Principles of Supply Chain Management (5e)

Chapter 4
ETHICAL AND
SUSTAINABLE SOURCING

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 Principles of Supply Chain Management (5e)

CHAPTER 4
LEARNING OBJECTIVES
You should be able to –
• Define and describe the terms used in ethical and sustainable
sourcing.
• Understand how ethical and sustainable strategies are developed
and implemented.
• Understand the use of environmental supplier certifications.
• Describe early supplier development and strategic alliance
development.
• Assess and improve the purchasing function.
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Introduction
Strategic sourcing - managing the firm’s external
resources to support firm’s long term goals.

Drivers of Strategic Sourcing

• Development of ethical & sustainable sourcing
initiatives
• Managing and improving supplier relationships &
capabilities
• Identification and selection of environmentally &
socially conscious supplier
• Monitoring & rewarding supplier performance
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 1

 Business Ethics - the application of ethical
principles to business situations.
 Corporate Social Responsibility is the
practice of business ethics.

 Ethical Sourcing is that which attempts to

take into account the public consequences of
organizational buying or bring about positive
social change through organizational buying
behavior.

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 2

Ethical sourcing practices include:

• Promoting diversity by intentionally buying from

small firms, ethnic minority businesses, and
women-owned enterprises.
• Discontinuing purchases from firms that use
child labor or other unacceptable labor
practices.
• Buying from firms in underdeveloped nations.

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 3

Ethical Policies should include:

• Determining where all purchased goods originated and

how they were made
• Knowledge of the suppliers’ workplace principles
• Inclusion of ethics as a performance rating
• Independent verification of vendor compliance
• Report of supplier compliance to stakeholders
• Provision of detailed ethical sourcing expectations to
suppliers
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otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 4

• Ethical Trading Initiative (ETI) - an alliance
of organizations seeking to take
responsibility for improving working
conditions and agreeing to implement the
ETI Base Code.
• Fair trade product - manufactured or grown
by a disadvantaged producer in a developing
country that receives a fair price for their
goods

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 5

Table 4.1 The Ethical Trading Initiative’s Base Code
Clauses Abbreviated Explanations Clauses Abbreviated Explanations

1. Employment is No forced, bonded or 6. Working hours are not excessive Working hours comply with
freely chosen involuntary prison labor. national laws and benchmark
industry standards

2. Freedom of Workers have the right to 7. No discrimination is practiced No discrimination in hiring,

association and the join trade unions and to compensation, access to training,
right to collective bargain collectively promotion, termination or
bargaining are retirement
respected

3. Working conditions Accommodations shall be 8. Regular employment is provided Work performed must be on the
are safe and clean, safe and meet the basis of recognized employment
hygienic basic needs of workers relationships established
through national law and
practice

4. Child labor shall not Persons under 18 shall not
be used be employed at night or in
hazardous conditions
9. No harsh or inhumane treatment Physical abuse or discipline, the
is allowed threat of physical abuse, sexual
or other harassment or other
forms of intimidation shall be
prohibited

5. Living wages are Wages should be enough to Empty cell Empty cell
paid meet basic needs

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Strategies

• Sustainable Sourcing should focus on
• Respecting human rights & reducing poverty by creating profitable trading
• Working within the finite limits of the planet’s resources
• Moving towards a low carbon economy
•Green purchasing ensures products or materials meet environmental
objectives e.g. waste reduction, hazardous material elimination, recycling,
remanufacturing, and material reuse
•Sustainability - ability to meet current needs of the supply chain without
hindering the ability to meet future needs in terms of economic, environmental,
and social challenges
•Supports the three P’s - people, planet, and profit
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Strategies

Sustainable Sourcing should seek to:

• Grow revenues
 New sustainable product introduction
• Reduce costs
 Increase resource efficiencies
• Manage risk
 Link brand to social consciousness of consumer
• Build intangible assets
 Build social and environmental responsibility
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otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

DEVELOPING ETHICAL AND SUSTAINABLE

SOURCING STRATEGIES
Framework for ethical and sustainable sourcing strategy
development:

Step 1 – Establish corporate ethical and sustainable sourcing policies

Step 2 – Train purchasing staff and implement policies
Step 3 – Prioritize items based upon ethical and sustainability
opportunities and ease of implementation
Step 4 – Develop performance measurement system
Step 5 – Monitor progress and make improvements. Increase use of
green and fair trade products
Step 6 – Expand focus to include other departments

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otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Supplier Certification

Programs, Part 1
Supplier certification programs are used to identify strategic
supplier alliance candidates

Strategic alliances - more formalized type of collaborative

relationship involving
- commitments to long-term cooperation and trust
- shared benefits and costs
- joint problem solving
- continuous improvement
- information sharing
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otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Supplier Certification Programs,

Part 2
Firms use in-house formal certification programs, & most require
ISO 9000 / 14000 or similar certifications as part of the
certification process.

