Chapter 4

ETHICAL AND
SUSTAINABLE
SOURCING

Prepared by Cynthia Wisner, MBA

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.
 CHAPTER 4
LEARNING OBJECTIVES
You should be able to
Understand and appreciate the trends in ethical
and sustainable sourcing
Define and describe the terms used in ethical
and sustainable sourcing
Describe the differences in ethical and
sustainable sourcing
Understand how ethical and sustainable
strategies are developed and implemented

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2
 LEARNING OBJECTIVES (Continued)

You should be able to:

Understand the use of environmental supplier
certifications
Discuss the benefits of strategic supplier
alliances
Describe how and why sourcing practices are
benchmarked
Discuss why firms would want to assess their
sourcing capabilities

2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2015
3
 CHAPTER OUTLINE

Introduction
Ethical and Sustainable Sourcing Defined
Developing Ethical and Sustainable Sourcing Strategies
Ethical and Sustainable Sourcing Initiatives
Early Supplier Involvement
Strategic Alliance Development
Rewarding Supplier Performance
Benchmarking Successful Sourcing Practices
Assessing and Improving the Firms Sourcing Function

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4
 Introduction

Purchasing personnel can have a tremendous

impact on their companies costs and
reputations through use of ethical and
sustainable sourcing practices

Increasing number of global competitors;

demands companies become more ethically
and environmentally focused

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5
 Introduction

Strategic sourcing - managing the firms external

resources to support firms long term goals.
Drivers of Strategic Sourcing
development of ethical and sustainable sourcing
initiatives
managing and improving supplier relationships and
capabilities
identification and selection of environmentally and
socially conscious supplier
monitoring and rewarding supplier performance

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6
 Ethical and Sustainable Sourcing
Defined
Business Ethics is the application of ethical
principles to business situations
Utilitarianism
Rights and duties
Corporate Social Responsibility is the practice
of business ethics
Ethical Sourcing is that which attempts to take into
account the public consequences of organizational
buying or bring about positive social change through
organizational buying behavior

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
7
 Ethical and Sustainable Sourcing
Defined (Continued)

Ethical Policies should include

Determining where all purchased goods originated
and how they were made
Knowledge of the suppliers workplace principles
Inclusion of ethics as a performance rating
Independent verification of vendor compliance
Report of supplier compliance to stakeholders
Provision of detailed ethical sourcing expectations to
suppliers

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
8
 Ethical and Sustainable Sourcing
Defined (Continued)

Ethical Trading Initiative (ETI) - an alliance of

organizations seeking to take responsibility for
improving working conditions and agreeing to
implement the ETI Base Code
Fair trade product - manufactured or grown by a
disadvantaged producer in a developing country that
receives a fair price for their goods

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
9
 Ethical and Sustainable Sourcing
Defined (Continued)

Table 4.1 The Ethical Trading Initiatives Base Code

Clauses Abbreviated Clauses Abbreviated Explanations
Explanations
1. Employment is freely No forced, bonded or 6. Working hours are not Working hours comply with
chosen involuntary prison labor. excessive national laws and benchmark
industry standards
2. Freedom of Workers have the right 7. No discrimination is No discrimination in hiring,
association and the to join trade unions and practiced compensation, access to training,
right to collective to bargain collectively promotion, termination or
bargaining are retirement
respected
3. Working conditions Accommodations shall 8. Regular employment is Work performed must be on the
are safe and hygienic be clean, safe and meet provided basis of recognized employment
the basic needs of relationships established through
workers national law and practice

4. Child labor shall not Persons under 18 shall 9. No harsh or inhumane Physical abuse or discipline, the
be used not be employed at night treatment is allowed threat of physical abuse, sexual or
or in hazardous other harassment or other forms of
conditions intimidation shall be prohibited
5. Living wages are Wages should be enough
paid to meet basic needs

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
10
 Ethical and Sustainable Sourcing
Defined (Continued)

Table 4.1 The Ethical Trading Initiatives Base Code (continued)

Clauses Abbreviated Explanations
6. Working hours are Working hours comply with national laws and benchmark industry standards,
not excessive whichever affords greater protection. Workers shall not on a regular basis be
required to work in excess of 48 hours per week and shall be provided with at
least one day off for every 7 day period. Overtime shall be voluntary, shall not
exceed 12 hours per week, and shall always be compensated at a premium rate.
7. No discrimination is There is no discrimination in hiring, compensation, access to training, promotion,
practiced termination or retirement based on race, caste, national origin, religion, age,
disability, gender, marital status, sexual orientation, union membership or political
affiliation.

