Apple Confronts Weak Links in its Supply Chain

 

Takeaway

  • The cost of conforming to regulations in the U.S. often prompts companies to do their manufacturing overseas
  • There is a debate over whether companies, consumers, NGOs, or the government should monitor human rights conditions

In February 2011, Wired magazine ran a cover story about widespread employee unrest at Foxconn, the Chinese company that manufactures electronics for Apple and other retailers worldwide. More than a dozen workers had committed suicide in the previous year, and the company was described as a labor camp that forced employees to work long hours in cramped spaces for miniscule wages. “Who’s to Blame?” the article’s headline demanded.

The conditions at Foxconn received widespread media attention and were the subject of much debate, but the issue faded from the public consciousness. Apple said it would work more diligently to monitor conditions at partner facilities. But last month, Foxconn was back in the spotlight after 150 employees pledged to kill themselves if working conditions did not improve.

This time, the public responded more vocally, sending Apple a petition with more than 200,000 signatures in support of protecting workers in the Chinese factories. The company responded by pledging to allow the Fair Labor Association to audit its international plants and to report on specific instances of violations.

Apple is not the only company that has faced this predicament. Nike and other apparel companies were blasted in the ’90s for contracting with sweatshops. In January Hershey pledged $10 million to educate African cocoa farmers about their rights in response to widespread criticism for its ties to suppliers that engage in child slavery.

Companies want to do the right thing while also remaining profitable, yet reports of abuse continue to surface. What’s the answer? Some experts believe tighter regulation may provide some safeguards, while others think the market asserts sufficient pressure on companies to more closely monitor their upstream operations. But in today’s era of global business and increasingly complex manufacturing, problems still find their way into supply chains.

Roots of the Problem   

American firms have many incentives to do business with overseas suppliers, including the lower cost of labor and looser regulations. While outsourcing might make good business sense, it can also link companies to unethical practices they might not even know about.

“These supply chains have gotten so much more complex in developing countries where the laws are not quite as strict” and labor is less expensive, such as Thailand, Myanmar, Vietnam, and Cambodia, says Douglas Morrice, professor of operations management at McCombs. “People want to work,” he explains, “and they’ll do things they wouldn’t even consider in this country,” thanks to standards set by the Occupational Safety and Health Administration and other organizations.

One solution could be to strengthen the standards imposed on international plants that supply U.S. firms, but this proposal would likely be met with heavy resistance from companies domestically and overseas, says Sridhar Seshadri, a supply chains expert at McCombs.

“That’s a complaint of U.S. businesses: ‘The cost of the regulations is so high that we can’t afford to do business here,’” he says.

Even though the U.S. has higher regulatory standards than other countries, reports of abuse continue to surface. To some, this suggests a need for even tighter requirements. “But the moment you do that, profitability will go down,” Seshadri says. “It’s lose-lose.”

Visibility and Proximity

What’s more, it can be difficult for a company’s buyers to track working conditions when they do not work directly with the companies that sell to their suppliers.

“Once you get more than one tier back in the supply chain, or maybe two, [buyers] don’t know exactly what’s happening,” Morrice says. “If I have standards and someone else is not enforcing them, I’m only as good as the weakest link in the chain.”

Seshadri says that part of the problem is based on geography: When companies are located on opposite sides of the world, there is less accountability when something goes wrong. Conversely, when violations surface at a manufacturer in the U.S., it’s more difficult for an American buyer to claim it wasn’t aware of any wrongdoing, Seshadri says.

For example, when toys imported from China were found to be toxic several years ago, very little blame was directed at the American companies that bought them. But when problems originate closer to home, blame shifts toward the buyer.

“If the buyer and seller are both in one country, I don’t think the buyer can get away with ethics violations in its supplier’s factories,” he says. “There seems to be a double standard.”

If the gap between buyers and suppliers is the crack that allows unethical practices to seep into the supply chain, more careful monitoring might prevent problems from going unnoticed. But the ambiguity of who should take on that responsibility is an unresolved issue.

