2008 apics conference_stanly_thelen_ sep 14

The Dollars and Sense ofSocially Responsible Purchasing

Assessment, Strategic Prioritization, and Case Study

SummaryAs procurement managers we often struggle to “do the right thing” while at the same time “do the right thing” to reduce costs. But, through socially-responsible procurement (SRP) we are afforded that very opportunity. Furthermore, our customers, investors, and the communities in which we work are demanding it. The Institute for Supply Management defines socially responsible procurement (SRP) as "a framework of measurable corporate policies and procedures and resulting behavior designed to benefit the workplace and, by extensions, the individual, the organization, and the community."

This is a hot-button issue with investor activists, communities, employees, and special interest groups that must not be ignored. More importantly, it's the right thing to do. Besides, effective application of SRP will save a company money through their procurement efforts.

Pursuing this objective requires focused efforts along the dimensions of community involvement; diversity and inclusion; environmental protection; ethics and financial stewardship; human rights respect; and, health and safety.

Among our basic beliefs of socially responsible procurement are that it can confer a very real competitive advantage to your company; aspirations must be set high because customers and investors expectations are high; and, the time to get started is now, as your customers and investors are expecting it. Importantly, to demonstrate that it’s the right thing to do financially, some consideration of cost, benefit, and risk relationships must be taken into account. Doing so will definitely make SRP “the right thing to do” from everyone’s perspective.

Research materials from the Committee on Social Responsibility of the Institute for Supply Management—whose 2007-08 Chair is from IBM—played a key role in the supporting content of this assessment guide.

The Dollars and Sense of SRPGetting Started

Questions

Issues to Avoid

Principles

Constructs

Cost : Benefit

Risks

Diagnostic

Strategic Options

Prioritization

Assessment Plan

Infrastructure

Organization and Roles

Case Study: The IBM story

Getting Started

What are CPO’s asking about socially-responsible procurement (SRP)?

Most CPO’s have a common set of questions and desire a common set of deliverables around socially-responsible

procurement

Compilation of management’s SRP objectives

Catalog of SRP options Map of SRP initiatives to overall

strategy Preliminary workplan for

implementation phase Decision on implementation of rapid

assessment recommendations


Catalog of SRP options Map of SRP initiatives to overall

strategy Preliminary workplan for

implementation phase Decision on implementation of rapid

assessment recommendations

Core questions Diagnostic deliverables

Just what are SRP practices? How do we know what’s right for our business on socially-responsible procurement (SRP) initiatives? What are credible strategic objectives in SRP for a company such as ours, and what are the elements of such an infrastructure? What are the cost : benefit considerations for our business? How do we manage individual SRP efforts?

Getting Started

There are typically many perceptions . . .

What are stakeholders’ views of SRP?Many companies lack true agreement as to SRP’s role

in the business

. . . and an opportunity may exist to

clarify and set an SRP

strategy suited to the

company’s needs

. . . and an opportunity may exist to

clarify and set an SRP

strategy suited to the

company’s needs

Improve thecommunity

Increasesafety

Includenew ideas

Goo

dwill

Marketadvantage

Protect

rights

Cost

contain-

ment

Influenceethicaldecisions

Prevent

abuses

CONCEPTUAL

Protect

environment

Getting Started

Do we have problems we are trying to cure, or at least avoid?

There are six dimensions of SRP Prior infractions

Need for sustainability

Lack of environmental responsibility

Inattention to opportunities for disassembly, reuse or recycling

Prior human rights abuses

Lack of provisions for the instrumental value of creating the necessary conditions of human well-being

Potential exposure of human rights compromises

Boycotts due to sourcing activities

Lack of diversity in supplier base

Lack of diversity within organization

Lack of diversity throughout the supply chain

Past discriminatory practices with suppliers, employees or others

Lack of trust by community stakeholders and key publics

Pressure from advocacy groups or the media

Trade union issues

Compliance with OSHA or other legal or regulatory requirements

People hurt or killed

Dangerous conditions

High insurance and medical costs

Past unethical actions

Potential exposure of unethical actions

Compliance with Sarbanes-Oxley (SOX) or other legal or regulatory requirements

Substandard financial responsibility

Environment

Human Rights

Diversity

Community

Safety and Health

Ethics and FinancialStewardship

Getting Started

Why are such remedial actions important?

