June 16, 2023 6 Ethical Supply Chain Missteps to Avoid

Can technology help address, manage and improve sustainability and ethical operations even as business becomes more complex?

By Brent Dawkins, Director of Product Marketing, QAD

The forces pushing for sustainability and ethical standards in business multiply and amplify every day. How can top-level executives balance the seemingly conflicting challenges of “doing the right thing” and optimizing financial performance? Can technology help address, manage and improve sustainability and ethical operations even as business becomes more complex?

As calls for sustainability and ethical standards continue to rise, leading companies have made bold commitments and are being held accountable for their sustainability and ethical standards. Neglecting or mishandling these issues not only damages a company’s reputation but can lead to regulatory fines, customer dissatisfaction and higher employee turnover.

Supply chain compliance is increasingly dynamic. Environmental concerns, shareholder expectations, border disputes and import/export compliance requirements are common factors that organizations have to navigate. One recent example of legislation is the German Supply Chain Act.

This supply chain due diligence act went into effect in January 2023 and the legislation states that companies with 3,000 or more employees must take appropriate measures to respect human rights and the environment with their supply chains. The US Uyghur Forced Labor Prevention Act is another recent example, and one that requires importers to prove that products do not contain any trace of material associated with China’s Xinjiang region.

So how can companies avoid any missteps in this highly scrutinized industry? Here are six ethical supply chain missteps to avoid.

1. Neglecting Assistance

The ethical and sustainable supply chain journey may seem complicated. When developing the initial plan, do not hesitate to recruit additional expertise. Many experienced consultants and non-governmental organizations can provide valuable support. For example, what are the proper KPIs to measure and track? Failure to correctly measure performance or monitor too many KPIs can result in damage to the organization’s credibility. Or, to minimize risk, you may want to start small with pilot projects to determine how best to scale your ethical supply chain activities. Leverage experience where possible to better ensure success for your company and the planet.

2. Lack of Supplier Connectivity

With pressure to address ethical supply chain concerns, companies are realizing the benefits of tightening relationships with suppliers to better manage environmental, social and governance (ESG) risks. Through improved connectivity with suppliers, enterprises are eliminating carbon emissions, improving working conditions and jointly coordinating opportunities for continuous improvement.

Enhanced collaboration means rethinking supplier relationships. Companies need more than a loose combination of available suppliers. They need a responsive and flexible strategic network that quickly responds to ethical supply chain concerns. They need better coordination and a proactive approach within the enterprise, and better collaboration with supply chain partners. They need to increase the availability and visibility of critical sourcing, labor, production and other information with suppliers to avoid the risk that a supply chain regulatory violation will disrupt their business.

Companies that strive to build a more holistic relationship with their supply chain partners must consistently commit to discussing and addressing ethical and sustainable topics. This focus on collaboration builds a more efficient and effective partnership that improves compliance.

3. Overlooking Indirect Child Labor

Use of child labor in farms, factories, mines and other areas of the global supply chain continues today. The International Labor Organization has estimated that 160 million children between the ages of 5-17 can be considered child laborers. A 2021 UNICEF report warns that globally 9 million additional children are at risk of being pushed into child labour by the end of 2022 as a result of the pandemic. With a constant quest for lower product costs, companies unknowingly and sometimes knowingly rely on child labor to keep cheaper products on store shelves. This unacceptable number is also due to companies not actively seeking this type of information until recently. The costs fall on children in the form of lost education and increased health risks. Many child laborers are not simply working at an after school job.

Many companies adhere to strict child labor policies and avoid child labor at all costs. However, it can be difficult to uncover violations within complex global supply chains that include multiple tiers of suppliers, contract manufacturers and subcontractors.

4. Insufficient Supplier Screening

Companies still rely on outdated processes or fail to understand the role supplier sourcing plays in maximizing global supply chain performance and compliance with regulatory requirements. There are big opportunities for improvement within sourcing practices which can be inflexible and manually intensive. Much of today’s sourcing information still relies on spreadsheets and the manual analysis of data. A good first step towards a modern approach is to collect sustainability information from suppliers during the sourcing event and factor sustainability and ethical responses into sourcing decisions.

Whenever possible, information on secondary suppliers will also need to be collected. This is likely to be a major challenge for many companies as they do not typically deal directly with all the upstream suppliers within the supply chain. Depending on the industry, primary suppliers can routinely subcontract orders or portions of orders to other firms. In these situations, visibility into the subcontractor’s business practices regarding worker health and safety along with the level of environmental concern is difficult.

5. Inconsistencies Across the Organization

Ongoing education and creating buy-in across the organization are required to reduce both existing and future sustainability risks. It’s imperative that employees and trading partners talk about sustainability and fully understand the importance of minimizing the impact on the environment, supporting social standards and maintaining governance compliance. Even though a few personnel may argue that sustainability isn’t important in their job, it is — as more and more studies show that consumers are increasingly including environmental consciousness and social considerations in their buying decisions.

6. Ignoring ESG Monitoring

The global and swiftly changing nature of ESG mandates makes ethical procurement and supply chain management more complex. Supply chain data is now vital for organizations to reduce corporate risk and guide companies to accurately meet compliance objectives and regulatory standards and laws. For many organizations, monitoring the performance of supply partners and understanding the ethical pulse of supply chains is challenging. Advanced analytics, artificial intelligence and machine learning technology now play a role in providing deeper insights into day-to-day processes that impact ethical performance.

Conclusion

Companies and supply chain partners need to function in a symbiotic manner and ecosystem to reduce ethical supply chain risks. As separate entities that rely on each other for survival, the environmental, social and sustainable performance of one party directly impacts the other trading partner. In order to jointly meet ethical objectives, both parties must have visibility into their own supply chain operations and seamlessly share critical information with their partners. By avoiding missteps and sharing ESG insights into procurement and supply chain information, supply chain trading partners can build a more adaptive and sustainable future.

Brent Dawkins is QAD’s Director of Product Marketing with over 20 years of manufacturing and supply chain experience. In his spare time, you can find him hiking the Rocky Mountains of Colorado, coaching youth hockey or enjoying time with family.

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