“Consumers expect somebody to do this,” Seshadri says. “But whose job is it? That’s the question.”

Who Monitors?

Most companies do inspect conditions at the plants that supply them, but only up to a certain point, Seshadri says.

“U.S. businesses need to voluntarily say, ‘I’m not going to buy from these people’” if the practices of their suppliers are unethical, he says. “You’ve got to treat the seller as your own company.”

But not every company will follow the rules voluntarily, especially when doing so would take a cut out of the bottom line. In these cases, Seshadri says, there should be an outside watchdog that can back up the rules with some measure of authority.

“You need cops, you need policemen, you need regulations, and if you get caught, you need punishment,” Seshadri says. “We need the government. I don’t think the fifth estate [the media] can do this job. I think it is the job of the government.”

Several agencies and organizations monitor human rights and working conditions in the manufacturing industry, including the United Nations, the World Trade Organization, nongovernmental organizations, and nonprofits such as the Fair Labor Association. Standards upheld by these groups provide a uniformity that allows ethical companies to participate in the supply chain and excludes the violators, at least in theory.

“It makes it easier for everyone in the chain to be at a certain threshold to even be part of it. If you’re not, you’re out,” Morrice says.

Power of the Market

The collective voice of consumers can be an even more effective check against unethical supply chain relationships than any type of government regulation, says Lamar Johnson, senior associate director of the Supply Chain Management Center of Excellence. The fear of a bad reaction from the market prompts companies to avoid situations that could cast them in a negative light.

“Corporate America today is much more sensitive to issues around corporate responsibility than they have ever been. It has a lot to do with the fact that the public is aware of those issues and is calling out companies to behave responsibly,” Johnson says.

“That’s the way the market works,” he continues. “If a consumer doesn’t like what a company is doing, they shouldn’t buy the product. If they don’t buy the product, the company’s got to figure out why the product isn’t selling and take some action to remedy that. If they don’t, they go out of business.”

However, there are cases in which the market remains silent in the face of allegations of worker abuse. Until very recently, Apple’s image was largely unblemished in the wake of the reports about suicides and harmful working conditions — even though the first wave of those reports surfaced more than a year ago.

“This is the second time in a year that issues with Foxconn have exploded into the news, and it has apparently done no damage to Apple’s reputation — which is both interesting and a little disturbing,” says Michael Hasler, McCombs lecturer and former operations executive. “People say, ‘Oh yeah, they have a problem — but I don’t care because I can still get an iPhone.’”

This could set a bad example for the rest of the manufacturing industry, Hasler says.

“Companies are looking at the market reaction to Apple and seeing that this threat of mass suicide has done very little to impact Apple’s revenue stream,” he says. “That says more about us as a society than it does about Apple as a supply chain-oriented firm.”

In the end, the answer may come down to education. If customers learn more about where their products come from, perhaps they will be better able to recognize the complexities of the modern supply chain, both the good and the bad.

“There’s an overall level of ignorance in our society about where these things come from, what kind of impact it has, whether it’s human rights issues or environmental issues,” Morrice says. “When something’s on the other side of the world and in a country you’ve never heard about, there’s ignorance. As we develop in this supply chain area, we need to be more transparent in helping people understand what impact we have.”

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Comments

#1 Nightline visited the Foxconn

Nightline visited the Foxconn facility to see firsthand what the working conditions are like. Based on the disclaimer at the beginning of the report, I do not know to what extent I believe the veracity of what's presented: http://abcnews.go.com/watch/nightline/SH5584743/VD55173552/nightline-221-apples-chinese-factories-exclusive In response to the closing thoughts in the article, the market is developing tools to help educate consumers about the nature of the supply chain behind the products they buy. One example is Free2Work, a smartphone app that scans barcodes and provides information about the labor practices of the suppliers. While this is specifically geared to combat slavery, the idea might catch on and become as regular as comparison shopping for price. http://www.free2work.org/

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