RESEARCH INSIGHTS...Visibility Methods: Methods that help companies “sense” issues in the supply chain by providing data on supplier practices and performance. Response Practices:

1

The Relationship Between

Responsible Supply Chain

Practices and Performance

Barchi Gillai Angharad H. Porteous Sonali V. Rammohan Hau L. Lee

RESEARCH INSIGHTS

November 2013

2

Reaction to

Violations

Penalties

Incentives

Supplier

Capability

Building

Proactive Product &

Process Design

The Relationship between Responsible Supply Chain Practices and Social,

Environmental, and Operational Performance

Insights from the Stanford Initiative for the Study of Supply Chain Responsibility (SISSCR)

By Barchi Gillai, Angharad H. Porteous, Sonali V. Rammohan and Hau L. Lee

November 2013

Despite multinational firms’ continued investments in factory audits and other practices aimed at tackling

social and environmental issues in their supply chains, lapses in employee labor standards, health and safety

standards and environmental protection remain an issue in many industries. In an effort to explore these

challenges and gain a better understanding of the responsible supply chain practices1 likely to be most

effective in reducing labor and environmental violations, the Stanford Graduate School of Business

launched a research project, the Stanford Initiative for the Study of Supply Chain Responsibility (SISSCR).

The research was based on two main sources of information: the “Social and Environmental Responsibility

(SER)” section of SCM World’s 2012 Chief Supply Chain Officer Report (based on input from 334

companies), and a smaller, more comprehensive survey conducted by the Stanford Graduate School of

Business (completed by 33 companies).

Based on the leading practices multinational firms employ as part of a continuous improvement program

for monitoring suppliers, the research team found that responsible supply chain practices can be divided

into three major categories:

Management Systems: Leadership, policies and procedures that lay the foundation for responsible

practices across the supply chain.

Visibility Methods: Methods that help companies “sense” issues in the supply chain by providing

data on supplier practices and performance.

Response Practices: Actions taken, either in response to identified violations, or in an effort to

prevent potential issues from developing into major problems.

This “Sense and Response” Responsible Supply Chain Framework is presented in Exhibit 1 below.

Exhibit 1: “Sense and Response” Responsible Supply Chain Framework

Management Systems Visibility Methods Response Practices

Leadership & Resources

Policies &

Procedures

Visibility

Into

Violations

Continuous

Monitoring

1 We define supply chain responsibility as the implementation of supply chain management practices that lead to

improved social, ethical and environmental performance. In this paper, we focus on social and environmental

responsibility.

3

The two surveys examined multiple practices related to each dimension of our “Sense and Response”

Responsible Supply Chain Framework, and their link to reduced SER violations and lower operating costs.

Highlighted below are the main findings from analyzing the two sets of survey responses. Both surveys

showed similar results in many areas. Where there were inconsistencies between the findings in the two

surveys, we present the results associated with the Chief Supply Chain Officer (CSCO) Report.

1. Practices used to manage social and environmental issues are correlated with lower labor and

environmental violations.

Close to 60% of the practices related to the “Sense and Response” Responsible Supply Chain

Framework were associated with reduced labor and environmental violations. Please refer to Appendix

1 on page 6 for a complete list of the SER practices included in this study, and their link to reduced

SER violations. Below, we highlight the most interesting findings.

When examining the prevalence of different SER practices, we found that many firms seem to be

“getting it right” by investing in practices that are associated with reduced SER violations. For example,

61% of Stanford survey participants reported having regular involvement of senior management in the

continuous improvement of social and environmental issues, and having sufficient resources to address

social and environmental issues. These factors were found to be positively correlated with reduced code

of conduct violations2. Similarly, more than 90% of CSCO survey participants had monitoring systems

in place. For about half, the monitoring systems focused on internal operations, while the other half

also monitored external suppliers. These monitoring capabilities were also linked with reduced

violations, particularly those that included external suppliers. Similar results were obtained through the

Stanford survey, which looked at more specific visibility and monitoring practices related to risk

assessments, auditing, and reporting. The Stanford survey also revealed that many companies are using

proactive response practices to prevent social and environmental violations from reoccurring. The

survey looked at six proactive practices, and each of them was found to be used frequently by at least

40% of the survey participants; all of these practices showed strong correlation with reduced violations3.

