According to IBM’s Samuel J. Palmisano, the multinational corporation is taking on a new form, that of the “globally integrated enterprise”.  It is increasingly focused on managing global supply chains.  This is changing totally the nature of trade.  Around one-third of trade is now intra-company trade.  That is, transactions between different parts and subsidiaries of one company which are based in different countries.  And a growing share of trade is in components, not final products, involving a big range of suppliers and subcontractors.

This phenomenon provides many benefits.  But, quite predictably, it is giving rise to a whole new set of challenges.

The rise of the globally integrated enterprise is essentially a response to the imperatives of globalization and new technology.  The process of corporate globalization has shifted its focus “from products to production -- from what things companies choose to make to how they choose to make them, from what services they offer to how they choose to deliver them”.

The globally integrated enterprise is all about “the integration of production and value delivery worldwide”.  Borders matter less and less.  This means lower costs and tapping new sources of skills and knowledge.  Investments are more to service global than national markets.

Specific tasks are located in the lowest cost place.  “American radiologists send x-rays to Australia for interpretation. Customer-service centers in Nova Scotia handle warranty inquiries for U.S. shoppers. Procurement centers in Manila process corporate purchasing decisions on behalf of firms big and small around the world. Back offices in Dublin process derivatives transactions for global investment banks.”

Shared business and technology standards enable businesses to plug into truly global systems of production.  And as these shared business practices spread, along with shared modes of connecting business activity, companies can hand over more and more of the work they had previously performed in-house (from back-office support work, such as invoicing and employee-benefits administration, to R & D, sales, and customer support) to outside specialists.

In short, the spread of outsourcing is encouraging companies to view themselves as an array of specialized components: procurement, manufacturing, research, sales, distribution, and so on. For each of these components, the global integration of operations is forcing companies to choose where they want the work to be performed and whether they want it performed in-house or by an outside partner.

Outsourcing and the creation of supply chains got started between the US and Mexico.  And then following the appreciation of the yen after 1985, Japan outsourced much of its labour intensive production to developing countries in East Asia.  And in Europe, the expansion of the European Union to the former communist countries of central Europe, paved the way for outsourcing and the development of European supply chains.

Challenges of supply chain management

One of the key challenges for globally integrated enterprises is managing these supply chains.  According to Bill Valentino from Bayer, this requires monitoring and evaluating the suppliers and relationships.  It is a two-way network, a system of organizations, people, activities, information and resources involved in moving a product or service from a supplier to a customer.

Embedded in the supply and purchasing process are risks that fundamentally affect the overall survival, competitiveness and bottom line of every business.  In the supply chain there are operational risks – the interruption of goods and services: financial risks – significant changes in the price of goods or services: but "reputational risk" can be even more serious than operational or financial risks because the loss of reputation can be catastrophic for a company especially those with globally extended supply chains, inevitably face.  This risk places new responsibilities on supplier and supply, not only to monitor environmental and social concerns but also to influence them.

With expanding and increasingly fragmented global supply chains come new and often unanticipated responsibilities. They all need to actively and strategically manage not only their own ethical, social and environmental practices and policies but also those of their suppliers and subcontractors.  Modern corporations need to establish an ethical supply chain in order to reduce risk, protect reputation, live up to stated values, enhance the productivity of suppliers and reduce social and environmental impacts.  Companies today need to be concerned with actively managing or at least monitoring and be aware of the ethical, social and environmental practices and policies of their suppliers and subcontractors in these low-cost labor markets.

Many companies have even put in place independent monitoring systems for inspection of suppliers in order to ensure that these standards are met. Despite these precautions, labor violations, excessive hours, dangerous working conditions, overcrowded and dirty living conditions and accommodations continue. The reason for this is that governments in the developing world want and need the investment capital, and they have often been too eager to turn a blind eye to sweatshop conditions, official corruption or environmental exploitation in order not to scare away corporate buyers or investors.

The success of companies is more and more dependent on collaboration with and the performance of their suppliers. But what happens when those suppliers are found guilty of poor environmental, product safety or employment practices? Guilt by association becomes the new norm and companies are painfully realizing that by outsourcing or shifting production they are not able to rid themselves of all the legal, ethical and quality responsibilities accompanying these processes.

This remains true even when suppliers are located in foreign countries and are both organizationally and legally separate from them. What is critical under these new circumstances is the increased need for monitoring and evaluation of supplier relationships, to be certain that their behavior is not endangering corporate reputation through illegal or unethical social or environmental practices.

Another critical factor is the explosive growth in the number of activists, pressure groups and NGOs that now actively monitor both domestic operations and extended supply chain operations of corporations worldwide. These include development agencies, single-activist groups, corporate watchdogs; labor rights activists, and wide ranging environmentalist agencies such as Greenpeace and the WWF.

