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First Thoughts
  By Dan Gilmore - Editor-in-Chief  
     
   
  March 12, 2015  
     
 

Any Limits to Large Companies' Supply Chain Control?

 

Over the past few years, I have been asking myself these questions: Is there - or should there be - any limits on what a big company can in effect order its suppliers - and even their suppliers - to do? Those are probably controversial questions to be pondering these days.

Of course, the scope and scale of how large companies control their supply chain continues to grow. There is no better example than Apple, which has been closely monitoring its supply chain for awhile, but really took its approach to a new level in 2011. That came after criticism that workers in its extended supply chain were receiving poor treatment in some/many places, notably at giant contract manufacturer Foxconn in China.

Gilmore Says:

There is a libertarian streak in me that wonders if a company that Apple doesn't even do direct business with should be subject to an instant audit if the inspectors knock on its door some morning.


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It was an interesting dynamic. Not only was Apple facing external scrutiny and criticism, including some major negative articles in the New York Times, but CEO Tim Cook said many employees were worried that maybe Apple wasn't really a "good company" amidst the allegations. Perhaps they would run off to Facebook.

So Apple began upping its level of supplier audits dramatically, from 127 in 2010 to 188 in 2011 to an amazing 633 last year. And those audits grew to encompass not just direct suppliers but its extended supply chain, meaning you can be a second or third tier supplier and have Apple's inspection gang scheduling your procedure. Those audits, by the way, are based on Apple's Supplier Code of Conduct and also Supplier Responsibility Standards, together 100+ pages of documents defining comprehensive requirements in 20 key areas, including labor and human rights, health and safety, environment, management systems, and ethics.

While most audits are scheduled, in recent years Apple has started to conduct "surprise audits," where it shows up at a supplier and expects to be let in to do its audit business within 2-3 hours. I don't know how far back in the supply chain Apple goes with the surprise audit version, but in theory you could be a chip maker selling to a board manufacturer selling to a contract manufacturing building products for Apple, and be subject to a surprise audit at one of your factories.

Is this all a good thing? I am pondering.

In 2009 of course Walmart started its Supplier Sustainability Index, which somehow rates its vendors on a series of environmental and other areas to produce a score that is some indication of how Walmart views its suppliers' practices. The elements of the score come from work Walmart did with an outfit called The Sustainability Consortium (TSC). TSC is jointly run by the University of Arkansas and Arizona State University, and has evolved into a collaboration of more than 100 of the world's largest retailers, consumer product companies, and NGO and academic partners.

Is the score a company receives on the Sustainability Index correct? I would assume largley so, but is it always fair? I don't know. Increasingly a vendor's score - and thus perhaps its very survival - is a factor in whether Walmart will buy from that supplier. At the same time, Walmart merchandisers are increasingly evaluated personally on how well they are using the index to make vendor-product sourcing decisions. What a major change.

A couple of weeks ago, Walmart launched a consumer-facing side to this program, where on its ecommerce site (and perhaps soon in stores) Walmart will tag certain products as "Sustainability Leaders." Will that designation affect consumer behavior? That is the trillion question, and we will all be interested in the results.

If the impact is significant, especially if the program moves in-store too, then it will inevitably force all vendors to meet the standard for the designation (a score of 80 or more out of 100 in a given product category's measurement criteria). Ironically, when all vendors are meeting the standard, then the designation becomes meaningless.

In early 2014, Walmart notified its suppliers they would have to reformulate soaps, makeup and household cleaners as it moved to shed what it said were harmful chemicals from store shelves. Walmart was there to help re-engineer.

Consumer products giant Procter & Gamble is among a number of very large companies requiring its suppliers to report their own CO2 emissions.

Another one that interested me was news out of Ford in 2013 that it was pushing suppliers hard to get on board with its sustainability goals, using a tool it created in 2005 that it calls the Aligned Business Framework (ABF).

Under the program, Ford signs bilateral agreements with suppliers that "comprehensively and formally spell out specific business commitments," based on 20 key principles that address specific Ford commitments, supplier commitments, and bilateral commitments. In other words, it would seems Ford sort of owns you (admittedly not knowing a whole lot about the details).

There is some carrot with the stick for being part of the ABF program, with Ford willing to extend longer term commitments to suppliers that are part the program. But one requirement is that suppliers must take control of their own supply chains - thus Ford's ABF suppliers must manage and assure proper working conditions, ethical treatment of workers, and responsible environmental management systems in their own operations and extended supply chains. In other words, the suppliers must do the work for Ford in meeting Ford's goals and policies in their own multi-tier supply chain networks.

Finally, whether you love it or you don't, the UK's Carbon Disclosure project used a sort of sneaky if effective tool to get large companies to participate in its services years ago by convincing a large number of banks and financial firms - the types that can affect a company's stock price - to indirectly apply pressure on product firms to get with the CDP program. Those companies in turn now "encourage" their own suppliers to complete the CO2 emissions reporting, which some 3400 did in 2014.