At the same time, some popular practices do not actually correlate with reduced number of SER

violations. When it comes to penalizing suppliers for code violations, 45% of CSCO survey participants

issued a warning followed by a reduction in the amount of business they give to the supplier. However,

this practice was found to be negatively associated with reduced violations. This may suggest that it is

challenging for low performing suppliers to improve over time, or that the threat of reduced business is

not sufficient to motivate suppliers to invest in improving performance. In fact, of the six penalties

examined, the only type found to be correlated with reduced SER violations was issuing a warning,

followed by contract termination. And yet, fewer than 30% of CSCO survey participants reported using

this practice. It is important to note that while contract termination seems to be much more effective

2 For both surveys, a practice was considered to be correlated with a performance measure (e.g. “reduced SER

violations” or “lower operating costs”) if its Pearson Correlation Value was greater than 0.2 and its p-value was at most

0.05. 3 A correlation was considered to be “strong” if the Pearson Correlation Value was greater than 0.55, with a p-value of

at most 0.05.

4

than retaining a nonconforming supplier, it may not always be feasible, as there may be no alternative

suppliers available.

Some collaborative practices and incentive programs are used infrequently, despite being associated

with reduced SER violations. For example, participation in industry working groups to collectively share

and develop responsible practices is associated with lower violations, yet only 24% of Stanford survey

participants reported doing this. In terms of building supplier capability, only 27% of Stanford survey

participants reported training factory/supplier managers on monitoring and improving socially and

environmentally responsible practices in their own upstream suppliers, a practice that was also found to

be correlated with reduced SER violations.

For more complete information on the prevalence of each SER practice among the Stanford survey

participants, please refer to the “Most Popular Answer” column of the table in Appendix 1, and to the

diagrams on page 9.

2. Many SER practices are positively associated with lower operating costs.

While reducing labor and environmental violations and building social and environmental value is a top

priority of SER policies and practices, many SER practices are also positively correlated with lower

operating costs. Some of the SER practices that showed the strongest correlation with lower operating

costs include proactive practices used to prevent social and environmental violations from reoccurring,

and to strengthen supplier capabilities. These include, for example, reengineering product and/or

process designs; investing in training and education for factory managers and supplier staff; and

consulting public information and worker opinions when assessing supplier risk. Senior management

involvement was also found to be linked to reduced operating costs. In contrast to conventional wisdom

that building in supplier incentives can be costly to buyers, some of the incentives studied were also

found to be positively correlated with reduced operating costs. Please refer to Appendix 1 for a

complete list of the SER practices studied in this research and their link to lower operating costs. These

findings clearly indicate that investment in SER practices can result in increased business value.

Companies should therefore consider SER practices not as a cost burden, but rather as an opportunity

to reduce operating costs in addition to improving SER performance and enhancing the company’s

public image.

3. Reduced SER violations are linked with lower operating costs.

Many of the SER practices examined in this research were positively associated with reduced SER

violations as well as lower operating costs. This result intuitively makes sense for a number of reasons.

First, health and safety violations or incidents such as fire or a building collapse are likely to result in

supply side disruptions, which in turn can lead to financial losses. Furthermore, buyer firms may be

held legally accountable for their suppliers’ actions. It is therefore not surprising that efforts to reduce

SER violations are also linked with lower operating costs. In addition, efforts aimed at reducing waste,

water, and energy use along the tiers of the supply chain can not only improve environmental

performance, but may also result in cost savings for the buyer company and its suppliers.

5

Summary The study results clearly demonstrate a positive link between certain SER practices and improved social,

environmental, and operational performance. However, not all practices were found to have the same

relationship with performance; some of them showed no correlation with reduced SER violations and/or

lower operating costs, and one of them – the reduction of business engagement with repeated SER violators

– was actually found to be negatively correlated with both of these performance measures. In addition, we

found that the practices that were the most prevalent among the survey participants were not necessarily

those that were most positively correlated with improved performance. At the same time, some less

prevalent practices did show correlation with improved performance.

Overall, our research suggests that senior management involvement, supplier collaboration and capability

building, supplier incentives and more proactive practices aimed at preventing problems from occurring in

the first place seem to be the most strongly associated with SER performance improvement and lower

operating costs. That said, companies should be careful when crafting their SER strategies, and choose to

implement those practices that seem to be most likely to yield the desired results for their organizations.

We’d like to thank Professors Kala Mehta, Joshua Cohen, and Richard Locke for their valued insights.

