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Focus: Manufacturing

Feature Article from Our Supply Chain Trends and Issues Subject Area - See All

From SCDigest's On-Target E-Magazine

Jan. 25, 2012

Supply Chain News: Apple's Groundbreaking Moves to Audit its Extended Supply Chain for Compliance to its Supplier Code of Conduct


Apple takes its Practices to Next Level, becomes First to Open Supplier Factories to Fair Labor Association


SCDigest Editorial Staff

In a move that may set a precedent for other global manufacturers, Apple last week released details of an internal audit on working conditions at its contract manufacturing facilities, research that came in large part under after pressure from various interest groups after a string of suicides at one of its CMs brought into question how well its contractors were treating workers making iPhones and iPads.

As part of its 2012 Supplier Progress Report, Apple says that it is "committed to driving the highest standards for social responsibility throughout our supply base," and that its suppliers must "provide safe working conditions, treat workers with dignity and respect, and use environmentally responsible manufacturing processes wherever Apple products are made."


SCDigest Says:


There is a lot more in the full report, including environmental reviews, but this seems to us a seminal sort of shift in how offshored suppliers may need to be managed in the future.

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That includes adhering to Apple’s Supplier Code of Conduct as a condition of doing business with the company.

To ensure compliance, Apple says it conducts "rigorous audits," with the help of independent experts, of both end assemblers and component manufacturers, and that if it finds any of these suppliers do not meet Apple's standards, "we stop working with them."

Apple said "We continue to expand our program to reach deeper into our supply base, and this year we also added more detailed and specialized audits to address safety and environmental concerns."

Interestingly, Apple says its programs include training workings at its suppliers about its standards and local laws and regulations, and that "there are more than one million people who know their rights because they went to work for an Apple supplier." How well the suppliers react to that education is not clear.

Apple also says it recently became the first technology company accepted by the Fair Labor Association (FLA), and that it will open its supply chain to the FLA’s independent auditing team, who will measure Apple's suppliers’ performance against the FLA’s Workplace Code of Conduct. The results of those audits will appear on the FLA website. Under the program, FLA auditors will conduct surprise inspections at 5% of the factories producing Apple products.

Apple is also listing 156 of its suppliers, which combined to account for 97% of its supplier spend, on its web site. That is a bit surprising, because Apple has traditionally been very secretive about who its suppliers were.


Audit Details

Apple says it conducted 229 supplier audits in 2011, an 80% increase over 2010. More than 100 audits were at factories Apple had not audited in the past.

The company notes that it expanded its environmental audits in 2011, including "specialized" environmental audits at 14 suppliers based on specific concerns. Apple says it "brought in third-party environmental engineering experts who discovered a number of violations. We have been working with our suppliers to correct these issues, and we will continue to build on this program of specialized environmental audits in the coming year."

Apple says it is also spending money to provide free training to employees of its contracted final assembly operations. The Supplier Employee Education and Development (SEED) program offers free classes on a range of subjects including finance, computer skills, and English. Apple says that "More than 60,000 workers have taken one or more of these professional development courses. The curriculum continues to expand, and we have partnered with local universities to offer courses that employees can apply toward an associate degree."

This one really surprised us: Apple says it monitors the process of workers who move from their home country to work in its suppliers’ factories in another country, saying there are often abuses in this process, especially around fees charged to these workers to get the jobs. Stepping up efforts in this area in Singapore and Malaysia, it forced suppliers there to reimbursed $3.3 million in excess foreign contract worker fees last year, bringing the total that has been repaid to workers since 2008 to $6.7 million.


Apple's Approach

Apple says each audit is led by an Apple auditor, supported by local third party auditors. It is not clear if that means these lead auditors are actual full-time Apple employees, or contracted staff.

The process includes a review of hundreds of records, physical inspections of manufacturing facilities as well as factory-managed dormitories and dining areas. It also conduct interviews with workers and managers in relevant functional areas.

In the end, the auditors grade the facility’s level of compliance with every line item in the Apple's Code— more than 100 specific areas. In addition, Apple says it evaluates "the strength of the underlying management systems and identify areas for improvement. Management systems include policies and procedures, clear roles and responsibilities, and training programs for workers, line supervisors, and managers."

All contract manufacturers providing final assembly services are audited each year. In addition, Apple says it is increasing the number of audits of component manufacturers as well, selecting which ones to audit based a number of factors including the country in which the facility is located, past audit performance, and the type of work performed at the facility.


(Manufacturing article continued below)




Apple is especially sensitive to what it calls "core violations." Those include underage or involuntary labor, falsification of audit materials, worker endangerment, intimidation or retaliation against workers participating in an audit, and significant threats to the environment. It says "All core violations must be remedied immediately, sometimes with the help of expert consultants."

The subject of working conditions is an especially sensitive one for Apple, given a number of worker suicides in 2010 - as many as 18 - at an Apple assembly plant in China run by contract manufacturing giant Foxconn led to questions about how employees were being treated there.

Those suicides gave Apple a public relations black eye, causing the company responded vigorously, and a short time later it said that it had received commitments from Foxconn to improve conditions at the employee housing complex set up next to the sprawling factory, among other changes.

Below is a chart showing the percentages of suppliers which passed or failed the audits across a number of labor related standards.



Source: Apple Supplier Progress Report 2012


The report notes, for example, that Apple’s Code sets a maximum of 60 work hours per week and requires at least one day of rest per seven days of work, while allowing exceptions in unusual or emergency circumstances.

There were a large number of violations of this portion of the standards, with 93 facilities having records that indicated more than 50% of their workers exceeded weekly working hour limits of 60 in at least 1 week out of the 12 sample period.

At 90 facilities, more than half of the records reviewed indicated that workers had worked more than 6 consecutive days at least once per month, and 37 facilities lacked an adequate working day control system to ensure that workers took at least 1 day off in every 7 days.

As a result, Apple says it began weekly tracking of working hours at facilities where excessive work hours were commonplace. It also required facilities to make changes to their work shifts and hiring to drive compliance, and hired a consultant to provide additional training to facilities on factory planning to avoid excessive work hours.

Apple also found a number of violations relative to worker pay. For example, 67 facilities used deductions from wages as a disciplinary measure. Although this is legal in some countries where the factories are located, it is not permissible under Apple's Code. Another 108 suppliers were not paying appropriate overtime wages.

Apple is addressing these and other pay related issues with the offending suppliers.

There is a lot more in the full report, including environmental reviews, but this seems to us a seminal sort of shift in how offshored suppliers may need to be managed in the future.

What will be the impact on supply chain and production costs? That is the real million dollar question. Apple has a differentiated product line that can surely withstand whatever cost increases come from clamping down on unacceptable practices from suppliers. But what about manufacturers in less differentiated areas, who might take a hit from higher costs relative to other domestic of foreign competitors which turned a blind eye to certain practices?

That story will play itself out over the next 5-10 years.

What do you think of Apple's program and audit? Will it become the norm? Will those embracing such an approach by burdened by higher costs - or rewarded by consumers? Let us know your thoughts at the Feedback button below.

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