CB BureauThe report ‘Changing Course – A Study into Responsible Supply Chain Management’ introduces a new approach to supply chain management – Responsible Supply Chain Management 3.0 (RSCM 3.0). The vision is that it should be possible for international buyers to invest and purchase goods from specific ‘risk-free’ zones without the risk of being involved in violations on standards derived from the ten principles of the UN Global Compact.
International buyers, local suppliers in economically developing countries, public agencies and NGOs, among others, all stress the shortcomings and challenges to the current approaches to supply chain management, and these are the points that are discussed in the report. The approach to RSCM is in line with recent recommendations from the UN stating that corporations should work with local or central government to increase their leverage and incentivize improvements in the supply chain.
Responsible supply chain management (RSCM) emerged in the 1990s as an important part of the corporate responsibility (or corporate social responsibility – CSR) discourse. The concept primarily emerged as a corporate
response to human rights risks appearing in suppliers’ operations, sweat shops, child labour, forced labour, safety and health neglect, and similar violations. Lack of effective human rights governance in the home state of suppliers, as well as stakeholder pressures on the buyers to react, paved the way for RSCM as we observe it practised by corporations today. This executive summary describes key learning points from the study of six proposed key challenges ingrained in current RSCM practices. In addition, the executive summary points to a possible change of direction, in terms of corporate approaches to RSCM. Six different hypotheses have been examined, all of which imply challenges with current approaches to RSCM.
Current approaches to RSCM can roughly be divided into two main groups, denominated 1st and 2nd generation approaches, hereinafter referred to as RSCM 1.0 and RSCM 2.0, respectively. The characteristics of these two approaches will be outlined below. Subsequently, the findings on each hypothesis will be reported. Finally, implications for an alternative approach will be described via the introduction of the concept of Responsible Supply Chain Management Generation 3.0, or RSCM 3.0.
RSCM 1.0: Individual codes of conduct
RSCM 1.0 is the most widespread approach to RSCM. This approach involves a company developing a code of conduct (hereinafter Code) to describe the demands its suppliers are expected to meet. To ensure compliance
to the Code, the buyer company will often monitor and audit its suppliers. Regular visits at suppliers’ premises by company employees trained to assess suppliers’ performance against Code requirements have become a common practice. In addition, some companies require external auditing by independent third-party CSR auditors.
Corporate practices with Codes, monitoring and auditing procedures build parallel systems, which substitute malfunctioning state governance. These systems are exerted with increased rigour where lack of state governance on human rights, environmental protection and anticorruption is most profound, often in a developing country setting.
RSCM 2.0: Shared codes of conduct
In RSCM 2.0, companies use a shared Code rather than their own individual Codes, e.g. a Code for an entire industry or a Code established through a multi-stakeholder process (note that some multi-stakeholder initiatives do not entail Codes). Examples of RSCM 2.0 approaches can be found in Electronic Industry Code of Conduct (EICC), Business Social Compliance Initiative (BSCI), the Ethical Trading Initiative (ETI), Social Accountability
8000 (SA 8000), ILO’s Better Work initiative and Fair Labour Association (FLA). In addition to creating and using common Codes, many RSCM 2.0 initiatives are shifting focus from monitoring compliance to building supplier capacity; most notable is the Business for Social Responsibility ‘Beyond Monitoring’ initiative. Often, a shared ‘clearing house’ is established to manage monitoring or certification of suppliers and accreditation of auditors.
Findings from six hypotheses
Hypothesis A – Cost-efficiency
This hypothesis is twofold in nature, as on the one hand it concerns identification of the costs of monitoring and auditing, while on the other hand it evaluates the actual impacts that follow as a result of RSCM practices. Regarding the costs, it is extremely difficult to estimate the resources currently being spent on monitoring and auditing. One of the main reasons is that buyers do not appear to track the exact additional costs that RSCM practices have meant for their operations. However, a basic estimation of resources invested in such practices by ‘best-practice’ companies indicate that RSCM incurs considerable annual costs. Examples from the Danish context indicate that large companies on average use a minimum of 0.22 per cent of their annual turnover to establish RSCM Generation 1.0 monitoring procedures, a small percentage but amounting to enormous figures taking the size of the turnovers into account.
The amount being invested leads to an expectation of positive impact, as described in the other half of the hypothesis. And suppliers do indicate that RSCM has an impact. On the positive side, suppliers emphasise, for instance, increased productivity and improved health and safety standards. However, all suppliers also stress the negative impacts such as increased demands on human and financial capacity. In general, the international literature highlights difficulties attached to measuring this impact and limited knowledge on the actual impact of RSCM. Hence, it seems reasonable to question whether there is in fact a positive relationship between resources invested and impacts achieved.
