By Dr. Robert Gordon, CPC
Faculty Member, Reverse Logistics Management and Government Contracting and Acquisition
For successful operations, organizations must understand the ethical issues in supply chain management. Procurement and supply chain management often involves a complex series of business operations, typically on an international scale. It is also necessary to understand national and international laws.
Ethical Issues in Supply Chain Management and Procurement
There are several ethical issues involving supply chain management and procurement. Here are some of them:
- Human rights and labor conditions
- Fair competition
- Environmental sustainability
Human Rights and Labor Conditions
The first consideration is human rights and labor conditions. In many cases, an organization in one nation will often purchase materials from another nation with different human rights laws and working conditions.
For example, the average hourly wage in India is $1.26, according to Insightful. This hourly wage is far lower than the minimum hourly wage in the U.S., which is $7.25 according to USA.gov. However, there is no law that says overseas workers must be paid at the U.S. wage scale. As a result, an organization must ensure that its partners are not engaging in exploitative labor practices and continue to uphold basic human rights.
An organization should be transparent with its supply chain operations. Hiding information about failures will usually not keep people from eventually finding out the truth. Companies must be transparent about their operations and hold their partners to the same standard. This transparency can also help prevent fraud and corruption.
An organization must ensure fair competition for the materials used in the company's supply chain. Procurement processes must be fair and transparent to ensure that competition is based on quality and value, rather than corruption. This adherence to fair competition typically includes avoiding favoritism, nepotism, or bribery in the supplier selection process.
An organization needs to ensure that its supply chain is environmentally sustainable. As concerns about climate change and environmental degradation continue to grow, companies are increasingly expected to minimize their ecological footprint by:
- Sourcing raw materials in a sustainable manner
- Minimizing waste
- Managing waste properly
- Preventing deforestation, water depletion, and water pollution
- Reducing carbon emissions
- Encouraging business partners to follow environmentally responsible practices
In addition, companies need to consider the local impact of their operations on local communities, such as displacement, environmental damage, and economic disruption. In addition, they should adhere to governmental environmental policies.
It is vital to ensure workforce safety in the host nation. Some suppliers may skimp on quality control to maximize profits and save on production costs, leading to unsafe working conditions, unreasonable working hours, and unsafe products. However, companies have an ethical obligation to ensure product safety and quality and to reject partners who don't meet these standards. Inspecting physical work areas can help supply chain professionals to identify safety and quality issues created by cutting ethical corners and lead to corrective measures to protect workers, products, and customers.
How Ethics and Supply Chain Management Are Related
Ethics and supply chain management are related in various crucial ways. As businesses become more global and more complex supply chains are created, ethical considerations have become increasingly significant to supply chain management. There are three other areas where supply chain ethics and management overlap.
The first area is fair trade practices. Companies that operate ethically will ensure that their supply chain partners adhere to ethical business practices.
Protecting the labor force in the host nation from exploitative practices provides a level playing field for all competitors. All suppliers must conform to import/export rules, safety standards, labor laws, and environmental regulations.
The second area involves ensuring positive and productive supplier relations. Ethical businesses treat their suppliers fairly and honestly. They honor their contracts, pay on time, and do not use their position to exploit suppliers. Adhering to all relevant laws and regulations is a baseline requirement for ethical supply chain management.
Third, companies must avoid corrupt practices and human rights abuses, even when they are permissible in the host nation. For instance, supply chain professionals must conduct business operations ethically and ensure supplier compliance with the law, even when they are in another country.
U.S. citizens are accountable to U.S. law, not the host nation's laws, even if they reside in a foreign country. Under the Foreign Corrupt Practices Act (FCPA), "it is unlawful for a U.S. person or company to offer, pay, or promise to pay money or anything of value to any foreign official for the purpose of obtaining or retaining business."
New Ethical Issues in Supply Chain Management Are Emerging
As supply chain management becomes increasingly complex and global, new ethical and environmental issues will become apparent to many organizations. Anytime there is global economic unrest and uncertainty, there will be people who engage in unethical practices to get ahead. For instance, the scope of the Fat Leonard scandal shows how many important people at different levels could be swayed to unethical behavior for personal gain.
At the top of emerging issues is human trafficking. Despite international efforts to combat human trafficking, modern slavery remains a significant problem. It includes forced labor, debt bondage, and child labor. Companies are increasingly expected to conduct due diligence to ensure supply chain transparency and that they are free from exploitative practices.
This problem will continue to grow as the global economic situation remains uncertain.
Furthermore, international conflict continues to displace people who lack other economic survival options, leading to desperate measures being taken by desperate individuals.
