How can supply chains be more ethical? – Why is it important to have an ethical supply chain?

Ethical supply chains it’s no longer a choice… It’s a Must!

Today, there is more pressure than ever to clean up supply chains. Recent research from Garnier shows that 73% of consumers want sustainable products and that businesses with low sustainability credentials will increasingly deter people from buying them (1). As a result, most of the hard work on sustainability takes place in the supply chain, with Scope 3 emissions – those from vendors – accounting for up to 80% of all companies’ emissions. Historically, there have been high-profile ESG (Environmental, social, and corporate governance) transgressions* that caused public outrage. Fashion and food have historically been the most affected by ESG transgressions. Examples include a famous sports clothing company’s use of sweat-shopped slave labor in the late 1990s, and the boycott of a big food company during 1977-1984, because of its aggressive marketing of powdered milk formula across Africa (2). North-West African chocolate manufacturers are eliminating child slave labor from their supply chains (Picture 1) as a result of a lawsuit filed last year by children represented by an international human rights organization, who say they were forced into slavery on cocoa plantations that supplied the most significant food companies with cocoa. 

Picture 1. North-West African chocolate manufacturers are eliminating child slave labor from their supply chains.

• ESG is a framework embedded into an organization’s strategy that considers the needs and ways to generate value for all organizational stakeholders.

Besides being illegal, such supply chain offenses also damage the organization’s reputation (2). For example, migrant workers in Italy, the third-largest tomato exporter in the world, continue to be exploited by illegal gangmasters – known as Caporale – and unethical processors and growers. The high demand for seasonal, temporary labor, particularly in southern Italy, attracts vulnerable economic migrants seeking to support their families. Carporale often recruits and exploits them through illegal wages, poor working conditions, a lack of contracts, and forced labor. According to recent research from Italy’s National Labour Inspectorate, similar practices are on the rise throughout the country, with over 68 companies in southern Italy set up to be using irregular employment practices from 2020 to 2021. The agri-food industry remains the most exposed sector. Seasonal labor is one of the many areas where a planter can try to reduce costs, making the services of illegal gangmasters a charming option. By committing to pricing that reflects the factual costs of the product and signing contracts in advance of the crop season, processors can play an essential part in enhancing fiscal stability among farmers and reducing the threat of unethical practices that allow Caporale to thrive. Naturally, developing and enforcing practical social sustainability approaches takes time and investment. A fair and transparent price for tomatoes, while guaranteeing a 100% ethical, ‘Made in Italy’ product – in my view – is apparently a price worth paying (3) (Picture 2).

Picture 2. A fair and transparent price for tomatoes while guaranteeing a 100% ethical, ‘Made in Italy’ product.

The demand for ethical sourcing, sustainability, and fair trade is growing, particularly amongst the coming generation of consumers. Retailers can only try to wear an invisible mask over their supply chains for a while and anticipate thriving. The capability to trace origins and provenance with astounding detail means retailers cannot hide behind an invisible mask in terms of their impact on other rudiments of their force chain. While end-to-end visibility makes business sense, it’s ethically the right thing to do. By enabling transparency, we can protect workers, the environment, and communities that have suffered behind a façade of ignorance. These areas of concern should also become less vulnerable to exploitation as transparency shines a light on unethical practices. Those supply chain leaders and retailers who regularly fall foul of exploitation will no longer be suitable to deny knowledge or keep their brand faultless.

Here are six steps organizations should take to build ethical and sustainable supply chains successfully (4).

1. Identifying Trusted Suppliers 

Before adopting an ethical supply chain strategy, organizations must find business partners with the same ethical practices. They can search for possible partners based on specific criteria – for example, whether the company in question follows sustainable working practices or adheres to fair labor practices (4). 

While the international community has generally acknowledged that corporate globalization has reduced poverty in many regions, another scourge is decentralized corporate supply chains. Despite global attention, resources, and regulations, the International Labor Organization (ILO) estimates that 10 million more people will be in slavery in 2021 compared to 2016. In 2021, there were 10 million more out of 50 million people living in slavery around the world, owned by another person, and 28 million were working in forced labor (Picture 3). In addition, it is often surprising to many that forced work is high in developed countries: we encounter more than 52% of all forced labor in middle or high-income countries. The ILO emphasizes the importance of supply chain due diligence to reverse this trend. With over 86% of forced labor occurring in the private sector, the focus is clearly on corporate procurement and supply chain teams, who face daunting due diligence and pressing moral obligations. In addition, new and evolving regulations such as the German Supply Chain Act and the EU Business Due Diligence Directive will soon make it a legal requirement for organizations to include strategies to ensure that human rights due diligence measures adequately identify and mitigate risks in their operations and supply chains. But companies should not wait to implement their compliance strategies until the legislation affects them. Companies in all industries can begin or accelerate their efforts by building the internal understanding and capability to create a foundation for monitoring and managing risk. A good starting point is the international policy frameworks and guidelines, such as the UN Guiding Principles on Business and Human Rights. A broader sustainable procurement program that includes environmental and ethical issues should integrate modern slavery and human rights due diligence (6). This way, the organization gains efficiencies- avoiding silos, facilitating information flow, and increasing understanding of correlated risks – and suppliers, which increases the incentive to participate. Overall, companies must trust their partners to ensure ethical practices throughout the supply chain.