Ethical and environmental certifications - used by various

organizations to identify rogue suppliers and suppliers who fail to
certify according to ethical requirements.

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Early Supplier Involvement, Part 1

Early supplier involvement (ESI) is a highly effective supply
chain technique where key suppliers become more involved in the
internal operations of their customer, which may include
• Managing inventories at their customers’ points of use
• Participating in their customers’ new product & process design
processes
Value engineering activities help the firm to reduce cost, improve
quality & reduce new product development time.

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Early Supplier Involvement, Part 2

Vendor managed inventory (VMI) –
Suppliers manage buyer inventories to reduce inventory carrying costs &
avoid stockouts for buyer
From the buyer-firm’s perspective –
• Supplier tracks inventories
• Determines delivery schedules and order quantities
From the supplier’s perspective –
• Avoids ill-advised customer orders
• Supplier decides inventory set up & shipments
• Opportunity for supplier to educate customers about other products

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otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Early Supplier Involvement, Part 3

Co-managed inventories - buyer and supplier reach an

agreement regarding how information is shared, order quantities,
when order is generated and delivery timing.
• Preferable for high value items
• When customer desires more input into the day-to-day supply
activities
• When customer is still assessing a supplier’s ability to take full
responsibility

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otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Strategic Alliance Development, Part 1

Strategic alliance development - refers to improving the
capabilities of key trading partners

Strategic supplier alliances result in

• Better market penetration
• Access to new technologies & knowledge
• Better service

Alliance development eventually extends to a firm’s second-

tier suppliers, as the firm’s key suppliers begin to form their
own alliances.
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Strategic Alliance Development, Part 2

Table 4.4 Maintaining a Successful Strategic Alliance Program
Steps Discussion

1. Determine the key strategic Can be based on business units, geographic areas,
parameters to organize industries, key alliance partners, or combinations of
around. these.
2. Facilitate the dissemination Alliance management and development information
of information. should be centrally controlled and available through
internal Web sites, pamphlets, and workshops.

3. Elevate the importance of Assign a director or vice president of alliance programs,

the strategic alliance program. reporting to top management. Establish consistent
procedures for alliance programs throughout the
organization.
4. Provide continuous Management can increase the value and acceptance of
evaluation of alliance alliance programs when successes are made visible to
performance, visibility, and the firm’s lower level managers and employees. Alliance
support. management requires resources and ongoing
reevaluation.
5. Reward suppliers as Rewards typically include increased business and other
performance merits. nonmonetary awards.

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otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Strategic Alliance Development, Part 3

For successful strategic alliance programs:
• Organize a program that cuts across functional
boundaries
• Disseminate program information quickly & effectively
• Acquire the necessary resources
• Create program acceptance by the line managers &
employees
• Achieve concrete, measurable success
• Reward supplier performance

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otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Rewarding Supplier Performance

Rewarding suppliers provides an incentive to surpass
performance goals.

Punishment is a negative reward, may be to reduce future

business; or a billback penalty equal to the incremental costs
resulting from a late delivery or poor quality.

Strategic supplier agreements can reward

suppliers by allowing:
• A share of the cost reductions
• More business and/or longer contracts
• Access to in-house training seminars & other resources
• Company & public recognition

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 Principles of Supply Chain Management (5e)

Assessing & Improving the Firm’s Sourcing

Function, Part 1
The sourcing function is one of the most value-enhancing
functions in any organization.

• Performance is periodically monitored against set

standards, goals, and/or industry benchmarks.

• Surveys or audits can be administered as self-

assessments as part of the evaluation process.

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Assessing & Improving Firm’s Sourcing Function, Part 2

Assessment criteria include:
1. Participating/leading 8. Creating strategic supplier
multifunctional teams alliances
2. Participate in value engineering 9. Contribute to new product
efforts development
3. Finding/evaluating ethical and 10. Initiate supplier cost
sustainable suppliers reduction programs
4. Optimize supply base 11. Improvement of purchased
5. Managing local, regional and product & service quality
global suppliers 12. Improve time to market
6. Early supplier involvement 13. Maintain internal
initiatives cooperative relationships
7. Further supplier integration
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 Principles of Supply Chain Management (5e)

Assessing & Improving Firm’s Purchasing Function, Part 3

Purchasing Professionals Skill Set Requirements

Top three responsibilities Cost-controlling activities
• Negotiating contracts • Reducing supply base
• Selecting suppliers • Negotiating global
• Managing supplier agreements
relationships • Adopting new purchasing
technologies

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 Principles of Supply Chain Management (5e)

End of Chapter 4

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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