As sustainability and ethical procurement move from being buzzwords to standard expectations, SMEs may find the concept of managing corporate responsibility risks in their supply chains daunting. Soledad Milius suggests some practical starting points.

Small or medium-sized enterprises (SMEs) operating in a business-to-business environment cannot escape scrutiny over the social and environmental practices in their supply chains. That said, the size of the business does not necessarily render SMEs powerless in influencing the sustainability practices of their business partners.

Increasingly, companies are seeking information on the sustainability of their supply chain, of which your business may be part. You may find yourself inundated with requests for carbon footprint data, human rights compliance documentation, and chain-of-custody certification to identify the origin of the materials that make up your products.

The rising tide of transparency

Due to rising stakeholder expectations, regulation, consumer awareness, increased transparency and the acknowledgement that, often, social and environmental risks translate into financial and operational risks, companies and investors are requesting more information on the sustainability of their business partners’ supply chain than ever before.

In 2010, 44 member companies of the Carbon Disclosure Supply Chain Project, including Unilever, Nestle, and Vodafone, reached out to 1402 of their suppliers seeking data on their carbon emissions and climate change strategies (Carbon Disclosure Project, Supply Chain Report 2010). SEDEX, the Supplier Ethical Data Exchange, has 23,000 member companies, many of whom have been compelled to join by their high street retailer customers, and acts as a platform to collect and share information on the labour, health and safety, and environmental practices of suppliers and their suppliers’ suppliers.

SMEs may traditionally consider their primary stakeholders to be their immediate business partners but in today’s operating context, the stakeholders of your stakeholders indirectly affect your business by influencing your customer’s expectations. High street retailers face increased pressure from savvy and ethically aware consumers, socially responsible investors, and evolving concepts of accountability and liability in binding (eg the UK Bribery Act) and non-binding (eg the United Nations Guiding Principles on Business and Human Rights 2011) national and international normative developments.

Just good business

Ultimately, taking your suppliers’ sustainability practices into consideration is good for business, no matter what size your company.

Benefits for SMEs include a better understanding of the supply chain and the opportunity to strengthen relationships with key suppliers by engaging them in a dialogue (rather than imposing requirements) about sustainability. Where SMEs are faced with a multitude of customer requirements around sustainable supply chain practices, they can identify points of convergence among the requirements and implement an ethical procurement programme that simultaneously meets multiple customers’ standards while reducing confusion for suppliers. By demonstrating that the programme has been implemented effectively, SMEs can potentially reduce the number of audits their customers might require of them or their suppliers, the costs of which are often passed down the supply chain. SMEs can also gain a competitive advantage by proactively addressing sustainability before customers demand it or regulations require it. For example, those companies that started to identify and eliminate potentially harmful chemicals from their products early on had lower compliance and adaptation costs of compliance with the European Union’s Registration, Evaluation, Authorisation and Restriction of Chemicals regulation, which came into force in 2007.

But how does an SME actually go about monitoring and improving sustainability practices in its supply chain effectively, and with limited resources?

Supply chain sustainability on a shoestring

Consider what systems you already have in place to manage relationships with your suppliers. How do you ensure that your suppliers provide materials that meet the quality requirements of your customers, on time and for the right price? Do you verify the quality of the materials before establishing an initial purchase agreement? Do you require suppliers to sign a document that contractually obliges them to guarantee a certain level of quality, lead time and price? What procedures do you have in place to track and address quality defects caused by supplier materials? Any and all of these processes can be re-tooled for managing sustainability with suppliers. While implementing management systems may sound daunting, building on existing processes and keeping it simple will help you get started.

Step 1: Review and consolidate requests for information

If your customers have their own sustainability requirements or criteria, or have requested specific types of information related to your company’s or your suppliers’ social and environmental practices, there may be an opportunity to consolidate the requirements by adopting a single standard that meets all of the requirements but reduces duplication and confusion. In addition, you can provide your customers with the information they are seeking according to a schedule that makes sense for your business and allows you to gather the information once for all customers, rather than on an ad hoc basis. This should reduce interruptions to your business and the amount of staff time that is dedicated to responding to those requests.

Step 2: Develop a policy

Based on the above exercise, you can develop a policy that lays out labour, occupational health and safety and environmental criteria for suppliers. The format that is used to communicate these standards to suppliers is often called the Code of Conduct. Code provisions usually reference international human rights and environmental standards, as well as emphasise the requirement for compliance with local laws and regulations.

The following are key questions that will help you to develop the policy.

  • What standards do you want your suppliers to follow?

  • How are those standards linked to international social and environmental standards?

  • How are those standards linked to the company’s mission and values?

  • What constitutes “zero tolerance” issues for which the supplier will be put on immediate notice?

  • What is the scope of the policy (what types of suppliers, geographically and how far down the supply chain does it apply)?

Ethical certifications already exist for particular products, such as Forest Stewardship Council (FSC) certified wood, in which case it is worth checking if your suppliers already use sustainably certified materials.

