimenez
In the traditional export framework, exporters produced goods and sold them to foreign importers. However, in recent decades the rise of large multinational corporations has substantially changed this dynamic. In particular, large manufacturers discovered that they could profitably outsource manufacturing to independent factories around the world.
No longer a matter of merely exporting a finished product from one country to another, it is now commonplace to assemble goods in one country from components which have been sourced from numerous other countries; the finished products are then re-exported throughout the world.
The complexity of managing an international network of independent factories spurred the development of global supply-chain management. The specific practice of managing the supplier base by searching worldwide for new suppliers and controlling the quality is referred to as “global sourcing”. Ensuring conformity of the foreign-produced goods with environmental and human rights standards is a sub-discipline which is referred to as compliance.
Today, all major consumer-goods companies must manage complex, international supply chains. Product manufacturing is routinely outsourced to independent foreign factories, which in turn import their raw materials and components from numerous other countries. The final product is shipped and sold throughout the world.
Every manufacturing company has therefore had to develop expertise in “global sourcing”, which comprises logistics and supply-chain management, shipping, environmental and human rights compliance, and customs.
Let us distinguish global sourcing from the traditional import model, which may be referred to as international purchasing. International purchasing merely implies a commercial buyer and seller located in different countries. Global sourcing is more complex, involving the selection and coordination of materials, components, vendors and suppliers across a global platform.
The move from purchasing to sourcing is related to a firm’s size and international sophistication. Small and beginning importers may begin with an international purchasing approach; often, the motivation is simply that they lack a competively-priced domestic supplier for a particular product. Early international purchases are thus often pursued on an ad hoc basis. However, as large corporations grow internationally the scale of their buying operations reaches a threshold that requires them to coordinate their sourcing strategies across global buying and manufacturing locations.[Page196:]
Today, it has become standard for large international manufacturers, known as “OEMs” (for “Original Equipment Manufacturers”), to outsource the manufacturing of their products or components to independent factories, known as OEM suppliers or vendors.
The decision to outsource manufacturing is known as the “make versus buy” decision. While outsourcing is primarily driven by cost-reduction concerns, there are also important strategic considerations. A well-known example of a questionable outsourcing decision was IBM’s decision in the 1970s to outsource two major components of its desktop computers. The computer processor was outsourced to Intel and the operating system to Microsoft. The long-term result was that Intel and Microsoft flourished while also offering their products to IBM’s competitors, who began to out-compete IBM in the personal computer sector. By 2005 IBM was forced to sell off its languishing personal computer division. Apple, in a contrasting strategy, retained control over the development of its hardware and software — even while using outside suppliers.
A commonly used strategic metric for determining whether it is advisable to outsource is “total cost of ownership” (TCO). TCO is a more complete way of analysing potential suppliers (as compared to the traditional method of choosing the supplier who quotes the lowest factory price). A number of factors considered in TCO allow firms to arrive at more precise calculation of whether sourcing from a particular supplier is profitable in the long term:
As global sourcing became common in the 1990s a number of problems arose. Many firms underestimated the risks of sourcing and found that the expected cost savings were reduced or eliminated by quality control problems and supply chain inefficiencies. Hitachi’s U.S. division found in 2005 that up to 20% of its component imports were delayed in customs, creating a risk of breaching delivery commitments to customers.
An even greater concern arose when NGOs began to protest leading branded OEMs, accusing them of complicity with sweatshop conditions and environmental degradation. A “sweatshop” has been defined as a manufacturing facility which is guilty of two or more labour and human rights violations (such as: use of child labour, forced labour, mandatory overtime, unsafe working conditions, discrimination in hiring, sexual harassment, and/or failure to pay the minimum wage). Allegations of sourcing from sweatshop factories can be very damaging to a company’s brand and reputation. Thus, in 2010 worldwide attention focused on an enormous Foxconn Technologies factory (a major Apple supplier) in China, from which 18 workers had attempted suicide in one year. The resulting public relations backlash led to Taiwan-based Foxconn’s decisions to raise worker salaries.
