Lack of Ethics in Supply Chain Seen a Major Problem for Businesses

86 percent of companies do not include suppliers in their company's ethics and compliance programs, creating financial and reputation risk — Integrity International

Waltham, MA — November 9, 2007 — Global 2000 companies are not extending their corporate ethics and compliance programs and controls into their global supply chains, with few companies including suppliers in their company code of conduct, according to a recent survey by consultancy Integrity Interactive.

The September 2007 survey of 75 Global 2000 companies found that 86 percent of companies do not include suppliers in their company code of conduct, and nearly 60 percent were not sure if their company regularly assessed ethics risks in the supply chain.

Many enterprises around the world are unaware of how effective supply chain ethics and compliance programs can help them avoid costly recalls and brand damage that results from a supply chain ethics scandal, said Integrity, which designs and implements programs and services to mitigate risk in the areas of compliance, ethics and corporate responsibility.

Supplier Ethics Management

Supplier ethics management (SEM) is a relatively new business practice that enables companies to manage their suppliers and supply relationships through strategies, programs and metrics that better align supplier business conduct with purchaser standards. The goal is to reduce a purchasing company's overall risk of corporate integrity failure in the supply chain by aligning supplier conduct with purchaser standards in three major areas of corporate integrity: compliance, ethics and corporate responsibility.

In the globalizing economy, many companies outsource much of their manufacturing to a network of external suppliers. While many large U.S. companies have implemented some degree of ethics and compliance programs and training, the survey indicates that a great majority of Global 2000 companies have not extended these programs and practices to their supply chain. This is a significant risk to the financial health and reputation of these companies and to their customers, Integrity said.

In addition to the troubling absence of ethics and compliance programs for the supply chain, the survey also found information that points to other areas of significant risk:

  • 88 percent of respondents do not maintain a Web-based portal for suppliers;
  • 86 percent of respondents do not include suppliers in their company's code of conduct;
  • 59 percent of respondents don't regularly assess compliance risk in their supply chain;
  • 56 percent of respondent companies do not audit supplier compliance with code standards.

"The Company You Keep"

In recent weeks, U.S. consumers have seen a series of stories about tainted food, lead paint in toys and other disturbing developments. All of these products came through an extended supply chain.

"Recent product recalls at Mattel and Starbucks underscore the need for corporations to revaluate their company programs regarding supplier compliance and ethics," Integrity said. "Mattel had to recall more than 9 million toys because they included millions of tiny magnets that can be deadly if swallowed. Starbucks is recalling 250,000 plastic cups made in China that can break easily and endanger children. Recent negative stories about overseas child labor at outsourced suppliers to The Gap and other retailers have also focused attention on the problem."

"Being an ethical company isn't enough anymore," said Richard J. Cellini, vice president of Integrity Interactive. "Enterprises are being judged by the company they keep, which means the whole supply chain must be ethical."

If a dishonest supplier thousands of miles away disregards manufacturing standards to make more profit, it reflects on the U.S. company that hired that supplier, Cellini noted. "The public holds the supplier accountable, not the outsourced vendor. Supplier ethics ... impacts the bottom line because consumers reward companies that deliver a safe product to market and punish those that do not."

The SEM Drive

The demand for organized SEM programs is being driven by government regulators and consumers. The changes include stronger import/export standards, product safety rules and labeling requirements.

Integrity said that ethics and compliance officers can ensure their company creates and maintains an effective SEM program by implementing the following:

  • Make ethics and compliance a factor in supplier selection;
  • Create and maintain profiles of important suppliers;
  • Assign ethics and compliance personnel to major supply relationships;
  • Conduct regular assessments of supplier ethics;
  • Evaluate supplier ethics data regularly;
  • Target and segment suppliers by importance and ethics risk.

"Your brand will be judged by the company it keeps," said Cellini. "These are basic, affordable actions that companies can enact today to ensure they don't make the headlines as the subject of the next supply chain scandal."