Detecting unethical practices at suppliers factories:the

monitoring and compliance challenges

Case Presentation

PRESENTATION OUTLINE

1. Introduction of the case

2. Porters Five forces model Analysis

3. SWOT analysis

4. Findings and Recommendation

STRATEGIC PROFILE

1• Factories in China were in spotlight – China factories export to United

States and European Union

2• Substandard wages, long working hours, poor working conditions,

deficiencies in safety & health conditions, child labor.

3• Accusation focused on firms that contract local plants instead of global

corporations with own off-shores factories.

4• Criticism by human rights activists tarnish firm’s reputation.

5• Efforts taken to counter criticism includes implementation of supplier’s

code of conduct.

6• Firms in scrutiny: Walmart & Nike

5

• The nation's number-one retailer. • Walmart Supercentre - redefined convenience and one-

stop shopping, Every Day Low Prices went international• In 1992, Walmart employed 371,000 associates in 1,928

stores and clubs.• In 2000, Walmart.com was founded, allowing U.S.

customers to shop online. • In 2012, Walmart celebrated 50 years of helping people

save money so they can live better. • The company employs 2.2 million associates worldwide

and serves 200 million customers each week at more than 10,000 stores in 27 countries

Walmart

Overview of Compnay

Nike : Nike's Code of Conduct for Its Suppliers and Contract Manufacturers

1. rights of all employees,2. Minimizing impact on the environment3. safe and healthy work place4. Ensuring the health and well-being of all employees

> Forced Labor > Child Labor

> Compensation

> Benefits

> Hours of Work/Overtime

> Environment, Safety and Health (ES&H)

> Documentation and Inspection

Nike's System for Monitoring ContractManufacturers

Basic monitoring or SHAPE inspections:factory 's overall compliance performance,including environment, safety, and health. SHAPE audits on each active factory each year,

In -depth M-Audits: deeper measure of the working conditions within contract factories.

MAV Audits: focused on findingroot causes of noncompliance issues that mostimpacted workers, specifically work hours,Wages/benefits, grievance systems, and freedom of associations. root cause identification42 MAV audits through year

Independent external monitoring: member of the Fair Labor Association (FLA), conducted independent audits of factories

The FLA applied a common set ofcompliance standards in all of its factory audits.

Rivalry among competing sellers:

Medium – High- Competitors have similar

sizes.- Industry growth is slow.- Switching cost for buyer

is low- Exit barriers are high

Power of Substitutes: Low- Medium- usually hypermarkets offer different products in one

location.- Consumer switching costs are low.

Prices and quality of substitute products are very competitive

Buyers’ Bargaining Power : Low

- A large number of customers.

-Customers usually make small purchases.

New Entrance : Medium pressure-Economies of scale.

-Entry barriers are relatively high-Wal-Mart has cost advantage over other competitors

- Existing industry members are looking to expand their market

Suppliers’ Bargaining Suppliers : Low

-Wal-Mart purchases huge quantities of

products-Low switching costs from one supplier to

another.- Many suppliers

Porters 5 force Model: Walmart

Rivalry among competing sellers:

Medium – High-Competitors were also engaged in aggressive differentiation strategy

-Switching cost is low for buyers

Power of Substitutes: Low- substitutes for athletic footwear products are

low

Buyers’ Bargaining

Power : Low- A large number of

customers.-Customers usually

make small purchases.-Sellers’ product are

differentiatedNew Entrance : Low pressure

-Economies of scale.-Entry barriers are relatively high

-access to athletic shoes distribution channels is a moderate to high to

-many athletic shoes customers are brand loyal

Suppliers’ Bargaining

Suppliers : Low

-many suppliers in this industry- very little

differentiation among the suppliers- Low switching cost

Porters 5 force Model: Nike

StrengthNature of the organization get

introduced to the public with their very own codes.

Ability of converting criticisms into competitive advantage.

The forming way of code of conducts that inspires their employees to act ethically.

Weakness Emergence of pricing pressure for

the contract factories. Compliance with the codes of

conducts are costly. Use of multiple codes creates Audit

Fatigue. Ineffective Codes.

OpportunitiesBuilding a strong relationship

with the blend of trust, honesty, team work and respect for each other.

Driving of CSR activities that will lead to economic benefits.

ThreatsIncur of high cost will make

customers to switch to the substitute products I the market.

Reputation can be at risk for the criticism by human rights activists.

Loss of good vendors.

SWOT Analysis

Unethical Practices at Supplier Factories

Forced & Child labor

Inadequate

occupational

safety

overtime pay

violationsUnsafe & unhealth

y working

condition

wage discrimina

tion

Underpayment of

minimum wages

Findings…Foreign manufacturers are deliberately deceiving

inspection teams and concealing violations of supplier codes of conduct through

- Maintaining two sets of books- Hiding the use of underage workers and unsafe work practices- Meeting requirements by secretly shifting production to

subcontractor- Coaching managers and employees on answering questions

posed by audit team members

Findings…

Strapping pressures from importers to keep prices low give suppliers a big incentive to cheat on their compliance with labor standards.

Difficult for importers to maintain & monitor the foreign manufacturer’s falsification records.

Downward pressure on prices made it financially difficult for foreign manufacturers to improve working conditions and workers compensation & benefits.

Recommendations Audits need to conduct both by customer companies and industry

alliance groups and help suppliers comply with the expected standards rather than to impose penalties for violations and permanently cutting off purchases.

Increasing the number of audits and conducting unannounced audits of factories across the world that supplied its members and affiliates had also becoming more familiar with the factories and their workers & keep suppliers alert to follow the code of conduct.

Companies need to be more conscious on raise the order price and lengthen turn-over time so as to reflect reasonable labor costs.

Recommendations Provide workers at its supplier factories with labor rights

training programs, and establish worker representation through democratic elections to protect workers’ legal rights, health and safety, and overall welfare.

Distributing the code to all of its contract factories in directed them to post the code in a visible place and in the appropriate local language so that suppliers would comply with companies’ expected standard.

The code had been periodically evaluated and modified based on experience and feedback from the ethical sourcing community over the years.

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