Ethics Issues Prevail in Supply Chain Management

By Beroe Inc.

July 02, 2014 at 12:43 PM

By Sairamnath A, Lead Analyst, Capex & MRO, Beroe, Inc. 

In business, financial necessities have been prioritized over certain values  such as ethical behavior and social responsibility. In spite of advances in technology, supply chain even at a global level is based on the interaction between people which gives rise to ethical issues at several stages of the process. The reason for such ambiguity in prioritizing values is due to the fact that corporations are focused on containing cost. Cost has been the single driving force behind the unethical behavior of certain corporations. 

Nike was famous for outsourcing manufacturing operations to a cheaper destination and became a trendsetter with this practice as they could get the business done at a fraction of the cost that they would incur at any plant in the US. An agreement with the contract manufacturer consisted of ‘no liabilities’ towards labor conditions at the manufacturing site. This would prove to be an image buster for the company later as the company founder Phil Knight admitted that his products have become synonymous with labour exploitation after facing backlash in U.S. Nike felt that the code of conduct that it laid down for its suppliers/contract manufacturers needed to be more stringent after this case. Laying the code of conduct is only the initial step. Monitoring whether the codes are put into practice makes the process more effective. Acting ethically responsible is a Corporate Social Responsibility (CSR) activity by itself, for a company.

So what are the factors contributing to unhealthy decision making of companies? Growing demand for low cost products, fierce business competition, easier availability of counterfeit products etc., are major drivers, according to companies. So steps/strategies taken by companies depends on management. 

Product innovation, cheaper but suitable alternatives of existing raw materials, effective supplier shortlisting process etc., are some of the measures a successful company adopts and practices.

A laissez-faire attitude of top management to tackle such issues prevailing in the market will only add to their misery. Proactive management will always look to analyze every link of the supply chain and thereby reduce cost by adopting best practices and morality simultaneously. 

Supply Chain

The supply chain consists of a series of links that enable the movement of product from the producer to the customer. This movement incurs a series of costs for the various entities involved. The management of supply chain is called supply chain management in plain text. But supply chain management is a process which involves goods, place, time, quantity and cost all acquired in right proportions. 

Supply Chain Management Activities

The functions of supply chain management are broadly classified as:

  • Customer relationship management
  • Materials management
  • Production control and resource management
  • Risk management
  • Inventory management
  • Supplier relationship management

All of these are vital links of the supply chain which needs constant monitoring so that it will be a seamless process. All of the above links could be possibly kept intact by an organization provided there is a belief in the culture called planning. An organization in order to reap the benefits of a successful supply chain has to do three kinds of planning. They are:

  • Strategic planning 
  • Operational planning 
  • Administrative planning 

While strategic planning is generally done to realize a long-term prospect and devised by a pro-active top management, the operational planning and the administrative level are done at the middle and the lower management respectively. These two planning process are for mid-term and short-term respectively. All these are emphasized or should be so that the supply chain process that starts from the producer’s end smoothly transitions to the other links of the supply chain process. 

Supply Chain Entities 

The supply chain process is about movement of goods from one end to the other end. On a broader note, they are characterized by the involvement of different entities/parties in the loop.

Emergence of Ethical Issues

With different parties involved in the supply chain process there is always a question of who is being fair and otherwise. Tensions arise in supply chain mainly due to the perceived understanding of ‘fair play’ between various parties. What may seem as a legitimate course of carrying out the business may be perceived as an unfair trade practice by the other. So below are some of the ethical issues faced by the parties involved in the supply chain process. 

