Module 1

Environmental and ethical criteria that impact on the supply chain
Supply Chain Management, as a domain, includes activities deeply entrenched in strategy,
regulations and standards. Without these standards — and proper strategies for implementing
them into daily supply chain activities — supply chain risks would materialize a lot more often
than they do.
The ESG (Environmental, Social and Governance) criteria is no exception to this rule.
Conceptually, the ESG criteria serve as a guideline for environmentally friendly, socially
acceptable, and ethically righteous supply chain activities; especially in the procurement,
sourcing and supplier relationship management-related actions.

These criteria (Environmental, Social, and Governance) apply as much internally, as they do
externally. Meaning, if ESG standards serve as a parameter during an organization’s monthly
internal-performance review, the same standards should be applied during a random supplier
factory-audit.
As a result of globalization and the outsourcing of labor, within globally functioning supply chains,
traceability and transparency into supplier’s activity has become necessary to manage ESG

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related risks. This is why ESG must be a main focus when developing a procurement or sourcing
strategy.
“The procurement function often has a handle on what takes place among Tier 1 suppliers
(possibly also Tier 2). But for a globalized supplier base, with numerous subcontractors and sub-
tier sourcing relationships, supply chains can often be very obscure”

Obscurity of supply chain networks has made the management of ESG related risks, the
application of preventative guidelines/actions, and the response to manifested supplier-related
risks a very complicated process.
Typical supply chain management strategies include supplier-compliance actions, and review of
compliance performance. This information is the building block for purchasing entities to ensure
that suppliers are performing in line with ESG expectations.

“Such supplier monitoring is a transactional governance mechanism designed to provide buyer-
firms with information that can help them manage supply chain risk and make strategic
outsourcing decisions. However, it is not clear that buyer-firms are getting complete and accurate
information from their supply chain monitors.

Participation from the supplier-body is crucial in collecting reliable and quality data sets. Without
quality supplier-related data, purchasing entities have a tough time working with the right
suppliers. Subsequently, collaboration with the wrong suppliers could lead to unethical supplier
actions, such as feeding back faulty data sets to the purchasing entity.

What role does ESG play in optimizing Supply Chain Management?
ESG serves as guidelines by which supply chain management strategies should be built from
bottom-line to top.
Gauging a supply chain’s ESG performance level would be relative to the organization’s wants
and needs within environmental, social and governance action. Implementing an approach, as

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spoken about in last week’s post, of ethicality as a KPI could be a good start for measuring ESG
performance.
Business performance — in respect to environment, social and governance concerns — has
become one of the crucial criteria when investment companies evaluate a potential investment.
Social criteria that impact on the supply chain
SUPPLY CHAIN AND ITS ENVIRONMENTAL IMPACT

There is an increasing need to combine environmentally friendly choices into supply-chain
management. Your supply chain costs impacts the environment because if you deliver products
more efficiently, it can reduce your carbon footprint on the environment. Companies are now
implementing sustainability programs to help the environment by reducing miles, reducing
production costs, and reducing product waste as well as unplanned activities.
Importers & exporters collaborate with their suppliers to communicate their values and
expectations in their sustainability efforts. They use surveys and questionnaires to assess their
greenhouse gas emissions, energy & water usage, and waste generation. This data is used to
identify the necessary improvements that a company should make to reduce harm to the
environment.

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Companies with sustainability initiatives will work with suppliers to identify sources of pollution
and waste to discover preventative measures. They would also encourage suppliers to use
cleaner and more cost-efficient means of production to prevent pollution. The goal is to extend
the responsibility within the supply chain.

Making the planet a greener place is not the only perk of being environmentally aware.
Companies who strive for sustainability also have business advantages such as improved business
image, lowered risk of non-compliance, attraction of other environmentally aware customers
(this group is growing larger), improved productivity and quality, and an increase in more
sustainable products.

