Partnering with the wrong supplier can cost companies millions. In the electronics supply chain, if a supplier misses a shipment date, entire manufacturing lines can be left idle. The impact of such an event can be measured by productivity losses, hourly wages, per-unit prices of the delayed parts, and so on. But what if your supplier mistreats employees? How do you measure the damages of misconduct?
This is a very real problem in the electronics supply chain. Apple Inc. (Nasdaq: AAPL) has faced criticism for partnering with Foxconn Electronics Inc. Workers at the Asian EMS services provider have allegedly killed themselves because of mistreatment. The charges have tainted Apple's brand, if not its bottom line.
Risk management assessments are one way companies gauge the impact of intangibles such as a damaged reputation. This month, a group of companies are launching a method for assessing the risks associated with labor and human rights factors in the supply chain. The alliance, which includes watchdog agencies, investment groups, and manufacturers, has drawn up a list of key performance indicators (KPIs) that will be used for benchmarking.
Jon Lukomnik, executive director of the Investor Responsibility Research Center Institute, which funded the initiative, said in a press release:
Investors remain concerned about the labor and human rights risks of the companies they own. And companies know that public concern can inflict deep corporate reputational damage, result in boycotts or product recalls, and ultimately damage the bottom line. The IRRC Institute is involved with this labor and human rights KPI project to provide investors and companies with a method to objectively assess a significant risk factor that has commanded the concern and attention of many of the world’s largest corporations and investors.
A 2009 Harvard Law School research report looked at more than 2,500 global companies, including some with market capitalizations of more than $10 billion. It found that roughly 28 percent of the companies had labor and human rights policies covering their global supply chains. The near majority of European companies had such policies, the report said, with the United States and Asia lagging far behind.
According to the press release, the KPIs that are being tested include:
- Code of Conduct -- issues such as child labor, freedom of association, health and safety
- Supplier and Managers Training on Code of Conduct
- Corporate Commitment to Code of Conduct
- Suppliers with Confidential Reporting Channels for Worker Grievances
- Suppliers Monitored At Least Annually for Code Compliance
- Suppliers Subject to Independent Verification by External Monitors
- Sourcing Countries in Which Company Consults with Civil Society Groups
- Percentage of Successful Remediations of Code Violations
The full listing of draft KPIs is available at the IRRC Institute Website.