The article below is written by Kaush Oza on November 11, 2011

Ethical Manufacturing Sourcing is a critical component of Corporate Social Responsibility.  The goal is to use suppliers that incorporate principles of morality in manufacturing conditions, including proactively trying to reduce harm to and / or exploitation of labor and the environment.  Addressed correctly, ethical manufacturing sourcing minimizes the risk of failure within the supply chain.  Some industry sectors are more impacted than others.  Not surprisingly, the retail and consumer product industries garner the most public attention as the customer experience of tangible products and their ethical-sourced supply chain are integrally woven.

There are five key enablers for ethical sourcing that will drive and create a competitive advantage, not to mention a market enhancing image for a company that addresses ethical sourcing correctly:

  1. Reach out to Suppliers as Partners – A multi-partner strategy where the company uses not only its internal assessment, but also external sources in evaluating its supply chain partners is desirable.  This is especially true for countries where initial production is the beginning of the sourcing process – no company wants bad publicity to smear its image.  The United Nations, Non-Governmental Organizations, and human / environmental rights activist organizations can play an important role and provide contextual information.  However, nothing replaces a partnership approach where a company can continually evaluate and support its supplier base in the form of joint development activities and assistance in prototyping a desired product line to specifications.
  2. Reward / Penalize Behaviors – A solid Supplier Relationship Management Scorecard should incorporate a metrics driven structure that can quantify and qualify supplier ability to sustain their ethical manufacturing commitment.  This structure should reward suppliers who are consistently delivering on their promises in the form of repeat and increased business. This does not mean volume commitments, but a partnership approach to utilize dependable services and products.  It is important to have clear objectives and metrics, and equally important for the suppliers to be aware of the company’s program and expectations.
  3. Incorporate Ethical Sourcing Language into RFx Events – Contractual language should be well crafted to deter any major deviation from the norm.  By providing clear Terms and Conditions for sourcing via electronic or manual bid processes a standardized structure should be implemented.  For companies with global business units it is imperative that a uniform process drive the bid process.  This can be done by involving legal, marketing, and finance teams in the sourcing discussions during the pre-bid process.
  4. Manage Risk at Source – Periodic inspection and / or supplier outreach is another aspect of ensuring conformance to desired objectives.  Failure to assess or support supplier programs can have undesired consequences for production cycles.  Proactive monitoring of manufacturing conditions (e.g., labor standards, environmental conformance) tells the supplier that the company is serious in its intent to address the ethics challenge.
  5. Collaborate with a Wider Audience – For any consumer product, retail, or manufacturing activity with a global footprint an alliance approach is critical.  For instance, for a retailer or consumer product company that heavily uses labor meeting International Labor Organization (ILO) guidelines or for a toy company being integrally involved with International Council of Toy Industry (ICTI) should be a basic foundational capability.  However, the dialogue and more importantly management of the company’s image should extend to a broader audience, including consumers, workers, shareholders and sub-contractor networks. While retailers can be reluctant to work with their competitors, sharing common information about environmental or child labor transgression related to a supplier helps to weed out undesirable activities without anger from or harm to the end consumer.  More importantly, it sends a message to suppliers that the industry means business.

Early adopters of ethical sourcing have leveraged this capability for years.  With technology capabilities allowing our globe to continually “shrink” and be more competitive, ethical sourcing is now gaining traction on a much larger scale.  There are three benefits to pursuing ethical sourcing:

  1. Market Image – Consumer perception and buying habits are often swayed by how a company conducts or does not conduct itself.  The last thing a company wants is adverse publicity.  A single environmental or child labor issue can have a far reaching impact on a company’s image not to mention its market standing.
  2. Cost Avoidance – Focus on product safety and improved process controls enables better contract handling and monitoring of supplier scorecards.  This in turn provides companies with the ability to reduce suppliers and more importantly product / service failure rates while improving the overall cycle time.  This is of utmost importance particularly during recessionary times or declining sales as CFOs are under pressure to reduce costs and improve margins.
  3. Bottom Line Impact – Companies that pursue ethical sourcing reap the benefits of better supplier relationships, reduce risk exposure and improved cost structures. The reason is greater efforts are made by the companies in allocating time and resources to ensure suppliers are living up to higher moral standards and execution responsibilities.

During tough economic times such as currently seen in the market, where sales are stagnant or declining, ethical sourcing can provide much needed margin improvement.  Ethical manufacturing sourcing is not about a philosophy or a new fangled approach in this day and age – it is another potential channel that companies can implement across the organization’s buying habits to enhance their image and reduce waste.