The challenges faced by companies in the 21st century are not just related to the fact that they now operate in or source from many more countries than they did in the past.

With their multiple levels of subcontracting, in particular in countries or regions where labour laws are either non-existent or not enforced, global multinationals can be significantly exposed to the risks associated with inhumane practices and inadequate working conditions. The US Department of Labor, for example, has a list of 136 goods produced in 74 countries that use forced labour, child labour, or both. These goods include everything from strawberries, coffee, chocolate and sugarcane to footballs, bricks, garments, tobacco and gold.

Five challenges are of particular importance:

1. Supply chains have become more and more complex. Individual products now often comprise inputs from many dozens of suppliers. Can global companies actually monitor and ensure the integrity and performance of their suppliers?

2. Demands on suppliers have intensified. In turn, this has exacerbated the pressures on companies and employees in supply chains, too often resulting in downward pressures on wages and working conditions and upward pressures on working hours.

3. The range of issues that need to be considered and managed by companies has grown. In recent years, non-governmental organisations and others have called on companies to address issues as diverse as the living wage, local content and HIV/AIDs. In many cases, these are issues that have proven extremely difficult for companies to manage in their own operations and factories, let alone in their supply chains.

4. Ever closer media scrutiny and advances in communication technology have meant that companies cannot hide from their own practices or those of these suppliers. This heightened scrutiny has also meant that the argument that companies do not have responsibility for the impacts of their suppliers is no longer seen as credible, not least because it is companies’ reputations that are affected by the actions of their suppliers.

5. Legislation. Companies now face a complex patchwork of national and international legislation that looks to hold them to account for the social issues in their supply chains.

Changing business perspectives

While companies have struggled to develop management systems and processes that enable them to respond effectively to these challenges, there are signs of material changes in companies’ approach to the management of social issues. The most fundamental change has already happened in most global companies, namely the explicit recognition that social issues are business issues and that business issues are social issues. This has led many companies to accept that they do have responsibility for their supply chains and that they need to strengthen their oversight and management of them.

Others have gone further. Some have broadened or reframed the objectives of their supply chain management efforts from a narrow focus on costs and efficiencies, to a wider focus on resilience, security and quality of supply. Others recognise that in the quest for higher social standards, there is a need to work collaboratively with suppliers and other stakeholders (such as NGOs and trade unions) to implement schemes aimed at, for example, developing opportunities for advancement, ensuring equal and appropriate representation, and improving legal protection for workers.

Finally, some are looking at how they can ensure that ethical values, as well as economic considerations, are appropriately integrated into the decisions that they make and the management practices that they adopt.

How can companies identify social issues in their supply chains?

Different social issues will be relevant to different companies depending on:

• Jurisdictions they operate in or source from

• Products or services that they source

• Business model

• Commercial pressures they face

The consequence is that companies will need to go through their own processes of identifying the social issues-related risks and opportunities associated with their supply chains.

Companies often feel that they are expected to engage with their entire supply chain. However, given the scale of most companies’ supply chains, this is generally unrealistic. Many companies therefore chose to focus on their most important suppliers; those that the company sources directly from, has significant spend with and/or views as critical to production. They may, in addition, focus on particular “hot spots” in the supply chain – for example, suppliers in particular subsectors or regions that are seen as exposed to these issues.

Effectively manage supply chain risks

There is now a robust body of knowledge and experience on how companies may effectively manage their supply chains in a way that protects the company’s interests whilst maximising the social contribution made by companies.

Supply chain risks – as with other business risks – need to be managed through an iterative process. This begins with an acknowledgement of the key issues associated with a company’s supply chain operations:

• Focus on the implementation of formal policies and management processes

• Effective engagement and communication strategies ensure that stakeholders contribute to and remain informed

Wider strategic considerations

Simply managing social issues will not necessarily deliver the best business outcomes. Nor, given the breadth and complexity of the social issues involved, will it necessarily guarantee the sort of outcomes sought by employees, suppliers or civil society.

The three core principles that we believe should underpin multinational corporations’ supply chain management efforts.

1. They should properly understand and, act on the role that they play in creating or exacerbating social issues in their supply chains.

2. They need to identify ways in which they can develop new buying practices that support, rather than undermine, suppliers’ ability to provide decent pay and conditions for their workers.

3. They need to see their suppliers as partners, and develop their suppliers’ capacity to manage social issues through:

• Training and awareness-raising,

• Helping suppliers to build effective management systems, or

• Encourage suppliers to recognise and engage positively with trade unions.