Subsequently, Apple faced similar scrutiny on the environmental front. In 2011 a consortium of five Chinese environmental NGOs criticized Apple for using Chinese suppliers who were known polluters. After facing a barrage of headlines such as “Apple Attacked over Pollution in China,” Apple entered into talks with the NGOs to discuss strategies for eliminating the environmental problems at its suppliers.[Page197:]
In 1991 world media attention was drawn to reports of sweatshop abuse at Nike factories in Indonesia. Nike initially maintained that it was not responsible for labour conditions in independent factories. However, by 1998 a firestorm of criticism from NGOs and public figures forced Nike to reverse course and announce that it would develop a rigorous program of oversight intended to prevent labour abuses.
The most common method used by OEMs and corporate buyers to control labour compliance is the use of factory inspections or audits. This approach is sometimes referred to as a checklist approach because inspector or auditors visit factories with a standard compliance checklist and then evaluate the factory’s compliance.
A number of problems and criticisms have arisen in connection with the inspection/ audit approach, particularly from NGOs who have complained that the inspection system has failed to improve factory quality and eliminate abuses. The most common misconception concerning the factory inspection system is that failing an inspection leads to termination of the factory as a supplier. This is almost never the case. Rather, most buyers use a system of ratings and warnings to give factories a chance to fix their problems, with termination used only as a last resort.
Another complaint is that buyers use their own inspectors, which creates an incentive for the inspector to be lenient in the event of factory noncompliance. However, even when buyers rely on independent auditors, it is reported that some factories use subterfuges to avoid compliance. One technique is to maintain a “double set of books” on hours worked per employee, to avoid infractions based on excessive or mandatory overtime. Another technique is to bribe the inspector, a practice which unfortunately is not uncommon in countries where compensation for inspectors is low.
Finally, there is the widely-reported problem of “inspection fatigue” or “audit fatigue”: even well-meaning factory owners find it difficult to comply with overlapping and/or contradictory requirement from multiple buyers. It is possible that as industry-wide or global inspection standards begin to supplant the proprietary standards of individual buyers, inspection fatigue will be reduced and compliance will improve.
Case ExampleTragedy in Bangladesh: Rebuilding Trust in ManufacturingOn April 24, 2013, the collapse of the Rana Plaza factory building on the outskirts of Dhaka, Bangladesh, led to the loss of 1129 lives, in what is now considered the deadliest garment-factory disaster in history. Approximately 2500 people were rescued from the rubble. Not long before that tragedy, on November 24, 2012, a fire had broken out at the Tazreen Fashion factory in Dhaka, leading to 117 deaths. A few months earlier, on a single horrific day in Pakistan, September 11, 2012, two fires broke out, one at the Ali Enterprises textiles factory in western Karachi, and another at a shoe factory in Lahore. The combined death total was 315.
Thus, in a period of less than a year, three major industrial catastrophes hit the global apparel industry. This concurrence of tragedies generated a worldwide storm of criticism of Western brands that manufactured in outsourced factories. Well-known brands from companies around the world were implicated in the various factory disasters. Among these apparel buyers were the U.S. Marines, Wal-Mart, Li & Fung, Joe Fresh, Mango, Benetton and the Children’s Place.
