Q&A: Richard Locke on Responsible Supply Chains

July 7, 2016
Categories: Compliance, Global Supply Chains, Supply Chain

In this Q&A, CEO Pamela Passman talks with Richard Locke about responsible supply chain manPamelacrop smallagement. Richard Locke is a member of the Advisory Council and is Provost and Professor of Political Science and Public and International Affairs at Brown University. His research focuses on improving labor and environmental conditions in global supply chains. Working with leading firms including Nike, Coca Cola, Apple, and HP, research by Locke and his students have also looked at the alignment of corporate profitability and sustainable business practices.

Passman: “You have been researching labor standards in supply chains for well over a decade.  What are the factors that make improving labor standards so difficult to address?”

Locke2_0Locke: “The challenge of improving global labor standards begins with the complexity of today’s supply chains. Consider the production of consumer electronics. Raw materials for electronic components are extracted, often under harsh working conditions, from mines in Asia and Africa. These materials are refined and processed in Asia and then sold to Western and Asian companies that manufacture component parts such as computer chips, batteries, cameras, and circuit boards. These parts are then assembled, primarily in China, in large factory complexes that employ hundreds of thousands of workers. The final products are shipped back to consumer markets that are located principally in developed economies. The shelf life of these devices is relatively short, and the e-waste generated by consumers who dispose of their phones and other portable devices in exchange for newer models is, in turn, shipped back to Asia and Africa.

These new supply chains reflect a shift both in the geography of global manufacturing—from the advanced industrial states to developing countries—and in the organization of production. In the past, most brands relied on manufacturers and suppliers located within their home countries or else were vertically integrated multinational corporations that owned their subsidiaries in foreign markets. Today, lead firms are coordinating the production of thousands of independent suppliers located for the most part in developing countries.

Such changes have had profound implications for labor regulation. For most of the 20th century, labor standards were regulated largely on a national basis, through a mixture of laws, union-management negotiations, and company policies. Internationally, the conventions and technical services of the International Labour Organization (ILO) provided an additional source of moral authority and advice, though the ILO lacked significant enforcement power. The emergence of global supply chains stretching across national borders, from richer to poorer countries, presented a forceful challenge to this model of regulation.”

Passman: “Have the private and public sector, independently or collaboratively, managed to successfully enhance compliance along the supply chain?”

Locke: “In many cases, the governments of the developing countries hosting these new factories lacked the institutional capacity to regulate labor, health, safety, and environmental standards. Moreover, they often intentionally overlooked their own laws for fear of driving up costs and thereby turning away foreign investment, jobs, and tax revenues.

In the 1990s, in an initial effort to fill the regulatory void, NGOs and others pushed to include “social clauses” within global trade agreements. These same groups sought to mobilize consumers in developed countries who would in turn pressure developing countries to enforce labor laws. These efforts failed: they were blocked by developing-country governments, which argued that such standards were protectionism with a moral face. Efforts by the ILO and the United Nations to promote core labor standards through the establishment of Decent Work Conventions (2008) and the Global Compact (2000) also had limited impact because they too lacked enforcement powers.

In the absence of an enforceable system of global justice, private, voluntary regulation became the dominant approach, promoted by labor rights NGOs and global corporations alike.

Private, voluntary regulation comes in many forms. The most familiar is a corporate code of conduct. A global brand—Nike, HP, Apple—develops standards for working conditions, wages, hours, and health and safety and requires that its suppliers accept those standards. Private audits are then used to assess factories for compliance with those codes of conduct. In some cases, outside certifiers label products “sweat free” or “fair trade,” thus signaling to consumers that the products are made under fair or sustainable conditions.

Heated debates have raged over the specifics of these programs: which standards should be included in codes of conduct; how factory auditors are trained and selected; how information generated from factory audits is shared. Yet regardless of the mission, good will, leadership, organizational design, and even resources underlying private initiatives, they have all produced limited or mixed results.

Passman: “Why has private regulation, in particular, this focus on auditing of labor practices had such limited impact?  

Locke: “Despite many good faith efforts over the past 15 years, private regulation has had limited impact. Child labor, hazardous working conditions, excessive hours, and poor wages continue to plague many workplaces in the developing world, creating scandal and embarrassment for the global companies that source from these factories and farms. That is my reluctant conclusion after a decade studying this issue.

A significant contribution to the limited impact is the lack of collective action across industries and sectors and the focus on auditing by individual companies and not capability-building.  Factories spend substantial resources responding to audits and not necessarily focused on embedding the internal controls needed to ensure consistent fair working conditions.

Additionally, our research has shown that poor working conditions and weak labor standards can also stem from global buyers’ responses to dynamic market conditions. In the consumer electronics industry, for example, brands feel forced to constantly create new gadgets that will attract buyers, and the result has been dramatically shortened product life cycles. To maximize market share, large retailers engage in constant promotions that rapidly erode selling prices. Price erosion, along with pressure to carry a broad product assortment, means that retailers do not like to carry large inventories. This practice puts an enormous strain on contract manufacturers to deliver smaller, more customized batches of products as quickly and cheaply as possible. As a result, the pressure falls on suppliers and workers.

Passman:Why is capability building the most effective way for companies to engage in responsible supply chain management versus the traditional code and audit approach?”

Locke: “The capability-building model starts with the observation that factories throughout the developing world often lack the resources, technical expertise, and management systems necessary to address the root causes of compliance failures. Whereas the compliance model sought to deter violations by policing and penalizing factories, capability building aims to prevent violations by providing the skills, technology, and organizational skills that enable factories to enforce labor standards on their own. By providing suppliers with the technical know-how and management systems required to run more efficient businesses, this approach aims to improve these firms’ financial situations, thus allowing them to invest in higher wages and better working conditions. At the same time, to keep these factories running “high-performance” operations, management must also train shop-floor workers to help identify persistent quality problems.

Capability-building programs envision a mutually reinforcing cycle in which more efficient plants invest in their workers, who, in turn, promote improvement throughout the factory, rendering these facilities yet more efficient and thus capable of producing high-quality goods on time and at cost while also respecting corporate codes of conduct.”

Passman: “How can the private and public sector interact to further ensure responsible supply chain management?”

Locke: “Improving global working conditions requires government action, since only the state has the authority and legitimacy to enforce labor legislation and to promote and protect citizens’ rights. Thus, even as manufacturing stretches across national borders, the fate of workers remains tied to their home countries’ institutions.

But private, voluntary regulatory efforts do not necessarily crowd out or undermine state enforcement of labor laws and employment standards. Under certain circumstances, private projects can complement and even enhance government enforcement. For instance, Nike’s private compliance program works best in countries with more developed labor inspection schemes and strong rule of law.

Other researchers working on both labor and environmental standards have found similar results. According to David Graham and Ngaire Woods, governments in developed and developing countries can enhance the effectiveness of corporate self-regulation by insisting upon—and perhaps even legislating—greater transparency and accountability among global buyers and their suppliers. Those governments can demand that the rights of workers to organize and mobilize be protected. Only in these circumstances can the promise of private, voluntary regulation be fulfilled.”

Read more about Richard Locke’s work in his book ‘The Promise and Limits of Private Power’ available at Cambridge University Press.