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Responsible sourcing can be good for business

A company's reputation and bottom line can be damaged if its suppliers engage in harmful practices. Responsible sourcing and risk assessment technology can help mitigate the harm.

In today's global economy, it's more important than ever that businesses know from whom they are buying goods.

The damage to a company's reputation -- and, yes, its bottom line -- can be considerable if it becomes known that its suppliers use child or forced labor or engage in practices that harm the environment. While those are on the higher level of supply chain risk factors, the list can include all manner of shady business practices, from bribery to sexual harassment.

This is why many businesses developing programs and practices for responsible sourcing of goods is not just a public relations exercise; it's good for business.

"There's never been so much pressure for businesses to be more responsible," said Julia Litvak, program director for responsible supply management at Medtronic, during a panel discussion at the CPO Rising Summit, a conference for procurement professionals sponsored by the research firm Ardent Partners.

Medtronic, a global medical devices manufacturer based in Minneapolis, is building responsible sourcing into its supply chain processes, according to Litvak. The consequences of not paying attention to suppliers that use questionable practices can be very detrimental.

A good reputation is good for business

"A company's reputation or brand value is at risk for hits when you find [suppliers with] poor working conditions in the supply chain," Litvak said. "We're all concerned about this; we're all afraid that it could happen to us."

There's never been so much pressure for businesses to be more responsible.
Julia LitvakMedtronic program director for responsible supply management

The pressure for more responsible sourcing can come from a variety of sources, according to Litvak. These include regulatory agencies, who keep track of employment practices around the globe; customers, who have expectations and mandates to do business with responsible companies; investors and shareholders, who care where their money is invested; agencies, who rate companies on their responsible practices; peer companies, who may use ethics as a competitive differentiator; and potential employees, who want to work for responsible companies.

People are also attracted to businesses that are doing good, and responsible sourcing can start within procurement and the supply chain, according to Kristen Jordeth, GTM director of North America for supplier management at SAP Ariba.

"If you have the information in front of you and there's two suppliers that you can choose from, of which one is defending human rights in a third-world country or protecting or conserving our water and energy versus someone who's not, let's endorse the ones that are doing this," Jordeth said. "It's not the easiest process to put in place, but by having technology that allows you to bring it together, it helps to somewhat simplify the approach and gets you to a point where you can start with this approach."

While few dispute the value of the goals of responsible sourcing, the realities of operating globally when there is a range of standards in other countries can cause difficulties.

Cultural differences are a challenge

One company that faces this challenge is J.M. Huber, an Atlanta-based, family-owned company that produces ingredients for a variety of industrial products. The company operates on five continents, according to Brian Bender, senior director of global purchasing, and has found it challenging to vet suppliers that adhere to its ethical standards. These standards are strong and very important to the company, but Bender was unsure if they meant the same thing in other parts of the world.

"I've ultimately got the responsibility to make sure that every buyer we have is acting on the up and up so that we don't have a problem, because the family doesn't want to have their name in the paper ever," Bender said. "So the challenge that we have is how do you interpret ethical behavior in different cultures and different countries, and then how do you understand or make sure that the message is being received appropriately at all the levels in all the different countries and cultures that we do business in? Because we operate in 17 countries today."

Litvak agreed that this is very challenging because different countries and cultures have different standards for things like working conditions, where something that may be unsafe to someone from North America or Europe may be acceptable in Asia.

"What we see from our cultural perspective as terrible working conditions is something that they feel doesn't need to be addressed," she said.

Building responsible sourcing processes

Medtronic's program for responsible sourcing is built on three pillars, Litvak explained: following regulatory compliance guidelines, adopting responsible sourcing best practices, and meeting customer and shareholder expectations.

For regulatory compliance, Medtronic adheres to standards that include a Global Human Rights and Labor Standards Policy and a Conflict Minerals Policy. These policies explicitly delineate standards and assign roles and responsibilities for taking action to maintain adherence to the standards, such as conducting audits or training.

The responsible sourcing best practices include implanting a supplier code of conduct, performing supplier risk assessment and training with suppliers, Litvak said.

For example, a few years ago, as the company's business in China began to expand rapidly, it became very concerned about bribery. To address this, Litvak created a training document on ethical procurement that was targeted specifically for Chinese suppliers.

"I went over there with our vice president of sourcing and delivered several trainings to them to say what's allowed and what's not allowed," she said. "We just wanted to be very clear that no level of bribery in any type of form is allowed, and we explained our policies to them again; that this is how you select suppliers and there are no favors for relatives or anything like that. So we were very clear, but whether it worked, we don't know yet."

Medtronic is now implementing SAP Ariba Supplier Risk to manage responsible sourcing after previously using other risk assessment technologies.

Risk assessment technology boosts responsible sourcing

Although technology can't solve problems like poor working conditions or bribery in business dealings, it can help businesses implement and adhere to their own responsible sourcing practices, according to SAP Ariba's Jordeth.

SAP Ariba now includes a Supplier Risk module and a Supplier Management module that enable companies that use the SAP Ariba network to build due diligence into the procurement process and make better decisions about who to use as suppliers. When you begin to vet suppliers, Jordeth explained, you can use Supplier Risk to understand more about them and your potential relationship.

"It begins with asking some upfront questions, which we call inherent risk, that help you to understand what's going on with this relationship and how risky is the relationship? And, once you have the questions, the system triggers what you need to collect," she said.

"We've also created sophisticated algorithms that pull in 600,000 sources worldwide with specific information on what's happening -- are they under investigation or are they doing something good like funding women's rights -- so you can use that and have the dashboard report that shows you when there are preferred vendors, which are the first ones you see when you go in to buy."

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