Step 3: Communicate the policy

Determining how the policy is communicated to suppliers and how that communication is documented will help to ensure that it is consistently applied.

Some companies incorporate the policy into supplier agreements and request that sign-offs are returned to the company. These are kept on file for every supplier and re-signed on an annual basis. The supplier agreement states that the supplier must adhere to the policy and should provide information on sustainability performance through the agreed means (see Step 5). The agreement may also state that the company reserves the right to terminate the supplier for non-compliance with the Code.

Step 4: Conduct a risk analysis

Consultants may lead you to believe that risk analyses are highly technical and require specific skills. In fact, it depends on the level of detail required. You can conduct a basic risk analysis yourself. The purpose of the risk analysis is to segment the supply chain to identify high-risk suppliers and allocate resources appropriately in terms of communication, monitoring frequency and follow-up. For example, high-risk suppliers may warrant a visit or an audit, whereas a brief questionnaire for medium-risk suppliers, and simply communicating the Code of Conduct to low-risk suppliers, may be sufficient.

Risk criteria can be based on any or all of the following:

  • country of operation (political and legal contexts)

  • industry/type of product (likelihood of child labour, toxic ingredients, etc)

  • procurement spend

  • strategic importance

  • level of influence/leverage

  • presence/likelihood of subcontracting

  • workforce size and type (such as migrant workers)

  • self-assessment questionnaire results

  • previous assessment results.

Supplier self-assessments or questionnaires can be used to gather information on suppliers’ social and environmental practices. The results can be used as the basis of a risk assessment or to help focus assessments or other on-site visits on specific areas of concern.

Step 5: Gather sustainability performance data

Although this may be the most challenging step in terms of cost and feasibility, especially where suppliers may be larger than the company gathering the information, SMEs should not be deterred. In fact, the response may be surprising. Larger companies may already have sustainability programmes in place due to other customer requirements, in which case it would be relatively easy for them to provide the information.

There are various ways in which information can be gathered from suppliers and they can be applied according to the risk analysis outlined in Step 4.

  • Request general information: asking open-ended questions about a supplier’s sustainability practices is the least intrusive method and allows the supplier to provide information in their own format. A key question to ask is whether the supplier faces sustainability requirements from other customers and whether they undergo audits for those requirements. This will reduce duplicative efforts, an approach your supplier should appreciate.

  • Send a self-assessment questionnaire: although there are limitations to self-reported data, brief questionnaires are a cost-effective way to gather preliminary information and can also be used to identify potential issues that may warrant additional investigation.

  • Take advantage of on-site visits: if your quality department or other senior management visits supplier facilities, use the opportunity to gather information about the supplier’s social and environmental performance. Even though they may not be social or environmental experts, a few key data points and well-formulated questions can help to identify glaring issues.

  • Conduct a social and environmental audit: an audit allows you to gather specific, verifiable information on supplier performance. The resulting report can be used to develop a corrective action plan and drive improvements. The scope of the audit and whether it is conducted by internal staff or a third-party will affect the costs.

Step 6: Mitigation

Defining a process for mitigation and remediation is critical to ensure continuous improvement. A central component of the process must include incentives for improving performance and consequences for failure to improve.

SMEs should explain in advance the process for remediation and timelines for improvement, including at what point continued non-compliance may result in termination. Where non-compliance or opportunities for improvement have been identified, the supplier should submit a corrective action plan within a clearly defined and reasonable timeframe.

The success of this approach will largely depend on what leverage the SME has with the supplier. Where leverage is weak, the SME may consider approaching the supplier in collaboration with other companies sourcing from the same supplier.

Step 7: Integration

The best ethical procurement programme is only effective where the company as a whole embraces it and integrates it into the way it does business. Most importantly, this means ensuring that procurement practices do not undermine efforts to raise social and environmental standards among suppliers and that they support incentives for suppliers to improve. Those responsible for procurement should be involved in all stages of the programme, whether through direct contribution to its development, training, or incorporating their responsibilities for ethical procurement into their job responsibilities. For example, the procurement department should not be able to bring on a new supplier without ensuring that they sign off on the Code of Conduct and should not be able to issue purchase orders where a high-risk supplier has failed to make improvements. In addition, procurement staff should understand how their decisions affect the ability of suppliers to comply with social and environmental standards and why ethical procurement is essential to doing business responsibly.

Resource constraints should drive innovation, not inaction

SMEs should not be afraid to ask for help, whether from their customers who may already have responsible sourcing programmes in place and may be willing to share their learnings, industry associations, strategic partnerships, or multi-stakeholder initiatives, such as the United Nations Global Compact, half of whose membership is made up of SMEs. In sum, ethical procurement programmes are not out of reach for SMEs and taking a simple, risk-based approach can strengthen your relationships with customers and suppliers, lead to competitive advantages as an early adopter, and start you on the path to a sustainable supply chain.

Resources

About the author

Soledad Milius is Programme Manager at UL Responsible Sourcing

Last reviewed 17 April 2012