Facing worldwide pressure, apparel companies moved quickly to develop a plan to present to the public. However, behind the scenes there was intense international debate on the best way to respond to the danger of future tragedies. Within two months after the Rana Plaza collapse two main approaches had diverged, one primarily European and the other North American:
Accord on Fire and Building Safety in Bangladesh (“Accord”) Following an approach mapped out America’s PVH and Germany’s Tchibo, more than 50 companies signed a binding 5-year agreement obliging the companies to invest in measures to increase safety in Bangladesh factories. Relatively few American companies followed PVH’s lead, so that the Accord was predominantly composed of European companies.[Page198:]
The Accord is based on an inclusive approach which brings together apparel brands, unions (the IndustriALL Global Union and the UNI Global Union), NGOs such as Clean Clothes Campaign, Maquila Solidarity Network, and Worker’s Rights Consortium, and intergovernmental organisations. The International Labour Organisation (ILO ) agreed to act as an independent chair for the Accord’s steering committee. Under the Accord, the brands are responsible for providing funding to improve factory safety conditions, which will be verified by inspections. Over 1,000 suppliers in Bangladesh are covered by the Accord, but it only extends to Bangladesh. Given the extent of involvement from European unions and brands, the Accord has been dubbed by some as a European initiative
Alliance for Bangladesh Worker Safety (“Alliance”) Many top brands opted for a rival plan, the Alliance for Bangladesh Worker Safety. The Alliance is anchored by major American brands, such as Wal-Mart, Target, and Gap. The American plan committed US$ 42 million to improving factory conditions and an additional US$ 100 million in loans to help factories finance their own improvement. Under the Alliance approach, the onus is on the factory to improve its conditions or risk termination as a supplier. One major difference with the Accord is in the absence of unions and worker representatives in this effort. Worker’s rights groups, such as the Clean Clothes Campaign, Workers Rights Consortium and United Students Against Sweatshops, were quick to criticize the Alliance approach. In particular, they noted the absence of legally-binding commitments in the American approach.
Whether these measures will improve factory conditions in Bangladesh remains to be seen, though an additional fire that killed 8 at the Tung Hai sweater factory on May 8, 2013, while the companies were debating their approaches, suggests that hopes for rapid improvement need to be tempered by realism. However, one limitation of the two approaches outlined above is clear: they apply only to Bangladesh. What about factory conditions in other countries around the world? The rise of so-called ethical fashion is one of the industry’s responses to continued consumer concerns, but the largest brands will remain exposed to major public relations risks until these calamities become a thing of the past.
The factory auditing (sometimes called social auditing) sector is dominated by large, private auditors with global reach, such as SGS (Societe Generale de Surveillance), Intertek, Bureau Veritas and UL (Underwriters Laboratories). Wal-Mart alone commissioned over 9,800 factory audits in one year. While these audits commonly reveal a range of safety violations, ranging from the trivial to the serious, it is up to each brand to decide how to react to negative audits. Most brands prefer to give non-conforming factories a chance to improve conditions before terminating relations, which is considered a drastic step that can hurt vulnerable workers at the factory in question.
Increasingly, pressure from environmental NGOs and host-country regulators has spurred corporations to develop methods for ensuring that their suppliers respect environmental laws and regulations, and deliver products which do not cause harm to consumers or the environment.
There are a great number of organisations, systems, and service providers used by buyers to ensure environmental compliance. Among the best known are:
> ISO 14000 A “family” of standards for conducting environmental audits or internal reviews, known as EMS for Environmental Management System. ISO is the International Standards Organization. ISO doesn’t certify companies directly, rather third-party certifiers will state that a factory is in compliance with ISO 14000. Alternatively, companies can self-certify. ISO 14000 can serve as a first step for a company in managing its environmental impact. By requiring OEM suppliers to obtain ISO 14000 certification, buyers reduce the risk that factories will be accused of pollution or deliver products which contain hazardous materials.
> Bluesign Bluesign is an example of the very rapidly-growing area of environmental certification of suppliers and supply chains. Bluesign is now a subsidiary of SGS, the world’s largest inspection company. Bluesign’s specialty is certifying the environmental impact of the supply chain in textiles and apparel, including dyeing, weaving,[Page199:]manufacturing, etc. Bluesign certifies certain factories as compliant, and then allows apparel brands that work with those factories to feature the bluesign trademark. Bluesign is in effect a an advanced form of ISO 14000 specific to a particular industry, but in which one company does all the certification.> Notable users: Patagonia, Eileen Fisher
> Life Cycle Assessment (LCA) Life cycle assessment is the most prevalent conceptual framework for analyzing the environmental impact from the beginning to the end of a product’s use, from extraction, processing, manufacturing, and sales, to final consumption and disposal.
> Cradle to Cradle Design This is a proprietary concept based on biomimetic design which is intended to aim for a more complete form of life cycle assessment, where each stage of the production and consumption process is sustainable.
