Chapter 4

Ethical and Sustainable Sourcing

Learning Objectives:
• After completing this chapter, you should be able to :
• • Understand and appreciate the trends in ethical and sustainable sourcing.
• • Define and describe the terms fair trade products, green purchasing,
social sustainability, supply base rationalization, VMI, supplier co-location,
and collaborative negotiations.
• • Describe how ethical and sustainable sourcing strategies are developed
and implemented.
• • Understand the use of environmental supplier certifications.
• • Define outsourcing and how it differs from purchasing.
• • Discuss the importance of developing strategic alliances.
• • Understand the benefits of using 3PL suppliers.
 Chapter Outline
• Ethical and Sustainable Sourcing Defined
• Developing Ethical and Sustainable Sourcing Strategies
• Supply Base Rationalization Programs
• Ethical and Sustainable Supplier Certification Programs
• Outsourcing Products and Services Early Supplier
Involvement
• Strategic Alliance Development
• Using Third-Party Supply Chain Management Services
 Introduction

• Global population growth, increasing

environmental awareness, consumers’ desires
for better corporate responsibility, and
declining worldwide levels of natural resources
have combined to place unprecedented
pressures on the abilities of company
personnel to effectively manage firms’ supply
chains.
• The influence of the purchasing, sourcing, or
supply management department both within
the organization and outside its boundaries is
quite unique, in that it interacts with internal
and external customers and suppliers; internal
design, production, finance, marketing, and
accounting personnel; and also the firm’s
executive managers
• The global economic recession of the past few
years has indeed hastened many
organizations’ plans to institute supply chain
management strategies to reduce costs,
delivery cycle times, and carbon footprints,
while improving quality, customer service, and
ethical reputations, with the ultimate goals of
improving competitiveness, market share, and
long-term financial performance.
• Today, these trends have become the drivers
of strategic sourcing and supply chain
management initiatives.
• Taking the notion of sourcing one step further,
strategic sourcing can be thought of as
managing the firm’s external resources in ways
that support the long-term goals of the firm.
• This includes the development of ethical and sustainable
sourcing initiatives that are also tied to the:
• make-or-buy decision,
• managing and improving supplier relationships and capabilities,
• identification and selection of environmentally and socially
conscious suppliers,
• monitoring and rewarding supplier performance, developing
and managing second- and third-tier supplier relationships, and
• use of technology to support these many important sourcing
activities
 Ethical and Sustainable Sourcing Defined

• Ethical Sourcing:
• In the most basic sense, business ethics is the
application of ethical principles to business
situations, and has been very widely studied.
• Generally speaking, there are two approaches
to deciding whether or not an action is ethical.
• The first approach is known as utilitarianism. It
maintains that an ethical act creates the greatest
good for the greatest number of people.
• The second approach, known as rights and duties,
states that some actions are right in themselves
without regard for the consequences. This
approach maintains that ethical actions recognize
the rights of others and the duties those rights
impose on the ones performing the actions.
• Today, the practice of business ethics may also be
referred to as corporate social responsibility (CSR).
• Much of the discussion to date of CSR assumes
that a corporation can act ethically just as an
individual can.
• Whether firms practice CSR because they are
forced to do it, feel obliged to do it, or want to do
it is a matter for debate, but it is indeed being
practiced.
• Ethical sourcing can be defined as “That which
attempts to take into account the public
consequences of organizational buying or
bring about positive social change through
organizational buying behavior.
• 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; or
sourcing from firms with good labor treatment or
environmental protection credentials.
• Purchasing goods from suppliers in developing
countries can be risky in that if human rights,
animal rights, safety or environmental abuses
become associated with the firm’s suppliers or
foreign manufacturing facilities, this could lead
to negative publicity for the buyer, along with
product boycotts, a tarnished company image,
brand degradation, lower employee morale, and
ultimately lower sales, profits and stock prices.
To minimize these risks, ethical sourcing policies should include:
• Determining where all purchased goods come from and how they
are made;
• Knowing if suppliers promote basic workplace principles (such as the
right to equal opportunity and to earn a decent wage, the prohibition
of bonded, prison or child labor, and the right to join a union);
• Use of ethical ratings for suppliers alongside the other standard
performance criteria;
• Use of independent verification of vendor compliance;
• Reporting of supplier compliance performance to shareholders;
• Providing detailed ethical sourcing expectations to vendors.
 The Ethical Trading Initiative’s Base Code