8. Regular employment Work performed must be on the basis of recognized employment relationships
is provided established through national law and practice. Obligations to employees under
labor or social security laws shall not be avoided through the use of labor-only
contracting, sub-contracting, or through apprenticeship schemes.

9. No harsh or Physical abuse or discipline, the threat of physical abuse, sexual or other
inhumane treatment is harassment or other forms of intimidation shall be prohibited.
allowed

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
11
 Ethical and Sustainable Sourcing
Strategies (Continued)

Sustainable Sourcing
Green purchasing is aimed at ensuring products or
materials meet environmental objectives e.g. waste
reduction, reuse and recycling
Sustainability is the ability to meet current needs of
the supply chain without hindering the ability to meet
future needs in terms of economic, environmental,
and social challenges
Supports the three Ps - people, planet, and profit

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
12
 Ethical and Sustainable Sourcing
Defined (Continued)

Sustainable Sourcing should seek to

Grow revenues
New sustainable product introduction
Reduce costs
Increase resource efficiencies
Manage risk
Link brand to social consciousness of consumer
Build intangible assets
Build social and environmental responsibility

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
13
 DEVELOPING ETHICAL AND
SUSTAINABLE SOURCING
STRATEGIES
Functional Products - MRO items & other
commonly low profit margins with relatively stable
demands & high levels of competition
Innovative Products - characterized by short
product life cycles, volatile demand, high profit
margins, & relatively less competition

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
14
 DEVELOPING ETHICAL AND
SUSTAINABLE SOURCING
STRATEGIES
Framework for ethical and sustainable
sourcing strategy development
Step 1 Establish corporate ethical and sustainable sourcing
policies
Step 2 Train purchasing staff and implement policies
Step 3 Prioritize items based upon ethical and sustainability
opportunities and ease of implementation
Step 4 Develop performance measurement system
Step 5 Monitor progress and make improvements. Increase use
of green and fair trade products
Step 6 Expand focus to include other departments

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
15
 Ethical and Sustainable Supplier
Certification Programs
Supplier certification programs are used to
identify strategic supplier alliance candidates

Firms use in-house formal certification programs,

& most require ISO 9000 / 14000 or similar
certifications as part of the certification process

Ethical and environmental certifications are

used by various organizations to identify rogue
suppliers and suppliers who fail to certify
according to ethical requirements
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
16
 Supply Base Rationalization
Programs
Supply base rationalization (AKA supply base
reduction or supply base optimization) is often
the initial supply chain management effort

Buyer-supplier partnerships are easier with a

rationalized supply base & result in
Reduced purchase prices
Fewer supplier management problems
Closer & more frequent interaction between buyer &
supplier
Greater levels of quality & delivery reliability

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
17
 Outsourcing Products and
Services
Outsourcing allows a firm to
Concentrate on core business activities
Reach its sustainability goals

The Supplier Ethical Data Exchange (Sedex)

Focuses on responsible and ethical business
practices
Helps reduce risks associated with outsourcing

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
18
 Early Supplier Involvement

Early supplier involvement (ESI) highly effective

supply chain techniques where key suppliers become
more involved in the internal operations of their customer,
which may include
Managing inventories at their customers points of
use
Participating in their customers new product &
process design processes

Value engineering activities help the firm to reduce

cost, improve quality & reduce new product development
time

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
19
 Early Supplier Involvement (Continued)

Vendor managed inventory (VMI)

Suppliers manage buyer inventories to reduce inventory
carrying costs & avoid stockouts for buyer

From the buyer-firms perspective

Supplier tracks inventories
Determines delivery schedules and order quantities

From the suppliers perspective

Avoids ill-advised customer orders
Supplier decides inventory set up & shipments
Opportunity for supplier to educate customers about other
products

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
20
 Early Supplier Involvement (Continued)

Co-managed inventories
Buyer and supplier reach an agreement regarding inventory
Preferable for high value items
Supplier co-location or JIT II
Suppliers employee is embedded in buyers purchasing
department to forecast demand, monitor inventory & place
orders with access to sensitive files & records
Advantages
Purchasing organization gets the use of a cost-free
employee who understands their particular problems and
requirements
Supplier gets the security of future purchases
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
21
 Strategic Alliance Development

Strategic alliance development, an extension of

supplier development refers to increasing a key
or strategic suppliers capabilities.
Strategic supplier alliances result in better
market penetration access to new technologies &
knowledge, & higher return on investment
Alliance development eventually extends to a
firms second-tier suppliers, as the firms key
suppliers begin to form their own alliances.