Another aspect of sustainability in the supply chain is the social and economic responsibility; this
encourages companies to use good governance practices. The United Nations Global Compact
has ten principles of supply chain sustainability:

 Principles 1 – 2: businesses should support the protection of human rights and also
make sure that people’s rights are not abused.

 Principles 3 – 6: strives to protect the labor force by eliminating forced labor, child
labor, and eliminate discrimination in the workplace.

 Principles 7 – 9: support protecting the environment as discussed above
 Principle 10: prevent corruption in all forms such as fraud, bribery, and extortion.
 More details about the ten principles can be found on The UN Global Compact’s

website.

Environmental leaders and organizations are creating practical guides for companies to follow.
The goal is to teach companies how to continuously improve their sustainability practices. If a
company adopts these responsibilities, it will help manage their business risks, improve
efficiency, and aid in keeping up with the changing trends in the market and in technological
advancements. The company can influence their suppliers and all stakeholders in their supply

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chain to practice the same, and this nonstop cycle will eventually impact society and the earth
on a much larger scale.

TOPIC QUIZ
I. Explain the use of environmental scanning to determine the impact of the external

environment on the supply chain, with specific reference to PEST/STEEPLE and the Five
Forces Model
II. Discuss macro-economic criteria such as interest rates, inflation, exchange rates, level
of economic activity (GDP/ GNP) that impacts on organisations
III. Define micro economic criteria such as demand and supply that impacts on
organisations
IV. Identify political criteria such as stability and instability that impacts on organisations,
different economic sectors and on countries
V. List legislation that impacts on organisations such as on standards, health and safety,
environmental standards and employment law
VI. Identify environmental criteria such as natural risks, waste emissions, pollution and
energy efficiency that impact on organisations
VII. Categorize ethical and social criteria such as employment rights, community benefits,
working conditions and standards that impact on organisations
VIII. Discuss changing societal preferences, tastes and fashions, demographics, labour and
fair-trade standards and how these can impact on organisations

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KM-01-KT04: Ethics and the supply chain

KT0401 Ethics defined
KT0402 Ethics and the supply chain
KT0403 Ethical Decisions
KT0404 Legal fundamentals of public disclosure
KT0405 Unethical Behaviour

Ethics defined

When talking about ethics in the supply chain, experts generally focus on:
 Freedom of employment and association
 The eradication of child labour
 Safe and hygienic working conditions
 Appropriate pay and working hours
 Humane and non-discriminatory treatment
 Anti-bribery and corruption
 Environmental awareness

In the past these ingredients of an ethical supply chain were largely governed through the
values of individual businesses and countries but over recent decades this has become codified
in international law.

The golden rule
The golden rule of supply chain ethics is ultimately ‘know your suppliers’. Businesses need peace
of mind that those they do business with meet certain standards to ensure their supply chain is
above board.

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Ethics and the supply chain

Under pressure from a growing movement of activists determined to make supply chains more
ethical, businesses that once disclaimed responsibility for their overseas suppliers' behavior are
re-examining that stance. Companies are scrutinizing the supply chain on questions ranging from
environmental standards and product safety to the treatment of workers. Some businesses are
adopting corporate responsibility codes, while others are wielding new technologies to enhance
transparency. As they try to meet this challenge, companies are confronting numerous obstacles,
including far-flung supply chains and regulatory standards that vary by country. But the
consequences of failure can be high: Bad news about a company's supply chain can damage
reputation, depress sales and alienate investors—and the negative reviews can spread quickly in
today's hyperkinetic information environment. These are among the issues companies and their
critics are debating: Do ethical supply chains enhance profitability? Is it possible for a company
to ensure its supply chain is ethical? Are voluntary standards, industry certifications and
governmental regulations doing enough?

Ethics Issues Prevail in Supply Chain Management
Product innovation, cheaper but suitable alternatives of existing raw materials, effective supplier
shortlisting process etc., are some of the measures a successful company adopts and practices.
A laissez-faire attitude of top management to tackle such issues prevailing in the market will only
add to their misery. Proactive management will always look to analyze every link of the supply
chain and thereby reduce cost by adopting best practices and morality simultaneously.

