Operations & Logistics

How Big Brands Can Cultivate Ethical Suppliers

To ensure that contract manufacturers act responsibly, employ a mix of strategies — and don’t skimp.

October 31, 2016

| by Kerry A. Dolan


A worker carries a stack of clothes in a garment factory

BENIGN BARGAINING High-profile brands can wield many forms of leverage when it comes to worker safety. | Reuters/Andrew Biraj

When the Rana Plaza garment factory in Dhaka, Bangladesh, collapsed and killed 1,129 people in 2013, the tragedy made headlines globally. It also brought renewed attention to the fact that unsafe conditions occur at factories in many countries, not just in Bangladesh. Worker suicides at Taiwanese electronics contract manufacturer Foxconn in 2010 resulted in revelations about poor working conditions at the company’s factories in mainland China and entangled high-profile Foxconn customers Apple, Dell, Hewlett-Packard, and Sony.

Substandard working conditions and the occasional tragedy continue, but they aren’t always widely reported.

How can brand-conscious companies manage the risk of suppliers not meeting acceptable workplace standards? In a new study, Hau Lee, a Stanford Graduate School of Business professor, and coauthors Ruixue Guo of Stanford and Robert Swinney of Duke University’s Fuqua School, suggest ways to move the needle.

Managing risky suppliers requires the use of multiple tools, Lee says. One is certification — which entails paying a third party to visit the factory and determine whether it meets established quality-management and worker safety standards. Lee cautions, however, that suppliers can temporarily improve conditions to pass the certification, then revert to unsafe practices after inspectors leave.

Another tool is an audit, which is a more in-depth investigation done by a third party, typically performed annually. Lee’s research found that these audits are not to be taken lightly. “If you spend more money, you get more accuracy,” he says. “But if you do it once every two years, the comfort level is low.”

A third tool is the terms of the contract between the branded company and the supplier. Companies should be careful not to negotiate too hard on price, which can drive factory owners to put workers at risk in order to make a profit. “If we’re squeezing the supplier too tight, they have no room for any errors,” Lee says. “We should be more generous so they can do a better job.”


Companies should be careful not to negotiate too hard on price, which can drive factory owners to put workers at risk.
Hau Lee

Another tactic is to offer incentives. Lee noted that several well-known firms have developed their own methods to reward responsible suppliers. If a coffee farmer or processor is found to be complying with Starbucks’ Coffee and Farmer Equity Practices program, Starbucks pays the farmer more than market price for their beans. At Li & Fung, a logistics company serving major brands and retailers, the reward for better behavior is better financial terms; “good suppliers” get paid 15 or 30 days faster than others. Ireland-based firm PCH International, a custom design manufacturer, borrows funds for its best performing suppliers at interest rates far lower than a factory would likely have to pay if it tried to borrow money from the bank.

Sports gear giant Nike has an initiative not only to make its suppliers highly efficient — known as lean manufacturing — but also to encourage the factory to treat workers better, in what it calls “equitable manufacturing,” Lee says. To achieve efficiency, Nike sends its best industrial engineers to suppliers in Vietnam, Indonesia, and Thailand to train executives there. The rationale is that more efficient factories are better able to absorb the shocks of power outages or unexpected increases in the price of raw materials, which makes them less likely to cut corners.

To make conditions more equitable, Nike also is setting up ways for whistleblowers to circumvent local managers and report issues directly to Nike. “A potential message could be: ‘You guys came to audit us and you found no violations. But now the air conditioning is no longer working,’” says Lee. In the ultimate check on responsible factories, the workers can become the brand’s eyes and ears.

Lee stresses that companies should seek to use a variety of tools to manage their suppliers. “The majority of buyers tend to use one instrument,” he says. Companies need to realize that no single method will enable them to ferret out every unethical supplier. By relying on just one tool, says Lee, “you may give yourself a false sense of security.”

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