  • Producers. There are numerous ethical issues that a producer could possibly face in a supply chain process. Working conditions, labour rates, child labour, environment unfriendly practices (including production of goods and disposal of wastes), utilization of natural resources are some of the factors in which an organization can deviate from its fair business practices. Some organizations with the backing of the government in their homeland resort to exploitation of the available resources either by exploiting the political instability or by feeding the corrupt law makers of the host nation. These actions create a sense of dissatisfaction among the workforce in the longer run which may result in disruption in the production process. Also environmental degradation cannot be ruled out if the organization is totally unmindful of the way their wastes are disposed. Unfair trade practices always stems with disregard for intellectual property rights. A producer is deemed to be unethical if the product whose technology or idea has been duplicated from another producer that has spent millions to create a value for their end users.
  • Suppliers. Suppliers are an integral part of the production process of an organization. Not all producers procure all raw materials directly from a source. Suppliers perform an integral job of procuring raw materials of high quality and maintaining high standards of inventory and a sound distribution network. But some suppliers maintain lower standards in managing inventory or the quality of materials procured will be of a cheaper quality, reasons which are attributed towards saving cost and increasing profit margin. Signing a mandatory code of conduct with the organization has been the need of the hour mainly because of the lack of trust. This lack of trust has stemmed from the fact that standards and quality may have not been maintained according to the expectations of the producer which has led to signing of agreements between parties. Also certain suppliers form a cartel which leads to manipulating the market. For example, farmers from whom the agricultural products are procured, will be under the mercy of these cartels that resort to rogue pricing. These raw materials are sold at a higher price to the manufacturer so that there is a higher profit margin for the suppliers. Exploitation of the resources happens not only with organizations that procure materials directly but also by suppliers that act as middlemen between the original source and the manufacturer.
  • Retailers. Similar instances of unethical practices have been recorded with retailers when it comes to packaging or labeling the products. Retailers resort to practices such as tampering with the packages or partially filled packages which amounts to cheating as the customers who buy the product are led to the belief that the content of the package is equal to the weight disclosed on the cover (For example, a potato wafers packet may consist of only 25-30 grams whereas the disclosed weight on the product would be 35 grams). Also retailers may resort to pseudo-marketing techniques to project a good image among the public. For instance a retailer may claim that part of the proceedings in the purchase of the product goes towards a noble cause. Even manufacturers make tall claims about their product being totally environment friendly which may not be the case (Sainsbury shopping bags – Daily Mail, 2007)
  • Consumers. Though consumers are in the receiving end of unethical practices most of the time, not always it could be justified. If companies offer a quality product at a higher price, the willingness to buy has reduced considerably due to availability of alternatives. By alternatives it does not mean availability of substitutes alone. Consumers have started buying counterfeit products which are priced much cheaper. Their only approach towards buying is based on cost and not quality. As a reason, manufacturers are forced to cut down or compromise on the quality of the product they have been offering plainly because of lack of sales which burdens their profit margin. So overall it has become a vicious circle where in a slight increase in the cost of the material supplied by the supplier which is passed onto the manufacturer who increases the cost of the final product leading to consumers preferring alternatives. 

Another quality that is expected of consumers is ethical consumerism. It is a trait among individuals to look beyond the purchase of product. They are not focused on self or about the harm that would occur on the product usage/consumption but also possess a higher moral understanding that connects people across culture, creed, gender and nation. For example, during the festive month of Diwali in India, certain people abstain from purchasing crackers citing the reason that lot of child labour had gone into the making of the crackers which is still widely prevalent in South India.

Code of Business Ethics 

  • Professionalism. All participants of the supply chain process should exhibit a high standard of professionalism. It means that each entity should treat the other with an equal amount of respect and trust and in no way shall intervene or command the other. Information that is deemed to be classified should be guarded safely by all parties involved. Adherence to the laid down terms and conditions should be a pre-requisite for all. 
  • Personal Integrity. Integrity is defined as a trait in a person who exhibits qualities such as honesty and having principles that are morally strong. Personal integrity is a strong sense of commitment towards morality, openness and high standards of ethics that an individual stands by and act as a role model for his/her colleagues. Every individual and not just the overall entity should have high personal integrity to make sure the entire supply chain process is ethically right. Behavior like receiving favors such as gifts, monetary commissions, stakes, preferential treatments are considered to be outside the code of business ethics. 
  • Transparency and accountability. All the parties involved in the supply chain process have to be open and accountable. For e.g. certain companies approach or try to manipulate officials of a state/nation to gain advantage over their competitors for their personal agenda rather than proceeding on legally right channels. Public resources are used by different parties in the supply chain which must adhere to fair usage policies. 
  • Compliance and continuous improvement. Compliance to local laws is a mandatory pre-requisite. No party shall bypass the laws of the state/nation for their business motives to gain unfair advantage. All entities shall work towards fostering a continuous improvement culture in their supply chain activities and serve as a role model for others to follow. Doing so can lead to earning concessions/credits from government as a token of appreciation. 

