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Responsible Sourcing Standards and Social Accountability: Are They Possible in a Global Supply Chain?

2015: Volume 14, Number 1
1. Editor’s Note
2. Shanghai FTZ: Expectations Have Never Been Aligned With Reality
3. Responsible Sourcing Standards and Social Accountability: Are They Possible in a Global Supply Chain?
4. Mobile Technology in China: A Transformation of the Payments Industry
5. China and the Iran Model
6. An Interview with filmakers Adam James Smith and Song Ting
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The allegation of child labor did not exactly fit the picture I was looking at — a photo of a toddler sitting next to a box with my client’s logo on it. Accompanying the photo, a whistleblowing email from the client’s supplier of Christmas ornaments claiming he had visited a factory near Guangdong Province’s Dongguan. During the visit, he said he observed children working in the factory. For anyone familiar with toddlers, the chances of one participating in any organized activity, much less labor as detailed as painting Christmas ornaments, would seem highly unlikely.

Still, the picture was taken by the supplier and sent to the client, who forwarded it to me along with the email. The photo and email warranted further examination, particularly since the factory had passed a number of social accountability audits required by the retail brands that bought its products. If the allegation turned out to be true, then all orders bound for the U.S. would be cancelled since U.S. Customs regulations prevent products suspected of originating from factories using child or prison labor from entering the U.S.

The concept of social accountability – sometimes called social responsibility, ethical sourcing, and responsible sourcing among other names – became prominent for manufacturers, brands, and retailers in the early 1990s after it came to light that many factories producing clothing and footwear for brands such as Nike had poor working conditions, even in some cases using child or prison labor. From the late 1990s, brands and retailers got serious about implementing labor standards as identified by the International Labour Organization’s Declaration on Fundamental Rights, the United Nation’s Universal Declaration of Human Rights, and local labor laws. In 1997, Social Accountability International, a non-governmental organization that works to improve human rights for workers globally, published the SA8000 Standard, a set of guidelines based on the ILO labor conventions and integrating ISO management system principles. The guidelines promote such concepts as fair pay, limitations on overtime, days off, and preventing child and prison labor.

In the late 1990s and early 2000s, hoping to avoid the situation that the garment industry had faced, many multinational corporations began auditing their suppliers and their supply chains for compliance with local labor laws using the SA8000 standard. But, as my client discovered, particularly in developing countries, rural areas, and in certain categories, the supply chain lacks transparency and labor practices still differ from expectations even after more than 20 years of publicity and advancement in the field.

For me, working in China, allegations of child labor were fortunately rare. More common were issues related to falsified records ranging from faked time sheets to doctored payroll records. In an established area like Dongguan, factories have been audited for labor practices and trained in local labor law for a long time. If the child labor allegation were true, it would be a disappointing set back. I had to ask the question: Is it even possible to have a supply chain that is compliant with responsible sourcing standards?

Hong Kong-based Jon White, Managing Director of Omega Compliance Ltd., a firm that conducts social responsibility audits and consults with brands and retailers in the field, told me that in China, child labor is rare now. In the summer months, however, underage workers – those within a year of the legal working age – can be found in factories after they’ve gotten out of school. They are trying to make some money during the holidays. However, White cautions that “applying a blanket approach to labor law compliance across every category of products is a mistake.” He points out that the garment industry has 15 years of exposure to fair labor compliance and auditing, and that their customers have worked very closely with garment suppliers and have long-term relationships with them that enhance communication on labor issues. By contrast, suppliers in other industries, such as furniture or seasonal categories (like my client) may have only five years of exposure to the concepts, training, and auditing.

Closer to home, The Coca-Cola Company’s Director of Global Workplace Rights, Ed Potter, outlined for me how an industry sector develops toward their goals of implementing a responsible sourcing framework. Potter says that when he joined the company in 2005 to build a framework around the Supplier Guiding Principles defining company expectations around workplace rights, his team started working with China immediately. The standards were new to the fast-moving consumer goods supply chain. Potter’s team discovered that of their 1,600 suppliers and bottlers in China only 29 percent complied strictly with China’s labor laws. But by 2008, working with their supply chain in China, he says Coke raised the compliance rate to 63 percent, and by the end of 2014 it hovered around 90 percent. “The company’s goal is to improve the score each year in every country we work in,” Potter says. But, he counsels that there is still detailed work to do. In his 10 years heading the Workplace Rights team, he feels he has only built a framework, which needs to be filled in now.

Most experts in fair workplace practices agree that monitoring is not the answer; it’s just the first step to get factories to start to understand fair workplace practices. Most brands and retailers have the belief that factory management will follow and manage labor policies themselves. However, many factories still follow the retailer or brand’s lead. An ideal scenario would be for the purchasing team, the factory, and the workers to all take ownership and control of implementing fair workplace practices.

Craig Moss, an Executive Advisor at NGO Social Accountability International, agrees. “A factory owner once mentioned a Chinese idiom ‘he who holds the gold, makes the rules,’ and right now the purchase order is gold, and that’s the way most manufacturers understand and implement labor practices.”

At the factory producing Christmas ornaments, we learned that some workers had brought their children to the factory on a public holiday. The local day care was closed, but the factory was open because of the push to complete purchase orders by the shipping date necessary to meet the all important Christmas shopping season in the U.S. While the few children were looked after by one employee, their parents were able to get overtime pay of three times the normal rate for working on a public holiday. China’s labor law requires this overtime calculation on public holidays so technically, the factory was operating within the law.

Typically, the allegations we look into involve situations in which orders to be shipped prior to Chinese New Year or the National Day holiday would involve factories not paying worker’s overtime and trying to disguise that by creating fake records or turning security cameras off on sensitive days. At certain times of year, Chinese and U.S. holidays align in a way that causes rush orders and necessary overtime for workers.