Helps ensure that actions are lawful

Reduces risk

Lowers total cost of operations

Facilitates strong public relations

Helps recruit and retain customers

Guides managerial actions and commitments; Guides

employee actions; Guides supplier actions

Improves supplier competitiveness

Improves trust in both internal and external (suppliers,

customers, and others) relationships

ChecklistChecklist

Ensures that all individuals are treated with dignity and

respect

Avoids complicity in human or employment rights

abuses

Allows for equal opportunity and non-discriminatory

treatment

Prohibits the existence of child labor and forced labor

Fulfills legal responsibilities to ensure the health and

safety of employees, customers, suppliers and

communicates in which we work

Ensures requirements to protect the environment

Getting Started

What is the single most important issue to your company?

Environment and being ‘green’ Human rights around the world Diversity and minority business

development Community involvement Health and safety of workers and

customers Ethics and financial stewardship

Principles of socially-responsible procurement (SRP)

Health and Safety

Promote a safe environment for each employee in your organization and supply chain. (Each organization is responsible for defining "safe" within its organization.)

Support the continuous development and diffusion of safety practices throughout your organization and the supply chain.

Community

Provide support and add value to your communities and those of your supply chain.

Encourage members of your supply chain to add value in their communities.

Diversity

Proactively promote procurement from, and the development of, socially diverse suppliers.

Encourage diversity within your own organization.

Proactively promote diverse employment practices throughout the supply chain.

Environment

Encourage your own organization and others to be proactive in examining opportunities to be environmentally responsible within their supply chains either "upstream" or "downstream."

Encourage the environmental responsibility of your suppliers.

Encourage the development and diffusion of environmentally friendly practices and products throughout your organization.

Ethics and Financial Stewardship

Be aware of ISM's Principles and Standards of Ethical Supply Management Conduct.

Abide by your organization's code of conduct.

Become knowledgeable of, and follow, applicable financial standards and requirements.

Apply sound financial practices and ensure transparency in financial dealings.

Actively promote and practice responsible financial behavior throughout the supply chain.

Human Rights

Treat people with dignity and respect.

Support and respect the protection of international human rights within the organization's sphere of influence.

Encourage your organization and its supply chains to avoid complicity in human or employment rights abuses.

Environment

Human Rights

Community

Source: Committee on Social Responsibility of the Institute for Supply Management; IBM

Getting Started

The Dollars and Sense of SRP

Getting Started

Questions

Issues to Avoid

Principles

Constructs

Cost : Benefit

Risks

Diagnostic

Strategic Options

Prioritization

Assessment Plan

Infrastructure



Constructs

What is the business case for SRP?In economic and socio-economic terms, benefits

outweigh the costs and risks

BenefitsCosts Risks

Internal Benefits

Innovation from new sources of supply such as new minority suppliers or new origin countries

Increased opportunities for disassembly, reuse, and recycling

Consistent treatment of suppliers and customers

Improved fiscal management

Allow for equal opportunity and non-discriminatory treatment

Reduce insurance costs

Prevention of injuries

Enhance market share, business volume and revenue

Become a favored supplier

Improve morale of employees

Improve reputation to attract and retain customers and

employees

Strengthen the organization’s culture of trust

External Benefits

Trust and support of community groups and key public figures (facilitating physical plant expansion or local tax benefits)

Enhanced reputation with suppliers and customers

Improve union relationships

Positively influence the community

Earn respect from suppliers, customers, employees and

other stakeholders

Improve public image

Counteract negative press

Reduce legal costs

Reduce risk uncertainties

Lead supply chain partners by example; Influence supplier actions

Constructs



BenefitsCosts Risks

Cost of Action

Maintenance and updates of policy, codes, benchmarking, and other documentation

Program manager

Legal counsel

Membership fees

Training and certification

Communications

Hotline or help line

Evaluations and audits

Donations and matching donations programs

Sponsorship funding for events

Salary of staff when providing voluntary support to external groups or causes

Travel and expenses for site visits, conferences, and trade events

Cost of Inaction

Lost market share

Loss of suppliers, customers, and investors

Negative publicity

Compromised employee and community morale

Increased legal, insurance or other costs

Boycott of business

Lost opportunity to pursue governmental or certain other new business

Negative attention by advocacy groups

Negative coverage in the media

Negative public relations events

Regulatory penalties

Constructs



BenefitsCosts Risks

Risks of Action

Negative reaction from some shareholders, customers, or community members to specific SRP initiatives

