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Forced Labor, Traceability Rank as Top Supply Chain Risks for 2016

Human Rights 2016_from Verisk report

Labor—whether forced, child or otherwise unethical—has consistently been a risk factor facing global supply chains, but now that working conditions are under greater scrutiny, the topic tops the list of challenges for companies in 2016.

Transparency, the supply chain buzzword of sorts for the better part of the last couple years, ranks as the second greatest risk companies will face this year, as many simply lack it.

In its latest Human Rights Outlook 2016, risk analysis company Verisk Maplecroft said, “More public scrutiny and comparative benchmarking of how businesses respect workers’ condition in unmapped tiers of the supply chain is increasing the potential impact of human rights violations on brand reputation.”

There’s no hard date for when public scrutiny started escalating, but Bangladesh’s Tazreen and Rana Plaza tragedies have often been pointed to as catalysts for greater attention to compliance. And according to Verisk, that intense attention will tick up even further in 2016.

Some businesses may have developed tools to improve transparency in their supply chains but many still have little visibility of the chain’s more distant tiers and are therefore ill equipped to handle the kind of supplier scrutiny that could uncover labor violations like modern slavery.

Because public probing has become so commonplace, the general population now counts on a brand to be responsible for all workers who contribute to the making of its end products.

“Brand reputation is therefore tied to a broadening perception of responsibility that exposes businesses to increased risks, especially if like many, they have not yet managed to trace products to their point of origin and to map supply chains transparently,” according to the report.

Now brands need more than just audits to assess their supply chains—they also need offerings that empower workers to help themselves, rewards for ethical suppliers and collective action to meet challenges that are bigger than the business, like guaranteeing decent working conditions.

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The report outlined the major issues that will change the way businesses handle human rights in their supply chains in 2016.

Finding ethical labor brokers

It’s nearly impossible not to hire labor brokers to help with hiring, but handing over the task of recruiting undoubtedly leads to a certain level of uncertainty. Some brokers charge fees so excessive for their services that it essentially channels adults into forced labor conditions as workers often can’t pay—especially where migrant workers are concerned.

To combat this, companies will have to change brokers’ behavior by rewarding them for ethical recruitment. But for this to work, it will take coordination among governments, organizations, civil society and businesses.

“Although such action is emerging at the international and regional levels, these initiatives are in their infancy and require coordination and the investment of time and money by all parties,” the report noted. Businesses will have to prohibit suppliers from using brokers that charge those excessive fees and governments will have to sign bilateral agreements to better regulate the exchange of migrant workers.

But to monitor the enforcement of the aforementioned, it’s going to take a high level of not just coordination, but traceability.

Achieving traceability

Transparency and traceability are necessary in today’s markets and a lack of either leaves companies vulnerable to major unethical supply chain happenings.

The first thing businesses have to get past is focusing only on Tier 1 suppliers. Tier 1 suppliers should be tapped immediately to help map the supply chain of sub-suppliers to improve visibility.

Also, as Verisk added, “Certifying critical suppliers in the supply chain helps to share responsibility for ensuring that products are produced by ethical methods.”

Moving beyond the audit

Audits are obviously still essential, but as the report explains, “The audit system is not keeping pace with the challenge of complex, global supply chains, and, “At best, workplace audits identify labor violations after they occur; they lead to improvement rarely, and only when combined with proactive business engagement.”

To do more than the audit, businesses will need to invest in new technologies, open dialogue and strong relationships. They’ll have to provide mobile phone surveys for workers, encourage dialogue between suppliers and unions, between businesses and suppliers, and workers will need to be trained on their rights so that they know when those rights are being violated.

Enhancing transparency with mandatory reporting

“In 2016, businesses will increasingly be required to publicly report on compliance with voluntary human rights standards,” according to the report.

Legislation in the U.S. and the UK requires that business report on their efforts to eliminate forced labor and human trafficking from supply chains, and this year, the EU will require companies to report on their due diligence regarding metals and minerals from conflict areas.

“Increased transparency will empower consumers and NGOs to put pressure on companies to promote ethical and responsible business activities,” the report noted. “While the financial penalties for non-reporting are negligible, reputational costs to major brands are high when they demonstrate lower commitment to addressing human rights compliance than that of their peers.”

Meeting living wage expectations

Paying workers enough to sustain a living—buy food, live somewhere decent by local standards and support their family—has been a problem most companies haven’t solved.

But, as Verisk analysts noted, “As the campaign for a living wage becomes more mainstream, business wage policies will increasingly be benchmarked against living costs.”

The campaign to get workers fair pay really took off in 2015 and companies like Marks and Spencer and H&M made big promises to get wages to a decent level for workers (though recent reports claim their workers’ wages are still woefully low).

There are manifold interpretations of what constitutes a living wage, which poses problems, though as attention to the topic has heightened, brands are starting to realize that sometimes complying with a country’s minimum wage doesn’t mean workers are earning enough to live.

“It is likely that 2016 will see increased scrutiny of wage practices, and the link to modern slavery may heighten companies’ vulnerability to reputational harm,” the report noted.