A constructive view on business strategies:

ICC guide to responsible sourcing

Gamini Peiris CEO, ICCSL

We seldom import raw materials from suppliers across the Globe to produce finished goods. More often than not we are at the other end of the supply chain where we export raw materials or finished components to be used in a much larger, complex final product, produced in another country.

The developed world is getting more and more conscious and concerned about their suppliers. There was a time when companies looked for cheap suppliers but not any more. Low price is not the only consideration, but there are other factors that matter when we have to complete.

In recent times there are many instances of foreign producers blacklisting cheap suppliers based on the “other” parameters. It will be useful for the local exporters to be aware of the mindset and the high standards expected by the foreign producer.

What is responsible sourcing?

The ICC has released a guide to responsible sourcing which presents six practical steps that companies can take to influence and monitor social and environmental performance in their global supply chain. Responsible sourcing, also referred to as supply chain responsibility, is a voluntary commitment by companies to take into account social and environmental considerations when managing their relationships with suppliers.

This strategy is now an integral part of effective supply chain management. As production chains expand, companies of all sizes and sectors are devoting more efforts to managing supply chain risks and building long term supplier relationships.

Improving social and environmental performance in production chains is becoming a major element of this process.

As experience has shown, one bad incident with one supplier can lead to a disproportionate amount of adverse publicity, damaging a company’s reputation and brand image. This has led a growing number of companies to develop and promote responsible sourcing practices.

Indeed, effective supply chain management is a way for businesses to build a competitive advantage, especially in sectors where production is largely outsourced, such as clothing, footwear, electronics, or food products.

For many companies, working towards improving social and environmental standards in the supply chain has become a natural extension of their commitment to corporate responsibility and, as such, forms part of their overall business model.

Getting involved

Many companies have literally thousands of suppliers across the globe. While a company cannot be held accountable for the actions of all its suppliers, its purchasing activities may create leverage to influence and monitor its suppliers’ conduct in areas such as working conditions, respect for labour rights and environmental protection.

The ability of companies to influence their suppliers’ business conduct will vary greatly depending on the commercial environment in which they operate and the nature of their supplier relationships.

The great diversity that exists within business requires companies to consider a range of tools and approaches so that these can be tailored to their specific circumstances.

To help companies develop their own approaches to responsible sourcing, this guide prepared by the International Chamber of Commerce (ICC) provides a series of practical steps from a global and multi sectoral perspective.

These steps are based on real-life experiences collected from ICC member companies around the world, and can be used by companies of all sizes, sectors and regions.

The following guidance presents basic steps that companies can take to influence and monitor social and environmental performance in their global supply chains.

Because not all suppliers pose risks, and many have

Step one: selecting a supplier

good business practices already in place, a company should focus on high-risk areas, concentrating efforts where they are needed most and most likely to bring about change.

A careful selection of suppliers is one of the best ways to ensure continuity and long-term efficiency of the global supply chain as well as enduring brand support. When choosing a supplier, in addition to making a final determination on cost, companies often need to evaluate a range of supply chain issues: product quality and safety, continuity of supply and speed of delivery, and intellectual property protection. Criteria such as working conditions, environmental practices, safety standards, and human rights policies should also be factored into the selection process.

When sourcing from low-income countries, a risk analysis should be conducted at the beginning, so that labour and environmental issues can be identified early on and integrated into a cost-benefit analysis.

As a first step, companies

Step two:

should check basic facts about the social and environmental legislation and the level of enforcement in the country of production, to assess potential production risks.

When contracting with a supplier, companies should make it known that they expect their business partners to comply with all national laws and regulations, including labour and environmental laws, and as appropriate, to take into account principles from relevant international instruments, which may sometimes go beyond local legislation.

These instruments include the International Labor Organization (ILO) Declaration on Fundamental Principles and Rights at Work, other ILO conventions, and the Universal Declaration of Human Rights.

Another useful reference is the Global Compact and its “10 principles” covering human rights, labour standards, the environment, and anti-corruption.

A company can also adopt a supplier code of conduct.

Before doing so, it should consider the possible difficulties for suppliers to comply with the proliferation of such codes and their requirements.

To ease the compliance burden on suppliers, which are often small and medium-sized enterprises, a company may consider partnering with a sectoral association that has developed an indus

Step three:

try-wide supplier code of conduct.

Examples of such initiatives include the Business Social Compliance Initiative, the Electronics Industry Citizenship Coalition and the International Council of Toy Industries CARE Foundation.

By integrating responsible sourcing into its own buying practices, a company should avoid undermining the capacity of suppliers to respect social and environmental standards. Inefficient practices, such as rush orders, last-minute changes or placing orders that surpass suppliers’ capabilities, which often lead to excessive overtime work and other compliance violations, should be avoided.

A company can initiate direct improvements in two

Step four:

ways: by raising awareness among its corporate buyers of the impact their decisions might have at factory level; and by encouraging more coordination among corporate buyers, a supplier’s sales team, and production units when planning production schedules.

A company should encourage suppliers to develop their own responsible practices rather than imposing requirements on them. In doing so, it is essential to stress the commercial benefits of responsible business practices on quality, productivity, contract renewals, and lowering employee turnover.

To help them internalize change, suppliers should be directly involved in the shaping of performance objectives. This way, suppliers can integrate these objectives into their own business strategy, based on their individual capacity and needs.

If useful, a company can provide training to its suppliers to help them improve their management practices and performance. Such support is an integral element of the knowledge transfer that comes with sourcing. Training programmes for management and employees may cover supervisory skills, environmental management, and raising aware

Step five:

ness of health and safety practices.

In sectors where labour or health and safety risks may be present further down the supply chain, a company can also work with its direct suppliers to ensure that social and environmental considerations in turn play a role in their relations with second and third tier suppliers.

Companies can ask their suppliers to provide comprehensive information about their social and environmental practices.

On-site visits can also be organized to monitor suppliers’ progress, or lack of progress, in meeting social and environmental performance objectives. Evaluating this information may become part of a company’s regular assessments of business requirements, such as quality control.

To make performance checks truly effective, companies should involve their suppliers’ factory management and workers in monitoring, and give them the training and tools to develop their own compliance system and to identify problems.

Taking a risk-based approach can help with a large base of suppliers when monitoring social and environmental compliance. Companies should focus on high-risk suppliers rather than monitoring across the board, as well as on suppliers in charge of the main steps in the production process.

A company can save monitoring costs by collaborating with other companies from the same sector and developing common approaches for auditing suppliers.

To harmonise monitoring practices and ease the compliance burden of suppliers, several sector associations

Step six:

have brought together manufacturers of branded goods, suppliers, retailers and customers with a view to develop common tools and rationalise supply chain requirements.

Initiatives which bring together non-governmental organizations, trade unions and companies can also help encourage dialogue and build overall confidence in the compliance process.

To build customer trust, companies can collect information on supplier performance across markets, and publish it in an annual report or other publicly-available format. Reporting efforts should be used to measure performance and flag areas for improvement.

Some companies also choose to validate their first or second-party monitoring (audits conducted by the company or on behalf of a company by another organization) by third-party monitoring (conducted by independent bodies).

A company’s strategy in this area will often be shaped by the way it manages its broader stakeholder relationships, for example its relations with consumers and local communities.