During the 1990s, new technology ushered in the possibility of instantaneous communication and opened companies to the global economy, allowing them to tap labor and materials at the best prices, anywhere in the world.
Since then, the changes have brought dividends not only to companies but also to consumers in the form of lower prices. Globalized operations have delivered their share of challenges, though. Increasingly, companies are facing the need to uphold labor and environmental standards in factories not owned by them, across international boundaries. It is a complex undertaking — one that essentially means bringing corporate social responsibility to far-flung supply chains.
Two companies that illustrate the task are AT&T and California-based Deckers Outdoor, known for its niche footwear products such as UGG boots and Teva sandals. These two organizations are very different from each other, notably in scale and in the corporate space they inhabit. Yet they both have concluded that their supply chains present them with risks as well as opportunities in the corporate citizenship arena. Both have developed strategies for diminishing those risks while leveraging the benefits of a more socially and environmentally responsible supply chain. Each can offer recommendations to other companies about how to engage their suppliers, lessons that often travel well across industries and locations.
Among other indicators of performance, AT&T looks at whether suppliers are tracking greenhouse gas emissions and have specific targets for lowering those emissions; AT&T’s own goal in that respect is to make sure that by 2015 a majority of its spending is with companies doing just that.
“Our supply chain is a large ecosystem,” says Steve Bernard, sustainability manager, supply chain, at AT&T, pointing to companies that provide AT&T with products and services ranging from cell phones and office supplies to network equipment and installation. “We spend tens of billions of dollars annually with tens of thousands of suppliers. So we have an opportunity to make a positive impact on society through both influence and collaboration” with suppliers, Bernard adds. In one such collaboration that began in 2008, AT&T has worked with suppliers — car manufacturers, alternative fuel-conversion companies, vehicle transporters, vehicle up-fitters, and others — to significantly expand the use of alternative-fuel vehicles in its own fleet. As a result of these efforts, AT&T has deployed 7,500 such vehicles (halfway to a goal set for 2018), and during 2012 alone, avoided purchasing four million gallons of gasoline.
As a $1.4 billion enterprise, Deckers Outdoor has a smaller supply chain. It does, however, contract with factories in places as far o as China. Mark Heintz, the company’s director of corporate responsibility and sustainability, points out, “Any issues that arise are traced back to our brands. There’s a brand risk in not understanding and monitoring the supply chain.” At the same time, Heintz says, there are clear opportunities to burnish the brand through “ethical sourcing.” Like AT&T, Deckers also derives tangible benefits from working closely with producers on sustainability and energy efficiency (benefits that can take the form of cost savings passed on to the company and stronger business relationships with suppliers).
Though the reasons to engage a supply chain are clear enough, the strategies for doing so are just beginning to take shape in many companies. AT&T and Deckers each has five years of experience that show how companies can extend commitments to corporate citizenship into their supply chains.
From Principles to Programs
Codes of conduct for suppliers—which articulate principles, standards, and expectations — are by now routine in corporate America.
For example, the code promulgated by Deckers in 2008 states, “We believe that no business should ever be complicit in human rights abuses. We promote greater environmental responsibility, and we encourage the development and use of environmentally friendly technologies.” It calls for suppliers to observe the highest standards — often beyond compliance with laws and regulations — when it comes to issues such as child labor, work hours, wages, health and safety, and the environment. The code established by AT&T that same year affirms, “Suppliers are an important part of our business and therefore must be an important part of our approach to citizenship and sustainability.” It proceeds to set out guidelines in several areas ranging from sustainability and safety to diversity, labor rights, privacy, and data security (an unavoidable subject for a telecommunications company).
What has become clear to most stakeholders is that publishing a code — even a very good one—is not the same as engaging a supply chain. Companies are seeing a need to move from statements to processes, from principles to programs of implementation. AT&T seems to underline the point by calling its program, “Engaging Our Supply Chain.” Likewise, Deckers puts the heavy emphasis not simply on its code but on its “Ethical Supply Chain” initiative that animates the guidelines and the approach to suppliers.
Both programs establish clear performance goals and metrics for evaluating progress, as well as processes for achieving the goals.
