How to keep your brand clean and shiny

Your supply chain can destroy your reputation but there are steps you can take to minimise the risk.

Managing conditions in global supply chains is a challenge.

Companies have long faced reputational risks from harmful and abusive working conditions in their supply chains. In the 1990s exposes revealed rampant child labour and brutal conditions in factories making products for Nike, marring the brand’s carefully cultivated image. In the early 2000s Apple faced a barrage of activist pressure and embarrassing media coverage following a rash of suicides at the factory of its supplier Foxconn.

The pandemic is placing a new spotlight on such dangers: consider the media allegations of low wages and inadequately protected frontline workers at UK suppliers’ factories making apparel for Boohoo and the swift action by investors and retailers to dump the brand.

One strategy 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 a supplier falls short, what are the chances the supplier will remedy matters?

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 they do.

Improved suppliers?

Countries and cities vary, of course, in terms of production costs, labour availability, general working conditions, and propensity for strikes and other disruptions. Our research indicates that such locational differences can reinforce or undermine efforts to encourage suppliers to improve their working conditions. For example, we found greater improvement among suppliers in countries with more non-governmental organisations per capita and more media freedom than in other countries; both factors heighten the probability that harmful working conditions will be exposed. This suggests that buyers ought to monitor suppliers in countries with low NGO density and restricted media freedom — countries such as Bangladesh and China — more closely than they monitor suppliers in countries with high NGO density and media freedom, such as Honduras and Jordan.

But that’s just a start. 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? On the basis of our research and that of others, we have identified five factors.

1: Management system standards
Our research with Yanhua Bird found that factories adhering to management system standards such as ISO 9001 (process quality) 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. The standards require suppliers to conduct internal audits and institute procedures to promote continuous improvement, such as action plans that encourage workers and managers across silos to identify, communicate about, and remedy problems. Such a system creates an engine that drives improvement not only in quality and environmental protections but also in working conditions.

2: Lean management
The lean system is a set of practices that include standardising procedures, team-based problem-solving and quality control, continuous improvement to eliminate waste, and production planning to minimise peaks and troughs in the use of labour and equipment. Two studies of Nike suppliers (one by Greg Distelhorst, Jens Hainmueller and Richard Locke, and the other by Locke, Fei Qin and Alberto Brause) found that it improved compliance with labour 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.

3: Unions
Our study with Yanhua Bird also revealed that following an audit, unionised suppliers improved working conditions more than non-unionised 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.

4: Piece-rate 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 Bird. Piece-rate pay incentivises workers to focus on short-term production goals, potentially discouraging practices that would boost compliance with labour standards but might reduce productivity — for instance, wearing protective equipment, participating in safety and emergency preparedness training, and using machine guards.

5: 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’ labour practices. We suspect that this happens because such buyers are particularly worried about facing similar criticism in the future, which would demonstrate that they hadn’t learned their lesson. Consequently, they are more likely to be cautious when selecting new suppliers and to step up efforts to scrutinise them, encourage and support improvements, and walk away when bad conditions persist.

Improve working conditions?

Companies can boost the odds of improvement by using monitoring methods we identified in separate research projects conducted with Ashley Palmarozzo and Hugill. They should:

1: Use highly trained auditors
We found that 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. The notion that auditors can play a valuable role by making suggestions is supported by other work. For example, a study one of us conducted with David Levine and Matthew Johnson showed that health and safety regulatory inspections in California prompted substantial reductions in injuries. The head of the Occupational Safety and Health Administration at the time attributed this to inspectors having essentially provided “a professional safety or industrial hygiene consultation” while they were assessing compliance.

2: Announce audits in advance
Many companies conduct surprise audits to avoid giving suppliers time to cover up transgressions. Indeed, our research has shown that unannounced audits reveal more problems than preannounced visits do.

But that’s only part of the story. Although companies want a full picture of what’s going on at their suppliers, they also want their suppliers to improve. And according to a study by Locke, Matthew Amengual and Akshay Mangla, announcing audits in advance can foster teamwork and trust between the auditor and the supplier, which promotes learning.

3: Align activities
A study of Gap’s suppliers by Amengual and Distelhorst found that suppliers that failed an audit improved only after Gap formally linked the future of the business relationship to the supplier’s labour standards by co-ordinating 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 track better?

Our research also reveals several factors that result in more-accurate audit reports.

1: Rotate auditors or audit firms
We discovered that audit teams produce more accurate audits when any member is conducting their first inspection of the factory at hand or when the factory’s prior audits were conducted by a different firm.

2: Include a female auditor
We found that 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.

3: Choose and pay auditors
Many companies reduce costs by requiring their suppliers to pay for audits — and some even allow suppliers to choose the auditor — but that can be “penny-wise and pound-foolish”. It sets up a conflict of interest that might tempt auditors to paint an unduly rosy picture.

4: Don’t fully outsource auditing
Our ongoing work with 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.

Managing conditions in global supply chains is a 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.

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Jodi L. Short is the Roger J. Traynor professor of law at the University of California Hastings Law.
Michael W. Toffel is the Senator John Heinz professor of environmental management at Harvard Business School.
Copyright 2021 Harvard Business Review/Distributed by NYTimes Syndicate