The public is beginning to see the rise in authority and legitimacy of NGOs as a valuable counterbalance those corporations whose purpose might be only for profits and seem to avoid dealing with social and environmental exploitation or other issues in countries where they operate.  While some companies view NGOs as adversaries to be avoided at all costs, it makes more sense to engage NGOs via CSR and utilize it as an important tool to win over NGO support.

One key factor is the increased scrutiny of media, which uses the threat of public shame, to exert influence on an altogether new and unprecedented scale. A single negative headline article can cost a company millions by ruining its reputation at a stroke.

Another major factor is investors who are increasingly avoiding investing in companies that have a reputation for permitting unacceptable social or environmental activities in their supply chain. For investors, the slightest hint of a scandal or wrongdoing can trigger a rapid sell off of stocks.

The development of Socially Responsible Investment (SRI) movement reflects different types of investment concerns. SRI, which is investing in listed companies that can adhere to higher standards of ethical, social and environmental performance provides another compelling reason for companies to demonstrate their commitment to exemplary behavior via CSR in these areas.

Ethical indexes such as the Dow Jones Sustainable Asset Management Index the FTSE4 Good are just two examples of how companies are being monitored according to their policies concerning corporate governance, environmental reporting, corruption, human rights issues, new green technologies and environmental product design and disposal policies.

A case study -- An investigation into four suppliers of Carrefour by China Labor Watch

China Labor Watch is one of many NGOs monitoring and reporting on supply chain “sweatshop stories” involving exploitations such as the rampant use of child labor and exposure of workers to toxic chemicals.  They argue that multinational companies undermine China’s most fundamental labor laws in ways that appear slight, but actually dramatically affect employees’ earnings, dignity and human rights.

One case that China Labor Watch has investigated is that Carrefour, a massive French retailer, the second largest big box store in the world.  In addition to its operations in France and other countries, in 2007 it operated 156 “hypermarkets” in China, alone.  Between February and April of 2010, China Labor Watch (CLW) investigated four Carrefour suppliers: Dongguan Lanyu Toy Company, Kiddieland Toys, Shenzhen Nanling Toys Products and the Xinlong factory. Many employees at these manufacturers were not contracted (a violation of China’s 2008 Labor Contract Law) and averaged workdays of 11 to 12 hours. They were housed in overcrowded dormitories and found that conditions created an environment in which resigning would be exceedingly difficult.

In light of these observations, CLW strongly encourages Carrefour to set up a comprehensive monitoring system that includes random inspections and consultations with local civil society groups to ensure that suppliers are aware and obedient of local regulations.

One of the four companies examined, Dongguan Lanyu Toy Limited Company, is one of Dongguan City’s most renowned local companies.  China Labor Watch’s investigation of the Dongguan Lanyu Toy Company, Ltd. found the following serious abuses:

• Overtime at the factory is not paid in accordance with the law.

• The factory only allows workers two days of rest per month, with a workload of 11 to 12 hours per day. Often, workers have to work through the night to finish an order.

• Dormitory rooms are infested with biting insects.

• Workers lack social insurance, a blatant violation of Chinese labor regulations.

• Employees in the varnishing department are exposed to toxic fumes, with nothing but flimsy masks to protect them.

• Employees are paid only if they complete three months of work at the factory.

• Quitting at the plant is exceedingly difficult; in practicality, it is only possible for a worker to resign when his or her contract expires.

Reports on the other companies examined can be found on China Labor Watch’s website.

Concluding comments

Guilt by association or complicity with unethical, immoral or illegal activities of suppliers can be a challenging concept for many businesses to accept.  But Western publics see that businesses profit from the relationships, and that businesses should be held responsible.  Corporate social responsibility should therefore apply to not only the direct actions of a corporation, but also those of its business partners who contribute to the production of the corporation.

References:

The Globally Integrated Enterprise, Samuel J. Palmisano, Chair of the Board, President, and Chief Executive Officer of IBM.

Foreign Affairs, May/June 2006

http://www.ibm.com/ibm/governmentalprograms/samforeignaffairs.pdf

Trade Facilitation: Links to Logistics and Development, This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Geneva May 2009

http://vi.unctad.org/windiesst09/docs/presentations

Supply Chain Management And Corporate Social Responsibility, by Bill Valentino.  China Sourcing News

http://www.chinasourcingnews.com/2007/12/10/4041-supply-chain-management-and-corporate-social-responsibility/

An Investigation of Four Suppliers of Carrefour. China Labor Watch

http://www.chinalaborwatch.org/articles/2010_05_20/index.php