A recent article in The New York Times has renewed the awareness of labor and environmental conditions in Chinese factories that supply components to global electronics companies. Despite the surge in interest, most readers understand that these issues are not new and not restricted to any single OEM.
We live in an age of globalization where companies have the ability to maximize efficiency and help lower costs by using manufacturing services anywhere in the world. In the 1990s, Stan Shih — the founder of Acer computers — made an observation known as the “smiling curve” that elegantly explains this trend: When return on investment (ROI) is plotted against a product’s life-cycle, the most profitable stages are at the beginning (design) and end (marketing and retail). The middle stages (manufacturing), return the lowest value and this bends the ROI line upward on the right and left, forming a smile. This can also help explain why the lowest margin activities — like manufacturing — are increasingly outsourced to low-cost countries.
As the outsourcing trend continues the question becomes: Who is responsible for the social and environmental impacts of manufacturing the product? Of course, companies that manufacture their own products are directly responsible for the labor and environmental conditions in their factories. But, when manufacturing is outsourced, this responsibility can become less clear. In essence, outsourcing moves labor and environmental issues from the black-and-white realm of compliance to the murkier area of business ethics.
Ethics, as opposed to compliance, feels murky because there is no one telling us what we can do and can’t. The late Rushworth Kidder, author of How Good People Make Tough Choices, defined ethics as “adherence to the unenforceable.” This succinct definition sums up the dilemma faced by many companies in the age of outsourcing: How far should a company go to ensure its suppliers are appropriately managing social and environmental conditions?
Given recent press on conditions in the electronics supply chain, this is a question that many companies are likely dealing with right now. Most companies might start by auditing their suppliers. It is an axiom of life that virtually all audits will find something wrong… regardless of how well the factory is managed. Thus, most audits generate a list of “corrective actions” which starts a cycle of remediation and re-auditing. Over time, relationships based primarily on auditing can be overly adversarial.
In my experience, this relationship can be self-defeating. Ultimately, suppliers are responsible for their own social and environmental performance. If the customer assumes too much of that responsibility, the supplier’s ability to self-manage these programs can be diminished. A seemingly better approach is for the customer and supplier to agree on a set of clear expectations and work in a close partnership to manage performance.
One of the most effective processes for managing social and environmental performance is to incorporate these issues into regular business reviews. Since business reviews are the primary forum where senior executives from both companies meet, this process can help bring increased awareness and focus to these issues. It can also help to ensure that they are considered along with the other key performance indicators that, when taken together, manifest the overall health of the business relationship. Compliance audits still play an important role, but in this context, are used to verify self-declared information and as a mutually accepted process to help improve performance.
Weaving social and environmental considerations into the fabric of the business relationship is a far more efficient, effective and sustainable solution than the compliance-based model. A key to help make the relationship work is a change in thinking about the supplier-customer relationship: In an outsourced business model, suppliers’ factories become the manufacturing floor, their environmental footprint is part of a business’s environmental footprint and their labor relations are part of the business’s labor relations. When companies make this paradigm shift, it can become natural to consider social and environmental issues as a fundamental element of the customer-supplier relationship. And, as these issues become part of the business relationship, the vagueness about whether and how to manage them is able to evaporate in the objective, results-oriented atmosphere of a business review.
As social and environmental issues are increasingly integrated into business-to-business relationships, the hopeful vision of the future is that customers from more developed economies will help to improve labor and environmental conditions throughout the global supply chain. This vision is becoming reality as more companies with outsourced production models grapple with these issues and fold them into their business processes.