Case Analysis 

  • Bangladesh tragedy. The recent tragedy across the border has shaken the global garment industry. Mere compensation to the victims or the kin of the victims has only cleared the monetary difficulties. What about the pain that will forever remain in the hearts of those people who had lost their sole breadwinners in the tragedy? The Bangladesh tragedy was one of the biggest or may be the biggest tragedy to have happened in the garment industry. After China, Bangladesh is the second largest exporter of garments in the world. People still wonder how this tragedy occurred. That’s because seldom are we aware of imminent danger. Yet we can prevent them with pro-active thinking and actions. The building that collapsed killed scores of people with a death toll that breaching the 1000 mark. This tragedy opened the eyes of the global apparel giants to take some responsibility thanks to some online campaigning by human rights groups across the globe that made these corporates to finally sit up and look at the situation that needed immediate attention. It could have been another situation where corporates would have wanted to absolve themselves of the responsibilities by feeding the corrupt law makers but not this time because of the quantum of this accident that occurred. 

Mostly developing countries don’t have stringent laws regarding labor working conditions and Bangladesh was no different. Now after this tragedy global corporations have started focusing more on labor rights and working conditions. Even companies have started to insist on understanding the details of the premises that they want to purchase (For example, the age of the building, quality of material used etc.) or acquire through lease. Maybe a more pro-active approach would have saved many lives as our neighbors didn’t deserve such a gruesome end. 

So the key focus area to improve the supply chain process is public interest. What are the three factors if mismanaged can put the interests of the public at stake? Environment, safety and consumer rights are those critical factors in which disruptions in either of these links will jolt the entire supply chain process. Companies need to procure, design, manufacture and distribute products that will have minimum life cycle impact on the environment. People are involved inevitably in the process of supply chain and any compromise on their rights or the work environment will lead to serious damage of the supply chain. All products reach the end user and any exploitation will lead to legal issues as well damaging the reputation of the company. Pseudo-marketing techniques such as claims of being an eco-friendly product or contribution towards noble cause (cause-related marketing) through the purchase of a product will eventually hit the image of the company. Focusing on innovations in developing a product, strategizing on cost reductions, adopting best practices and new technology development will only help a company to re-invent itself in a changing business world. 

References:

Ethics in Supply Chain Management, Abedullah Zaman

Building Ethical Supply Chains, Forbes

McDonald’s supply chain

Ethical Issues in the Global Supply Chain, Bodo B Schlegelmilch , Magdalena Oberseder

Bangladesh Tragedy, Steve New


Sairamnath A is a Lead Analyst with Beroe Inc., a global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. Sairamnath A specializes in tracking CAPEX (Capital Equipment) in the Pharmaceutical & CPG Industry. He has worked on multiple projects for many Fortune 500 clients involving categories such as Form, Fill and Seal machinery, Cleanroom equipment etc. Sairamnath A has earned his degree in Bachelor of Mechanical Engineering from Anna University (Chennai) & Masters in Business Administration from the SRM University, Chennai.

 

 

 

 

 

 



Tags: purchasing Supply chain management Procurement Ethics sourcing corporate social responsibility
Category: News Article

Beroe Inc.

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Beroe is a global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. With nearly 400 dedicated procurement specialists in 38 domains, across 9 industries, Beroe proactively invests in knowledge assets to build valuable, real-time procurement insight. For more information, visit  Beroe Inc. online.


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