Labour Rights Compliance in Supply Chains

Foxconn apologizes for pay-related error at China iPhone plant after worker unrest

Labour rights compliance in the extended Supply Chain are becoming a top agenda for the boardroom discussions. The customers, investors and the regulatory bodies are looking more critically at how a company operates its extended supply chain. The customer wants to know where products come from and the conditions under which the products were made.

Around three-fourth of the auto-sector workers who sustained injuries over the past five years have lost almost two fingers on an average to crush injuries, according to a Safe In India (SII) Foundation annual report based on the data of around 2,500 workers who suffered non-fatal injuries in factories in Faridabad-Gurugram-Neemrana auto belt in India. Almost 80% of them were employed in the supply chains of some of the largest auto-sector brands.

Such reports can be damaging for the companies or brands who buy components or parts from these manufacturers. It may not have legal implications but definitely violates the code of ethics and sustainability. Regardless of the sector and size of organization, you need to think beyond own organizational boundaries, into the extended supply chain. The management systems and standards that apply to your own organization should also be upheld by your suppliers, contract manufactures, logistics service providers for their respective organizations. However, given the cost pressures, demand volatility, customization, increased outsourcing and other competitive factors, the risks and the cases of violation of labor standards have increased tremendously.

Steps for ensuring Labor Compliance in Extended Supply Chain

1. Map your Supply Chain: The first step is to understand and map your supply chain that includes your Tier 1,2,3 suppliers, contractors and service providers. The complexity of supply chain would depend on the nature of industry, geographic spread and your company's position in the value chain. In order to simplify, categorize these entities by category e.g. agricultural commodities, mining, convertors & processors, service types, contractors etc., as well as the geographic locations.

While developing the map, you may realize that a lot information about your supply chain may be unknown to you. Also, you may come across the situations wherein your contractor is subcontracting to another partner to fulfill your peak demand or to save costs. Another example could be that your logistics service provider may be using the contract labor, who may not be fulfilling the labor compliance requirement. Therefore, one of the biggest challenges is that your suppliers and service providers may not be willing to reveal this information. It may require a meaningful dialogue, physical visits and audits of the suppliers' operations & documents.

2. Map the Labor Standards Risks: To begin with, compile a list of your company’s top 20% suppliers and organize them by location, the type of goods they supply to you, and the cost. Start with macro or country level and industry level risk assessment. Some countries may have lenient laws when it comes to use of child or forced labor. The chart below shows the number of goods that are prone to the use of child & forced labor. The details of the goods / industries can be found on https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods-print.

Another important indicator of the robustness of labor regulations or laws in a country is the Labour Rights Index. The heat map below for 2022 is composite of 46 topics involving different aspects of Labor Rights. For more details at country level, visit https://labourrightsindex.org. There are many other indices like Slavery index etc.

This step allows you to identify those high risks suppliers who might expose your company to legal liability or reputational damage associated with human rights violations.

3. Risk Assessment: This step involves doing a due diligence on different aspects of labor rights compliance. These aspects may include:

• Presence of management systems for internal and supply chain labor rights compliance
• Labor relations and legal history
• Fair Wages
• Working hours
• Equal Employment Opportunities
• Social Security and Welfare
• Health & Safety
• Child & Forced Labor
• Employee Unions

Apart from these, they also need to be assessed for the system & process in place to ensure these compliances for their key suppliers, contractors and service providers. If any red flags are found, getting a background check for any legal actions, penalties & lawsuits may be done. Each red flag should be evaluated from the perspective of risk & impact on your business.

4. Develop Mitigation Plan and Allocating Resources: It may not be feasible to address all the risks identified across all suppliers. Therefore, the risks have to be prioritized using the matrix of likelihood and impact. The scope needs to be realistic and implementable so that you may focus your resources in a way that mitigates your very highest risks and impacts areas. Some of the areas they are more prone to the violation of the standards and therefore may require more attention for the risk mitigation are:

• Labor intensive sectors or companies
• Service providers or contractors that provide outsourced labor
• Sourcing from sectors that are largely unorganized e.g. leather, bricks & stones, agricultural products, metals & mined products, meat & sea-food, textiles, cottage industries etc.

While developing a plan, it is important to adopt a collaborative approach with the suppliers rather than taking a directive approach. There could be an initial resistance from the suppliers, therefore a positive dialogue, training support and hand holding plays a very important role in managing the change. The timeframe for each initiative should be realistic considering the suppliers' capabilities and the environment in which they operate.

5. Contracts with Suppliers: Inclusion of clauses related to Labor rights in the contracts act as a deterrent against any violations. The clauses that supplier agrees to abide by the regulations, ensures reasonable standards for labor rights protection and provides the evidence of the same as & when required, should be mandatorily included for all the supplier contracts.

6. Monitoring and Auditing: More than 70% programs and initiatives die in the initial period due to absence of review and monitoring mechanism. The monitoring and auditing play a critical role in sustaining the program and ensuring the seriousness that it deserves by all the stakeholders. At least for the high-risk suppliers should be subjected to periodic audits to validate their processes and compliance. In certain cases, suppliers may be asked to self-audit and self-certify their processes with relevant evidence.

Managing the supplier audit program & tracking actions using the spreadsheets can become very time consuming requiring lot of non-value-added work. This may discourage both parties to follow a disciplined approach to sustain the program. SIMSA application for managing audits at multiple suppliers streamlines & automates the entire workflow. It saves upto 70% of the time of the resources that translates into 50% cost saving, apart from making all the information available to all stakeholders on one common platform.

Conclusion

Every company has the responsibility for protecting and promoting labor standards in their supply chains. As the world goes through a turmoil and increasing competitive pressures, the risk of labor rights violation increases. A structured approach of mapping the risks in supply chain and timely due diligence, monitoring & audits is required to mitigate these risks.