We’d also like to thank Kevin O’Marah of SCM World for sharing data from the annual Chief Supply

Chain Officer survey, and members of the Stanford Initiative for the Study of Supply Chain Responsibility

for their valuable support – Microsoft, CREATe, Nike, PwC, Intel, PCH International, Cisco, EMC, and

Ryder Supply Chain Solutions.

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Ap p e n d i x 1 : S E R P r a c t i c e s a n d T h e i r L i n k w i t h Re d u c e d S E R Vi o l a t i o n s a n d

Lo w e r O p e r a t i n g C o s t s

The table below lists all the SER practices covered in our research, and indicates whether they

were found to be correlated with reduced SER violations and reduced operating costs. A practice

was defined as correlated with one of these performance measures if it met the following criteria:

• Pearson Correlation Value ≥ 0.2 and P-Value ≤ 0.05

Question

SER Practice

Reduces

SER

violations?

Reduces

operating

costs?

Most

popular

answer

Ma n a g e m e n t S y s t e m s : Le a d e r s h i p & r e s o u r c e s 1 Extent of senior management involvement ✔ ✔ Level 3

Ma n a g e m e n t S y s t e m s : Pol i c i e s & pr oc e dur e s

2

Participate in industry working groups ✔ ✔ No Share with peer companies successful practices ✔ ✔ Yes Share audits and audit results with other companies

(suppliers only)

Yes

Adoption of standard code of conduct Yes

Vi s i b i l i t y M e t h o d s : Co n t i n u o u s m o n i t o r i n g

CSCO Extent of monitoring systems for internal operations

and external suppliers

✔ Internal

only

3

Risk assessment completed at set intervals ✔ ✔ Yes/No

Risk assessment completed when risk is suspected No

Risk assessment is completed before a contract is signed

or first place an order (suppliers only)

Yes

4

Use of public information for risk assessment (suppliers

only)

✔

✔

Yes

Use of worker opinions for risk assessment ✔ ✔ Yes/No

Use of information about certifications / standards

achieved for risk assessment

✔

Yes

Use of data from historical audits for risk assessment Yes

Use of data from assessments conducted by buying

company for risk assessment

Yes

Use of data from risk assessment services (e.g.

Maplecroft) for risk assessment (suppliers only)

No

5

Encourage suppliers to produce annual CSR report

(suppliers only)

✔

✔

No

Encourage suppliers to produce annual CSR report

using standardized format (e.g., the Global Reporting

Initiative) (suppliers only)

No

Allow suppliers to privately disclose issues without

penalty (suppliers only)

No

Ask internal factories to self-report their SER

performance (factories only)

Yes

6

!

7

Question

SER Practice

Reduces

SER

violations?

Reduces

operating

costs?

Most

popular

answer

Vi s i b i l i t y M e t h o d s : Vi s i b i l i t y i n t o v i o l a t i o n s

6

Send company members to observe audits ✔ ✔ Yes

Clearly communicate audit results ✔ ✔ Yes Follow industry standard auditing procedures ✔ Yes Issue corrective action plans in a timely manner ✔ Yes Publicly disclose audit results ✔ No

Participate in shared audits with companies using the

same supplier (suppliers only)

No

CSCO Extent of visibility into internal operations and external

suppliers Internal

only Re s p o n s e P r a c t i c e s : Re a c t i o n t o v i o l a t i o n s

7

Share with supplier best practices on implementing

corrective actions

✔

✔

Yes

Require suppliers to involve workers in implementing

improvements

✔

✔

No

Collaborate with supplier to conduct root-cause analysis ✔ Yes

Systematically follow up to ensure corrective action

plans are completed

✔

Yes

Re s p o n s e P r a c t i c e s : Pe na l t i e s

CSCO

Warning followed by monetary fines No

Warning followed by termination of contract ✔ No Warning followed by reduced business Negative No No warning; monetary fines No No warning; termination of contract No

No warning; reduced business No Zero tolerance approach No

10

Clear penalties for common social and environmental

violations

✔

No

Immediately terminate contracts when certain issues are

uncovered (suppliers only)

No

Offer support to terminated suppliers to enable them to

re-engage with us (suppliers only)

No

Terminate contracts only after repeated corrective action

attempts (suppliers only)

No

Manage these issues like other performance issues (e.g.,

quality)

Yes

Re s p o n s e P r a c t i c e s : In c e n t i v e s 8 Include SER performance in supplier scorecard ✔ ✔ Yes

9

Weight given to social and environmental performance

on the scorecard

No

scoring

system

8

Question

SER Practice

Reduces

SER

violations?