Data ethics is a second emerging issue. With the rise of digital supply chains, data privacy, protection, and management issues are becoming more prominent. The misuse of data can have severe consequences for a company's reputation, public perception of social responsibility, and finances.
For example, imagine that an organization shares proprietary information is shared with a company in the host nation. Later, that nation might then decide to use that information to produce a competitive product.
All governments do not honor copyright laws. Consequently, individuals might sell proprietary information to enrich themselves and improve their nation.
The Benefits of an Ethical Supply Chain
Every organization needs to invest in an ethical supply chain. Defending the brand and reputation of an organization is worth more than the organization at times. The importance of an ethical supply chain lies in its impact on a company's reputation, financial performance, and broader societal impacts.
A business that is committed to ethical supply chain practices is often perceived more positively by consumers, investors, and other stakeholders. This enhanced reputation can increase customer loyalty and create a competitive edge in the market. On the other hand, a poor reputation in the marketplace will cause decreased consumer demand and organizational leaders will seek to distance themselves from negative press.
Companies with strong ethical standards tend to perform better financially. Decades ago, I researched this area as part of my dissertation, and there is a strong correlation between high ethical standards and better financial performance.
Businesses that avoid unethical behavior can avoid negative costs like fines, lawsuits, and boycotts. If they concentrate on ethical performance, they may also attract more customers and investors.
As a part of society, businesses play a role in societal impacts. Ethical supply chains can contribute to a positive social impact by promoting fair labor practices, environmental sustainability, social responsibility, and economic development.
Furthermore, employees often prefer to work for ethical companies. A company devoted to environmental stewardship, strong ethics, and sustainability practices in its supply chain may attract and retain talented employees, who can contribute to its overall performance.
The most significant external area for any company is its customers. Customers expect the companies they buy from to operate ethically and to provide a positive customer experience. By
meeting these expectations, companies can build stronger relationships with their customers.
Ways to Build Ethical and Sustainable Supply Chains
Building a sustainable and ethical supply chain is difficult, but it is increasingly necessary in today's business environment. First, an organization must have a robust code of conduct covering internal employees and external suppliers.
Second, the organization must make sure to invest resources in audits. Third, the organization must be committed to training and education to ensure all supply chain partners understand what is required. Fourth, the organization must seek to become part of the circular economy.
Organizations committed to an ethical supply chain must have a code of conduct, often displayed prominently on an organization's website. However, it's also possible to use an association code of conduct, such as the code of ethics for the National Contract Managers Association.
Suppliers must also adhere to this code of conduct, outlining the expectations for labor rights, environmental impact, and anti-corruption measures. This code of conduct should reflect the organizational code of conduct and extend to suppliers, subcontractors, and sub-suppliers.
Suppliers should be regularly audited to ensure compliance with an organization's code of conduct. These audits of suppliers can be conducted by internal teams or by independent third parties.
Also, technologies such as blockchain, smart devices, artificial intelligence, or cloud-based platforms can help to improve transparency and traceability across a supply chain. These technologies can decrease the costs for audits and improve the reliability of supply chains.
A business should provide training and resources to suppliers to help them meet an organization's ethical and sustainability standards. This training could involve:
- Improving their environmental performance
- Strengthening labor practices
- Enhancing management systems
Supply chain professionals should consider collaboration in participating in industry initiatives or multi-stakeholder partnerships.
To reduce waste, reuse resources, and recycle materials across an ethical supply chain, supply chain managers should apply circular economy principles. Ideally, there should be a lifecycle plan for all items and an understanding of how materials will be recycled or reused.
Creating Ethical Operations and Sustainable Supply Chains Requires Commitment from Everyone
Creating ethical operations and sustainable supply chains requires top leadership commitment and ongoing efforts to monitor performance and make improvements. It is increasingly a business imperative in the face of evolving consumer expectations, regulatory pressures, and global sustainability challenges.
Addressing the issues of supply chains requires a solid commitment to ethical practices at all company levels – from upper management to individual employees – and the use of resources to confirm ethical compliance.
Consumers are increasingly making purchasing choices based on their perceived ethical conduct of companies. Businesses with ethical supply chains can enhance their reputation, boost customer loyalty, avoid human rights violations, and achieve better financial performance.
About the Author
Dr. Robert Gordon, CPC, is a faculty member of the Reverse Logistics Management and Government Contracting and Acquisition programs at the University. He holds a bachelor's degree in history from the University of California, Los Angeles; a master's degree in business administration from the University of Phoenix; and a doctoral degree in management from the University of Phoenix. Dr. Gordon also holds graduate certificates in information technology
project management, information technology security, and logistics management from American Public University. He has four published books and has authored several chapters, numerous peer-reviewed articles, and hundreds of other publications