1. Employment is freely chosen

2. Freedom of association and the right to collective
bargaining are respected
3. Working conditions are safe and hygienic
4. Child labor shall not be used
5. Living wages are paid
6. Working hours are not excessive
7. No discrimination is practiced
8. Regular employment is provided
9. No harsh or inhumane treatment is allowed
 Sustainable Sourcing
• While protecting the earth’s environment has been a
subject of concern for many years, it has more recently
become a popular topic of debate as politicians and
voters have made global warming an election issue.
• Growing out of this environmental awareness was the
idea of green purchasing. Green purchasing is a practice
aimed at ensuring that purchased products or materials
meet environmental objectives of the organization such
as waste reduction, hazardous material elimination,
recycling, remanufacturing and material reuse.
• Sustainability, as applied to supply chains, is a
broad term that includes green purchasing as
well as some aspects of social responsibility
and financial performance.
• It can be defined as “the ability to meet the
needs of current supply chain members
without hindering the ability to meet the needs
of future generations in terms of economic,
environmental and social challenges”
• Like CSR, social sustainability concerns involve
worker safety, hourly wages, working
conditions, child workers, and basic human
rights.
• Indications are that the world is moving from
a storehouse of abundant cheap supplies of
energy to a place with a finite supply of
expensive energy.
• Sustainable sourcing is one activity then,
within the larger umbrella term of
sustainability— it includes green purchasing,
some form of financial benefit, as well as
aspects of ethical sourcing.
• Very simply, it has been defined as “a process
of purchasing goods and services that takes
into account the long-term impact on people,
profits, and the planet”.
 Developing Ethical and Sustainable Sourcing
Strategies
Supply Chain Ethical and Sustainable Sourcing
Strategy Framework:
STEPS Description
1. Establish corporate ethical Verifies top management support, establishes a vision and
and sustainable sourcing direction, enforces the importance of ethical and sustainable
policies sourcing, and reduces confusion
2. Train purchasing staff; Ensures that buyers are skilled in environmental and social
implement policies among considerations in sourcing, and that users and suppliers
users, supplier understand why and how purchasing decisions are ma
3. Prioritize items based on Allows buyers to “pick low hanging fruit” to provide evidence
ethical and sustainability for successful strategy implementation.
opportunities and ease of
implementation. Get started.
4. Develop a performance measurement Measurement provides accountability and
system. a way to improve over time. Should be
reviewed periodically
5. Monitor progress, make improvements. Use performance measures to identify
Increase use of certified fair trade and weaknesses. Step up efforts to develop
green products and services better capabilities in the firm and its
supply base.
6. Expand focus to include other Use the purchasing department’s success
departments and customers. Increase and influence to grow awareness in the
brand value. firm and among customers. Communicate
successes and programs to stakeholders.
• The purchase of fair trade products is a recent
sourcing activity that is becoming increasingly
popular as firms seek to demonstrate a more
ethical approach to purchasing.
• A fair trade product is one manufactured or
grown by a disadvantaged producer in a
developing country that receives a fair price
for their goods.
• Thus, the term fair trade most often refers to
farming products such as coffee, cocoa, sugar, tea
and cotton that are produced in developing
countries and exported to large firms in developed
countries.
• Agencies such as the Fair trade Foundation, Fair
trade Labeling Organizations International, and the
World Fair Trade Organization seek out and certify
these types of products as being “fair trade
products.
 Supply Base Rationalization Programs

