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A1 Ethical supply management

A) Goal of the indicator

The goal of this indicator is to get enterprises to take responsibility for the upstream steps in the added-value chain and to only select Common-Good-oriented suppliers. Common-Good-oriented enterprises actively address problems concerning the products/services they use and attempt to minimize resource consumption on the whole as well as its social and ecological consequences by taking active measures extending back “to the cradle.” Depending on the goods procured, quite different aspects can prove relevant (see background as well as implementation). Such enterprises strive for long-term cooperation with their suppliers and service partners while actively addressing aspects concerning the Common Good in processes which are as cooperative as possible. Competitors and external stakeholders (such as NGOs, multi-stakeholder initiatives) can also be involved in such processes (see also D2 and D5). Active engagement with this issue as well as actual procurement of products and services (P/S) with a higher social and ecological value are both rewarded. Diverse aspects can be taken into consideration here:

  • Working conditions: income which secures livelihood, health and safety, employees’ rights etc.
  • Ecological aspects: ecological quality of input materials used as compared to alternatives, use of best technology available, energy carriers used for production, avoidance of hazardous substances and emissions in air/soil/water etc.
  • Social effects on other stakeholders: direct impact on residents due to toxic substances, conflicts over raw materials, corruption, violation of human rights, violation of applicable laws, controversial entrepreneurial policies, exploitation of market power, etc.
  • Availability and existence of alternatives: Avoidance, long service life, reusable goods, alternative raw materials, products/services certified according to social and ecological criteria, etc.

 

Mere adherence to ILO core labour standards (see: http://de.wikipedia.org/wiki/Kernarbeitsnorm), even though these continue to be violated in some sectors and regions, does not sufficiently meet the demand for a socially and ecologically sustainable economy. In addition to taking account of negative effects, the contents of the Common Good Matrix serve as a good tool for comprehensive reflection on positive elements of relationships to suppliers. Organic apples from regional, solidarity-based agricultural enterprises will most likely prove more consistent with societal notions of sustainable business (fair distribution of added value, working conditions, etc.) than organic apples delivered by a grocery store chain. In many cases using goods mutually, reusing them or not requiring them in the first place should take priority over selection of efficient new products.

 B) Prompt questions

  • Which essential products and services are procured by the company (energy, raw materials, components, capital goods, services, merchandise, etc.) and how high is the proportion to overall procurements? What is the regional origin of key suppliers and who are they?
  • Which social and ecological risks (working conditions, ecological effects) are evaluated systematically along the entire supply chain? Which social and ecological criteria (working standards, ecological parameters, etc.) are applied for selection? How are these criteria ascertained and examined (certification, questionnaires, internal/external audit)? Do cooperation programs with suppliers exist which address social and ecological aspects?
  • Which proportion of goods and services is subject to consideration of which social and ecological criteria? To what extent are labels with a social and/or ecological orientation or comparable external forms of certification employed and if yes, which ones? Do any superior alternatives exist? If yes, which ones?

C) Evaluation table

 

Sub-Indicator

First steps (10%)

Advanced

(11-30%)

Experienced

(31-60%)

Exemplary

(61-100%)

Regional, ecological and social aspects / superior alternatives are considered

 

Relevance: high

… selectively in cases of products with negative social and/or ecological effects (eco-power)

… in regard to several key P/S

… in regard to the majority of key P/S …

 

+ in comparison very low consumption or clear reduction of critical materials with no superior alternative (see FAQs)

… in regard to all key procured P/S …

 

+ innovative solutions for avoidance of critical materials with no superior alternative

Active examination of impact of procured P/S and processes to ensure verification and determine the form and extent thereof

 

Relevance: moderate

Internal examination through actively sought information on the issue

 

Integration of social and ecological aspects into contractual matters (Code of Conduct  / Code of Ethics)

Internal audit in cases of hazards and key suppliers

 

Trainings (seminars, workshops, time budgets for expert discussions) of all employees in the purchasing process

Routine evaluation of social/ecological effects and  alternatives

 

Guaranteed by independent audit (for ex. P/S certified in accordance with social/ecol. labels, cooperation with NGOs)

Multi-stakeholder initiative (for ex. with market partners, NGOs etc.) in regard to social and ecological aspects

Basic structural conditions for fair pricing

 

Relevance: low

No purely price-driven supply processes (among others auctions, tendering processes)

 

No bonus system for purchasers dependent on purchasing price

Long-term, cooperative relationships are given preference over changing, cost-oriented ones

Evaluation of purchasers’ behaviour through routine discussions with employees focusing on the challenges posed by ethical supply

Innovative structures in supply management (for ex. participation in alternative currency concepts, economic approaches of solidarity-based  agriculture, etc.)

D) Special aspects regarding evaluation

Market power: with increasing market power (which often correlates with the size of the enterprise), the importance of fair pricing also increases since this is accompanied by a stronger influence on how the process is designed.

Size of enterprise: with increasing size, the demand for institutionalization and quality of management increases too.

Regional risks: ecological aspects tend to be of greater significance. The larger the amount of goodswhich are purchased from countries /sectors with low social standards, the stronger social aspects must be weighted.

