Supply chain audits falling short? Try this approach.

Many will remember the scandals of the 1990s, when brands such as Nike and Kathy Lee Gifford’s clothing line were linked to ‘sweat shop’ labour in factories where their products were made. Some suggest that these cases marked the beginning of corporate social responsibility in the consumer products industry, as we know it today.

However, flash forward twenty years as the consequences of the Rana Plaza tragedy continue to play out in Bangladesh, new investigations continue to uncover child labour in major clothing brand supply chains, and human rights and environmental violations are being exposed in other industries with alarming frequency.

The International Labour Organization (ILO) estimates that 21 million people worldwide are the victims of forced labour, 90% of whom are exploited in the private economy by individuals or enterprises. They estimate that profits generated through forced labour exploitation total a staggering US $150 billion per year.

Supplier auditing has become the standard tool for uncovering and addressing these abuses. Yet, despite thousands of audits conducted year over year, it seems improvement has been slow. In fact, one of the factories in Rana Plaza had passed an audit just before the building’s collapse. So why aren’t audits uncovering abuses like child labour, unsafe working conditions, and modern day slavery?

A 2016 report released by the Sheffield Political Economy Research Institute (SPERI) highlights some of the reasons supplier audits have failed to achieve the improvements in social performance that consumers are demanding. The authors highlight the ways in which the potential of audits to uncover serious human rights issues has been undermined, from deception by suppliers and failure of brands to scrutinize supplier subcontracting, to misusing audits as weak diagnostic tools and checklists, and the risky trend towards industry self-regulation.

Significantly, the report suggests that in an effort to demonstrate corporate social responsibility and ethical business practices, NGOs and businesses have worked together to create a patchwork of voluntary standards – monitored through audits – which serve to neutralize poor business performance, effectively undermining the role of States in corporate governance.

Despite the shortcomings of many of the existing practices in supplier auditing, there can still be tangible benefits to implementing a robust and thorough audit framework, provided it is applied with a different end in mind.

Here’s how taking a rights-based approach to supply chain audit can strengthen findings and encourage real and positive changes.

1. Put human rights first

In a survey conducted for the United Nations Global Compact last year, three-quarters of companies indicated that avoiding reputational risk was a key driver in ensuring sustainability in their supply chains. The emphasis on reputation management can mean companies tend to focus on those areas where they believe they are succeeding.

A recent landmark case in the Philippines linking the effects of climate change to human rights violations highlighted the connection between rights and the environment; however, as the SPERI report highlights, audits typically treat environmental concerns as separate from social concerns. This means a company can shine a light on achievement in environmental performance, while ignoring the persistent use of child labour in another part of its supply chain.

A human rights-based approach to supplier audits involves considering risk to people as the primary focus, and risk to the company as an important and inter-related component. We have previously illustrated how implementing a human rights program can complement existing risk management and responsible sourcing programs to illuminate risk blind spots.

The United Nations Guiding Principles on Business and Human Rights (UNGPs) lay out a standard framework for ensuring business respect for human rights: from setting a strong policy commitment, to ensuring mechanisms are in place to identify and respond to rights violations. The Shift Project has written a useful guide to help companies respect human rights through global supply chains by implementing the UNGPs to identify, prioritize, manage and align risks across the organization and address impacts with effective grievance mechanisms.

2. Change the dynamic – engage positively

Audits are typically punitive in nature, with suppliers being scored, ranked, and sometimes dropped if they are unable to improve in certain areas. The SPERI report suggests that this has resulted in well-known and widespread deception, quoting Nike admitting, “…monitoring does not bring about sustainable change. Often, it only reinforces a pattern of hiding problems.” Resources are often spread thin, making it difficult for auditors to uncover deception despite suspicions that workers have been coached, records falsified, or underage workers told to take the day off.

Some have suggested that companies approach audits more like journalists, showing up unannounced in unexpected places, and digging deep to expose violations. In fact, this serves to reinforce the dynamic that puts the ‘power-to-police’ in the hands of the big brands and does nothing to address underlying issues that lead suppliers to deceive in the first place.

Instead, engaging actively with suppliers to identify shared goals and solutions, encourage transparency to surface potential violations, and reward strong performance, is more likely to achieve positive outcomes.

For example, Hewlett-Packard (HP) has been recognized for their supplier engagement, having worked proactively with suppliers to improve water management practices through enhanced transparency and goal setting. They have also built a supplier rating system focused on eliminating the use of forced labour in their supply chain by rewarding strong performers with the possibility of more business when they achieve higher ratings.

3. Build capacity – of your team and your suppliers

Prior to launching their new supplier rating system, HP worked for several years training suppliers across 15 countries on its code of conduct and worked closely with NGO Verité to improve their own understanding of the risks in their supply chain.

Sometimes poor supplier performance is the result of low awareness or understanding of the issue and how it impacts the buyer. Companies engage with suppliers on a variety of issues from quality to materials cost, which presents an opportunity for education on related or intersecting issues.

Mars has collaborated with the government of Côte d’Ivoire and other industry players on their Vision of Change program, which provides training for farmers on agricultural practices, access to tools and fertilizers. The program simultaneously raises awareness about child and forced labour and the role of education in building a better future.

Internally, a company that appears more interested in completing the audit than in analyzing the findings might actually be the outcome of inadequate resources or low levels of internal competence. Building the capacity of internal auditors, board members and supply chain professionals will strengthen what may be the weakest link and support targeted and integrated solutions to performance issues.

Improving supplier performance is a team effort

Audits are, and will remain, an important part of managing supply chain risk. It’s how companies approach them that will make the difference.

A new report by Vigeo-Eiris assessed over 3000 companies in 35 countries on their human rights programs. It concluded that strong performers are those that have a good appreciation and understanding of where human rights risks exist in their supply chain well before conducting any audits. They cooperate with stakeholders, talk about the issues, monitor and publish performance, and are transparent about challenges they encounter and how they solve them.

Taking a rights-based approach – one that is rooted in the UNGPs and other international human rights standards, emphasizing participation as both a means and a goal, and building the capacity of all stakeholders to be part of the solution – is what will make the difference in tackling the serious social and environmental issues that are preventing all of us from reaching our potential.