Reduces

operating

costs?

Most

popular

answer

CSCO &

11

Preferred supplier status (suppliers only) ✔ Yes Increased business engagement (suppliers only) ✔ No

Invest in supplier’s training and education (suppliers

only)

✔

✔

No

Public recognition (suppliers only) ✔ No Better terms & conditions (suppliers only) ✔ No

Price premiums (suppliers only) No

Re s p o n s e P r a c t i c e s : Su p p l i e r c ap ab i l i t y b u i l d i n g

12

Suppliers to include worker representation to improve

working, environmental conditions

✔

✔

No

Involve external stakeholders in training ✔ ✔ No

Train factory managers in root-cause analysis,

continuous improvement

✔

✔

No

Train factory managers to report risks, violations ✔ ✔ No Train factory managers to monitor practices of

upstream suppliers

✔

✔

No

Involve factory workers in training ✔ ✔ No

Re s p o n s e P r a c t i c e s : Pr oa c t i v e pr oduc t a nd pr oc e s s r e de s i g n t o pr e v e n t v i o l a t i ons f r om

re o c c u rr i n g

13

Investigate our own company’s role in the root causes of

violations (e.g. product design, short lead time, and

materials used)

✔

✔

Level 5

Collaborate with our factories/suppliers to identify how

our company can contribute to reduced violations (e.g.,

joint demand planning, product design, or

communication)

✔

✔

Level 4

Work directly with factories/suppliers to identify their

root causes of violations (e.g., worker turnover,

production process, or worker-management

communication)

✔

✔

Level 5

Provide our factories/suppliers with resources to address

their root causes independently

✔

✔

Level 2

Reengineer product and/or process designs to improve

social and environmental performance

✔

✔

Level 5

Focus on changing practices where the greatest impacts

occur in the supply chain (e.g., at the smelter level for

conflict minerals, at the fabric supplier for apparel

companies) (suppliers only)

✔

✔

Level 3

9

9

!

Ap p e n d i x 2 : S t a n f o r d S E R S u r v e y Re s p o n s e S t a t i s t i c s : S E R P r a c t i c e s

*All questions are with respect to either a firm’s top 5 internal factories or suppliers – whichever

is applicable.

Qu e s t i o n 1 : How involved is your senior management (e.g. director level and above) in the

continuous improvement of social and environmental issues?

15% Senior management is not very involved (Level 1)

61%

24%

Senior management is regularly updated on issues, but does not take an active role (Level 2)

Senior management is regularly updated on issues and takes an

active role, providing suf!cient training and !nancial resources for

monitoring and improvement programs (Level 3)

Qu e s t i o n 2 : Does your company collaborate with other organizations on social and

environmental issues in any of the following ways?

10

We complete an assessment before we sign a contract or !rst place an order (suppliers only)

We complete an assessment at set intervals as part of our ongoing factory/supplier monitoring (e.g., during annual

50%

evaluations)

We complete an assessment when we suspect a risk 30%

We have no risk assessment procedure 9%

Qu e s t i o n 3 : When do you carry out a factory/supplier risk assessment on social and

environmental issues?

80%

Qu e s t i o n 4 : Which information sources do you consult when doing factory/supplier social and

environmental risk assessments?

Assessments conducted by our own company 87%

Historical audits 83%

Certi!cations/standards achieved 77%

Public information (e.g., Internet /newspapers/databases/

nonpro!t organization reports) (suppliers only)

Worker opinions (e.g., from hotlines or crowd-sourced data)

Risk assessment tools/services (e.g., Maplecroft)

(suppliers only)

35%

50%

65%

Qu e s t i o n 5 a : Do you ask your internal factories to self-report their social and environmental

performance?

Yes: 75% No: 25%

10

11

Qu e s t i o n 5 b : Are suppliers encouraged to self-report their social and environmental

performance?

We encourage suppliers to produce an annual corporate

social responsibility (CSR) report

48%

We allow suppliers to privately disclose issues without penalty

48%

We do not ask suppliers to report on their own performance

43%

We encourage suppliers to produce an annual corporate

social responsibility (CSR) report using a standardized

format (e.g., the Global Reporting Initiative framework)

24%

Qu e s t i o n 6 : How do you audit your factories/suppliers for social and environmental

compliance?