> UN Global Compact A United Nations forum for the promotion of 10 basic principles of corporate social responsibility by more than 10,000 member companies in 130 countries. By encouraging companies to operate responsibly and take strategic actions that support society, the UN Global Compact works to ensure that business activity adds value not only to the bottom-line, but also to people, communities and the planet. The UN Global Compact requires companies to take a comprehensive approach to sustainability, and lays out 5 essential elements of corporate sustainability for business to put into practice. Companies must:
> operate responsibly in alignment with universal principles and
> take strategic actions that support the society around them.
> Then, to push sustainability deep into the corporate identity, companies must commit at the highest level,
> report annually on their efforts, and
> engage locally where they have a presence.
Given the immense complexity of global sourcing and compliance, it is not surprising that a number of consultants and service providers have arisen in the field. Many OEMs and other buyers have long relied on buying agents or sourcing agents to help them locate the best foreign factories and suppliers.
The largest and most well-known intermediary of this kind is the Hong Kong-based company Li & Fung, which occupies a unique position in the global sourcing. While Li & Fung has been in the sourcing business for over a century, the visionary leadership of two Harvard-trained brothers, Victor and William Fung, transformed Li & Fung over the past 30 years into a multi-billion dollar company at the heart of global manufacturing.
Essentially, Li & Fung simplifies the complex world of global sourcing by maintaining its own network of thousands of coordinated factories. Li & Fung provides a web-based interface that allows importers to collaborate and exchange information with trusted factories and shipping companies around the world. Li & Fung account executives work closely with their import clients to streamline the design and manufacturing process by distributing orders for materials supply and manufacturing throughout its network of affiliated factories (though Li & Fung itself does not own or manage factories).
With the rise of worldwide public scrutiny on the environmental and human rights performance of outsourced factories, Li & Fung responded in 2010 by introducing a sustainability strategy aimed to approved the environmental and labour conditions within the Li & Fung supply chain. After the series of manufacturing catastrophes in Pakistan and Bangladesh in 2012 and 2013, Li & Fung redoubled its efforts in compliance, and introduced in 2014 a new business unit called Vendor Support Services. The primary objective of the new unit was to integrate Li & Fung’s existing services throughout its network of over 15,000 suppliers, particularly as regarded providing them with additional safety and compliance training. Li & Fung publicly[Page200:]announced that it was moving from a “box-ticking” or “compliance” mentality to one involving coaching, support and assistance to factories in achieving better rates of compliance.
Most large OEMs and corporate buyers have now instituted, and made public, supplier codes of conduct, often referred to as a “Supplier Code of Conduct” or “Vendor Code of Conduct”. These codes of conduct are framed in simple, direct language that is intended to be easily comprehended by the public, suppliers and the suppliers’ employees and stakeholders. The codes are principally aimed at promoting and maintaining compliance with environmental, labour and ethical standards. Thus, they must be distinguished from a related type of document, sometimes referred to as a Vendor Compliance Manual, which often deals much more technically with industry-specific or buyer-specific requirements (i.e., the manner in which shipments are to be packed, labelled, sorted, etc.).
Below are examples of typical provisions found in international supplier codes of conduct:
Specific labour standards to be respected typically include:
> Freely Chosen Employment
Forced, or indentured labour or involuntary prison labour, slavery, and trafficking are specifically prohibited. This includes transporting, recruiting or receiving vulnerable persons by means of threat, force, abduction or fraud. Work must be voluntary and workers must be free to leave work at any time or terminate their employment. Workers must not be required to surrender identification, passports or work permits as a condition of employment.
> Child Labour Avoidance
Child labour is not to be used in any stage of manufacturing. Most corporations define the term “child” as referring to any person employed under the age of 15 (or 14 where the law of the country permits), or under the age for completing compulsory education, or under the minimum age for employment in the country, whichever is greatest.
> Working Hours
Since studies link worker strain to increased injury and illness, workweeks must not exceed the maximum set by local law. Most corporations go further and prescribe a maximum workweek of 60 hours per week, including overtime, except in emergency situations. Workers must be allowed at least one day off per seven-day week.