Recipient communities or organization may suffer if a change in support or support level is made

Socio-political disfavor by some interest groups

Complacency with current suppliers or sources resulting in lack of competition, compromised quality and/or increased costs

Lack of sustainability

Substandard level of financial compliance or fiscal management

Potential exposure to human rights compromises

Risks of Inaction

Unsafe conditions or situations

Injury or death

Damage to environment

Inconsistent treatment of suppliers, customers, or communities

Constructs

What do most companies today think of SRP?

It’s too costly an activity to undertake Benefits do far outweigh costs and risks There’s too much risk associated with

these activities Companies don’t know what to make of

SRP


Getting Started

Questions

Issues to Avoid

Principles

Constructs

Cost : Benefit

Risks

Diagnostic

Strategic Options

Prioritization

Assessment Plan

Infrastructure



Diagnostic

Business protection

Business enhancement

Business leadership

What are our strategic choices in SRP?There are 3 ‘levels’ of SRP strategy with different objectives and

necessary underlying commitment

Objective Protect financial objectives by meeting all legal and regulatory requirements

Enhance earnings by mitigating risk exposures and contributing to society

Differentiate the company competitively and create a market advantage via innovative commitments and activities

Key elements Minimize costs and risk exposures, even if foregoing some SRP opportunities

Limit SRP activity to what is required to operate the business

Balance SRP commitments with desired returns from SRP initiatives

Invest in programs that reduce risks while garnering benefits and favorables for the company

Create and promote new SRP initiatives which address specific needs of employees, suppliers, communities, origin countries for materials, et al

Manage risks and costs associated with new, innovative programs and initiatives

Senior management role

Set expectations and risk limits Review performance and

compliance reports regularly

Fund initiatives Review programs and risk exposures

frequently Actively participate in ongoing decision

making Ensure integration of SRP programs

with company strategy

Build appropriate organization and capabilities to administer the SRP initiatives

Create and champion SRP within company and among investors

Develop altogether new SRP programs as a means of competitive differentiation

CONCEPTUAL

Diagnostic

Rapid assessment workplan* for SRP strategic direction

Full-time work for 1 to 2 persons for 14 to 20 days, plus 3-4 hours of others’ time each day

Timing

Activities

3 days

Draft and submit data and document requests

Prepare interview schedule

Tailor question series to individual stakeholders

Update SRP standard and leading practice criteria vis-à-vis the client’s industry sector

Interview plan Final data request

End products

Resources

* The assessment may require 14 to 20 days of work spread over 3 or even 4 weeks

Collect findings over two weeks

Synthesize findings over one week

DiagnoseConduct workshop

Prepare

5 to 7 days

Conduct interviews Review strategy, source

documents, and data Research annual reports

and benchmarking materials to establish SRP leading practices in industry sector

Define client-specific costs, benefits, and key risk exposures for the company in light of emerging SRP objectives


Catalog of SRP options

3 to 5 days

Map SRP initiatives to overall strategy

Seek-out industry peers and organizations for thought-partnering

Assess client aspirations compared to stakeholder expectations

Map of SRP initiatives to overall strategy

1 day

Review and discuss findings with procurement [and senior management] team

Decision on implementation of rapid assessment recommendations

Diagnostic

2 to 4 days

Syndicate initial recommendations with key members of client procurement team

Prepare workshop materials

Preliminary workplan for implementation phase

How should we allocate our resources for SRP initiatives? Diagnostic

Environment

Human Rights

Diversity

Community

Safety and Health

Ethics and FinancialStewardship

Our ability to make a difference

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Emphasis are

a

Emphasis are

a

x’s = Stakeholder groups

EXAMPLE


Getting Started

Questions

Issues to Avoid

Principles

Constructs

Cost : Benefit

Risks

Diagnostic

Strategic Options

Prioritization

Assessment Plan

Infrastructure


Case Study: The IBM storyInfrastructure

SRP leadership committee Senior managementProcurement managersand buyers

Identify all initiatives undertaken by the company

Develop policies and procedures to support SRP

Plans and executes internal and external communications to stakeholders, including employees, investors, suppliers, and activist groups