• firms taking an active role in supply chain

management seek to reduce purchases from
marginal or poor-performing suppliers while
increasing and concentrating purchases among
their more desirable, top-performing suppliers.
• Firms doing this are practicing supply base
rationalization, also referred to as supply base
reduction or supply base optimization.
• Thus, supply base rationalization programs have the
benefits of reduced purchase prices due to quantity
discounts, fewer supplier management problems, closer
and more frequent collaborations between buyer and
supplier, and greater overall levels of quality and delivery
reliability, since only the best suppliers remain in the
supply base.
• This topic fits well with ethical and sustainable sourcing
efforts—firms may desire to interact more frequently and
closely with suppliers exhibiting ethical and sustainable
purchasing habits.
Ethical and Sustainable Supplier Certification
Programs
• Proactively seeking and creating strategic supplier
alliances have become important objectives of
firms looking to manage their supply chains.
• Strategic alliances are a more formalized type of
collaborative relationship, involving commitments
to long-term cooperation, shared benefits and
costs, joint problem solving, continuous
improvement, and information sharing.
• Ethical and sustainable supplier certifications
are one way to identify strategic alliance
candidates or to further develop existing
alliances. In many cases, certification
programs are simply based on internationally
recognized certifications like the Switzerland-
based International Organization for
Standardization’s ISO 9000 quality certification
and ISO 14000 environmental certification.
Outsourcing Products and Services
• Purchasing spend as a percentage of sales has
been growing over the years, in part because
firms have opted to outsource the production
of materials, parts, services and assembled
components to concentrate more resources
and time on the firm’s core business activities.
• Simply put, many organizations are sourcing
more while making less these days.
• Insourcing:
• Unfortunately, some firms do not adequately
study the decision to outsource, and thus
experience problems with product quality, late
deliveries, or suppliers otherwise not living up
to expectations.
• In these cases, the outsourcing arrangement is
unsuccessful and can result in insourcing, also
referred to as back sourcing.
• For example, global financial giant JPMorgan
Chase & Co. rescinded its IT outsourcing
agreement with IBM after only two years of
what was expected to be a seven-year, $5
billion arrangement.
• Global energy company Chevron also recently
arranged to bring back in-house some
activities which had been previously
outsourced.
• Co-sourcing:
• In yet another variation of the outsourcing theme, and
in many cases the most popular outsourcing
arrangement, the use of co-sourcing, also referred to
as selective sourcing, is becoming popular.
• Co-sourcing refers to the sharing of a process or
function between internal staff and an external
supplier. In this arrangement, firms will retain the
more strategic activities while outsourcing the more
resource-intensive, non-value-adding activities.
 Early Supplier Involvement
• As the adoption of concurrent engineering and
design for manufacturability techniques becomes
more commonplace and relationships with
suppliers become more trusted, reliable and long-
term, key suppliers often become more heavily
involved in the internal operations of their
industrial customers, including managing
inventories of their products at their customers’
points of use, and participating in their customers’
new product and process design processes.
• Key suppliers can become contributors to these efforts by serving
in a decision-making capacity for purchase timing and quantities,
and on new product and process design teams within the firm.
• While serving on a customer’s new product development team, a
supplier representative’s input can help the firm to reduce
material cost, improve new product quality, and reduce product
development time. Cost reductions come about through use of
more standardized parts, fewer parts, and less-expensive
materials.
• Use of these value engineering techniques with help from the
supplier allows firms to design better quality and cost savings into
the products from the time a product first hits the shelves.
 Vendor Managed Inventories
• Vendor managed inventory (VMI) services for key customers is
perhaps one of the more value-enhancing activities performed by
suppliers when their past performance allows customers to develop
trust in their ability to manage their inventories, such that inventory
carrying costs are minimized and stockouts are avoided.
• From the customer’s perspective, allowing their suppliers to track
inventories and determine delivery schedules and order quantities
saves time, which may be better spent on more strategic sourcing
activities.
• For the supplier, it means they avoid ill-advised orders from buyers,
they get to decide how inventory is set up, when to ship it, how to
ship it, where it goes, and they have the opportunity to educate their
customers about other products
• Ideally, these valued suppliers manage their customers’ inventories
using real-time visibility of inventory movements in their
customers’ storage areas or at the point of assembly or sale.
• This can be accomplished with bar code labels and scanners that
instantly update computer counts of inventories as the items are
used or sold.
• This data is then made available to trusted suppliers using
compatible inventory management systems or a secured website.
• This allows a supplier to profile demand and determine an accurate
forecast, and then ship an order quantity when the inventory levels
become low enough—the reorder point.
• Supplier Co-location:
• A more advanced and dedicated extension of the vendor managed
inventory concept is supplier co-location. The concept refers to a
situation wherein a supplier’s employee is permanently housed in the
purchasing department of the buyer’s organization, acting as both
buyer and supplier representative.
• This person is given all the rights and duties of an employee for the
buyer organization—she forecasts demand, monitors inventory levels
and places purchase orders, and has access to all of the files and
records of the buyer organization.
• This special arrangement requires high levels of trust from both
organizations and occurs only with long-term buyer–supplier
relationships.
 Strategic Alliance Development
• strategic alliance development, an extension of
supplier development (covered in Chapter 3), refers
to increasing the firm’s key or strategic suppliers’
capabilities.
• Business owners and executives are beginning to
realize that strategic supplier alliances, if successful,
can result in better market penetration, access to
new technologies and knowledge, and higher
returns on investment than competitors with no
such alliances
Using Third-Party Supply Chain Management
Services
• The use of third-party logistics (3PL)
companies for supply chain management
services is a growing trend, as firms seek to
gain quick competitive advantage from the
deployment of proven, effective supply chain
strategies.
• The term 3PL today refers to a firm that
supplies logistics and possibly other supply
chain management services.
• These services assume some or all of a firm’s
sourcing, materials management, and product
distribution responsibilities; charge a fee for
their services while saving costs (estimated at
10 to 20 percent of total logistics costs); and
ultimately hope to improve service, quality,
and profits for the clients.
• As supply chain management has grown in
strategic importance, some shippers are
experimenting with the use of fewer 3PL
services, or even one primary 3PL provider and
overseer, more commonly referred to as a 4PL
or lead logistics provider (LLP).
• Some shippers argue they need at least two or
three 3PLs to guard against service disruptions
or coverage problems.