Supply Chain
The supply chain consists of a series of links that enable the movement of product from the
producer to the customer. This movement incurs a series of costs for the various entities
involved. The management of supply chain is called supply chain management in plain text. But

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supply chain management is a process which involves goods, place, time, quantity and cost all
acquired in right proportions.
Supply Chain Management Activities
The functions of supply chain management are broadly classified as:

 Customer relationship management
 Materials management
 Production control and resource management
 Risk management
 Inventory management
 Supplier relationship management
All of these are vital links of the supply chain which needs constant monitoring so that it will be
a seamless process. All of the above links could be possibly kept intact by an organization
provided there is a belief in the culture called planning. An organization in order to reap the
benefits of a successful supply chain has to do three kinds of planning. They are:
 Strategic planning
 Operational planning
 Administrative planning
While strategic planning is generally done to realize a long-term prospect, and devised by a pro-
active top management, the operational planning and the administrative level are done at the
middle and the lower management respectively. These two-planning process are for mid-term
and short-term respectively. All these are emphasized or should be so that the supply chain
process that starts from the producer’s end smoothly transitions to the other links of the supply
chain process.
Supply Chain Entities
The supply chain process is about movement of goods from one end to the other end. On a
broader note, they are characterized by the involvement of different entities/parties in the loop.
Emergence of Ethical Issues
With different parties involved in the supply chain process there is always a question of who is
being fair and otherwise. Tensions arise in supply chain mainly due to the perceived

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understanding of ‘fair play’ between various parties. What may seem as a legitimate course of
carrying out the business may be perceived as an unfair trade practice by the other. So below are
some of the ethical issues faced by the parties involved in the supply chain process.

 Producers. There are numerous ethical issues that a producer could possibly face in a
supply chain process. Working conditions, labour rates, child labour, environment
unfriendly practices (including production of goods and disposal of wastes), utilization
of natural resources are some of the factors in which an organization can deviate from
its fair business practices.

 Suppliers. Suppliers are an integral part of the production process of an organization.
Not all producers procure all raw materials directly from a source. Suppliers perform
an integral job of procuring raw materials of high quality and maintaining high
standards of inventory and a sound distribution network. But some suppliers maintain
lower standards in managing inventory or the quality of materials procured will be of
a cheaper quality, reasons which are attributed towards saving cost and increasing
profit margin.

 Retailers. Similar instances of unethical practices have been recorded with retailers
when it comes to packaging or labeling the products. Retailers resort to practices such
as tampering with the packages or partially filled packages which amounts to cheating
as the customers who buy the product are led to the belief that the content of the
package is equal to the weight disclosed on the cover (For example, a potato wafers
packet may consist of only 25-30 grams whereas the disclosed weight on the product
would be 35 grams).

 Consumers. Though consumers are in the receiving end of unethical practices most
of the time, not always it could be justified. If companies offer a quality product at a
higher price, the willingness to buy has reduced considerably due to availability of
alternatives. By alternatives it does not mean availability of substitutes alone.
Consumers have started buying counterfeit products which are priced much cheaper.
Their only approach towards buying is based on cost and not quality.

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Ethical Decisions

An ethical decision is one that engenders trust, and thus indicates responsibility, fairness and
caring to an individual. To be ethical, one has to demonstrate respect, and responsibility.
Ethical decision-making requires a review of different options, eliminating those with an
unethical standpoint, and then choosing the best ethical alternative

Making Ethical Decisions: Process
Ethical decision-making refers to the process of evaluating and choosing among alternatives in a
manner consistent with ethical principles. In making ethical decisions, it is necessary to perceive
and eliminate unethical options and select the best ethical alternative.
The process of making ethical decisions requires:

 Commitment: The desire to do the right thing regardless of the cost
 Consciousness: The awareness to act consistently and apply moral convictions to daily

behavior
 Competency: The ability to collect and evaluate information, develop alternatives,

and foresee potential consequences and risks
Good decisions are both ethical and effective:

 Ethical decisions generate and sustain trust; demonstrate respect, responsibility,
fairness and caring; and are consistent with good citizenship. These behaviors provide
a foundation for making better decisions by setting the ground rules for our behavior.