Develop organization capable of addressing the company’s SRP strategy and expectations

Ensures that training is secured, where needed

Conducts audit of SRP initiatives

Strategy

Policy and Process

Governance and organization

Understand the SRP needs of the company

Develops clear definitions of company expectations for SRP

Support strategy for SRP initiatives

Adopt policies and procedures governing SRP expectations and processes

Approve overall organization resource support and funding

Requires tangible or measurable benefits to be recognized from SRP efforts

Report on the SRP initiative progress of company

Execute/implement SRP initiatives in concert with strategy

Implement processes and tracking systems to ensure adherence to plans and to policy

Engage with SRP committee on existing and proposed initiatives

Develop supplier capabilities and sourcing strategies that support SRP strategy

Approves overall strategy, policy, and resource commitment

What are the SRP management roles and responsibilities?

SRP succeeds when there is leadership and ownership

Infrastructure

Develops strategy and performance tracking for initiatives

Implements programs and reports regularly on progress

How can SRP initiatives best be managed?

Within the supply chain or procurement department

By cross-department, cross-company involvement

Through the office of the CEO By volunteer committee

How do we manage the priorities among potential SRP initiatives?

An SRP management committee can address this issue

Link business strategy with all initiatives along the six dimensions of SRP

Allocate funds to each initiative while monitoring risks

Define success and track performance (i.e. business returns) of the initiatives

CPO and senior procurement staff

May involve leadership in finance, investor relations, and public relations

Operations may need to be engaged, depending upon the SRP initiative

Quarterly briefing (more often, when needed)

Detailed reporting on all initiatives

Concrete discussion on strategic positions and SRP intent

Detailed definition of objectives

Involvement of all stakeholders in decision-making

Clear definition of mission

Leadership

Clear guidance

Infrastructure


Getting Started

Questions

Issues to Avoid

Principles

Constructs

Cost : Benefit

Risks

Diagnostic

Strategic Options

Prioritization

Assessment Plan

Infrastructure



Chief Procurement Officer

Supply Assurance

GlobalLogistics

GlobalSourcing

ProcurementEngineering

Procurement Policy & Practices

ProcurementServices

Procurement Operations

Direct (Production)Sourcing Councils

Suppliers

Indirect (General)Sourcing Councils

SCSR resides in Global Procurement, but separate from the sourcing and operations groups in order to remain focused and impartial

SCSR resides in Global Procurement, but separate from the sourcing and operations groups in order to remain focused and impartial

Supply Chain Social

Responsibility (“SCSR”)

IBM: Case StudySupply Chain Social Responsibility

External drivers of Corporate Citizenship (“CC”) are shifting society’s expectations of companies

Reduced role of government Impact of globalized production and

service delivery Growth of individualism as the

social norm Rise of consumer activism Growth of non-governmental

organizations (NGOs) Loss of trust following corporate scandals

External DriversExternal Drivers

Increased expectation for companies

to fill the void left from a reduced governmental role Economic strategies Establish standards Promote environmental protection

Be accountable and transparent for financial, ethical, social and environmental performance to wider stakeholder groups

Shifting ExpectationsShifting Expectations

Who is pressuring your company toward social responsibility?

Investor groups Senior management Governmental and regulatory bodies Customers Non-governmental organizations (NGOs)

or special interest groups

1.

2.

3.

4.

5.

Legal and ComplianceInitiatives

Strategic PhilanthropyInitiatives

Values-based SelfRegulation Initiatives

Cost SavingsInitiatives

Growth PlatformInitiatives

Consumers

Community

Employees

Business Partners

Investors

IBM research shows that companies pursue a number of incremental and/or new initiatives to stakeholder groups

Corporate Response InitiativesCorporate Response Initiatives Stakeholder GroupsStakeholder Groups

CC

Mat

urity

Corporate Citizenship Working Group

Representatives from each functional area meet monthly to manage IBM’s responsibility

reporting, stakeholder engagement and address cross-company citizenship issues.

