[Publisher’s note: Supply risk is a beast that wears many suits. Today, we conclude our exclusive three-part series that examines the problem of human trafficking in the global cotton supply chain.]
Dressed to Kill? is a recent report that closely examines the depth and breadth of unethical and unsafe labor practices, particularly in the global cotton and textiles industries. The report was a joint research effort by LexisNexis, Stop the Traffik, and Finance Against Trafficking; Ardent Partners reviewed the report’s findings in two earlier articles, which readers can find here and here. While this report focuses on cotton and textiles, unethical labor practices and similar issues may be impacting other supply chains today. As a result, today’s article discusses the implications for Chief Procurement Officers and their supply management teams, who may have to mitigate supply risks associated with not just cotton and textiles, but other commodities that are traded globally.
Supply Risk Constantly Evolves, Requires Vigilance
One of the challenges of managing supply risk, like human trafficking in supply chains, is that the risk environment constantly evolves. Moreover, the absence of supply risk today for a given commodity does not ensure a risk-free tomorrow. For example, regulation at the global, national, and state levels currently lags consumer interest and activism to tamp down unethical labor practices in the global cotton and textiles industries. As a result, enterprise procurement teams are currently not significantly at risk from a regulatory standpoint. But it is worth noting that this risk could change as more governments and governing bodies – at any level – propose and debate legislation that could bring more regulation to the global cotton and textiles industries.
Beyond regulation, there is legal risk for enterprises that source cotton and textiles from unethical or unsafe sources abroad. Victims of human trafficking, child labor, forced labor, or unsafe working conditions can and have brought suit against major retailers following labor violations or deadly accidents. Legal risk is present even when enterprises have been asked to help improve conditions on the ground. After the Rana Plaza Factory collapse in Bangladesh in 2013, many retailers and fashion brands, particularly in the U.S., cite greater legal liability as the reason why they will not sign on to international efforts to improve garment factory safety in Bangladesh.
Another example of how supply risks can emerge for CPOs is the Conflict Minerals Provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Prior to 2010, many enterprises were not affected by the presence of tungsten, tin, tantalum, or gold in the products or commodities in their supply chains. But when the Dodd-Frank Act passed in July 2010, it put these so-called conflict minerals on the radar screens of many CPOs. And when the final rule went into effect in November 2012, it put an estimated 6,000 U.S.-based businesses at risk with its supply chain investigation, auditing, and reporting requirements. This now meant that using minerals that were mined in areas of conflict had potentially huge ramifications – even if the supply was clean and nowhere near the troubled regions. Moreover, the conflict minerals example illustrates that a company’s products can, over time, create risk for legal and procurement teams, which would then have to devote more resources to mitigate this risk.
Lastly, enterprise procurement teams have to contend with brand or reputational risk when sourcing products and commodities – whether they’re from the cotton/textiles industries or from other industries. No enterprise wants to be associated with a deadly accident or allegations of human trafficking; it’s bad for business. Although trendy but affordable clothing may draw many to retailers and fashion brands, no matter the human interest behind their sourcing methods, some consumers have started to pay greater attention to where clothing and textiles are manufactured, and where their favorite brands stand on the issue. Brands and retailers may lose customers over their sourcing practices. This presents a brand or reputational risk for procurement, which increasingly has to mitigate them when sourcing goods and commodities for the enterprise.
Costs versus Benefits
Identifying, managing, and mitigating supply risk can be a challenge for CPOs, who often must contend with budgetary and staff constraints, emerging risks, particularly those that they cannot easily quantify, and risk probability/impact scenarios. Resources are finite, while risks seemingly are not. As a result, CPOs and other procurement leaders frequently have to make tough decisions regarding what risks the organization can mitigate or accept versus which ones it cannot, and allocate resources accordingly. Considering the risks that human trafficking or unsafe labor practices in the global cotton supply chain poses to enterprises, CPOs may grapple with the costs to fully investigate their supply chains for these practices. Indeed, we recently spoke with the CPO at a large, consumer packaged goods retailer who said that it would be cost prohibitive for his and other companies if they actually walked each of their products back to the start of the supply chain.
Therein lies the problem for many retailers and fashion brands trying to gain greater visibility into the cotton supply chain: it’s not enough to ask where a batch of clothing was made, but it’s too expensive to go much further. This is a problem not just for the global cotton supply chain – it’s one for many other commodity markets that procurement teams tap where gaining greater visibility can be costly. For the manufacturing industry, it’s conflict minerals from the Congo. For the aerospace and defense industries, it’s electronic subcomponents from China. Ensuring enough visibility into these supply chains to mitigate regulatory, legal, or brand risk can be quite challenging, to say the least.
Final Thoughts
Enterprises do not have to wait for customers and regulation before gaining greater visibility and sourcing more ethically within the global cotton supply chain or any other supply chain. They can take meaningful steps towards eliminating the unethical practices that exist in certain industries like the global workforce that work to make affordable, trendy clothing from half a world away. Issuing supplier codes of conduct, corporate social responsibility statements, leveraging supplier information management tools, and partnering with first-tier suppliers to look further into their supply chains are important first steps that Chief Procurement Officers can take towards mitigating the risks for businesses, which at the moment are mostly legal and reputational. But, it is not all about dollars and cents – this issue has a human face, and that shouldn’t be forgotten, either
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