Among other indicators of performance, AT&T looks at whether suppliers are tracking greenhouse gas emissions and have specific targets for lowering those emissions; AT&T’s own goal in that respect is to make sure that by 2015 a majority of its spending is with companies doing just that. More generally, AT&T maintains a “C&S Scorecard,” which rates its top suppliers on their achievement of citizenship and sustainability goals (the ones articulated in the code of conduct). The average C&S score now stands at 62; AT&T’s objective is to ramp it up to 80 by 2017.
Similarly, Deckers assesses each supplier according to its level of risk (low, acceptable, or high); the risk relates to problems that could flare up in the areas of concern identified by the code of conduct. The assessments are based on frequent audits conducted by a team that travels from factory to factory (mostly in China). A chart presented at the company’s Ethical Supply Chain web page indicates that the number of acceptable-risk suppliers has more than doubled in the past few years, while high-risk ones have dwindled. The number of low-risk suppliers has remained fairly stable, and one broad goal articulated by Deckers is to usher more of the higher-risk ones into that category. The footwear company currently works with about a dozen partnering firms that operate nearly twice as many plants in Asia.
Trainings on corporate responsibility and the supply chain have become a growing focus for both companies. Says Heintz: “Things that you and I may take for granted,” such as overtime, safety, and energy efficiency, “are often not on the radar screens of management teams in developing nations.” Last year, more than 150 managers from nearly two dozen supply chain partners attended training sessions that featured presentations and role-playing activities. AT&T’s major training thrust has been with its own contract managers who select suppliers, purchase products, and have direct relationships with these companies.
Tools of Engagement
One particular step in the Deckers process is its “corrective action” for conduct running afoul of the code. The problems and infractions are discovered in the audits, which Heintz describes as the “main tool” of the Ethical Supply Chain initiative. Nearly every audit turns up at least one issue that requires further action. “You don’t usually go into a factory and everything is fine,” Heintz points out, citing such causes of corrective action as excessive work hours (as defined partly by local laws and regulations) and wasteful water and energy use. At this stage, practically all of the problems are remedied without having to terminate a partnership.
In one case, auditors turned up a problem with work hours. That triggered what Deckers refers to as “root cause analysis,” another feature of the process that involves further investigation into the matter and feedback from those involved. The analysis led Deckers to realize that the basic problem had to do with the bonus structure at the factory as well as work processes that needed improvement. The company reports on its website that the remedies led to fewer weekly overtime hours and a drop in the number of continuous work days.
For its part, AT&T has sought to encourage suppliers partly through its annual Supplier Sustainability Awards, a program that has recognized 10 of these firms for improvements in such areas as alternative energy, greenhouse emissions, packaging, and water use.
Advice to Others
When asked how they would advise those who are new to the supply-chain side of corporate citizenship, representatives of AT&T and Deckers ordered recommendations that are broadly applicable to other companies and industries.
Nathan Sparks, who directs the program and project management team of AT&T’s supply chain and fleet operations, underscores the value of “setting up a roadmap early on.” By that he means a step-by-step plan with a clear mission and equally clear goals. AT&T’s roadmap started with its Principles of Conduct for Suppliers, in 2008, and led to a Supplier Sustainability Survey that assessed the levels of experience with sustainability programs among suppliers (2009); collaboration with the global nonprofit Carbon Disclosure Project’s supply chain program, along with the beginning of goal setting (2010); the introduction of scorecards (2011); and the Supplier Sustainability Awards (2012). Implicit in the roadmap strategy is the idea of incremental change (which might include starting o with a relatively modest number of suppliers), as opposed to “trying to solve all things at once,” Sparks adds.
In his recommendations, Heintz zeroes in on the collaboration — in the case of Deckers, with such groups as the Sustainable Apparel Coalition, which includes 100 leading apparel and footwear companies, and the lesser-known Leather Working Group, which monitors the environmental practices of tanneries and brings together leading brands. Heintz sees such industry collaboration as a cutting edge of corporate citizenship. “There’s no reason to create [a supply-chain initiative] from scratch. The blueprint is already out there,” he says, adding that the greatest strides come when companies “step out of our silos” and forge common standards and practices.
“Proactivity” is a word used by him and others to sum up the challenge of creating value in the supply chain. It reflects their sense that companies need to initiate changes in these operations, beginning with assessments and continuing with various kinds of action, rather than merely react to events. As Sparks vouches, “All that can help reduce risks and increase opportunities to make a positive impact.”
This article was originally published by Corporate Citizen Magazine.