How Will Apple Fix Its Supply Chain Problems? Part 2

Prepare to be audited more frequently and thoroughly if your company is a supplier to Apple Inc. (Nasdaq: AAPL) or provides contract manufacturing services to the consumer electronics and personal computer vendor.

That's one of the key solutions the company is implementing in response to an exhaustive audit of its entire supply chain in 2010 that uncovered numerous human rights and health and safety violations by suppliers and contractors in China and elsewhere across the globe. (See: What Did Apple's Supply Chain Audit Uncover? Part 1.)

Apple said it has audited almost 300 suppliers since 2007; 97 of the facilities inspected were audited for the first time in 2010, but more such visits to facilities in China, the Philippines, and locations in North America and Europe should be expected this year as the company seeks to demonstrate it is taking seriously allegations of workers' rights violations and other illegal or socially unacceptable practices in its supply chain.

In a report Apple said it will continue "to improve our supplier responsibility program to ensure that working conditions in our supply base are safe, workers are treated with respect and dignity and manufacturing processes are environmentally responsible." The company also outlined its "priorities" for 2011. These include the following:

• Expand the reach and improve the quality of Apple-mandated social responsibility training so that more workers understand their rights and how to communicate with factory management
• Equip additional suppliers with Apple SEED classrooms to help workers continue their education while remaining employed
• Collaborate with industry groups and NGOs in China to address key issues, such as working hours, underage labor, and employee well-being, through root cause analysis, more aggressive audits, stronger requirements for corrective and preventive actions, and expanded supplier training and assistance
• Drive conflict-free verification measures to smelters in our supply chain and require our component suppliers to source tantalum and tin from conflict-free producers

Apple isn't looking quite that rosy to some in the human rights realm, nor has it been given a clean bill of health by workers at some of its suppliers. Some EBN readers have also suggested Apple's actions appear self-serving since it took the company some time to respond to reported abuses at many of its plants, including at Foxconn Electronics, its leading contract manufacturer. Apple and rival OEMs operating in China knew they were stepping into murky ground when they began transferring production to Asia, some EBN readers said.

"Apple's findings are not very surprising," said one EBN reader. "Everyone knows cheap labor is why these companies contract overseas. We all know that working conditions are poor at these overseas subcontractors; to fain [sic] surprise now is misleading. Why did Apple wait until now to do the audit; Why have other OEMs not done any auditing? The answer is simple, they are looking to reduce costs at all cost."

It's not exactly correct that other OEMs have "not done any auditing." In fact, companies like Hewlett-Packard Co. (NYSE: HPQ), Cisco Systems Inc. (Nasdaq: CSCO), and IBM Corp. (NYSE: IBM) have detailed supplier agreements that require compliance with stringent conditions. In addition, all of these companies spend millions on other regulatory requirements, including environmental protection rules.

Although many observers are still suspicious of Apple's motives and criticize it for being tardy with supplier audit programs, disclosing its findings and future objectives has made it easier for critics to hold the company to its own pre-stated standards. Apple says it has already taken action on supply chain problems identified during the audit. Below are some of the actions taken by Apple in response to the violations it uncovered.

• Discrimination based on health: We classified these practices as discrimination -- even where permissible under local laws -- and required facilities to discontinue the practice and to establish clear policies and procedures to prevent reoccurrence.
• Working hour violations: We required facilities to develop management systems or improve existing systems to drive compliance with Apple’s limits on work hours and required days of rest.
• Occupational injury: We required facilities to equip all dangerous machines with adequate safety devices and to conduct regular maintenance to prevent injuries; establish a schedule for performing required inspections and to ensure workers have appropriate training, licenses, and certifications as required by law; provide the necessary PPE, to educate both workers and supervisors on the risks of not wearing the equipment, and to hold supervisors accountable for ensuring that workers use the equipment properly.
• Improper use and storage of hazardous substances: We required facilities to establish chemical management procedures for proper handling and storage of hazardous substances; correct their hazardous waste disposal practices and to maintain documentation to demonstrate compliance with Apple requirements and applicable laws.
• Suicides at Foxconn: Surveyed more than 1000 workers about their quality of life, sources of stress, psychological health, and other work-related factors; Evaluated Foxconn’s management of the crisis; presented findings and recommendations to Terry Gou and senior executives from Foxconn and Apple; Commended Foxconn for taking quick action on several fronts; will continue to work with Foxconn through the implementation of these programs, and take key learnings from this engagement to other facilities in our supply base.