Corporate Citizenship Working Group

Representatives from each functional area meet monthly to manage IBM’s responsibility

reporting, stakeholder engagement and address cross-company citizenship issues.

Governanceand

FinancialAccountability

CorporateCommunityRelations

EnvironmentalAffairs and

ProductSafety

Employee Well-Being

GlobalHuman

Resources

GovernmentalPrograms

IBM Corporate Citizenship management system

Supply Chain

IBM Supply Chain Social Responsibility initiative

Industry Collaboration

Industry Collaboration

Dialog with external

stakeholders

Dialog with external

stakeholders

Drive supply chain improvements

Drive supply chain improvements

Perform supplier audits / re-audits

Perform supplier audits / re-audits

Create / deploy IBM Supplier Conduct Principles

Create / deploy IBM Supplier Conduct Principles

IBM Supplier Conduct Principles

Forced or Involuntary Labor

Child Labor

Wages and Benefits

Working Hours

Nondiscrimination

Respect and Dignity

Freedom of Association

Health and Safety

Protection of the Environment

Laws, Including Regulations and Other Legal Requirements

Ethical Dealings

Communications

Record Keeping

IBM SCSR EducationSCSR education developed and deployed since 2004

AudiencePowerPoint

TeleconferenceWeb Based Comments/Observations

Councils and Staff

Covered all councils by Mar 2005; presented grapevine session 2007.

Audited Country Buying Teams

Individual Buyers700 completed the course; available in English, Chinese and Spanish.

SuppliersConducted pre-audit calls in EE. Marginally successful, did not remedy all uncooperative barriers.

Procurement Engineering

Overview with focus on H&S issues that Engineers may observe while conducting quality audits

IBM’s Supplier Audit Process

Engage global and local buyers; Country-

level focus (risk-based)

Engage global and local buyers; Country-

level focus (risk-based)

Assess a cross-section of suppliers; target min 80%

of spend in country

Assess a cross-section of suppliers; target min 80%

of spend in country

Supplier generates action plans; reviewed/

accepted by SCSR team

Supplier generates action plans; reviewed/

accepted by SCSR team

3rd party audit firm contracted

for the assessments

3rd party audit firm contracted

for the assessments

Audit report

provided to IBM

Results to supplier from IBM

Map results to code provisions and local laws Share results with suppliers, provide global / country

comparisons Request supplier improvement plan w/names and dates

of responsible parties Review improvement plans for consistent approach Communicate and enforce the business imperative of

compliance Re-audit to verify sustainability in 12-18 months

Map results to code provisions and local laws Share results with suppliers, provide global / country

comparisons Request supplier improvement plan w/names and dates

of responsible parties Review improvement plans for consistent approach Communicate and enforce the business imperative of

compliance Re-audit to verify sustainability in 12-18 months

Supplier Improvement Plans

Supplier audit drives post-audit improvement plans

Supplier Initial Audit Results – Global Cumulative (2004-2008)Brazil, China, Czech Rep, Hungary, India, Mexico, Philippines, Poland, Romania, Slovakia, Taiwan, and Thailand

(base = 449 suppliers)

0 20 40 60 80 100

Ethical DealingsFreedom Assoc

Forced LaborChild Labor

EnvironmentalNondiscrim

Record KeepingCommunicationsRespect & Dignity

Laws & RegsWages & Benefits

Working HoursHealth & Safety

% Non Compliant to IBM code

Significant Minor

Supplier Audits: Observations / Conclusions A number of issues are seen in most emerging market countries:

Health & Safety (almost universal)

Management systems are weak relating to social responsibility and laws/regulatory compliance

Corporate Citizenship remains a new concept to most emerging markets

Culture can not be overlooked as having a strong influence

Some issues are pervasive and country-specific:

China: working hours/wages/safety Mexico: discrimination/freedom of association India: wages/safety Brazil: safety/respect & dignity

Supplier audit results are similar to those reported by others in the sector

Thank you!

Michael Stanly [email protected] (320) 240-0235

Bruce Thelen [email protected] (312) 330-3225