Sometimes, the client’s purchasing practices are the cause of factories not following local labor laws, and then stepping over the line and falsifying labor records. For some buyers, the bottom line matters more. Factory management would comment they had to require overtime to reach shipping deadlines, in some cases because the buyer changed his mind about the color or the volume at the last minute. Most social accountability experts now agree that educating the supplier and the U.S.-based purchasing teams is key to getting factories to manage compliance to labor laws and standards.

SAI’s Moss points out that over the 15-20 years that social accountability has been practiced, a policing approach comprising audits and customer-designated labor codes has been most common. Factories see social accountability as external compliance. But, he added, leading brands are seeking to change this dynamic now, by supplementing audits with more transparent efforts to collaborate and help suppliers improve their internal processes for managing labor standards and performance.

Suppliers and their factories are often caught between the rock of a purchase order deadline and the hard place of complying with labor standards they agreed to when accepting the purchase order. For my client, the allegation was very serious, in the case of child or prison labor, as U.S. Customs will turn away products. Their company policy was to reject the product if child or prison labor were found. Consequences would be serious for the factory too, which would have lost the purchase order and been forced to absorb the expenses for raw materials and labor. A lot of businesses could not survive that kind of financial blow.

Even though the factory had a reason for children being on the property, an allegation of child labor is difficult to put into an acceptable perspective. The factory management saw the situation as a way to give their workers well-paid overtime, but the allegation could have led them to lose the business or any other future purchase orders. It was difficult to believe that the supplier making the allegation had done so knowing the seriousness of the consequences.

SAI’s Chief Operation Officer, Jane Hwang says that overtime regulations, rather than child labor, are among the biggest challenges for China because of the government’s strict limits conflicting with workers’ economic necessities. Hwang says many of the challenges faced in implementing workplace compliance guidelines are more socio-economic than cultural. “A generation of workers are used to certain conditions and opportunities. That changes. But you can never discount economic necessity and lack of access to opportunities.”

Omega’s White believes that for factories, “the temptation to shortcut is enormous,” precisely because of the facts of purchasing like changes in purchase orders, rushing to meet shipping deadlines, and labor shortages. He says that in some areas, factories are still presenting about 80 percent false or doctored records to auditors. White believes that the key to successful social accountability in a supply chain is “trying to get the brand or retailer to encourage transparency in their manufacturing base.”

For factories, fair labor practices can be complex. SAI’s Moss reports that there are more than 10,000 different labor codes globally. Big brands, industry, local laws, NGO codes, all have different details, language and terminology. A factory such as the one making Christmas ornaments, supplying to five or six different retailers around the world, could have to comply with five or six different labor codes, not to mention local laws.

So how can companies and their business partners in the supply chain avoid unwanted surprises in such a complex environment?

Coke’s Potter cites transparency, ethos, and anticipation as helping the company implement its Workplace Rights Program. After 2005, he says transparency became the key for the company’s work on human rights, which he calls “open source reporting.” This includes publishing all documents and reports on the corporate website, and producing a global workplace rights scorecard accessible to all business units. With huge, complex operations in 207 countries, Coke has “a basic belief that the company cannot be sustainable unless the communities in which it operates are sustainable.” And finally, anticipating the next big thing in the fair workplace practices field helps Coke maintain leadership on the issue, such as endorsing the U.N.’s 2011 Guiding Principles on Human Rights and disclosing country due diligence reports by third parties about Coke’s progress on Human Rights in the supply chain. Potter cites the publication of Coke’s due diligence in Myanmar as one of the benchmarks of transparency in the company’s Workplace Rights Program.

Omega’s White sees brands and retailers working closely with their supply chain partners as the key to success.

SAI’s Moss and Hwang echo the message of partnership. Their teams have seen the most success stories when partnerships in the supply chain encourage open dialogue, transparency, and responsibility. Moss cites one SAI program called Ten Squared, whose approach is to establish worker-management teams in a facility to improve a specific management system issue over 100 days. He says the combination of worker engagement and cross-functional teams helped create “trained, committed people who followed procedures to accomplish goals.”

But guidelines, standards, and sometimes lofty goals can get lost in the hustle to competitiveness. Otherwise, I probably would not have had to look into a case in which a questionable allegation was made in an attempt to hamstring a competitor.

SAI’s Moss thinks that a different type of competitiveness has improved workplace practices in China over the last two years. “The cost of labor pressures, labor shortages, and mobile technology have contributed to factory owners realizing the efficiency of applying labor standards. The most forward-thinking factory owners are working with productivity experts now,” he says. “They want to be competitive in getting and keeping good workers because they realize the cost of turnover and training now.”

At the end of our conversation, Potter tells me, “There are lots of good things happening and it all takes time.” That was true for the Christmas ornament factory as well. The client committed to working with this factory management, and with a number of seasonal production facilities, to understand how purchase orders and timing could be scheduled so that situations like the one in the whistleblowing email would not crop up as a surprise again.

Box on Social Accountability

Terms Used in Relation to Fair Labor Practices:
Social Accountability
Ethical Sourcing
Responsible Sourcing
Social and Environmental Responsibility
Workplace Rights
Labor Compliance
Social Compliance
Labor Relations and Corporate Social Compliance
Corporate Social Responsibility
Ethical Trading
Fair Labor Practices

Organizations and Related Declarations:
International Labour Organization (ILO)
Social Accountability International (SAI)
The U.N. Declaration of Human Rights
Global Social Compliance Program (GSCP)
Ethical Trading Initiative (ETI – UK organization)

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