 Effective decisions are effective if they accomplish what we want accomplished and
if they advance our purposes. A choice that produces unintended and undesirable
results is ineffective. The key to making effective decisions is to think about choices in
terms of their ability to accomplish our most important goals. This means we have to
understand the difference between immediate and short-term goals and longer-range
goals.

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Legal fundamentals of public disclosure

Effective supply chain management can have a vast impact on the efficiency and bottom lines of
both small and large businesses. In Fundamental principles of supply chain management, the
importance of supply chain management in both a global and local context and all areas of
business is discussed. Fundamental principles of supply chain management highlights supply
chain management from purchasing, operations and logistics perspectives. It also investigates
facilities, inventory, information, transportation and sourcing as the key drivers of supply chain
performance. The integrated supply chain is explained in terms of a more strategic coordination
for increased market impact, overall efficiency, continuous improvement and heightened
competitiveness.

Why are disclosures on supply chain sustainability important?

The UN has noted that: ‘The objective of supply chain sustainability is to create, protect and grow
long-term environmental, social and economic value for all stakeholders involved in bringing
products and services to market’
Supply chain sustainability has three principal benefits. Firstly, it addresses internal business risk,
secondly it adds value to the business itself and thirdly it has the potential to benefit stakeholders
(both individuals and companies) related to the supply chain. Each of these is outlined below.

Managing risk

Companies have strong incentives to minimize their risk within the upstream and downstream
supply chains as part of both good business practice and duty to their shareholders:

 proactive identification and reduction of risk within the supply chain can reduce a
company’s exposure to increased cost and time delays, as well as reputation risks and
associated customer backlash
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 the earlier a risk is identified, the more effectively it can be managed
 reporting on risk reduction helps to increase brand integrity

Adding value

There are cost savings related to gaining efficiencies within a business and this extends to the
supply chain. Savings can be made through waste reduction, streamlining business processes and
long-term planning such as:

 increasing efficiencies in resource and energy use, transportation and waste production,
which will reduce overall business expenditure

 taking proactive measures to meet industry standards which will lower long-term
monitoring and compliance costs

 using sustainability reporting of the supply chain to strengthen the organization’s position
as an industry leader in sustainability and to improve business partner relationships.

Benefits for external stakeholder groups Increased supply chain sustainability not only helps
businesses to grow, it also benefits customers and other stakeholders as follows.

 Disclosures on supply chain activity assist customers in making more informed decisions
on their purchases and the environmental and social impacts of their use.

 Improving sustainability levels at all stages of the supply chain could potentially lead to
improvements in the quality of products, and services

 innovations such as sustainable packaging, and design that facilitate recycling, reduce
environmental and economic costs for both suppliers and customers

 engaging with supply chains can be an effective means of disseminating knowledge on
sustainability and thereby creating wide-ranging sustainability improvements

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Unethical Behavior

Ethics is based on the recognition of certain human rights. An individual has the right not to be
deliberately deceived. He has the right not to be forced to go against his conscience. He has the
right to expect other parties to live up to their commitments and to behave according to the law.
In the workplace, the employer has the right to expect employees to behave according to
company policy.
Deliberate Deception
Deliberate deception in the workplace includes taking credit for work done by someone else,
calling in sick in order to go to the beach, sabotaging the work of another person and, in sales,
misrepresenting the product or service to get the sale. There are other examples of deliberate
deception, but these shows how damaging deception can be by using a person's trust to

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undermine his rights and security. In a workplace environment, this results in conflict and
retaliation. In a sales function, it can result in lawsuits from deceived customers.

