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Why ethical supply chains are the route to success after COVID-19

Manufacturing Advisor Rachel Baldry explains how building an ethical supply chain can lower risks, improve resilience and increase profit for manufacturers, and why COVID-19 has put ethical procurement back in the spotlight.

The COVID-19 pandemic has triggered a fundamental rethink of supply chain strategy. In particular, the crisis has exposed the lack of resilience many supply chains have to physical shocks, partly due to an over-reliance in some sectors on single countries and regions.

As a result, experts are now encouraging manufacturers to spread risk by diversifying their supply base around the world and ‘reshoring’ manufacturing where possible.

Related blog: Offshoring to reshoring - time for a change?

However, redesigning supply chains geographically is only part of the story. The social and economic impact of COVID-19 has also served to highlight the importance of ethics in the supply chain. As we rebuild and redesign supply chains for the future, ethics will be at the centre of the shift.

Ethical manufacturing in the spotlight

More than anything, COVID-19 has revealed just how interdependent modern supply chains are. Customers need their suppliers; suppliers need their customers. That means that when a global crisis puts the survival of companies at risk, there is a rationality to sharing the burden to keep everyone afloat.

Many businesses recognised this mutual dependence during the pandemic and have done their best to support their suppliers, even when facing cashflow difficulties themselves. However, there have also been well-publicised stories of companies being called out for failing to protect suppliers and workers in the developing world.

Nowhere has this been more obvious than the fashion industry, where several companies have come under fire for suspending payments for existing stock or cancelling contracts already part fulfilled. In Bangladesh, more than a million garment workers were thought to have been sent home without pay or let go entirely at the height of the crisis, after major clothing brands cancelled or suspended £2.4 billion worth of orders.

While difficult choices have to be made, the principle of putting all the risk onto the supplier jeopardises not only the buyer’s corporate reputation but also risks hollowing out the very supply chain they depend on to keep their customers happy.

Most people will remember the 2013 Rana Plaza disaster in Bangladesh, where more than 1,000 died after a poorly maintained garment factory collapsed. In the aftermath, the global fashion industry came under intense scrutiny for failing to ensure the safety and welfare of workers in the supply chain. The COVID-19 crisis is having a similar effect, except this time millions of workers across the world are at risk, across a much wider range of sectors.

With the livelihoods of so many people in the balance, businesses are being watched closely to make sure ethical standards are upheld during the difficult economic times to come. As Pauliina Murphy from the World Benchmarking Alliance puts it: the companies that pay attention to people in their supply chains will lead the way in the recovery.

Ethical = resilient

Building an ethical supply chain requires a careful balancing of the ‘three Ps’ – people, planet and profit. In other words, securing profitable supply should not come at the cost of the welfare and human rights of workers or the protection of the environment. This is not just the ethical thing to do; it’s good risk management. Prioritising the lowest price supply with little due diligence in the procurement process is a high-risk strategy – it only seems cheap because the potential costs are hidden until something goes wrong.

The less ethical the supplier, the higher the risk of disruption. The uncovering of illegal practices or a disaster event like Rana Plaza can incur huge costs on businesses downstream, from lost production to long-term reputational damage and possibly legal liability. Low cost suppliers offering little transparency are also the ones most likely to struggle with events such as COVID-19, where maintaining health and safety are pivotal.

Localising supply doesn’t remove risk

In some cases, shifting to a localised supply chain model or switching to suppliers in countries with higher welfare standards can reduce the risk of unethical practices in the supply chain. But it’s dangerous to assume it will remove risk entirely.

A particularly pertinent example during the current crisis is the case of fast fashion firm, Boohoo. The company’s share value collapsed by nearly half after allegations emerged that a supplier in Leicester was paying workers as little as £3.50 an hour and failing to observe Coronavirus restrictions. It’s worth noting that allegations of illegal working practices among Leicester’s garment factories have existed for several years, but the COVID-19 pandemic has brought things to a head.

Forced labour and other forms of modern slavery remain a problem both here in the UK and in Europe. It’s estimated that there are over 100,000 people living in modern slavery in the UK, with similar numbers in Germany, France, Italy and Spain. The widespread prevalence of modern slavery in Italy’s tinned tomato industry is just one well documented example.

In any case, most supply chains will continue to be spread across the world in the post-COVID economy. Many of the key manufacturing countries we import from have ready access to raw materials, and there’s no getting around the fact that labour costs will remain lower. We can’t bring everything back, and even if we could, we shouldn’t.

Doing it right

The most ethical companies work to ensure best practice throughout their global supply chain. Stockport-based schoolwear and corporatewear manufacturer Rowlinson Knitwear is a brilliant example. The company imports from a range of overseas manufacturing locations and has a strong ethical approach that values long-term relationships with its partner factories.

Over the years, the company has invested in a number of initiatives to improve quality of life for factory workers, from providing industrial water filters for employees’ homes in Bangladesh to paying around double the minimum wage in Egypt. During lockdown, it worked closely with its suppliers to ease down production in a way that allowed them to continue operating without laying workers off. The result is a much more resilient supply chain that can withstand major shocks, as well as happy suppliers and workers who feel valued.

Case study: In Conversation with Rowlinson Knitwear

Getting started

So how do you create an ethical supply chain? A good starting point is to implement a ‘triple bottom line’ approach to procurement, taking the three Ps into account when making purchasing decisions. Supplier qualification and questionnaires can help to ‘score’ existing and prospective suppliers on their social and environmental performance.

Manufacturers should also map out their existing supply chain in full by compiling a full inventory of suppliers and characterising them by vulnerability to different risks. This can help to target key areas for action and identify choke points where there is an over-reliance on certain geographies or single suppliers. 

Related blog: Why sustainable supply chains are essential post-coronavirus

In times of crisis, it’s important to shoulder the burden and take pressure off smaller suppliers where possible, for example by providing early payment or cashflow support. However, if you have no choice but to switch to a new supplier, make sure you have completed due diligence checks on their financial integrity, regulatory record and ethical commitments. In the effort to keep their factory operating stressed suppliers are more likely to let standards slip.

Added benefits

An ethical supply chain approach is more than just a risk management exercise. Sales of ethical goods and services have increased tenfold over the last two decades, and we can expect a further uplift in the aftermath of COVID-19.

We can also expect the concept of ‘social value’ to become more important in procurement, so if you can demonstrate a commitment to ethical supply, you will have an advantage when tendering for public contracts.

Related blog: Social Value: what it is and why it’s more important than ever

In conclusion, a supply chain is only as strong as its weakest link. If you act ethically, you will increase your resilience to change, reduce your risk and increase your profit.

We’re redesigning our services to help you      

As we emerge into this brave new world post-EU and COVID-19, we’re busy looking at new ways to aid business recovery and help you plan for the future. If you need help with any of the issues raised above, contact us and one of our specialist advisors will be in touch.

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Over the past five years, GC Business Growth Hub’s Manufacturing Team has worked with 600 manufacturing companies, delivering a £20m-plus increase in sales and supporting the creation of over 300 jobs. 

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