Ethical supply chains: Complex, but essential

The news out of Bangladesh was bad enough to begin with. A fire in a factory that was a supplier to many of the world's largest retailers killed 110 workers. Sometime later, a shoddy building that housed several factories—once again suppliers to Western retailers—collapsed. The death toll was more than 1,100. The tragedies—both preventable—raised anew a vital question for managers of global supply chains: What responsibility do businesses have for the practices of their suppliers—suppliers selected in large part because they are low-cost operations, with all that implies for wages, benefits, and working conditions?

It is not a new question. Three years ago, consumer electronics giant Apple found its reputation sullied by reports of abysmal working conditions at Foxconn, the Chinese company that produced its iconic iPhone. A decade earlier, the sporting goods marketer Nike faced a similar crisis as a result of news about working conditions in its suppliers' plants. Both were forced to make changes to their supply chain practices.

It might seem unfair to hold companies accountable for the practices of their suppliers, but I would disagree. The company you keep matters. Yet holding suppliers in diverse cultures to Western social and ethical standards is not simple in practice. In many places, concepts like workplace safety, fair pay, and sustainable operations are at best in their infancy, and keeping tabs on far-flung operations not directly under a company's control is not easy.

I was reminded of that again while reading the excellent article by Ernst & Young's Craig Coulter and Niul Burton in this issue of CSCMP's Supply Chain Quarterly. The consultants address what it will take for public companies to implement the conflict minerals reporting requirements that are part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The goal is to ensure U.S. companies do not use tin, tungsten, titanium, or gold smelted from minerals mined in areas controlled by armed groups in the Democratic Republic of the Congo and surrounding states. In short, it mandates that businesses substantiate ethical sourcing practices. Here's the rub: While the reporting rules will apply to some 6,000 public companies in the United States, the U.S. Securities and Exchange Commission estimates that the rules could affect as many as 100,000 companies around the world when supply chains are taken into account.

But complexity is no excuse. While building a global supply chain can have enormous financial benefits, it also brings with it enormous ethical responsibility. We've seen some steps in response to the Bangladesh tragedies—the Accord on Fire and Building Safety and the weaker Bangladesh Worker Safety Initiative. Those are a start. But businesses must step up and make supplier ethics, along with costs and competitiveness, a core element of their supply chains rather than be driven there by bad news.