There are many other examples.

So, what's the point? As noted at the top, I just wonder whether there should be any limits to how far this can go. Of course, at one level I recognize that a company should be able to source materials and products from whatever companies it wants, and if it decides to attach a growing list of conditions largely related to social good beyond product and price than that is its decision.

Hard at one level to argue with that.

Still, there is a libertarian streak in me (applied now to business) that wonders if a company that Apple doesn't even do direct business with should be subject to an instant audit if the inspectors knock on its door some morning. Or if a large company should be able to say I won't do business with you if you aren't using all Smartway carriers.

Put yourself in the seat of the smaller or mid-sized vendor (the P&Gs can deal with all of this just fine) that must now jump through a whole lot of perhaps expensive hoops it never encountered before. If just the large companies can quickly be designated Sustainability Leaders, for example, is that a good result?

And part of the reason for my concern is that this dynamic is only possible because some companies - Walmart, Apple, others - have become so large and profitable they can effectively exert the pressure - and afford all these audits. So, if Sam's Club ever gets spun out as a separate company, it may still be interested in Green, but even at about $58 billion in sales its ability to apply the pressure on suppliers and devote the resources to do so would be a lot less than the full Walmart today.

All that said, I am reminded that when Nike first tried to fend off allegations in the 1990s of "sweat shops" and more by basically saying "we don't own or control those suppliers," that stance didn't exactly win the day. Nike was forced to take much more direct control of its outsourced supply chain.

So I would say in the end it is what it is, and it not only isn't going to change, the control from the "supply chain masters" is likely to grow even more heavy. And it is mostly good in terms of results. No doubt working conditions at Apple's direct and indirect suppliers are better today for maybe tens of thousands of workers because of Apple's audits and related programs.

But I don't think it is all good - though I am probably in a minority. If you are a large company today, you are - and increasingly "own" - your extended supply chain. There is a huge change going on here.

Never seen anyone else touch this topic - be interested in what you have to say (anonymity requests respected as always).

Should there be any limits on how much large companies can control vendors in their extended supply chans? Or is it all for the good? Let us know your thoughts at the Feedback button or section below.

 
 
     
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Recent Feedback

You pose a very interesting topic.  In my opinion, the "big" companies have been using their clout for decades in many different ways - recall the U.S. automobile companies dictating the expected annual reduction in price that each supplier had to accomplish on their own.  More recently, one of the companies you mention - Wal Mart - has had a reputation for dictating all types of things to their suppliers from lower costs to RFID.

I think the Apple and Wal Mart examples that you cited are both more positive efforts than some of the past practices.  But I do agree with you that there is no way for smaller companies to resist without risking the loss of a very big customer.  Their best defense is to try and build a collaborative relationship with big customers so that they may have a voice in the decision making process.  Once these programs are announced, it is probably too late.

Editor's Note:

Thanks Herb.

 I think the big differences now are:

 1.       The control has moved way past price and service to all these social goods. When that GM procurement guy  (Lopez or something) caused all the furor in the 1990s, the complaints were about the price beatings almost exclusively.

 2.       Even bigger – control is now moving to second and third tier suppliers where there is not a direct relationship. This I think is actually quite a change.

 Dan Gilmore



 


Herb Shields
President
HCS Consulting
Mar, 12 2015

I am certain that if we were talking about something a bit more critical, like the quality of a third tier component manufacturer to Boeing or Airbus, you would not be so hesitant to support the right for an end customer to exert strong control.

I guess we just have to accept the old adage of “the customer is always right”.

I think that Apple or Walmart or Ford or anyone else large or small has the right to expect certain conditions.  Typically they impose these on the first tier, but when that apparently fails...


Steven R. Murray
Lead Auditor and Senior Research
WERC
Mar, 13 2015

Thanks a lot for shedding light on a very interesting and rarely debated topic. The topic highlights the paradigm shift of the balance of power in the hands of the consumer. In my opinion, the moot point here should be the substance of control rather than the scope of control. Audits to ensure compliance to objective universal parameters like environmental sustainability and labor laws would definitely do more good than harm for all the supply chain partners (including the supplier being audited). Again, the universality of these parameters would ensure that they do not impose unnecessary costs on the mid-size/smaller suppliers. If anything, these audits are costs to the retailer.

However those audits which are conducted to ensure compliance to specific business goals of the merchandiser and have limited system wide benefits and need to be questioned. As an example, an audit to make sure that a worker is not being overworked based on his wages is OK but an audit to make sure that the worker is assembling at an efficiency of at least 85% is not OK.

So, the terms of the supplier code of conduct need to be so defined so that they adhere to industry guidelines. As for the surprise element of audits, I guess it just ensures that quality is more of a habit than an act.


Apurva Agarwal
Senior Consultant
Cognizant Business Consulting
Mar, 16 2015


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