Companies have long faced reputational risks from harmful and abusive working conditions in their supply chains. The pandemic is placing a new spotlight on such dangers. One strategy that many companies adopt to avert such problems: Impose codes of conduct that stipulate minimally acceptable working conditions in suppliers’ factories. Numerous firms also periodically audit their suppliers to assess compliance.
Do these measures actually help managers identify unethical suppliers and lead to improvements in conditions for workers? When an audit reveals that a supplier falls short, what are the chances the supplier will remedy matters? Is the relationship worth the risk to the purchasing company’s brand? To answer these questions, we conducted a series of studies using tens of thousands of code-of-conduct audits of thousands of factories around the world. This uncovered several factors that predict which suppliers are likely to improve conditions over time and suggests several steps purchasing companies can take to ensure that they do.
WHICH SUPPLIERS LIKELY TO IMPROVE?
Countries and cities vary, of course, in terms of production costs, labor availability, general working conditions and propensity for strikes and other disruptions. Such locational differences are relevant. For example, we found greater improvement among suppliers in countries with more non-governmental organizations per capita and more media freedom than in other countries; both factors heighten the probability that harmful working conditions will be exposed.
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Factories within a given country may vary widely with regard to working conditions and the willingness and ability of their owners and operators to improve them. Which suppliers are more likely than others to take the necessary steps? We have identified five factors:
— CERTIFIED COMPLIANCE WITH MANAGEMENT SYSTEM STANDARDS. Our research with Yanhua Bird found that factories adhering to management system standards such as ISO 9001 (process quality)
ARE and ISO 14001 (environmental management) tended to be better than uncertified suppliers at improving working conditions. Suppliers opt in to such standards and hire third parties to attest that they comply.
— ADOPTION OF LEAN MANAGEMENT. The lean system is a set of practices that include standardizing procedures, team-based problem solving and quality control, continuous improvement to eliminate waste and production planning to minimize peaks and troughs in the use of labor and equipment. Two studies of Nike suppliers found that it improved compliance with labor standards relating to wages and hours. (Compliance with health and safety standards was unaffected.) In addition, lean management requires training workers to identify quality problems and managers to schedule workloads more efficiently to avoid excessive overtime. The studies found that after a factory adopted the lean system, managers became more reluctant to mistreat workers and exhibited greater concern that people might defect to a competitor.
— UNIONS. Our study with Yanhua Bird also revealed that following an audit, unionized suppliers improved working conditions more than nonunionized suppliers did. Although unions in developing countries can’t always increase workers’ political power, they promote dialogue between managers and workers in ways that can be helpful. They can enable workers to make management aware of hazards and to share proposals for mitigating them.
— AVOIDANCE OF PIECERATE COMPENSATION. Factories that pay workers by the units they produce tend to exhibit less improvement in working conditions than factories with other compensation systems, according to our research with Yanhua Bird. Piece-rate pay incentivizes workers to focus on short-term production goals, potentially discouraging practices that would boost compliance with labor standards but might reduce productivity — for instance, participating in safety training and using machine guards.
— SERVING ONCE-TARNISHED BUYERS. Our most recent research with Andrea Hugill found greater improvements in working conditions among suppliers serving brands that had experienced negative publicity related to other suppliers’ labor practices. Such suppliers should be attractive to companies with unblemished records, which can piggyback on the due diligence of their once-compromised counterparts.
HOW CAN MONITORING IMPROVE WORKING CONDITIONS?
Companies can boost the odds of improvement by using monitoring methods we identified in separate research projects. They should:
— USE HIGHLY TRAINED AUDITORS. Audits tend to spark greater improvement when they are conducted by highly trained auditors, who are better not just at detecting problems but also at suggesting solutions.
— ANNOUNCE AUDITS IN ADVANCE. Although companies want a full picture of what’s going on at their suppliers, they also want their suppliers to improve. According to a study by Richard Locke, Matthew Amengual and Akshay Mangla, announcing audits in advance can foster teamwork and trust between the auditor and the supplier, which promotes learning.
— ALIGN THE ACTIVITIES OF THE PURCHASING DEPARTMENT AND THE SOCIAL RESPONSIBILITY TEAM. A study of Gap’s suppliers by Matthew Amengual and Greg Distelhorst found that suppliers that failed an audit improved only after Gap formally linked the future of the business relationship to the supplier’s labor standards by coordinating the activities of its own purchasing and social responsibility departments. When those departments were siloed, as they are in many companies, failing suppliers made no improvement.
HOW CAN FIRMS BETTER TRACK PERFORMANCE?
Our research also reveals several factors that result in more-accurate audit reports, critical to managing brand risk.
— ROTATE AUDITORS OR AUDIT FIRMS. Audit teams produce more-accurate audits when any member is conducting his or her first inspection of the factory at hand or when the factory’s prior audits were conducted by a different firm.
— INCLUDE A FEMALE AUDITOR. Audit teams with at least one female member reported more violations, perhaps because they were less likely to let violations slide or because women are more likely than men to elicit sensitive information in interviews, particularly if the factory’s workforce is largely female.
— CHOOSE AND PAY AUDITORS RATHER THAN HAVE THE SUPPLIER DO SO. Many companies reduce costs by requiring their suppliers to pay for audits — and some even allow suppliers to choose the auditor. But that sets up a conflict of interest that might tempt auditors to paint an unduly rosy picture. Indeed, when the purchasing company pays the auditor, more violations are reported.
— DON’T FULLY OUTSOURCE AUDITING. Our ongoing work with Ashley Palmarozzo is yielding preliminary evidence that audits are more accurate when the purchasing company uses its own staff or hires third-party auditors but has its own staff conduct some inspections in the same market. This approach increases the control that buying companies have over auditors and allows them to better monitor the quality of any third-party audits they use.
MANAGING WORKING CONDITIONS in global supply chains is an ongoing challenge. The findings described here can empower managers to better predict which factories are more likely to improve working conditions and to design monitoring programs to foster such improvement and accurately track performance.
Jodi L. Short is the honorable Roger J. Traynor professor of law at UC Hastings Law. Michael W. Toffel is the Sen. John Heinz professor of environmental management at Harvard Business School. He is the faculty chair of the school’s Business and Environment Initiative.
