Building Corporate Social Responsibility in the Supply Chain

A progressively globalized business landscape, coupled with highly visible safety and environmental crises, has elevated the role of corporate social responsibility, or CSR, at many international corporations. Considering some of the recent disasters, like Cambodia’s deadly labor protests or Bangladesh’s factory collapse, establishing a CSR supply chain is particularly critical.

For businesses, corporate social responsibility spans all practices of the business that present an environmental, social or economic impact. Both social pressure and growing diversity in the supply chain have transformed what CSR governs. While previously companies may have focused on one element, for example, fair labor practices, managing all aspects of the supply chain – and ensuring sustainability environmentally, socially, and economically – is increasingly important. Companies are responsible for their products before, and after, they are sold to consumers, including every step involved with creating and distributing that product along the way.

Why Does CSR Matter?

According to the Korn Ferry Institute, most major companies outsource production to companies like China, Bangladesh or Vietnam, which can have crude human rights practices, compliance standards and working conditions – but generally offer lower operating costs. In emerging economies like Cambodia, Laos and Myanmar, the overhead for the company may be even lower, but so are the human rights, compliance and working condition standards.

Issues with sustainability in the supply chain can invite a host of challenges for corporations and consumers alike. Some examples include deforestation in the pursuit of food or consumer goods, natural resource or raw commodity shortages, conflict minerals or the economic livelihood of the workers and their communities.

Businesses benefit from CSR, too. Practicing sustainability in the supply chain can help mitigate or avoid reputation damage altogether. As IBM highlights in its IBM Corporate Responsibility brochure, thanks to the internet, the supply chain is visible, and consumers view all links in that chain as an extension of the brand. And while transforming the supply chain with a sustainable, responsible lens may increase some operational costs, it may pass along savings through alternative energy, disaster avoidance, risk reduction, an enhanced publish image and resource recycling, according to the Korn Ferry Institute.

Establishing governance that manages and improves the supply chain can also increase labor productivity, boost efficiency and spur innovation.

In practice, PepsiCo realized more than $60 million worth of energy-saving opportunity when the organization launched a carbon management and energy assessment with its suppliers. UK cosmetics firm Lush is another brand that is well known for its commitment to ethics, opting to buy products because they are the safest and the best – not because they are the cheapest. With more than 800 stores across the globe, the company is a good case study in why organizations don’t have to forgo success to pursue ethics.

Best Practices for Building a Sustainable Supply Chain

Businesses can build corporate social responsibility into the supply chain by establishing some standard practices:

Source Green Materials  

Although any eco-friendly product’s main cost component is the raw materials, businesses can offset these costs through innovation, enhanced brand value perception, lower logistics costs due to lighter weights or an improved development life cycle.

Practice Inclusive, Diverse Sourcing

For large corporations, partnerships with small businesses, or business owned by women, minorities, persons with disabilities, veterans or LGBT people offer multiple benefits. For one, it presents a commitment to the community, which can, in turn, improve public relations, forge stronger relationships with regularity agencies and boost employee engagement and candidate interest. Some companies enforce this with diversity criteria; others sponsor forums to help foster those connections.

At IBM, a culture of diverse sourcing is fostered through its supplier diversity program. Through the program, IBM strives to offer opportunities to diverse suppliers who have value to offer. In 2015, IBM reportedly spent $2.6 billion with first and second tier diverse suppliers, including $718 with non-U.S. suppliers.

Walmart pursues diverse businesses through its annual Open Call, where the company hosts potential suppliers and explains its pricing strategy to help potential suppliers offer relevant products at competitive prices in their pitches. Looking ahead, the company also offers scholarships for diverse business owners to attend Dartmouth’s Tuck Executive Education program.

In many cases, upholding environmentally friendly best practices may require partnership with parties outside the organization. Environmental management encompasses emissions control, appropriate disposal of hazardous and nonhazardous waste, recycling, energy efficiency and the pursuit of alternative energy. For Walmart, this compliance includes committing 34 million acres to fertilizer optimization, diverting up to 78% of waste and the adoption of 28% of its energy supply from renewable sources. By 2025, the company plans to source half its energy supply from renewable sources and reduce its operational emissions by 18%. 

Screen and Audit Suppliers

Businesses can embed sustainability into procurement processes. Up front in the sourcing process, companies can establish sustainability standards and set a zero-tolerance policy for them. Including major failures in termination policies helps companies eliminate suppliers who violate these requirements, either through an immediate termination or through phasing. To know if a supplier has violated a requirement, organizations should regularly examine the supply chain in detail. Often, this should include visiting suppliers and working alongside them to truly understand practices.

Suppliers for IBM are measured against environmental goals that quantify greenhouse gas emissions, energy use and waste, for example.

Auditing the supply chain should include delving into all suppliers, not only the largest ones. For example, Ford Motor Company has taken action against forced labor for the production of the pig iron that helps to create steel, according to a report by the United Nations Global Compact. The supplier is at least six tiers removed. For electronics companies, this could mean going as deep as the mineral sourcing, as these come from regions rife with social conflict and human rights violations.

Collaborate With Suppliers

Organizations can also encourage innovation and improvement from suppliers through incentive programs, preferred suppliers programs and supplier events that promote collaboration, sustainability and responsibility. A culture of transparency and accountability across the supply chain can reduce a heavy burden from lengthy audits. Not to mention, pulling suppliers together allows every party to learn from the other, which may reduce the burden on a single supplier, better standardize processes and increase capabilities. Collaborations should begin with expectation setting through the code of conduct and contracts to establish priorities. Then, through training, resources and general support, businesses can work with suppliers to improve capabilities and address issues that surface during an audit or as a result of disclosure. 

In some cases, this collaboration can extend outside of a single company and its supply chain. For example, IBM is one of 109 companies in the Electronic Industry Citizenship Coalition (EICC), which strives to create a sector that operates with social and environmental awareness. Within the coalition, teams have established the code, validated an audit process, built capability, assessed indirect spend, engaged with China, Europe, Asia and Indonesia on smelter issues, reported on conflict minerals, and established due diligence practices.

Walmart established a Sustainability Index, to foster disclosure across supply chains and to put that information into the hands of the customers.

Address Buying and Procurement Practice

Supplier scorecards should include a sustainability measure, and all procurement staff must be trained on sustainability practices, which include product risks, social compliance, responsible buying practices, and opportunities. Engaging and communicating with suppliers should be supported for buying staff. Finally, the system itself should establish practices that support sustainability. For example, a purchase order could be suspended until a supplier has met established standards. And the buying staff should understand the role and responsibility they have in furthering sustainability, which includes setting realistic deadlines and cost requirements that do not undermine that goal.

 Keep it Simple

While companies may be tempted to rotate suppliers or swap them out altogether to pursue the lowest cost, this regular shifting can make monitoring the supply chain increasingly difficult. In some cases, this can even invite additional sub-contracting to further convolute the supply chain. 

Make Ethics Part of Every Decision

While businesses may set and pursue sustainability standards at a corporate level, these objectives must permeate the supply chain – even when cost pressures also come into play.