Hypothesis B – Code mania
The concept ‘code mania’ covers how suppliers are met with a multitude of Codes simultaneously, in the worst cases one or more per customer they engage with. The data examined in this study generally confirms this hypothesis. Suppliers substantiate that they are, indeed, met with numerous Codes from buyers. They do, however, not necessarily see this as a problem in itself, since the Codes are usually very similar in content, covering the same requirements (e.g. core labour rights) described very broadly without detailed compliance specifications.
However, the suppliers pointed to the fact that challenges appear during the implementation of Codes, where the subset of requirements in relation to various items in the Codes differs considerably. These differences put considerable pressure on suppliers in order for them to comply, draining the suppliers of financial as well as human resources. The study also reveals that code mania is not only an RSCM 1.0 phenomenon, but that RSCM 2.0 Codes also contribute significantly, as RSCM 2.0 initiatives are often used in supplement to an RSCM 1.0 approach.
The nuances discovered by the study could, thus, lead to a rephrasing of the original hypothesis: Mainstream RSCM Generation 1.0 and 2.0 approaches lead to ‘code mania’, creating a situation where suppliers are met with multiple, contradictory and differing sub-demands during monitoring and implementation.
Hypothesis C – Impediments from traditional SCM
The data examined reveal that buyers manage their supply chain through a set of traditional procurement criteria involving price, delivery time, flexibility in meeting orders, economic solidity, quality, etc. Additionally, they are increasingly adopting CSR practices, leading to the implementation of Codes in global supply chains. Hence, a new set of criteria on human rights, including labour rights, the environment and anti-corruption standards, is handed down to the suppliers. However, these new CSR criteria do not always correspond well with traditional supply chain management criteria. The imposition of buyers’ additional CSR requirements to their traditional supply chain management entail that suppliers have to live up to criteria from
both practices simultaneously – CSR on the one hand and procurement on the other.
The two practices may, however, present opposing and conflicting demands (e.g. implement high CSR standards and maintain low prices, and/or manage on time delivery without the use of overtime labour, and/or ensure minimum wages and low prices without losing competitive advantages), which have severe implications for suppliers’ ability to comply. Hence, buyers’ conflicting demands, arising from the ‘additionality’ of CSR requirements, put pressure on suppliers from two sides, and thereby considerably reduce the room to manoeuvre for supplier companies.
Hypothesis D – Code limitations
The hypothesis is based on a United Nations declaration, following the Conference on Human Rights in Vienna 1993, stating that every human right should be treated on the same footing, as well as the UN Framework for
Human Rights and Business adopted by the UN Human Rights Council in June 2008, stating that all business sectors in all regions of the world can potentially affect all human rights contained in the International Bill of Human Rights. The review of 38 supplier Codes confirms the hypothesis. It reveals that current Codes from front-runner buyer companies include only few basic human rights, with no buyer company having included all human rights in their Code. In addition, buyer companies admit that they enforce the included human rights with different emphasis depending on the given right. In other words, companies seem to rank human rights and more readily accept the violation of some rights, while violation of others is entirely unacceptable. Buyer companies, as well as many other stakeholders, generally tend to find the notion of including all human rights very challenging.
Hypothesis E – The extensive number of suppliers and sub-suppliers
RSCM 1.0 and 2.0 basically add a number of additional (CSR) requirements to traditional supply chain management. Common expectations to RSCM approaches would include that they are non-discriminatory, transparent, accountable and independently verified.
The study confirms the existence of discriminatory, non-transparent RSCM 1.0 and 2.0 practices that lack accountability and independent verification. Given the number of suppliers every buyer company engages with, it seems highly unlikely that non-discriminatory, transparent, accountable and independently verified RSCM 1.0 and 2.0 engagements with all suppliers, from all tiers, will happen within the near future. Indeed, the mere challenge of engaging in such diligent RSCM approaches in relation to first-tier suppliers appears daunting and therefore impossible in relation to sub-suppliers. Relations between buyers, suppliers and sub-suppliers (the
suppliers of first-tier suppliers) differ considerably, which confirms that RSCM 1.0 and 2.0 approaches cannot be carried out in relation to all tier suppliers.
