A tool to strengthen the supply chain

Ethical employment practices and resilient supply chains are essential ingredients of a reputable and sustainable business. Worker tragedies in emerging economies, such as the collapse of the Rana Plaza textiles factory in Bangladesh in 2013 that killed more than 1,100 people, evidence of child labour in the production of mobile phones and batteries, and worker suicides at Foxconn in China, along with media coverage of those events, have made organisations increasingly aware of the need to know what happens down the supply chain and take responsibility for it. Failure to take responsibility can seriously undermine brand identity for many years, as many companies have discovered over time.

The Supply Chain Accounting and Employment Practices (SCA-Emp) research team, a multinational collaboration of academics and industry representatives, found that few companies employ effective strategies to promote ethical practices within their supply chain. The research team, which received funding and guidance from CIMA, also found that many companies miss out on opportunities to employ accounting techniques that could make their supply chains more resilient.

These findings were incorporated into the SCA-Emp Diagnostic Toolkit, which was designed to help accountants, human resources professionals, and supply chain managers work together to ensure ethical HR and accounting practices within their organisation and throughout the supply chain.

The toolkit was launched in 2016 and has been downloaded by companies in more than 20 countries.

What were the main findings?

The SCA-Emp project aimed to identify good practice and find out how (and whether) companies were checking on their suppliers' practices. What were they doing inside the company? Did they monitor their suppliers? And did they promote labour standards?

In 2014, the research team carried out a detailed survey of more than 100 automotive and textile companies in Brazil and South Africa, involving major retailers, original equipment manufacturers, and first-, second-, and third-tier suppliers. It also drew on in-depth interviews with accounting and finance managers, HR managers, CEOs, supply chain managers, trade unionists, professional bodies in accounting and HR, nongovernmental organisations, and employer organisations.

We observed that, in practice, many companies have little knowledge of supplier behaviour. We found that many companies shared information with their customers and suppliers on manufacturing processes but not on costs or employment practices (such as training, recruitment, performance management, and diversity) unless a problem arose. Most companies (70% of those surveyed) had an equal opportunities policy within their own organisation, but we found limited transparency through the supply chain. Also, within the companies themselves, there was limited diversity in terms of the people employed, especially in management roles.

In the automotive companies studied, knowledge of suppliers' employment practices rapidly diminished as you moved down the supply chain. Although Brazilian automotive companies still had strategic alliances with tier-one suppliers, cost-cutting pressures had led to arm's-length contracting further down the supply chain, particularly when sourcing from companies in Asia.

In South Africa, tier-one suppliers were heavily involved in the final production process, but outsourcing had meant that workers were often given inferior employment conditions. In clothing and textiles firms, jobs were much more likely to be short-term, with problems around health and safety, and a lack of effective worker voice. In rural areas, self-employed workers were used, though they were not monitored by the government or taxed. The sector as a whole was struggling to survive, due to the availability of cheap imports from China and South Asia.

These findings helped to inform the SCA-Emp Diagnostic Toolkit.

What accountants can do to promote resilient supply chains

Our research suggests that many organisations miss out on important opportunities to make their supply chains more resilient. Finance professionals can play an important role in helping their organisation achieve this goal by:

• Identifying ways that their skills can complement those of procurement and supply chain colleagues, and working together to explore those opportunities. For instance, accountants are able to bring their diagnostic skills, using tools such as open book accounting or make-or-buy, to inform other colleagues of the costs and benefits associated with different scenarios. The accounting section of the SCA-Emp toolkit can help identify ways to do this.
• Encouraging other colleagues and departments to get involved in the supply chain as well and to use the toolkit as a strategy planner. For instance, HR practitioners bring skills around conflict resolution, which can help identify the best course to take if industrial action such as strikes affect the supply chain. They might also be able to help interpret data on suppliers' employment practices with the intention of identifying potential instances of labour exploitation and therefore help prevent the risk of damage to brand image.
• Trying to build strong relationships with customers and suppliers. Our research suggests that long-term, trusting relationships between customers and suppliers boost competitive advantage for both. Sharing financial data between customers and suppliers (eg, by using open book accounting) can help to identify cost savings and prevent unexpected supply interruptions.
• Not being afraid to ask customers or suppliers for employment information. We found that many firms share data on production processes or product specification, but they rarely inform one another about labour costs and practices. This can help to highlight instances where workers are not being treated well — for example, by being paid less than the minimum wage. Sharing this type of information relies on trust, which can take time to build, but you can start small. You don't need to share confidential information to make improvements. For example, after using the toolkit, an agricultural business in South Africa with fewer than 100 employees introduced more professional procurement practices (eg, taking into account cash flow management issues), and this enabled the business to create better relationships with suppliers and develop more sophisticated production practices.
• Using the checklist in the SCA-Emp toolkit to help to evaluate current suppliers or to aid supplier selection. The toolkit can be used as part of the assessment criteria to create a preferred supplier list. Some firms have used the toolkit to integrate a more ethical dimension into their sourcing policy by asking suppliers to complete the toolkit at the point of registration and to review it at regular intervals. The completion of the toolkit by suppliers is an integral part of identifying and promoting best practices with preferred suppliers.

How to use the toolkit

The toolkit will appeal to companies and practitioners that wish to improve the competitiveness and resilience of their supply chain and to those keen to prevent damage to their brand that could arise if poor labour standards in supplier firms are exposed.

Companies can use the toolkit to check current practices within the firm, to plan strategy across departments, or to benchmark existing suppliers and evaluate potential suppliers.

Results obtained by toolkit users

Examining the aspects of the business highlighted in the toolkit has helped organisations around the world tackle several performance issues.

Organisations from across the world have used the toolkit to:

• Increase employee productivity and profits;
• Improve communication with employees and relationships with customers and suppliers;
• Enhance their focus on ethics and quality;
• Improve knowledge of the supply chain and work toward better integration of departments within the organisation; and
• Embed forms of best practice throughout the organisation.

An automotive company in Brazil has drawn on ideas from the toolkit to promote its performance appraisal system, improve benefits and training for employees, and enhance interaction between the accounting and commercial team. Between December 2016 and 2017, it developed better relationships with customers and saw an increase of around 7% in productivity, 5% more business, and a 2% increase in profits. Company directors informed us that they attributed much of this improvement to their use of the toolkit. A second automotive company in Brazil is now modelling best practice to other automotive companies, and during a time of economic crisis, managers felt that their experience using the toolkit helped them to maintain a focus on ethics, values, and strategy.

A large UK local authority uses the toolkit as a central part of its ethical procurement strategy. The initial phase of this process focuses on its largest suppliers and will then be rolled out to its smaller suppliers. The toolkit will then subsequently be used to assess potential new suppliers.

How to get the toolkit

The SCA-Emp toolkit is a free resource, available to download at sca-emp.com as an Excel file, or it can be completed online (registration is required).

The toolkit includes seven sections containing statements on supply chain management, employment practices, accounting, and monitoring of suppliers. It is a self-evaluation tool that includes suggested actions. The online version provides users with a report based on their responses.

To find out more about the research project or the toolkit, email Pauline Dibben at p.dibben@sheffield.ac.uk.

Pauline Dibben, Academic FCIPD, Ph.D., is a professor of employment relations; John Cullen, FCMA, CGMA, is a professor of management accounting; Gareth Crockett, Ph.D., is a research associate; and Juliana Meira, Ph.D., is a lecturer in management accounting, all at the University of Sheffield Management School in the UK. Geoffrey Wood, Ph.D., is dean and professor of international business at the Essex Business School in the UK. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.