We ensure corrective action plans are issued in a timely manner

82%

We follow industry standard auditing procedures

We clearly communicate audit results to the supplier and our management

We send members of our company to observe audits to learn from the auditor

We publicly disclose results (e.g., in our corporate social responsibility report)

We participate in shared audits with companies using the same supplier (supplier only)

29%

42%

70%

64%

79%

11

12

Qu e s t i o n 7 : What do you do when you find a code of conduct violation?

We collaborate with the factory/supplier to conduct a root-cause analysis and form a corrective action plan

We systematically follow up to ensure corrective action

plans are completed

We share best practices with factories/suppliers on implementing corrective actions

We review our own company’s role in violations as part

of our continuous improvement program

In certain cases, our company terminates contracts with suppliers for violations (suppliers only)

We require factories/suppliers to involve workers when

implementing improvements

48%

45%

70% 61%

97% 91%

Qu e s t i o n 8 : Is social and environmental performance included on your internal factory/supplier

scorecard?

Yes = 67% No: 33%

Qu e s t i o n 9 : If “Yes” to Q8, how much weight is social and environmental performance given

on the scorecard as a percentage of the total score?

0-5%

9% 6-10%

33% 12%

3%

3%

6%

11-15%

16-20%

21-25%

26% +

12%

6%

15%

Do not know, or I am not allowed to share this

Use another scoring system

No scoring system

12

13

Qu e s t i o n 1 0 : How do you penalize your factories/suppliers that have ongoing social and

environmental issues or code of conduct violations?

We manage these issues like other performance issues

(e.g., quality)

We terminate contracts only after repeated corrective action attempts (suppliers only)

We have clear penalties for common social and environmental violations

We rarely penalize factories/suppliers based on ongoing social and environmental violations

We offer support to terminated suppliers to enable them to re-engage with us (suppliers only)

We immediately terminate contracts when certain issues are uncovered (suppliers only)

10%

10%

24%

24%

21%

79%

Qu e s t i o n 1 1 a : Do you offer incentives to managers for strong social and environmental

performance at their factories (such as internal awards or recognition)?

Yes: 75% No: 25%

Qu e s t i o n 1 1 b : Which incentives do you offer to suppliers for strong social and environmental

performance?

Preferred supplier status (e.g., priority for future business)

57%

Increased business/volume 43%

None 33%

Investment in training and education for supplier staff 24%

Public recognition (e.g., supplier of the year awards) 14%

Better contract terms and conditions 10%

Price premiums 5%

13

14

Qu e s t i o n 1 2 : What is included in your company’s social and environmental capability building

program?

We don’t have a capability building program for factories/ suppliers

45%

Factory/ Supplier factory workers are involved in trainings 45%

We encourage factories/suppliers to include worker

representation to improve working conditions and

environmental conditions

Factory/ Supplier factory managers are trained to proactively report risks and violations

Factory/ Supplier factory managers are trained in root cause

analysis and continuous improvement

We encourage and facilitate the involvement of external

stakeholders in training

Factory/Supplier factory managers are trained on monitoring

and improving socially and environmentally responsible

practices in their own upstream suppliers

27%

42%

39%

39%

39%

14

15

14% 19% 29% 14% 24%

18% 21% 21% 9% 30%

18% 27% 9% 21% 24%

6% 9% 33% 15% 36%

15% 15% 15% 33% 21%

9% 21% 15% 27% 27%

Qu e s t i o n 1 3 : To what extent does your company take actions to prevent social and

environmental violations from reoccurring? Please rate each area with respect to your top 5

internal factories/suppliers.

We focus on changing practices where the greatest impacts

occur in the supply chain (e.g., at the smelter level for

con!ict minerals, at the fabric supplier for apparel

companies) (suppliers only)

We reengineer product and/or process designs to improve

social and environmental performance

We provide our factories/suppliers with resources to address

their root causes independently

We work directly with factories/suppliers to identify their

root causes of violations (e.g., worker turnover, production

process, or worker-management communication)

We collaborate with our factories/suppliers to identify how

our company can contribute to reduced violations (e.g.,

joint demand planning, product design, or communication)

We investigate our own company’s role in the root causes

of violations (e.g. product design, short lead time, and

materials used)

Level 1, We don't do this at all

Level 2

Level 3

Level 4

Level 5, We do this extensively

!

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