> Wages and Benefits
Compensation paid to workers must comply with all applicable wage laws, including those relating to minimum wages, overtime hours and benefits.
> Humane Treatment
Most codes provide that there must be no harsh or inhumane treatment of employees, including sexual harassment, sexual abuse, corporal punishment, mental or physical coercion, or verbal abuse.
> Non-Discrimination
Suppliers must not engage in employment discrimination. Workers must not be subjected to medical tests that could be used in a discriminatory way.[Page201:]
> Freedom of Association
The rights of workers to associate freely, join or not join labour unions, seek representation and join workers’ councils as well as right of collective bargaining in accordance with local laws must be respected.
> Health and Safety
Suppliers must seek to minimize the incidence of work-related injury and illness.
Specific health and safety standards include:
> Occupational Safety Worker exposure to safety hazards must be minimized through proper design, engineering and administrative controls, preventative maintenance, and ongoing safety training.
> Emergency Preparedness Potential emergency situations and events must be identified and assessed, and their impact minimized by implementing emergency plans and response procedures, including worker training and drills, appropriate fire detection and suppression equipment, and adequate exit facilities.
> Occupational Injury and Illness Procedures and systems must be implemented to prevent, manage, track and report occupational injury and illness.
> Industrial Hygiene Worker exposure to chemical, biological and physical agents must be identified and administrative controls must be used to control overexposures.
> Physically Demanding Work Worker exposure to the hazard of highly physically demanding tasks should be identified, evaluated and controlled.
> Machine Safeguarding Production machinery must be evaluated for safety hazards and physical guards and barriers must be provided and properly maintained.
> Sanitation, Food, and Housing Workers must be provided with ready access to clean toilet facilities, potable water and sanitary food preparation, storage facilities and eating facilities. Worker dormitories must be maintained clean and safe, and provided with appropriate emergency exits, hot water for bathing and showering, and adequate heat and ventilation and reasonable personal space.
Recognized management systems such as ISO 14001 must be implemented so as to maintain specific environmental standards, including:
> Environmental Permits and Reporting
All required environmental permits must be obtained, maintained and kept current.
> Pollution Prevention and Resource Reduction
Waste of all types, including water and energy, must be reduced or eliminated at the source or by practices such as modifying production, maintenance and facility processes, materials substitution, conservation, recycling and re-using materials.
> Hazardous Materials
Chemical and other materials posing a hazard if released to the environment must be identified and managed to ensure their safe handling, use and disposal.
> Wastewater and Solid Waste
Wastewater and solid waste generated from operation must be characterized, monitored, controlled and treated as required.
> Air Emissions
Air emissions of chemicals, aerosols, corrosives, particulates, ozone-depleting chemicals and combustion by-products generated from operations must be characterized, monitored, controlled and treated as required.
> Product Content Restrictions
Suppliers must adhere to all applicable laws and regulations and customer requirements regarding prohibition or restriction of specific substances.[Page202:]
To meet social responsibilities, suppliers are required to uphold the highest standards of ethics including:
> Business Integrity
Suppliers must have a zero-tolerance policy to prohibit all forms of corruption, extortion and embezzlement.
> Bribery and Undue Influence
Bribes or other means of obtaining undue or improper advantage must not be offered or accepted.
> Disclosure of Information
Information regarding business activities must be disclosed in accordance with applicable regulations and falsification of records or misrepresentations in the supply chain must be avoided.
> Intellectual Property
Intellectual property rights must be respected.
> Fair Competition and Advertising
Standards of fair business, advertising and competition must be upheld.
> Conflict Minerals
Suppliers must reasonably assure that tantalum, tin, tungsten and gold in the products they manufacture does not directly or indirectly finance armed groups that are perpetrators of human rights abuses in the Democratic Republic of the Congo or an adjoining country.
Suppliers must maintain a management system designed to ensure compliance with applicable laws, regulations and customer requirements, and conformance with the Supplier Code of Conduct.
Test Your Knowledge: Global Sourcing and Compliance
True/False
Answers: 1. F 2. T 3. T 4. F 5. F