What Makes A Sourcing Strategy Ethical?
Ethical sourcing is being able to demonstrate that your sources of supply, at every step in the supply chain, are protected and free from unhygienic, unacceptable, unsafe, or exploitative working conditions. Examples of this would be fair wages for staff, no evidence of a fear or violence in the workplace and having regard for the local environment including animal welfare.
A sourcing strategy should be able to plan out targeted questions in tender documentation to check that mandatory requirements for supplier qualification are met. Any successful supplier in a tender process should then be audited to cross check the mandatory requirements are being met over the duration of the contract. This coupled with the right KPIs for value engineering and improvement in the contract will ensure costs are optimised whilst maintaining ethical standards. Contract management planning and activation post tender is key to retaining visibility in the supply chains – such as capacity-building and worker education programmes.
What Are The Challenges?
There is a need for dedicated staff within the business and procurement to regularly monitor supply chain compliance through contract management across the complex web of suppliers within an organisation. This requires investment in the right technology, as well staff to get the promised standards and not just apply lip service to the concept.
Products that are sustainable and ethically sourced may have a higher price initially. However, investigating and protecting the value chain can lead to lowering costs by reducing waste and developing new production more efficient techniques.
Securing sources of supply which are robust, dependable and meet your ethical sourcing standards can lower costs by through boosting your company’s competitive advantage and thus brand value. The World Economic Forum has estimated that sustainable and ethical sourcing processes can reduce costs in the supply chain by up to 16%.
Pleading ignorance is not a viable excuse for poor practices in your supply chain. Ensuring that all Tiers of the supply chain are compliant with ethical sourcing practices is a must for organisations, or they face a potential backlash from customers, stakeholders and the wider public. Organisations can damage their brands if they have breached Modern Slavery regulations and end up in court which is very costly.
Where Should An Organisation Start?
Begin with the basics such as creating and mandating a supplier code of conduct, standardising tender questionnaires and launching a robust supplier audit program.
Then target a tranche of suppliers, by category, that may have the most challenging issues – such as a specific region of the world from which you source, which ones that may cause the greatest risk to your business from a human rights perspective or where you could have the biggest impact in terms of creating a solution. Launch a focussed, cross functional team to assess these value chains and report the results. Learn from the first project round and repeat until most all suppliers are under review.
Make sure to join industry groups and associations, attend conferences on the subject and get up to speed with the latest technology that can assist in networking supply chains to gain transparency for your stakeholders.
EU Taxonomy In Ethical Sourcing
The EU Taxonomy is an initiative designed to help investors and businesses identify sustainable projects. It provides them with a common language that can be used to describe, compare and measure sustainable activities. This makes it easier for companies to track the impact of their investments on sustainability goals across different sectors.
The regulatory landscape is expanding and evolving constantly. To succeed in a sustainable environment, global companies should develop a comprehensive system to collect, report on, and verify climate data to ensure full compliance with the new regulations and be prepared for any future ones. With the right technology, businesses can easily track their progress towards meeting sustainability goals and adapt quickly to changing regulations. Transparent reporting of this data is key to gaining customers’ trust and can also be used as a marketing tool to demonstrate a brand’s commitment to sustainability. For more information on global market regulations and how they affect brands and retailers, check out Global Market Access: A Regulatory Guide for Apparel Brands & Retailers.
How Can Technology Help?
Technology is a key component in embedding a successful ethical sourcing policy process and practice. There are systems available that can undertake multitier supply chain mapping, chain of custody for regulatory compliance , analytics risk reports, supplier onboarding and due diligence, and prebuilt questionnaires for tenders. Blockchain is also being used to track all supply chain transactions, through to digitisation of key data linked to performance management real time.
What Role Does Culture, Communication, and Collaboration Play?
Global supply chains are complex and can be multi-tiered. This presents a serious challenge with limited visibility down to into the supply chains. Mapping systems and technology can help but only if this policy is embedded within the business and cross functional teams work together to manage supply chains as part of contract management. There is movement from tier one contract management of supply chains to managing the supplier networks.
AI-powered reporting will enable teams to keep track of supplier and product information – using global data sources from different countries, regions and languages. The key is to raise the issues and gain the sponsorship to address the risks proactively.
Key Regulations To Follow
There are many. Below is a few to be aware of depending on which country you operate through. The key here is that you will need dedicated staff to monitor and manage these policies and keep up to date on the developments.
