Why are ethical practices important in supply chain management? First, there are rules and codes of conduct which govern sourcing, but increasingly consumers and business customers are demanding that the products they buy be ethically sourced. This may mean that the suppliers have fair labor practices, the products are authentic, or suppliers of natural resources use sustainable practices. If businesses don’t deliver products that take these factors into account, they put at risk their reputations, their market valuation, and their customer base. As Supply Chain Management found through research, “Experts suggest that Millennials in particular expect companies to adhere to socially and environmentally responsible practices and to tell consumers how they are doing so.”

Chairman and founder of State of Flux Alan Day has more than 25 years of experience in procurement and supply chain best practices. He spoke with us recently about how business needs to deliver a sourcing strategy that is not only effective, but also ethically sound to survive in today’s more socially conscious world.

What are the most common unethical practices in supply chain management?

We can classify unethical practices in supply chains as belonging to three types. One type is when behavior is purely unethical: People taking or asking for bribes, for example. Those are easy to identify; everyone knows it’s wrong.

Second, you have unethical practices where you may not be aware that it’s happening—for example, some types of modern slavery. You may have a group in your supply chain using child labor or forcing migrants to work while holding their passports.

Then there’s a third group, which I think of as corporate bullying. That’s when a very large organization demands that its suppliers do certain things that the suppliers don’t really want to do. It might include simple things like, “Please put controls in around how you assess your new employees’ financial backgrounds,” all the way through to doing something unethical. It is a far grayer area, but it’s a scary one for procurement because, when you’re negotiating—especially when you’re a large organization or a large brand—your influence is much, much bigger than you may realize.

What risks do businesses face if they have unethical practices within their supply chains?

The damage to a company’s reputation can translate directly to its bottom line. According to Zurich Insurance company research, once a share price starts being affected, you have about 10 days to deal with the issue; otherwise, the share price will never recover.

The biggest challenge is how quickly businesses must react. With social media, if someone flags a practice as unethical, a company has just minutes to try and do something about it. For instance, in one case, an airline passenger took a photo of their in-flight food that contained palm oil, tweeted it, and it went viral. That’s how quickly it can happen, and companies have to be prepared to address the issue just as quickly.

In another case, a major bank was approached by an NGO claiming that one of the bank’s suppliers uses paper sourced from rainforests. Although it was true, that paper wasn’t being used for any of the bank’s products. But the bank had to address the issue, otherwise its name was going to be at the top of the NGO’s press release.

How can technologies like artificial intelligence and blockchain help enterprises discover and eliminate unethical practices in the supply chain?

AI, blockchain, and other new technologies provide visibility into the entire supply chain. Who are your suppliers? What’s happening with them? What are their practices?

The role of AI

Take for instance a large mobile phone operator, a global player with roughly 150,000 suppliers around the world. How does it identify which one of those may be an ethical risk and what practices it’s engaged in? With AI you can track their performance, because a poor-performing supplier is a risk to your business. For instance, AI can notice rapid-changing factors and issues such as whether the supplier’s insurance get validated. It can also flag the news, looking at indicators and keywords for when a business is at risk of financial difficulty. If we can take that, plus the fact that their insurance didn’t get validated, plus a rapid changing of staff, there’s a huge risk— with advanced warning, your business knows to take measures to protect itself.

Segmentation is another area where AI can help. Dividing suppliers into groups helps you understand which ones may have similar ethical issues. For example, some elements of the Thai fishing industry use a hidden workforce subjected to modern slavery. If you deal with that industry, it should raise a flag within your segmentation as something to review. We can use software and AI to start doing that segmentation.

And then the next stage is actually drilling down: What are suppliers currently doing? How are they doing it? We can use tools like AI to identify that. AI can also search globally, and you can use it to identify keywords in the press: That’s a fairly good indicator. AI can help you to see where to put your effort—what areas you need to focus on within your supply chain for those unethical practices.

The role of blockchain

Where blockchain comes into practice is really on the product side of it, ensuring, for example, that a diamond is not a blood diamond—that is, sourced from a war zone and sold to finance an invading military’s actions or a warlord. Blockchain also enables things like micropayments, breaking up a payment into thousands of tiny payments. You can make your supply chain a lot more dynamic based on that, and you can use it to flush out unethical behavior from the supplier: it might receive a micropayment when it passes a quality check, for example.

But we have to be careful with blockchain, in the sense that if the first input is wrong or unethical, it can go all the way through the chain. Blockchain is not the be all and end all.

What else can businesses do to eliminate unethical supply chain practices?

It’s a change in the people themselves. Procurement professionals are now identifying that they need to add value in things like supply chain, supplier risk, and supplier management. Procurement is noticing what suppliers spend their money on, and whether that’s ethical.

As the next generation joins the workforce, they are bringing an incredible focused on being ethical and doing the right thing for the people and the environment. If we want to attract that talent, businesses have to focus on doing the right thing in their supply chains.

About the Author
Prior to founding State of Flux in 2004, Alan Day held roles as Director of Procurement and Supply Chain at Cable & Wireless, and Director of Accenture’s Supply Chain European Centre of Excellence. Alan started his supply chain career at Fisher & Paykel, the leading New Zealand-based manufacturer of domestic appliances. For more insights and perspective, you can follow Alan here on LinkedIn and Twitter.