2. Secure relationships with business partners 

Once a supplier is selected, it is essential to ensure that the supplier communicates with your organization. You can do this by using an identity and access management platform to define the digital identity of business partners across the business ecosystem. You will increase trust and minimize risks in business partner relationships. 

Picture 3. Data showed that 28 million people were working in forced labor in 2021

By doing this, you can ensure that third-party business partners, suppliers, and contractors have safe access to the internal systems they need depending on their role in the ecosystem, including logistics, inventory management, warehouse and enterprise systems, and data. 

3. Digitize Your Supply Chain  

After acquiring the desired business partners, companies must connect them electronically to the company to form a digital supply chain. Ideally, this would occur in a cloud-based data integration environment that enables the supply chain platform to scale with changing consumer needs and market conditions. Adopting a digital supply chain also helps prevent the falsification of manual, paper-based supply chain documents, thus indirectly reducing the number of fake ingredients in the supply chain (fraud), especially in the aftermarket sector. 

4. Trace the origin of the shipment. 

The key to creating trust and protecting the organization’s reputation is knowing the ingredients’ origin (Picture 4). Using the Internet of Things (IoT), organizations can improve supply chain visibility by tracking both the movement and condition of shipments, i.e., IoT sensors measure the temperature of perishable or frozen goods. This way, the shipper can help ensure that the products are not damaged. While IoT alone can bring several benefits to organizations, combining it with other advanced technologies like blockchain can take it further. We suddenly have the power to acquire information and use it to our advantage for visibility and strategic decision-making. We can collect and track information about every link in the chain. Blockchain fundamentally creates absolute transparency and visibility that supports and promotes the ethical practice. This way, the consumer is aware of what is happening, like the merchant (2). But we must remember that while blockchain is a powerful tool for traceability and transparency, it only works if the information entered at the beginning of the chain is verified. Additionally, while blockchain is changing ethical procurement practices, organizations are still in the early steps of understanding the technology and how it will impact their business. Blockchain will take a few years to find its way into all business processes (4).

Picture 4. The key to creating trust and protecting the organization’s reputation is knowing the origin of all the ingredients used.

5. Management of supplier communities 

Companies must manage ethical practices continuously and consider improving daily collaboration in their supply chains to achieve this. Effective cooperation with business partners helps promote adoption and compliance with ethical procurement practices. Companies should ensure that they have up-to-date contact information for each participant in the supply chain. Collaboration platforms can enable this. After all, it is easier to work with suppliers if the most important contact information, such as email addresses or phone numbers, needs to be included. By regularly researching supplier communities, companies can gain exciting insights into how the supply chain works and the level of ethical practices. 

6. Gather Ethical Knowledge 

 For many organizations, monitoring the actions of business partners and understanding the ethical “pulse” of supply chains remain crucial challenges. To this end, artificial intelligence, machine learning, and advanced analytics tools provide a helpful solution that offers rich insights into daily processes. With advanced AI dashboards, organizations can continuously monitor the ethical behavior of business partners. They use this data to make business decisions, such as renewing contracts with high-performing suppliers or terminating contracts with poorly performing suppliers. AI will transform future operations by providing the means to ensure compliance with ethical standards in supply chains and by implementing measurable results that all business partners throughout the chain can use. 

Consumers are looking for ethical manufacturers and suppliers, so we need to use the tools we have to make that possible. Ultimately, our success depends on our consumers. Therefore, reaching the prospect attracts them to our business.

References:

1. https://www.garnier.co.uk  (Sustainability Progress Report 2020 – Garnier)
2. https://supplychaindigital.com/sustainability/michelin-green-stars-promoting-ethical-food-supply-chains 
3. https://www.thegrocer.co.uk/supply-chain/a-fair-price-for-italian-tomato-growers-would-curb-exploitative-labour-conditions/668170.article 
4. https://www.supplychainbrain.com/blogs/1-think-tank/post/30725-six-steps-to-an-ethical-and-sustainable-supply-chain 
5. https://www.paultrudgian.co.uk/supply-chains-ethical-blockchain/ 
6. https://www.supplychainbrain.com/blogs/1-think-tank/post/36460-the-alarming-continued-rise-of-modern-slavery-in-supply-chains-how-procurement-can-help-reverse-the-trend