Common Ethical Sourcing Risk Management Questions
Do your suppliers have a code of conduct?
How long have you been in business?
Who, at your company, is responsible for compliance measurements and requests?
Is any part of an employees benefit structure taken out of their compensation. If so, what type of benefit, and what percentage of compensation is taken out?
Do you utilize labor agents when hiring new staff?
Risk management is not a “one size fits all” business process. Each company approaches risk management in their own, unique way – and rightfully so. Unique industry standards, NGO industry focus, sourcing efficiencies and more make risk management a delicate issue.
Some companies have a tried and true process that combines supplier pre-screening with regular field audits. Other companies find themselves doing the bare minimum and often miss clear indicators of unethical supply chain practices.
Most companies find themselves somewhere between these two extremes, but struggle to find a scalable process that doesn’t exceed their budget. Regardless of your approach, risk management processes follow very similar workflows.
Example: Ethical Source Risk Management Initiative
- Design an ethical sourcing initiative
- Determine which suppliers are in-scope of the initiative
- Engage suppliers and collect unique supplier data points
- Make a determination on your findings
- Implement a corrective action plan
Easier said than done, we might add.
Let’s dissect the first step in this process: Design an ethical sourcing initiative
Collecting meaningful ethical sourcing data is reliant on your ability to design a series of supplier assessments that collect both direct and indirect data points around ethical sourcing practices.
For example, if you want to ensure there are no instances of modern day slavery within your supply chain, you have to gather data on the root causes, or risk indicators, of modern day slavery – the type of working conditions your suppliers provide their workers, how they hire and contract their workers, employee compensation habits and more…
Ethical sourcing risk indicators can be all over the map. Fortunately, there are two categories we can use to dissect ethical sourcing risk:
External Risk Factors
Internal Risk Factors
External Risk Factors
Think about external risk factors as the characteristics or qualities of a company that are not driven by the way they choose to run their business.
- The location of a supplier
- The focus industry of the supplier
- Number of years in operation
External risk factors can give you a high level, objective overview of a particular suppliers risk. You’ll find that many external risk factors are well documented by special interest groups and non-governmental organizations that analyze global ethical supply chain practices.
Example: Location-based Risk
Supply chain geographical risk data is well documented. In the case of ethical sourcing, violations typically occur in global pockets where labor oversight is weak, and workers rights are not upheld.
Real world application – the Democratic Republic of the Congo is considered an area of very high risk due to its low labor oversight and rebel groups who push workers to the edge, mining for highly sought after raw materials (conflict minerals, cobalt, and other special materials hotspot).
Internal Risk Factors
Internal risk criteria are essentially the items and processes that a businesses management team controls as part of their operational processes:
- Management practices and policy decisions
- Recruitment of workers
- Employment structures
- Employee working condition standards
Internal risk factors have a tendency to be less transparent than external factors. As a good practice, Internal risk factors should be closely monitored and validated.
Example: Recruitment of Workers
Global recruitment for labor-intensive jobs is a historically brutal process that can lead to severe human rights violations. Large output suppliers in developing countries have been known to utilize labor agents who contract employees from other countries who are in need of employment.
Real world application – a person who desperately needs work finds the opportunity to get hired by a labor agent who assigns them temporary work. The employment requires the person to relocate to a new country, but consists of a wage, food and housing.
Fast forward two months – the person finds out the compensation they were supposed to receive is far less, if not zeroed out because the labor agent [agent that originally contracted the person] did not clarify the details (food and housing factored into the wage, not in addition to the wage) of compensation – the downward spiral of bonded labor begins.
Regularly assessing your suppliers with questions that ask them to outline their recruitment process can uncover unethical business practices like the one described above.
How to design
reverse engineer your objective
The examples above outline why it is imperative to look at your ethical sourcing initiative and dig deep into the indirect reasons behind ethical sourcing violations. Taking the time to reverse engineer your initiative will drastically improve the data you collect and the overall success of your ethical sourcing risk management system.
Risk management is an ongoing process and should be treated as such. Putting strong risk management systems in place can allow you to assess your supply chain on a variety of categories, gather meaningful data and help you develop an effective corrective action plan. To learn more about supply chain risk management, click here.