Mind the GAP

The big supply chain story this weekend has been the UK newspaper The Observer’s report on child and slave labor in an unauthorized subcontractor of one of GAP’s direct suppliers. In a statement Gap announces a full recall of the particular garment line produced in that sweatshop.

An early count of categories of this blog will teach you that social issues in apparel supply chains are among the more publicized supply chain issues. I suppose it is somehow reassuring that these conditions can still make the news prominently after years of people drawing attention to them. It is sad of course that this has not been enough to completely eliminate such practices. Doubly sad, actually, as GAP has a reputation of being a company that works hard on sourcing ethically, not least of which their sustainability report is proof in which the entire first part details their supply chain approach.

A look through their report teaches us that GAP has 90 “Vendor Compliance Officers” who performed 4,438 inspections of 2118 factories in 2006, covering 98.7 % of the factories that received the approved rating in 2005. Terminations of contracts do happen.

Additionally, GAP also invited all its top suppliers to a conference in 2005 to assess their capabilities in an effort to make sure the right type of order ends up with the right kind of factory (high-quality, small order vs. low-quality, quick, bulk orders etc.) and the emphasizes the importance of the relationship. These relationships are a work in progress and perhaps a step to inducting these suppliers into a more transparent ethical sourcing structure, again, as their report details.

It is clear that GAP does not willfully work with sweatshops that condone child and slave labor and actually does quite a bit to stimulate responsible business is its suppliers. But for instance, the Clean Clothes Campaign’s Looking for a quick fix report shows how, codes of conduct, audits and inspections are only half a solution. It is telling in this respect that despite GAP’s impressive inspection figures it only takes a team of inquisitive reporters to find a very rotten apple, just like in 2000, when the BBC reported on poor working conditions and abuses in GAP suppliers in Cambodia.

Granted, this instance concerns an unauthorized subcontractor to one of its suppliers. It is not clear whether this supplier has been inspected recently, but they clearly went outside of the agreements they had with GAP. Despite working on closer relationships with suppliers, this one slipped through the net in an act that the supplier must have known would severely damage their relationship with GAP.

The abuses are a vivid illustration of the dilemma’s faced in the apparel supply chain, between price and ethics incentives and who is responsible for them. Should GAP inspect even more? Or should it simply pay more for the products it sources? How far does their responsibility go down the chain? The first tier? The second? Or should they simply not source from high risk areas? Should the Indian government put more effort into enforcement of labor laws and perhaps take funds from another project or indeed risk its economy as low-costs producer? Where does human decency factor into the economic decision of parents deciding to sell their children and of factory owners that put them to work without pay and the GAP’s supplier’s disinclination to check this adequately when sub-contracting? What about individual consumers? How much doubt about ethics should we tolerate in a product, if any?

If anything GAP’s report is a good tool to highlight some of these dilemmas and how they deal with them. Their quick response to the issue has also been laudable, including ad hoc engagement with all suppliers in the region. The Gap report is a good start to showing how this incident may be the exception rather than the rule. But GAP will have to continue to structurally engage its suppliers, check them, train them and create the conditions for them to successfully meet GAP’s demands for price, quality and ethics.

But should GAP also ask suppliers to report from their perspective? This could help GAP and its stakeholders better understand the dilemmas from both sides. The sustainability report I would really have wanted to read, would have been the supplier’s!

Openness vs. Transparency

It made me think of one of the publications I read with great interest in preparation for the Transparency in the Supply Chain project was “A view on sustainability? Transparency in supply chains investigated” (“Zicht op duurzaamheid? Transparantie in productieketens onderzocht”), by MVO platform and it combines transparency research on specific products (gravestones, gems, cobalt, T-shirts, MP3 players and several tropical agricultural products) by several Dutch organizations.

The writers make the distinction between openness, which is, roughly, opening your shop being cooperative and providing information and clarity and transparency, which means that there is enough information available with the company on the sustainability aspects of a product including where and how all the components have been sourced. Where openness is a matter of attitude, transparency is a matter of capacity and the latter would appear to be a development of the former.

In that light it makes sense that some of the participating investigators found that SMEs were as open as larger companies questioned but that they were not as transparent. They are externally motivated to share the information that they have, anything really, to help them sell their products and/or services.

But clearly capacity is ultimately a function of demand. As long as transparency is asked for by buyers, be they larger companies downstream from the SME or (end) consumers, an SME or any supplier will see the case in obliging its client by building the capacity and providing sustainability information.

Initial indications from the project are that this is certainly one of the early motivations for companies, but that they see the value of reporting for their company’s internal operations and stakeholder management after a while. In the project transparency builds a more intrinsically motivated, open, attitude. And yes, I would consider this intrinsic motivation is a more favorable basis for supply chain transparency.

Supply chain: trust, openness and collaboration

One of the premises of the Transparency in the supply chain project is that MNEs partner up with their suppliers to assist them in making their reports. The MNE buyers, as experienced reporters, one of the main stakeholders and important client are seen as ideal candidates to fulfill this role.

Whereas the 90’s saw a huge wave of outsourcing, of operations and risk, we are currently seeing something of a reverse trend. Companies are integrating again. They’re not internalizing the tasks they rid themselves of, but they are increasingly only sourcing them to a tighter circle of trust suppliers and subcontractors and communicate with them more intensively.

Conceptually the project is based on this trend among leading companies to consolidate their chains and communicate with them more intensively. Sustainability performance is becoming more important for an MNE to communicate on, so it aught to become more important for its suppliers to communicate on as well.

To pick one example from our project, the Otto Group, has buying houses in Bangladesh, Hong Kong and Istanbul. There are people responsible for CSR in these offices and they work closely with Systain, the sustainable business consultant also involved in the project, which itself was formerly part of the Otto Group.

This consolidation is more than just a longer term commitment to certain suppliers. In another example, Nike’s Hannah Jones points out that they had sourced from the soccer ball factory in Pakistan for ten years before they terminated the contract when they found violations. Genuinely engaging with the supplier and trying to build some openness and trust in the relationship can work for both the buyer and the supplier.

The trust built up between key suppliers and Otto is part of what convinced some of these small companies to join in the project in the first place and they are starting to recognize its value along the way!

Deloitte highlights systemic risk in supply chains

When Deloitte’s Consumer Products Group recently surveyed consumers, 855 indicated being aware of the recent recalls and the supply chain scare, 33% indicated paying more attention to labels and packaging since then. More importantly 18% indicated they had actively started looking for additional information on the internet and elsewhere.

Deloitte categorizes the recent recalls as a new type of systemic risk that can seriously damage brand value. It further says that most companies are completely unprepared to deal with this kind of risk.

In the article, Pat Conroy, vice chairman and U.S. consumer products group leader at Deloitte & Touche USA LLP is quoted as saying: “Companies must now decide how they will compete in a much more transparent future (…)They have an opportunity to create and maintain trust by adhering to the highest standards of quality and transparency. On the other hand, in this new age of transparency, there will be immense consequences for missteps, which will directly affect consumers’ trust.”

It seems that in the age of increasingly aware and active customers, companies will have to be completely open on how they’re doing. Companies have to go out on a limb and explain themselves preemptively; describe the risks of their business and their supplier choices before something goes wrong.

When it does, and millions of consumers start browsing for details, it helps if there is a trusted, reliable, and brutally honest sustainability report available to pop up in their queries (as well as reports from key suppliers).