Violation of Conscience

Your sales manager calls you into his office and threatens to fire you unless you sell 50 large
toasters. You know the large toasters are inferior products and have been selling the small
toasters to your customers, instead. To keep your job, you must violate your conscience and
recommend that your customers buy the large toasters. Your boss is engaging in unethical
behavior by forcing you to do something you know is wrong, and also risking the ire and potential
loss of valuable customers to meet a product sales goal. He may be engaging in unethical conduct
because top management has forced him by threatening his job, too. Coercion is also the basis
for workplace sexual harassment and results in lawsuits. Unethical behavior often causes more
unethical behavior.

Unlawful Conduct

Padding an expense account with non-business expenses, raiding the supply cabinet to take
home pens and notebooks and passing around unregistered or counterfeit software are
examples of unlawful conduct in the workplace. The person who steals from the company by
padding her expense account or taking supplies for personal use risks losing her job. If a company
decides to overlook such theft on the basis of maintaining employee morale by not firing a
popular employee, other employees will also steal so they can feel they are getting the same deal
as their co-worker. Passing around counterfeit software, if discovered by the manufacturer, can
cost the company through lawsuits and fines.

Disregard of Company Policy

An employer is understandably concerned about avoiding lawsuits and angry customers because
those things negatively affect profitability. Most employers clearly state company policies against
deception, coercion and illegal activities. They also strive to convey an image of trustworthiness
to their customers and employees. Corporate trustworthiness helps retain customers and valued
employees, and the loss of either also negatively affects company profitability. To disregard

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company policy is unethical because it has the potential to harm the company and other
employees.

TOPIC QUIZ

I. Define what business ethics is and identify how it is relevant to your business
II. Discuss the ethical considerations and commitments in the formulation of a

transparent and clear policy on business ethics
III. Analyse philosophical approaches to professional and ethical behaviour against own

beliefs so as to determine an appropriate framework of behaviour and practice
IV. Discuss the value of regularly enforcing and monitoring standards regarding gifts and

entertainment
V. Describe various strategies that can improve the code of ethics and its implementation

in an organisation
VI. Identify the benefits of public disclosure to the individual, the organisation and the

community at large
VII. Discuss how to ensure ethical behaviour and describe the characteristics of an ethical

manager
VIII. Identify unethical behaviour and discuss preventative measures to address unethical

behaviour
IX. Evaluate a code of ethics as applicable to the operational environment against

internationally accepted principles for codes of ethics and gaps

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REFERRENCE

J. Gattorna: Living Supply Chains. How to Mobilize the Enterprise Around Delivering What Your
Customers Want. Prentice Hall, 2006, p. 2.
CSCMP Supply Chain Management Definitions, www.cscmp.org.
W.E. Hoover, E. Eloranta, J. Holmstrom, K. Huttunen: Managing the Demand- Supply Chain. Value
Innovations for Customer Satisfaction. John Wiley and Sons, New York 2001.
R. Cooper, R. Slagmulder: Supply Chain Development for the Lean Enterprise –
Interorganizational Cost Management. Productivity Press, Portland 1999, p. 10
K. Croxton, S. Garcia-Dastugue, D. Lambert, D. Rogers: The Supply Chain Management Process.
„International Journal of Logistics Management” 2001, Vol. 12, No. 2, p. 13-36.
Abdullah, A. B. (2011). Evaluating the Supply Chain Management System of Palestinian
companies (Doctoral dissertation, An-Najah National University).
Anderson, J. C., & Narus, J. A. (1990). A model of distributor firm and manufacturer firm working
partnerships. the Journal of Marketing, 42-58.
Arend, R. J., & Wisner, J. D. (2005). Small business and supply chain management: is there a fit?.
Journal of Business Venturing, 20(3), 403-436. Arshinder, Kanda,

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