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!

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.

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!

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).

On Monday the Financial Times topped with a story on Wal-Mart, which is starting a pilot with thirty companies in seven product categories to get them “to measure and report their green house gas emissions, in the biggest move to disclose emission from businesses.” Wal-Mart wants to be able to compare suppliers based on their emissions efficiency, and they draw a direct line from reducing emissions, to reducing energy use and thus cost among their suppliers. Eventually the retailer wants to role out the program to 68,000 suppliers.

It seems that the main supply chain initiatives fall into one of two categories: either they go far down the value chain of a product, from the base of the pyramid to the top, completely disclosing on a product; or they go wide, casting a wide net and engaging many direct suppliers of the company and dispersing the initiative across more suppliers, but not as deep.

The article is interesting because it lists efforts by Coca-Cola (also part of Wal-Mart’s pilot),Cadbury Schweppes and Kimberly-Clark trying to do the former, measuring the carbon footprint of certain products, whereas the Wal-Mart initiative and currently also the GRI/GTZ “Transparency in the supply chain” project do the latter, engaging first tier suppliers.

Looking at this division, it is interesting to see that brand name companies are looking to make certain identifiable products stand out as completely transparent, whereas retailers lean more towards being “generally responsible” and engage with their direct suppliers, which, of course, are quite often said brand name companies.

Regardless of preference or relative incentives, however, it is important to choose the right approach for what you want to measure. As far as emissions go, it makes sense to go as far down the supply chain as possible: the big emissions are usually at the bottom of the value chain! EarthNews’s Michael Burnham rightly remarks that “To reduce its indirect emissions of carbon dioxide and other Earth-warming gases, Wal-Mart may have to influence companies several layers deep into its supply chain.”

You can start by going far or wide but to really measure emissions in a significant way it will be relevant to end up doing both.

In 2002 Reebok, the sportswear company purchased by Adidas last year, experimented with the setting up of worker’s unions in China. They were carefully applauded by some but also criticized for interfering so heavily in their suppliers affairs in order to “appear good”.

Recently, Peter Lee, a labor activist, investigated one of these factories five years on, just before the unions reps were due for reelection. The report reflects some of the disappointment among workers with the union, which only seems to organize social events and barely represents the workers. The union will likely not hold an election but instead appoint new members itself, including the unpopular union leader.

Stephen Frost, writing for Hong Kong based CSR Asia Weekly cites this report, openly asking whether it could really be expected that anything else but this would happen. Worker’s unions should be worker owned, not externally implemented or demanded.

Of Reebok’s role he says, somewhat harshly perhaps, that Reebok’s Chinese Trade Union Experiment is yet another example in a long line of examples that demonstrate how workers’ aspirations are repackaged into forms that suit external agendas.” What can a company do in environment were organizing an independent labor union is already difficult, if not impossible?

He answers that the new client Adidas should do everything within its power to make decent work possible, such as ensuring decent workplace conditions and place orders in such a way that the factory can actually comply with local labor law.  This would allow somewhat normalized relations where industrial action doesn’t automatically entail missing a very tight order deadline.

I would tend to agree with this. A union should be independent and not set up under the auspices of a client. This, of course does not stop the necessity of an enabling environment, and a clear picture of the issue suppliers and their workers are facing. Arguing along the lines of Oxfam’s Offside! Report that transparency is key in this respect.

More and more brand companies are releasing their lists of suppliers, but “Transparency does not, however, end with the release of supplier addresses”, companies will still be asked about their sustainable supply chain management efforts. People will want to know about the actual improvements being realized for workers, or indeed, what improvements workers can realize for themselves, through unions. I think that getting this type of information and presenting it is part of what a supplier sustainability report can do, on its own, or as part of the brand company’s communication efforts.

With the recent recalls of toys and other products made in China (Mattel issued its third recall last week), the “made in China” brand is taking a hit. In a column in Ethical Corporation Magazine by Chandran Nair he rightly asks: “why is this so surprising?”. Chinese manufacturing thrives on low prices and often low quality, producing for US and European companies. Pressure for lower prices are an invitation to cut corners.

