Do You Have an Ethical Supply Chain?

Organisations today operate in a highly connected, more and more transparent world. Issues such as income inequality, forced labor, gender discrimination and climate change are increasingly on the minds of consumers, and they expect organisations to share their concerns if they want to earn or keep their business. According to one study, 70% of consumers believe companies have an obligation to take actions to improve issues that may not be relevant to everyday business operations. This notion is classically defined as corporate citizenship, or the recognition that businesses have social, cultural and environmental responsibilities to the communities and ecosystems their operations impact.

Organisations that strive to be ethical must look at the operational areas that have the biggest impact and develop strategies and solutions that minimise economic, societal or environmental damage. When looking to rework an aspect of your organisation with ethics in mind, creating an ethical supply chain may be the best place to start.

The importance of an ethical supply chain

The supply chain is the point at which an organisation’s ethical stances are put to the test in the real world. In other words, the supply chain is where “the rubber meets the road” when it comes to operating in ways that meet fundamental responsibilities in areas such as human rights, labor and the environment. Research from APICS, Supply Chain Management Review and Loyola University Chicago found that 83% of supply chain professionals say that ethics are extremely important (53%) or very important (30%) to their organisations. Some of the factors driving more ethical supply chains, and more ethical supply chain management, are consumer demand, profitability and visibility.

Consumer demand

The 2017 Cone Communications CSR Study found that consumers are more likely to trust brands that focus on societal and environmental issues such as poverty, human rights and global warming. On the other hand, this also means that consumers are more willing to punish brands that do not share their ethical concerns. For example, the 2018 Ethical Consumers Market Report found that nearly half (49%) of the UK population had chosen not to buy a product or shop at an outlet because of concerns about the brand’s ethical reputation (27% of personal boycotts conducted by shoppers in the UK in October 2018 were against businesses with a negative environmental impact, and 19% were in response to unethical corporate practices). In short, an ethical supply chain may help safeguard an organisation against consumer backlash in cases where human rights abuses or environmental impacts in the supply chain are brought to light.

Profitability and performance

In the introduction to the 2018 Global Human Capital Trends report, Deloitte cites two important studies that underscore the link between corporate citizenry and profitability: a longitudinal study of purpose-focused companies found that they outperformed their S&P 500 peers by a factor of eight, and a study of 22,000 investment professionals found that 78% have increased their investments in firms focused on corporate and social responsibility (CSR). Perhaps that explains why the majority of executives (60%) who responded to The Economist Intelligence Unit survey viewed sustainability on par with profitability in terms of importance to their overall business strategy.

Supply chain visibility

The Sustainability Consortium (TSC), a global non-profit organisation dedicated to improving the sustainability of consumer products, analysed over 2,500 surveys from 1,700 suppliers and found that the majority of manufacturers lack visibility into the sustainability performance of their own supply chains. Similarly, research from APICS and Supply Chain Management Review found that while the majority of companies (70%) indicated that they have a formal policy to understand where their supply is manufactured and who manufactures it, only 43% of respondents have an initiative to better understand how their suppliers operate. Moving towards a more ethical supply chain naturally improves visibility as it requires taking a closer look at inputs, outputs and processes at each step along the supply chain, bringing ethical issues to the surface and enabling organisations to focus efforts where they will have the most impact.

Ethical considerations in supply chain management

1. Environmental impact

McKinsey estimates that more than 90% of companies’ environmental impact is the result of their supply chain activities. Environmental impacts from supply chains can include deforestation, hazardous air emissions, toxic waste and water pollution. Companies that focus on environmental stewardship evaluate the environmental performance of their suppliers, vendors and shippers to identify sources of pollution and waste within the supply chain. Sustainability initiatives focused on reducing pollution and waste can also reduce production costs by delivering products more efficiently. For example, retail and transport packaging solutions optimised for cube density may result in fewer containers to ship the same number of products from warehouses in Southeast Asia, which translates to a lower carbon footprint and significant operational savings. In one example, packaging engineered and optimised for the supply chain helped a global apparel brand achieve operational savings of $50 million USD.

2. Labor laws and working conditions

Verisk Maplecroft, a leading research firm and global risk consultancy, revealed that businesses with supply chains in 115 countries have either a “high” or “extreme” risk of association with slavery, with China and India topping the list. Executives around the world anticipate a greater focus on the working conditions across supply chains and the human impact of their operational activities. In the retail sector, for example, executives rank working conditions about as highly as reducing operating costs in the next five years, according to The Economist Intelligence Unit report. Unfortunately, multinational companies may not be aware that labor laws are being violated and human rights abuses are occurring in their supply chains. In 2015, Nestlé, one of the most recognizable household brands in the world, publicly announced that it had found forced labor in its supply chains. Without precautions, global firms with complex supply chains risk unknowingly contributing to human suffering around the world.

3. Supply chain transparency

According to Human Rights Watch, a nonprofit global human rights organisation, there is a global trend of apparel companies adopting supply chain transparency. Publishing supply chain information is a powerful tool for promoting corporate and social responsibility. Supply chain transparency is also consistent with responsibilities under the UN Guiding Principles on Business and Human Rights, which states that companies have a responsibility to “identify, prevent, mitigate and account for” adverse human rights impacts of their business operations. Within complex international supply chains, companies must look beyond Tier 1 suppliers and evaluate the environmental and societal impact of lower-tier suppliers upstream. For example, if you are sourcing corrugate packaging in Southeast Asia, you should ensure that your packaging suppliers are not receiving raw paper materials that have been unsustainably harvested.

What is your barrier to a more ethical supply chain?

The Economist Intelligence Unit asked executives around the world about the main barriers to adopting a strategy around ethical supply chain sustainability and responsibility. The top three answers were increased costs (38%), difficulty in monitoring complex supply chains (29%) and organisational structures (24%). These barriers are understandable, but are far from insurmountable.

We make the complex world of packaging simple, helping global organizations evaluate, monitor and minimize the societal and environmental impact of packaging. We also have teams of packaging designers, engineers and project managers around the world to help support companies that lack the necessary internal structures. In terms of costs, we have demonstrated that ethically-sourced, well-designed packaging has the potential for significant savings. All of our Managed Packaging suppliers all buy from ethically-sourced paper mills and forests. Lower your operational costs, simplify your packaging supply chain and enhance your CSR efforts. Contact Billerud to find out how.