Credit: Rob Dobi
Ideas Made to Matter
4 ways to handle supply chain blind spots
Do you know where the cobalt that helps power your smartphone or car came from, or who dug it from the ground? If it’s an Apple device or a Volkswagen car powered by a Samsung battery, there’s a good chance some of it was mined by Congolese workers under unsafe conditions — despite promises by both companies to clean up their supply chains.
But the complexity of those global supply chains, which cross oceans, borders, and cultures as they transform raw materials into finished products, makes doing so easier said than done.
Problems with ethical sourcing in supply chains have affected the textile, seafood, palm oil, and jewelry industries, among others, and could have national security implications. Nike faced pressure in the early 1990s over garments produced in sweatshops, and by the end of the decade, the company was forced to make widespread changes amid protests. Diamond mining giant De Beers, facing similar pressure over purchasing “blood diamonds” that fueled brutal wars in Africa, pivoted its business model to emphasize that its supply chain was free of the stones.
Greg Distelhorst, a professor of global economics and management who studies labor standards in the apparel industry, said building responsible sourcing practices in supply chains is an enormous task that takes a mix of technological innovation and relationship-building.
“The idea of a responsible supply chain is really simple: ‘My dollar should not go to anyone who’s profiteering off of slavery or worker exploitation or destroying the environment.’ But the reality is so much more complex,” said Distelhorst, formerly with MIT Sloan, now with the University of Toronto. “[Supply chains] have multiple layers, and at some stages in the supply chain inputs from one source and another source are mixed together in ways that are very challenging to provenance.”
Here are a few approaches to keeping your supply chain clean and clear.
Employ new technology for tracking materials
The biggest challenge to ensuring your company is responsibly sourcing its raw materials and inputs is getting an accurate picture of where they originate. In the Congo, the cobalt sold to battery maker Samsung, which supplies both Apple and Volkswagen, is sourced from both mechanized mines and ones worked by miners. The minerals are then mixed before being sold.
“Global supply chains often consist of three or more of these layers,” said Joann de Zegher, an assistant professor of operations management at MIT Sloan who studies ways to develop innovative approaches to traceability in the first mile of commodity supply chains. “This makes the problem exponentially more difficult, as different tiers of the supply chain are further removed from each other and their commercial ties become more and more diluted.”
Distelhorst said technology has begun to help in this area. Companies like New York-based Applied DNA Sciences have begun using molecular ink to tag products with plant DNA, while others use bar-code based technology to track products. The tags are analyzed upon receipt to ensure a package received is the same one that left a factory across the globe. Organizations such as Starbucks and the U.S. Department of Defense have been counted among the clients of such companies.
“They’re improving technologies around determining whether a shipment actually was built in a certain factory, and that’s very promising,” he said.
Other examples of technologies used to keep tabs on unethical sourcing include hotlines for workers and satellites to monitor both deforestation and the activity of fishing boats. The latter was used to uncover the slavery practices rampant in the Thai fishing industry — the world’s largest supplier of seafood — when reporters from the Associated Press used satellite global positioning technology to track boats and shipments.
Eliminate incentives for unauthorized subcontracting
But it remains difficult to keep tabs on where commodities are sourced in supply chains. Distelhorst and de Zegher don’t believe technology alone can ensure responsible sourcing practices. It requires companies contracting with suppliers to enforce penalties for irresponsible behavior and foster relationships that encourage ethical action.
Many times, issues along a supply chain begin when a supplier is feeling pressured to maintain a lucrative relationship with a big-name brand. If they take on too many orders to try to keep the client happy, they find that they need to subcontract some of the work out to stay on schedule. Those subcontractors may not adhere to the same labor standards.
“You’re left with a choice: Should I tell this wonderful customer that I can’t manufacture that right now because I have too many orders in the plant, or that I can manufacture it but it’ll be weeks later, or, alternatively, subcontract that out to some factory that your customer does not know about. It’s the unauthorized subcontracting problem,” Distelhorst said.
If the penalties for taking that route are weaker than the penalties for shipping an order late, there’s a higher incentive to engage in unauthorized subcontracting. Eliminating those incentives will require harder policing by buyers, with higher penalties around that sort of behavior.
But a company’s ability to penalize a supplier is limited to the extent that it does business with them. Apple, for example, is considered a global leader in pursuing a more humane supply chain because the company has invested in improving its information sensing capabilities, Distelhorst said, expanding their ability to use third-party auditors to inspect the smelters deep in their supply chain.
“That’s a significant accomplishment. Not only does Apple not own those smelters, it’s also very likely that they’re not doing any direct transactions with those enterprises,” he said. “These are smelters that are selling to their subcontractors, and those subcontractors are then selling the product.”
But, not every company is as huge as Apple. Smaller companies will have less power to enforce penalties on suppliers. Even Apple is unable to know absolutely everything about its own chain. Just look at the Congolese cobalt case.
Try lean manufacturing
Recent research from Distelhorst demonstrates suppliers that adopt lean manufacturing can improve efficiency while improving working standards. This method aims to eliminate waste in production lines without sacrificing productivity. It typically involves expanding a worker’s role to include a wider range of tasks.
"We have a few examples where there are interventions you can do in factories that simultaneously improve the productivity and seem to result in better working conditions,” Distelhorst said, with Nike being the most visible.
Percent reduction in noncompliance with labor standards when Nike implemented lean practices in factories.
When Nike implemented lean manufacturing in factories in its supply chain to improve their efficiency, those factories saw a 15 percent reduction in noncompliance with labor standards such as wages, benefits, and time off. He believes that’s because lean encourages workers to engage in more complex tasks, which makes them more important to train and retain.
“What was really appealing about that intervention was that it was not seen as an intervention that was policing them and creating higher penalties for not complying — it was seen as coaching those factories around a new production system,” Distelhorst said.
Implementing this requires a high level of trust between the buyer and the supplier. A buyer can encourage lean manufacturing but won’t suffer significantly if it doesn’t work out. “If that factory owner doesn’t trust you to have their interests at heart, they’re going to be very skeptical of making any changes,” Distelhorst said.
A relationship also needs to be long-term in order for a supplier to be receptive to adopting a new, more ethical way of doing business.
In some cases, stick with it and effect change
When facing intense public pressure when something goes wrong in its supply chain, companies find themselves tempted to sever ties with a supplier to satisfy the outcry.
But de Zegher said that could do more harm than good. In the Congolese cobalt case, miners rely on the industry to power their local economy, despite the clear dangers of the work. When buyers stop doing business in the area, the miners may find themselves without any source of income.
“Often, reducing harm in the supply chain is very complex and it therefore requires time and long-term engagements between buyers and suppliers,” de Zegher said. “When a company gets slammed by a media campaign, it may find that it is too challenging to explain this complexity to the public and it therefore has no choice but to shut down relationships with the suppliers — just to be able to send a clear signal to the public. This can lead to significant back-tracking of any progress made and comes with the risk that the supplier is forced back to poor practices or worse.”
Distelhorst said public campaigns against issues deep in a company’s supply chain that force such action also disrupt a company’s ability to provide products to its customers by cutting off its ability to source the materials needed to produce them.
“[A buyer] just literally cannot do business with them anymore without suffering severe reputational damage,” he said. “As successful as Nike’s been over the last few years, that shadow really hangs over them from the 1990s, even as Nike has made great progress and become an innovator in responsible supply chain management.”