Hypothesis F – Exclusion of SMEs
On the basis of this study it is difficult to fully verify hypothesis F. The reason for this mainly relates to the setup of the study, the inability to separate the effects of RSCM and supply chain management practices, and the limited information from buyers on this subject. It has, in other words, been difficult to isolate the direct cause of exclusion that stems directly from RSCM, and not just the general tendency of SME exclusion within global supply chains.
Nevertheless, the findings from the study indicate that the negative consequences of RSCM practices hit SMEs harder than larger suppliers. For example, SMEs are in different ways restrained on human and financial capabilities – both needed in order to handle RSCM practices. Thus, the study concludes that the existing trend under traditional supply chain management practices of excluding SMEs from global supply chains appears to be accelerated by RSCM practices.
RSCM 3.0: Addressing the challenges of RSCM 1.0 and 2.0
RSCM 3.0 represents a shift in approach, compared to RSCM 1.0 and 2.0. Whereas RSCM 1.0 and 2.0 are focused on the value chains of individual companies, RSCM 3.0 focuses on creating ‘CSR risk-free sourcing and investment zones’ in a demarcated territory, thereby targeting all suppliers and sub-suppliers in a given area. The vision for RSCM 3.0 is for international buyers to be able to source from certain areas without the risk of being involved in violations of internationally agreed standards, derived from the UN Global Compact principles. Meanwhile, at the outset of integrating the RSCM 3.0 approach, RSCM 3.0 will only act as a supplement to RSCM 1.0 and RSCM 2.0, which will eventually be phased out. Thus, there will be a period where RSCM 1.0, 2.0 and 3.0 will unfold simultaneously. The establishment of ‘CSR risk-free sourcing and investment zones’ requires the building of local state capacity in order for the local state authorities to become capable of carrying out monitoring and enforcement.
However, many governments in developing countries do not have the will or resources to build such capacity; this creates the need for support in the form of capacity building from donor agencies. Donor agencies, therefore, become facilitators for the process, but only by invitation from the local authorities (state, region or district). Buyer companies have a great opportunity to create leverage with local state authorities since their willingness to source from, or invest in a specific geographical area, has great economic importance locally. Thus, buyer companies’ role in RSCM 3.0 is primarily to motivate local authorities to commit, plan and execute the establishment of ‘CSR risk-free sourcing and investment zones’.
A key difference between RSCM 1.0 and 2.0 and RSCM 3.0 is the inclusion of the state as a crucial partner in the latter approach. The inclusion of the state acknowledges that the duty to protect against violations from business lies with governments. Hence, RSCM 3.0 abstains from building competing parallel structures to the traditional state-society relation and, instead, enables the state to carry out its duty and to enforce its legislation. RSCM 3.0 thereby has the potential of providing a long-term and sustainable solution to CSR risk management in relation to suppliers’ conduct.
Nevertheless, the researchers appreciate that there are several challenges accompanying the implementation of an RSCM 3.0 approach. Some of the challenges one might expect to meet could range from the reform of embedded systems of corruption and dealing with political instability in developing countries, to resistance by professionals with current established systems that support corporate risk management. Change will, thus, not be made overnight. It is to be expected that buyer companies will engage in a period of transition where traditional RSCM approaches are continued and gradually phased out, while capacities in relation to RSCM 3.0 are built.
About the report
The report – ‘Changing Course – A Study into Responsible Supply Chain Management’ – has been authored by Sune Skadegaard Thorsen, CEO, GLOBAL CSR, and Soeren Jeppesen, assoc. prof., Centre for Business and Development Studies, Department of Intercultural Communication and Management, Copenhagen Business School, for the Danish ministry of foreign affairs.
It is published on the Danish ministry of foreign affairs’ website: http://www.um.dk/en/menu/DevelopmentPolicy/BusinessCooperation/businesstobusinessprogramme/News/NewStudyOnResponsibleSupplyChainManagement.htm
About Sune Skadegaard Thorsen
Sune Skadegaard Thorsen founded and heads the consultancy firm GLOBAL CSR, Copenhagen, and is partner in Corporate Responsibility Ltd in London. With a background in international corporate law, Mr Thorsen has specialized in corporate social responsibility (CSR) since 1996. GLOBAL CSR advises a range of leading transnational corporations, governments and organizations as experts on social sustainability. He was expert advisor to Mary Robinson’s Business Leaders Initiative on Human Rights (2003″09) since inception. Today, he continues as an expert advisor to the Global Business Initiative on Human Rights and as European Advisor to the Institute for Business and Human Rights, London.
For more information please see www.global-csr.com,
or contact Sune Skadegaard Thorsen at Cell: + 45 4020 9906 / E-Mail [email protected].