Purchasing practices: where supply chain systems meet labour standards management - by Patrick Neyts

For most companies, sourcing products in complex circumstances is nothing new.
What is perhaps new is the extent to which supply chains have become truly global and mobile. The global nature of supply chains goes a long way to explaining the need for, and the advent of, various initiatives to manage supply chain labour standards in the past decade. Companies, responding to the expectations of consumers and of broader civil society, have recognised their interest in addressing the working conditions of workers in third party suppliers, frequently in developing countries, for whom they have no legal responsibility.

As a result, the area of ethical trading has focused on trading relationships as the means by which influence can be exerted by retailers and brands to improve supply chain labour standards. In this model, then, commercial practices and ethical concerns are intimately linked. The problem, needless to say, is that commercial and ethical interests are not always identical, and may be in considerable tension.

How, for example, can a purchasing manager whose principle task is to negotiate down prices with suppliers should also adopt the role of labour rights champion, proposing minimum compliance requirements which may, it is argued, increase the labour costs of the supplier whose costs are already being squeezed? Even if labour costs are not concerned, it is perhaps neither useful nor appropriate that labour standards are appended as an additional contractual obligation, without consideration for how such standards are to be achieved at the supplier workplace.

Of course, there has long been a struggle among companies to integrate labour standards concerns with an efficient supply chain management model. What has changed in recent years is that, increasingly, companies are coming to understand that purchasing practices are in fact a vital factor in the effectiveness of attempts to manage supply chain labour standards. Any company which has understood the business logic for engaging in ‘ethical trade’, and which takes this activity seriously, needs to understand and to integrate the way in which their ‘trade’ either complements or undermines their ‘ethics’.

This change in perspective reflects a broader sea-change in supply chain labour standards management. For many years this was primarily driven by a policing mentality of catching suppliers doing something wrong. The debate has now matured from a ‘catch you out’ scenario to a multi-stakeholder engagement approach. In the more evolved version of supply chain labour standards management, the supplier is recognised not just as a link in the chain, trying to hide bad practices, but as a critical stakeholder willing to evolve together with the debate.

It is well understood that, as companies have explored how to ensure more durable improvements in supply chain labour standards, it has become evident that ‘policing’ approaches, in isolation, simply do not work. What is less well understood is that a lot of common code violations – such as overtime or wages – commonly spring from two fundamental root causes. First, the lack of management capacity and management systems at supplier level; second, the variability of the manufacturing environment triggered by late, fast and significant changes from the client – in other words, purchasing practices.

Late changes in production requirements, forecasting or production allocation, without accompanying changes in delivery conditions, constitute real pressures on the supplier to ensure that delivery at same cost and quality is guaranteed. This often results in difficult situations for the suppliers where the only option, other than losing the order, is temporarily to transgress the labour conditions mentioned in the client’s code of conduct. Moreover, companies are coming to understand that other aspects of purchasing practices – the length of trading relationship, timeliness of payment and critical path management – also influence the supply chain circumstances which may either perpetuate or improve labour standards.

Dialogue between global suppliers and large companies with globalised supply chains points to the next step in this evolution: if continuous improvement in product quality, code of conduct and supply chain efficiency is to occur then the management of labour conditions and code of conduct has to be (re-)integrated within the supply chain. Only when the know-how and supply chain systems which reside at the corporate client level are transmitted down through the supply chain to local supplier level with a constant two way information flow can durable improvements in labour standards become a reality.

This sort of capacity building is beginning to take place among the more innovative brands in the apparel, footwear and toy industries. These organisations have allocated resources in order to investigate why certain labour condition violations take place at some suppliers and not at others. Starting from this basis, labour standards experts and trainers build capacity and know-how within local suppliers – both at management and worker level – with the effect of instantly decreasing ‘code violations’ in a sustained manner while at the same time improving quality and efficiency. The implementation of supply chain practices such a VMI (Vendor-Managed Inventories) from brand level to local supplier level allows for better lead time planning, less over-time, less work in progress (less tied-up capital) and generally a much more productive and happier workforce.

Of course we should not throw out a decade of learning how to monitor workplace labour conditions. But the shift from an auditing model to a more participatory approach involving local stakeholders is key to the overall management of supply chain labour standards. Only an open and engaged understanding of local working conditions, the needs and aspirations of workers and their communities, and the local manufacturing challenges can lead to dialogue on how to improve current production situations continuously and sustainably.