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
22
 Strategic Alliance Development

Table 4.3 Maintaining a Successful Strategic Alliance Program

Steps Discussion
1. Determine the key strategic Can be based on business units, geographic areas,
parameters to organize industries, key alliance partners, or combinations of
around. these.
2. Facilitate the dissemination Alliance management and development information
of information. should be centrally controlled and available through
internal websites, pamphlets, and workshops.
3. Elevate the importance of Assign a director or vice-president of alliance programs,
the strategic alliance reporting to top management. Establish consistent
program. procedures for alliance programs throughout the
organization.
4. Provide continuous Management can increase the value and acceptance of
evaluation of alliance alliance programs when successes are made visible to
performance, visibility, and the firms lower level managers and employees. Alliance
support. management requires resources and on-going
reevaluation.
5. Reward suppliers as Rewards typically include increased business and other
performance merits. non-monetary awards.
Source: Adapted from Dyer, J., P. Kale, and H. Singh, How to Make Strategic Alliances Work, Sloan Management Review 42, no. 4 (2001): 3743.

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
23
 Negotiating Win-Win Strategic
Alliance Agreements
Collaborative negotiations (aka integrative
negotiations)
Both sides work together to maximize the outcome
or create a joint optimal result
Requires open discussions and a free-flow of
information between parties

Distributive negotiations
Refers to a process that leads to self-interested,
one-sided outcome

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
24
 Negotiating Win-Win Strategic
Alliance Agreements (Continued)

Steps Description

Gain an understanding of both parties interests;

1. Build preparation
brainstorm value-maximizing solutions; identify objective
process
criteria to evaluate fairness of agreement.

2. Develop Review previous negotiations to catalogue standards,

negotiation practices, precedents, metrics, creative solutions used,
database and lessons learned.

3. Design Create an environment to work together to create a

negotiation shared vocabulary, build working relationships, and map
launch process out a shared decision-making process.

4. Institute feedback Create process to provide feedback to negotiating teams

mechanism and capture lessons learned.

(Table 4.4)
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
25
 Rewarding Supplier Performance

Rewarding suppliers provides an incentive to surpass

performance goals

Punishment is a negative reward, may be to reduce

future business; or a billback penalty equal to the
incremental costs resulting from a late delivery or poor
quality

Strategic supplier agreements can reward

suppliers by allowing
A share of the cost reductions
More business and/or longer contracts
Access to in-house training seminars & other resources
Company & public recognition 26
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Benchmarking Successful
Sourcing Practices
Benchmarking
Measuring what other businesses do best and
matching their performance is an effective approach
to improving supply chain performance.
Benchmarking data regarding sourcing practices can
be obtained in any number of ways, both formal &
informal.
Resources for learning about & implementing
sourcing practices
The Center for Advanced Purchasing Studies.
Supply-Chain Council.
Institute for Supply Management.

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
27
 Assessing & Improving the Firms
Sourcing Function
The sourcing function is one of the most value-
enhancing functions in any organization
Sourcing or purchasing functions performance are
periodically monitored against set standards, goals,
and/or industry benchmarks.

Surveys or audits can be administered as self-

assessments among purchasing staff as part of the
annual evaluation process.

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
28
 Assessing & Improving Firms
Sourcing Function (Continued)

Assessment criteria include

1. Participating in and leading 8. Further supplier
multifunctional teams integration
2. Participate in value 9. Contribute to new product
engineering efforts development
3. Finding/evaluating ethical and 10. Initiate supplier cost
sustainable suppliers reduction programs
4. Optimize supply base 11. Improvement of
5. Managing local, regional and purchased product and
global suppliers service quality
6. Early supplier involvement 12. Improve time to market
initiatives 13. Maintain internal
7. Creating strategic supplier cooperative relationships
alliances
2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
29
 Assessing & Improving Firms
Purchasing Function (Continued)

Skill set requirements of purchasing professionals

have been changing. Purchasing personnel must today
exhibit world-class skills such as

1. Negotiating contracts Cost-controlling activities

include
2. Selecting suppliers
Reducing supply base
3. Managing supplier
relationships Negotiating global
agreements
4. Controlling costs
Adopting new
purchasing
technologies

2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
30