His main argument is that despite outrage in the West there is clearly a shared responsibility between the government and buying companies: “outsourcing responsibility doesn’t work”, to quote the title of the column.

In the case of lead paint in toys and loose magnets, the flaw was caught relatively easily: it was something that could be tested on the products themselves. What about economic, social and environmental issues which are also under pressure due to a similar mentality?

Mr. Nair perceives that “[t]he situation presents challenges with a strong moral core that rests on individuals and companies doing the right thing.” The solution he presents is the extension of Nike-style full disclosure of suppliers: “Such lists invite partnerships that pave the way for full, open co-operation on labour, environment and business issues.”

In many sectors such transparency is very feasible. To add a specific step to Mr. Nair’s train of thought: sustainability reporting by suppliers could be a great tool to start dialogue and partnerships. This will benefit not just product quality and safety, but will also start to address the social and environmental issues very concretely.

“Doing the right thing” is premised on knowing what’s right. A reporting process is a way to find out and plan and communicate how to move forward.

Read Chandran Nair’s full column here:

http://www.ethicalcorp.com/content.asp?ContentID=5359

The Dutch newspaper Trouw ran an article today stating that the French supermarket company Casino will start informing its customers about the foodmiles (or kilometers) of their house brand through labels (Trouw, September 4th 2007). The labels will be color coded and the recyclability of the packaging will be stated as well. They expect to have all of their 3000 products labeled by end of 2008 and have already taken action on some products: a cod filet that traveled 27.000 (!) kilometers before arriving at the store was taken out of the range. I haven’t been able to find any confirmation of this initiative in other news sources.

Several other supermarket chains and retailers are exploring similar schemes, Tesco announced an initiative to start reporting the carbon footprint of the 70.000 products they carry back in January (The Guardian January 29th 2007), but have not implemented it yet due to the complexity of the measurement. Another illustration:Timberland, the US shoe brand, has looked into reporting the carbon footprint of their products. The difficulty they encountered was that they’d have to measure all the way down to the cows, which the real base of their supply chain and the largest contributor to the carbon footprint (Environmental Leader, March 28^th 2007). One advantage Casino has is that they own their own distributor, Easydis.

With these labeling initiatives care should be taken to distinguish between foodmiles, being the distance a product (including all the separate components) traveled and the carbon footprint, which takes into account emissions of a particular mode of transport as well as the bulk and weight of the product. Laudable as they are in providing some much need transparency for consumers, the way in which such a label is implemented and what it will cover will be something to keep a sharp eye on once the system is in place.

These initiatives are a sure sign that green consumption is on the rise and major players see it as having great market potential, with Tesco accompanying their January 19^th announcement with a £ 500 million (€ 740 million) pledge to turn “the fringe green lobby into a mass consumer movement” (The Independent, January 19^th). And, coincidentally, today is the annual Dutch “Sustainable Tuesday”, a reference to the 3^rd Tuesday in September when the cabinet budget for the year is traditionally announced. The theme? Putting Sustainable Consumption on the Menu.

The first post in a new blog about sustainability and reporting in global supply chains. 

How did it come about?

This blog stems from the work that Leontien Plugge and I  are doing in the context of the Global Reporting Initiative’s work in the joint GRI/GTZ Transparency in the Supply Chain project. In short, this project is looking to help small and medium enterprises that are part of the global supply chains of several large European multinationals to report.  By going through a reporting process, with the support of the the value chain leaders (the European MNEs) knowledge and understanding about supply chain sustainability challenges of both buyers and suppliers can be exchanged, generating better information for decision making of the parties involved with a view to improve the sustainability of the supply chain.

What can you expect?

This blog allows me to pick up on the interesting issues, ideas and challenges that come across my desk through the project and research into supply chain issues generally. The project is not the reason to blog, it’s the backdrop. Hopefully this blog will elicit some interesting responses as well, contributing to the overall discussion about reporting and supply chains.  I will also invite Leontien and experts in the field to contribute on a regular basis to share their expert opinions and experiences.