UK Modern Slavery Act
The UK Modern Slavery Act requires companies with a global turnover of £36 million or more to publish an annual statement outlining their efforts to prevent slavery and human trafficking in their supply chains. Although no criminal sanctions exist for non-compliance, the Secretary of State can file injunctions to compel companies to comply with the Act.
EU Corporate Sustainability Due Diligence (CSDD)
The European Commission’s proposed Corporate Sustainability Due Diligence Directive (CSDDD) is an important step towards ensuring responsible corporate behaviour, as it requires companies to integrate human rights and environmental considerations into their operations and governance. This covers both EU and non-EU companies, mandating due diligence for any adverse impacts across their operations and value chains. In addition, large companies must align their strategies with the Paris Agreement’s climate goals.
The directive also puts the onus of oversight and implementation of due diligence onto company directors, who are tasked with considering human rights and environmental consequences when making decisions. It will be enforced through a combination of administrative supervision and civil liability, allowing both companies and citizens to benefit from improved human rights protection, environmental health, transparency, and stakeholder awareness.
French Vigilance Law
The French Corporate Duty of Vigilance Law holds large companies accountable for identifying and preventing human rights and environmental risks stemming from their operations, suppliers, and subsidiaries. These firms must create public vigilance plans to cultivate corporate social responsibility and help victims seeking justice. The law applies to companies that employ at least 5,000 employees, including subsidiaries (or 10,000 if not in France).
Companies not located in France but have supply chains running through the country must also comply. Those obliged to follow the law must create and publish vigilance plans annually, which outline risk mitigation measures, supply chain assessment, risk collection, action plans, and monitoring. Failure to comply could lead to fines of up to 10 million euros after a three-month grace period.
Dutch Due Diligence Act
The Dutch Child Labour Due Diligence Act aims to hold companies accountable for unethical supply chain practices, even if registered outside the Netherlands. This law requires companies to investigate any possible involvement of child labour and issue due diligence statements that outline their action plans should any suspicions arise. Non-compliance subjects companies to administrative fines and criminal penalties. This pioneering law demonstrates the Netherlands’ commitment to eliminating child labour and promoting ethical business behaviour. It serves as an important reminder that companies must be aware of their supply chain practices to uphold human rights and meet legal obligations.
German Supply Chain Due Diligence Act
The German Supply Chain Due Diligence Act imposes stringent regulations on companies operating in Germany with over 3,000 employees (dropping to 1,000 in 2024). This law mandates that businesses assess, monitor and mitigate risks associated with human rights and environmental violations within their supply chains. Companies must create a risk management system along with a designated human rights position responsible for regular risk analyses and developing a human rights strategy.
Additionally, businesses must take preventive measures such as ensuring their indirect suppliers are included in the due diligence process and have an established protocol for handling violations. Organizations that do not comply with the law face fines of up to two percent of their annual turnover. This legislation is indicative of Germany’s commitment to ethical business practices, responsible global supply chains, and protecting the environment from human rights abuses.
The Uyghur Forced Labor Act (UFLPA)
The UFLPA came into effect on June 21, 2022. According to the law, the United States Customs and Border Protection (CBP) requires companies to conduct due diligence and certify that their goods have not been produced with any form of forced labour or human rights abuses. Businesses must demonstrate that they have tight procedures and protocols in place for monitoring supply chains, including checks and auditing. If companies are found to be violating the law, they face serious penalties, such as being banned from doing business in the U.S. and expensive fines.
To fully comply with the UFLPA, companies need to know where their products are coming from and who is involved in their supply chain – from raw materials to the finished product. This means that companies must actively engage in supplier management, both from a legal and ethical standpoint.
European Union Corporate Sustainability Reporting Directive (CSRD)
Greenwashing, the process of using deceptive marketing to make a company or product appear environmentally friendly, is a pervasive issue that can damage customers’ trust in a brand and even lead to legal action.
The European Union Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy for Sustainable Finance are two initiatives designed to increase transparency in corporate sustainability reporting, helping to safeguard final customers from misleading claims in corporate communications.
The CSRD is an EU directive that has global implications as organizations’ supply chains often span across the globe. Companies are expected to provide a full overview of their own activities and those of their subsidiaries and suppliers they have control over globally – even if the activity is outside the EU.
Featured in Procurement Magazine https://publication.procurementmag.com/procurement-magazine-march-2024/0769225001709109953/p70