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.
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.