Monitoring Foreign Suppliers -

A Case Study

Misti Walker

Monitoring Foreign Suppliers

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It is very important for global companies to take steps to ensure that products
manufactured overseas are done so in accordance with human rights and local laws.
Global companies like Nike and walmart must take this topic seriously or risk major
damage to the image and reputation of the brand. While these costs are immeasurable,
other costs, such as fines, penalties, and legal fees, can also be costly. Companies
must take action to avoid both the tangible and intangible effects of employing subpar
labor practices. Besides all of that, it is the right thing to do.

It wasn’t until the 1990’s, when outsourcing manufacturing became popular, that
businesses implemented foreign supplier compliance programs to respond to criticism
about overseas labor practices. When Businessweek ran a cover story about Ningbo
Beifa Group, a sweatshop in China, walmart officials admitted that foreign suppliers
sometimes took unscrupulous actions to avoid detection of unethical or illegal practices.
These companies are taking the damage control approach to business ethics.
Expensive compliance programs are in place even though it is widely known that plant
managers go to great lengths to hide illegal activity. It is ironic that Ningbo paid a
consultant a hefty fee to give it advice on how to circumvent the very expensive
compliance programs employed by walmart. It seems that all this money could be
better spent improving the quality of life of foreign workers. This could be in the form of
higher wages, a safer work environment, and/or improved factory conditions.

Public outrage over alleged sweatshop usage caused Nike and walmart to rollout
extensive compliance programs for overseas suppliers. While the two programs are
similar in many ways, walmart’s system is the stronger of the two. For one thing, while
both companies created codes of conduct in the 1990’s, Nike did not set up a
compliance monitoring program for another decade while walmart rolled its compliance
program out with the codes of conduct. Another reason for the disparity is that walmart
switched to unannounced factory inspections to curb cheating, while Nike maintains that
it is essential to schedule the visits. Also, walmart conducts audits more frequently,
with 12,561 audits in 2004. Nike conducted less than 1,500 audits in the same
timeframe. Walmart enforces the regulations more consistently and with tougher
penalties. When serious infractions were found, the supplier was permanently banned
from producing goods for walmart. Nike, on the other hand, usually
based its decision to stay with a supplier based on a balanced
scorecard, with employee conditions being only one component.
Walmart employs a stricter set of standards for overseas suppliers
likely because the company’s All American image is at stake with more
media and public attention. Websites such as walmartwatch.com and
wakeupwalmart.com speak to the fact that walmart is under constant
scrutiny by the public. It seems that walmart has more to lose, so to speak.

Companies without the size, resources, and reputation of walmart may want to go the
less expensive route for compliance monitoring. That is, join the Fair Labor Association
or The Fair Factories Clearinghouse. These groups charge companies dues for
membership and pool this money to conduct audits of supplier factories serving one or
more of the group’s members. However, only around 3% of member factories are
inspected each year. In the sense that these compliance programs are meant to
appease consumers more than effect real change, it makes sense for smaller

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companies to partner and outsource this work. Suppliers complain that the prices paid
by companies such as walmart and Nike continually drop while compliance standards
are raised. If a company is truly interested in the conditions of its overseas factories,
internal audits are the better choice.

While some companies, such as walmart and Nike, go to great lengths and incur high
costs to monitor compliance of overseas factories, suppliers are matching these efforts
with strategies to avoid compliance. These practices include:
• Maintaining falsified employee records
• Hiding the use of child labor and unsafe work environments
• Outsourcing jobs to unscrupulous, noncompliant factories
• Telling employees how to answer auditor questions

One practice companies can employ to combat these tactics is to implement

unannounced audit visits. Another approach that works well is to conduct employee
interviews offsite and out of plant management view. Employees are more willing to be
candid in their responses without the fear of losing their jobs. On this same note, if a
company threatens to cease orders due to infractions, workers are more likely to lie
about wages and conditions to save their job. A better way is to work with offenders to
fix the problem instead of yanking the contract.

Any or all of these tactics can be employed to curb unethical and/or illegal activity
overseas, but the problem seems to be systemic. By forcing prices lower, global
companies exacerbate the problems found in overseas factories. Many plant managers
find the low wages and subpar conditions a necessary evil, as the workers in these
countries need jobs too badly to complain. Another route, employed by GE, Dell, and
Motorola, is to maintain factories overseas instead of sourcing the work to a third party.
These companies still realize cost savings from cheaper foreign labor without violating
human rights or endangering the reputation of the brand. When business is outsourced,
the best approach to reduce illegal and unethical employment practices is to stop
forcing the already-low prices down even further. If companies hope to realize any cost
savings, it should come from innovative business practices not at the expense of the
human labor.