The Importance of Supply Chain Ethics and Compliance

With an increasing importance placed on transparency, consumers look beyond company practices to ensure organizations uphold adequate supply chain ethics.

Posted by Joe Gerard in Brand Protection, Corporate Security, Ethics & Compliance on June 1st, 2010

With an increasing importance placed on transparency, consumers look beyond company practices to ensure organizations uphold adequate supply chain ethics. When organizations conduct risk assessments, it’s important to include an evaluation of suppliers, vendors and any other points of contact within the organizational network. To decrease the risks associated with suppliers, examine the culture, ethics and compliance practices adopted by the candidates. This helps companies make informed decisions to select suppliers that “fit” with their existing culture and practices.

A company’s code of conduct should apply to the entire supply chain. Download the free Code of Conduct template to get started.

Supplier Risk

To decrease the risks associated with suppliers, examine the culture, ethics and compliance practices adopted by the candidates.
Many organizations rely on suppliers to acquire resources needed for creating their products. Companies purchasing parts from suppliers need to ensure parts are inspected and manufactured in accordance with the same safety standards they would face if manufactured by the purchasing company. For example, several years ago HP announced a battery recall as there were two instances where batteries overheated and caught fire, resulting in property damage. HP buys laptop batteries from a supplier but, in the eyes of consumers, HP is responsible for the recall and any damages done, as it was a link in the HP supply chain that caused these problems.

In the article “Building an Ethical Supply Chain,” authors Michael R. Levin and Richard J. Cellini write:

“Consumers, investors, business partners, regulators, and media organizations now expect a company and its entire supply chain to be ethical. The supplier-generated ethics scandal is probably one of the biggest (and least foreseen) business risks most leading companies face today. The damage can be great, and protective measures can and should be adopted immediately.”

During risk assessments, many companies fail to look beyond internal controls. Results from a study conducted by Integrity Interactive Corporation are telling.

“In a survey of 108 Global 2000 companies, it was concluded corporate ethics and compliance programs and controls do not extend to their global supply chains. The survey found that 86% of respondents concede that their primary ethics code does not address the conduct of suppliers, and 59% of respondents do not include suppliers in their analysis when assessing their company’s own ethics and compliance risks.”

Mitigating Supplier Risk

There are several actions organizations can take to help reduce supplier risk and protect their brand name.

Case Management Solutions

Implementing a case management solution allows for improved communication throughout the supply chain. Reports can be filed to draw attention to defective shipments and other supplier issues requiring corrective and preventative action, holding suppliers accountable for their actions.

Once an investigation is complete, suppliers submit a report requesting approval of the corrective action taken. This allows managers to review the actions taken and the measures established to prevent the action from happening again.

Through reporting, managers can compare the performance of each supplier over time and track improvements using up-to-the-minute data. Communication throughout the supply chain is improved, as all parties are aware of faulty products, are responsible for taking corrective action and can view issues in real-time.

Collaboration and Policy Development

If a supplier lacks effective ethics and compliance policies, work with them to develop policies and encourage ethical procedures. Here are two examples of organizations working together with companies in their supply chain to make ethical changes:

  • Patagonia– Patagonia maintains a factory list, which can be found on the company’s website. This list includes the name and address of each location used to manufacture Patagonia products. Patagonia uses third-party auditors to conduct social audits. The report published by the auditor is sent for review and given to the company’s social responsibility manager, who determines if the factory review meets the requirements outlined in Patagonia’s code of conduct. According to company information and social responsibility on the Patagonia website:

“If necessary, the social responsibility manager works with the factory to develop a corrective action plan. The plan lists the problems and corrective actions. It includes a timeline for compliance. At that stage it’s incumbent upon the factory to take ownership of its shortcomings and embrace the fact that rectifying them is good for its business. Because the goal of our program is to safeguard and improve workers’ rights, it’s our policy to work with factories to correct social problems and promote better practices. Furthermore, the Fair Labor Association advises against ‘firing’ noncompliant suppliers unless the supplier is unwilling to work toward improvement.”

  • Texas Instruments (TI)- TI begins supplier selection by consulting Transparency International’s Corruption Perceptions Index to determine the level of risk associated with operating in certain parts of the world. The SHRM article “Monitor Ethics, Compliance in Supply Chain,”  discusses a speech given by TI’s VP and ethics director, David Reid, at a business ethics and compliance conference presented by The Conference Board:

“Collaboration if key between us and our supply chain—it’s really important to be working with them in a proactive way. The ‘value of ethics at Texas Instruments,’ a document on the company’s web site, is translated into a dozen languages. The company encourages suppliers to adopt something like it or to use it as a template. I have a pretty high bar, I want to see that they operate their factory similar to the way we would have a factory operated at Texas Instruments.”


Joe Gerard
Joe Gerard

CEO, i-Sight

Spend my days showing off the i-Sight investigative case management software and finding ways to help clients improve their investigations. Usually working with corporate security, HR & employee relations, compliance and legal teams.

Visit Website