Corporations and their suppliers can
survive and thrive in a relationship of mutual benefit. Companies depend on
reliable, high-quality goods and services from suppliers, and suppliers depend
on corporate customers to pay a fair price in return. Companies can invest both
figuratively and literally in their suppliers to assure the survival of
long-term relationships, and suppliers often tailor their operations and
products to the needs of specific customers.
Increasing specialization has driven
many firms to outsource large portions of their business. Consequently, the
reputations of companies increasingly depend on those of their suppliers. It is
no longer acceptable for companies to say they didn’t know or they have no
influence, when their suppliers become embroiled in controversy. Many
corporations around the world now require their suppliers to meet standards in
the areas of quality, environment, and labor rights, as a precondition to
conducting business with them. We believe that companies that have developed
relationships with their suppliers that enhance their mutual well-being and
create complementary social and environmental programs will help both parties
prosper and thrive in the long run.
Themes
The following are the four major
themes by which we assess the strength of corporations’ relationships with
their supplier partners:
While
other issues are also important in this regard, these four are those which we
believe we can most meaningfully and consistently assess.
Labor
Practices and Other Human Rights
Few
issues are more important or more controversial in today’s rapidly globalizing
economy than labor practices at the vendors that international companies employ
in the developing world. Although business can naturally be expected to seek to
lower its labor costs, the line between a reasonable approach and the abuse of
labor is not always clear. Put differently, while most consumers are pleased by
lower prices, few would say they want to buy goods produced by forced or child
labor, or even under abusive, if technically legal, conditions. Corporations
can play a valuable role in improving working conditions at their vendors, and
by doing so, not only raise living and working standards around the world, but
strengthen their long-term ties to reliable suppliers.
We
therefore look for companies that have adopted comprehensive labor standards
for their suppliers that incorporate the International Labor Organization’s
core conventions, recognize the potential pitfalls of outsourcing policies,
have been effective in preventing labor abuse, monitor actual practices at
their suppliers, and confront these issues honestly and openly with the public. Actual company practices are often
difficult to research. We often rely on communications and engagement with
corporations on this issue, seeking to increase mutual understanding of
potential problems and the sophistication of all parties in dealing with these
challenges.
Quality,
Environment, and Other Issues
Raising
levels of awareness and performance on issues of corporate social
responsibility at the huge number of small and medium-sized companies in the
business world is a major challenge, which if met can do much to extend the
reach of corporate social responsibility. Large companies have a particularly
effective means of raising these standards through their subcontracting
arrangements with these firms. Making contracts contingent on meeting quality
standards was one of the first and most widely used such tactics. An increasing
number of companies, however, are now requiring disclosure of subcontractors’
environmental records as part of their requests for proposals, inserting human
rights clauses into their contracts, and even requiring vendors to make similar
requirements of their own suppliers. Such mutually beneficial arrangements can
improve quality and reduce costs, while assuring investors and consumers of the
integrity of their investments and purchases.
We
view favorably companies that systematically communicate their concerns about
quality, the environment, and human rights to their vendors, and look
particularly favorably at firms that monitor and act upon these concerns.
Diversity
Within the Supply Chain
Local,
small businesses are often the backbone of a thriving and independent middle
class. By maintaining a diverse supplier base of smaller firms that build local
communities and provide access to financial independence for those who might
otherwise be shut off from financial success, large corporations can foster
stable and just societies. At the same time, we recognize that economies of
scale are driving some corporations increasingly to use fewer and larger
subcontractors in the name of profits and efficiencies, or to assure high
levels of quality, labor, and environmental standards. A company’s ability to
enforce labor standards, for example, is largely dependent upon the volume of
purchasing that the company accounts for, and the length of the company’s
relationship with the individual supplier. Companies that rely upon short-term
relations with a large number of suppliers may achieve the flexibility to fill
orders at lower prices, but also may find it difficult to hold these suppliers
to social or environmental standards. Managing this creative tension is a
challenge, but corporate managers with the long term in mind understand the
benefits, for both their company and society, of cultivating and maintaining
appropriate levels of diversity in their supply chain.
Within
the United States, companies often pursue a commitment to diversity by
contracting with vendors owned by women and minorities. Support for such
businesses, often struggling to obtain a foothold in mature markets, provides
groups that have historically been excluded from the business world with the
opportunity for success.
We
believe that a diverse base of long-term suppliers not only benefits societies
generally, but also provides large corporations with insurance against the
dangers of an overly concentrated supply chain.
Empowerment
and Viability
Large
corporations can strongly affect, either positively or negatively, the
viability of their suppliers and the quality of the lives of their suppliers’
employees. For example, on the positive side, large corporations can invest in
their suppliers to increase their technological capabilities and sophistication
to meet quality, health, or environmental standards. Small suppliers often lack
the resources, motivation, or training to make substantial and often costly
upgrades. As long-term purchasers of commodities, large companies can also
assure stable or preferential “fair trade” prices to protect their suppliers
from the often devastating swings of the markets. These cooperative
arrangements, which promote long-term, stable relationships, can work to
strengthen and benefit both parties over time.
By
contrast, through abusive contracting, large purchasers can turn their
suppliers effectively into indentured servants, tied solely to a single large
customer who imposes oppressive financial and production conditions and keeps them
out of a truly competitive market. Such arrangements not only harm suppliers
and their employees, but also weaken our economic systems.
Information
on supplier contracts tends to be anecdotal and usually surfaces for a
relatively limited number of corporations that are exceptional on either the
upside or the downside. When available, we view positive or negative indicators
in this area as particularly significant.
