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Complying with Supply Chain Transparency: Underlying Issues Lead to Regulation Backlash

It's important companies understand not only the dynamics and inner workings of their supply chains, but also the political and historical context of the regions from which they source.

Submitted by: Kelly Eisenhardt

Posted: Feb 19, 2014 – 09:45 AM EST

Tags: supply chain, sourcing, regulation, csr, compliance, brand, manufacturers, global market, transparency


By Kelly Eisenhardt

As regulatory pressure to comply with an increasing number of global environmental and social policies increases, corporations are being pushed to disclose more and more information about their sourcing and supply chain practices. In this race to maintain compliance and brand competitiveness, what role do contract manufacturers play? What is the impact on small- and medium-size businesses? And can information technology save the day?

Kelly Eisenhardt, newly appointed EVP and Managing Director, New England at AGEO360, interviews International Trade Attorney and former senior Congressional committee staffer Erik Autor. As a former VP and International Trade Counsel at the National Retail Federation (NRF) — the world’s largest retail trade association, Autor has worked at the important crux of regulatory demands and business compliance. Excerpts:

You’ve had a long career working with retail, most specifically as VP of the National Retail Federation. What do you see as the latest risks for companies and supply chain transparency?

Companies for the most part have been playing a game of “whack-a-mole,” when it comes to compliance. They’re chasing point issues instead of looking at the overall supply chain whack-a-moleprocesses or for a holistic solution. The challenge is when problems pop up, companies have to scramble, find a way to comply and quickly set their supply chain in order. Most companies do not plan for these problems in their budgets and the costs are enormous.

We need to have a more flexible system in place that can be readily adaptable to different types of processes and managing the supply chain. It’s definitely not cheap to address compliance but if companies begin to think more holistically about it, like it is part of a system and a repeatable process, it will be cheaper. It comes down to a choice: whether they want or need many single point solutions or whether there is a way to have a consolidated system which contains all the data identifying their risks.

It’s also important to ask, “Do we have a set of procedures, systems and relationships within the supply chain to adapt readily to industry, country, and incidence inquiries and regulations?”

Do you find that voluntary corporate responsibility, regulations and dynamic supply chains are too complicated and costly to achieve compliance?

There is a point where we have to ask whether a company’s business model renders them too far removed from a supplier to be accountable. We need to assess whether the laws we enact affect the intended change. We need to make sure the nature of the burden is realistic and achievable and we need to understand what control retailers have at the raw material level of the supply chain.

The beginning of the supply chain has a different customer than the end of the supply chain, where retailers sell to consumers. The raw material providers have a global market and are not necessarily concerned with the sourcing policies of a retailer. National economic stability and whole industries are at stake, and the risk of losing a small portion of business from companies who have social compliance sourcing strategies is often of little concern. They don’t care that retailers have instituted a boycott. They work on a global market basis.

Will there be a backlash against transparency if companies continue to struggle with raw material manufacturers and getting their programs implemented?

NGOs assume corporations have much more power than they do.

I can name a number of instances where the companies providing the raw materials do not care what the retailers on the other end think. They don’t feel any impact and they are far enough removed that it doesn’t have any effect. Believe it or not, supply-chaineven Walmart has very little power to control that end of the supply chain. There have been many situations where there are arguably criminal governments or even a lack of governing control, utter chaos, and no rule of law. How do you get people in those positions to do what you want them to do?

Even documenting the supply chain has its challenges. How do you make sure the data and certifications that are in place make their way up the supply chain without blockages, starts and stops? How often do you think paperwork is either lost or not transferred to the next level of the supply chain?

If a retailer never sees the Bill of Material for their product, how can they know their suppliers are following guidelines? What impact does the contract-manufacturing model have on governance and disclosure?

There needs to be a way to hold contract manufacturers accountable for environmental and social compliance and to make sure Tier 1 suppliers have met all those requirements and then passed the compliance information on to retailers.

Currently, there is a gap in the product information shared between the two. The nature of that model is such that retailers either pick from a catalog or provide product specifications and tolerances for manufacturing but never see the finished product’s bill of materials.  That becomes a challenge for documenting environmental and social compliance requirements, as the data stays solely in the contract manufacturer’s product lifecycle management system.

Unless the terms of a contract manufacturer are broadened to specify a degree of control over suppliers, companies could be liable for something as simple as the thumb drives they hand out at trade shows. Continuing with that example, thumb drives picked out of a catalog and branded with a company’s logo could be misconstrued as being produced by the branded company, thus requiring the branded company meet all compliance regulations, instead of the contract manufacturer having responsibility. Unless the control is circumscribed, the swag at a trade show could fall under the law and be construed too broadly. This puts a lot of pressure on a company.

If large corporations are struggling with compliance and transparency, how can small- and medium-size businesses manage these regulations and pressure?

Many simply can’t afford it. It puts small and medium businesses at a competitive disadvantage. It’s a time, cost, effort and resource issue. The corporations will figure out a way to do this cost effectively. The bigger companies can help evolve the tools, systems and practices. I don’t think anyone has a comprehensive solution right now. The small- and medium-size businesses still have to comply but if we keep piling compliance cost on top of compliance cost, it becomes unsustainable.

Some companies no matter what the size will just continue to pay the fines and fees, instead of evolving their practices.

Can technology save the day with tools to streamline the compliance and reporting aspects of the supply chain management process?

Right now, there is a lack of clarity around how compliance should be done. With all the various systems and choices, USB-driveit’s confusing.

This has opened up a gold mine of opportunity for third party compliance service suppliers. They’re all competing for this business but it is difficult to evaluate all of them and differentiate between them with a high degree of confidence.

Holistic solutions will need to be created to manage the supply chain instead of shooting for a single spot solution for individual regulation like the Dodd-Frank Conflict Minerals Act. Providers need to build systems and tools that enable industry to manage the supply chain at every tier, no matter how dynamic, and then get that information back to retailers, brands and manufacturers to address the issues.

What else should CSRwire readers keep in mind?

It's important to note we are trying to treat symptoms of deep problems and these regulations don’t address the underlying issues. How can we hope that our laws will address issues that occur in regions with hundreds of years of ethnic conflict? Will new regulations stop the conflict or the social compliance issue we're trying to address? Or is it simply about saying that we have clean supply chains?

Maybe it is about all of that

When we make demands in a political vacuum, we’re making demands where we don’t understand the long-standing histories and how times have evolved. It’s important that companies understand not only the dynamics and inner workings of their supply chains, but also the political and historical context of the regions from which they source.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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