Sector aspects:

Although it is impossible to make generalizations, one must differentiate the approaches taken by production, trade and service provider enterprises. Categorization depends on differences regarding the focus which is placed on supply such as classic raw and auxiliary materials (for ex. ore and coal in the case of a steel manufacturer; a large number of components in the case of a laptop manufacturer), sales and distribution of processed products in trade (for ex. foodstuffs sold by grocery retailers, electronic devices sold by chain stores) and other operating resources (IT; office equipment, operations buildings, machines, etc.). In addition, the capital goods used by the enterprise in question (factories, company cars, IT-hardware, etc.) are relevant.

—   Production enterprises: production enterprises are often characterized by close collaboration with suppliers of key raw materials. The existence of certified products is lower than on the end-consumer market and possibilities for improvement vary depending on the raw material in question (direct cooperation with suppliers in regard to social and ecological aspects; ethics audits by third parties, etc.).

—   Trade: trade usually involves a wide assortment of diverse products, the majority of which are usually procured from a large number of suppliers. For this reason, a systematic approach to trade is crucial (the key question being: which social/ecological criteria are applied and assessed when choosing which commercial goods?). Points of orientation vary from sector to sector. In the foodstuffs industry it is already possible to make use of a large number of existing labelling processes, for example (Bio, Demeter, Fair Trade etc.), whereas in other areas it is more effective to take an individual approach (catalogue of criteria, audits etc.).

—   Service providers (for ex. architectural agencies): below you will find several examples of typical supply processes used by service providers along with possible points of orientation: use of space (for ex. energy efficiency on the basis of an energy performance certificate and energy index kwh/m²), electricity (eco-power), heat (ecological quality of the energy carrier), social risks (for ex. a substantial proportion of natural gas in Austria and Germany is supplied by the Gazprom Group, which should be viewed quite critically from an ethical perspective; hence even small offices in Vienna and Berlin belong to the value-added chain of a very critical sector), IT-hardware (used > newly purchased, above-average service life, energy efficiency), cleaning and other personnel services (working conditions of providers, among them wages etc.), IT-services (GreenHosting), mobility services (avoidance > selection of soft transportation), paper (eco-label, recycling, FSC-certification, etc.), furnishings (used > newly purchased); vehicle fleet (avoidance > CarSharing > purchase of energy-efficient vehicles).

Differentiation from other indicators

A1 from D3/D4/E1: differentiation of ethical supply management from indicators concerning product design and effect is not purposeful since the procured products/services are part of the overall life cycle. The effect of A1 on these indicators depends on the relevance of upstream added-value steps (for ex. in the case of a purely trade-based enterprise it is very high since the majority of the effects are generated on the supplier side, whereas in the case of an architect it would be lower since the goods employed – classic office equipment – are solely used as a tool for planned houses).

A1 from E3: here differentiation depends on which ecological effects can be achieved at which points of the added-value chain through ethical supply (see FAQ: company car).

A1 from C3/D3/E3: a diagram pertaining to this will be placed on Wikipedia in a few weeks.

FAQs regarding evaluation

Procurement of information: where can you receive information on the ethical quality of suppliers? According to which criteria/certificates/labels can you distinguish whether the supplier in question is unobjectionable or not? Answer: this depends on the specific nature of the products or services. General background information on products/services can usually be found on the Internet quite quickly (for ex. ecological aspects on websites of environmental NGOs). For assessment of labels it can prove helpful to rely on information provided by independent initiatives (for ex. http://www.label-online.de/: label database with background information and evaluation; “Ökotest” etc.). In cases where there is close contact to suppliers, gathering information from them directly can be an effective approach.

The role of monetary aspects in the Economy for the Common Good: monetary assessments sometimes counteract the purpose of the Economy for the Common Good. Purchasing behaviour which is exclusively oriented towards prices can lead to a better evaluation. Would it not be more purposeful to eliminate monetary elements from the Economy for the Common Good altogether? (Question raised at a peer-group meeting in Stuttgart) Answer: the monetary level is applied here for purely ‘pragmatic’ reasons so as to roughly estimate the relevance of procured goods or the extent to which goods are traded in various areas. An alternative approach would be to select a physical unit of measure (for ex. weight, as is done for material and material-flow analyses). It is important to make a rough ‘quantification’ so as to filter out the essential procured goods. (Knowing whether 1 Euro is spent on pencils in one year or 500 Euros on paper usually allows you to conclude which of the two goods will affect consideration of social or ecological aspects more). This data is available in monetary terms (financial sheet, accounting) and it can be used for initial examination of the topic. Needless to say, this procedure should not be reduced to one single unit (be it monetary, physical or otherwise etc.); it should also be possible to take the sector or the framework conditions of the enterprise into account. The risk of solely price-oriented purchasing practises should not result in a positive evaluation on the basis of explicit social and ecological supply criteria.

Essentiality: what sum/which proportion of overall volume must be given to consider P/S essential? (bakeries: grain or ovens, etc.) Where does essentiality begin? Answer: it is difficult to find a general answer to this question; the ultimate responsibility lies with the auditors or process facilitators. A large number of very small-scale goods flows exist (both monetary and material) which are highly relevant (for ex. Tantal in the telecommunications industry; many rare metals and non-metallic raw materials).Thus a ‘reductionist version’ based solely on monetary size should be viewed critically. The monetary basis is merely a point of departure; the structure of ABC goods could serve as orientation (For ABC analyses, 80 %, 15 % and 5 % for A-, B- and C-items respectively or similar parameters are often suggested). This should be supplemented by an analysis of potential hazardous goods (in particular regarding the vanishingly small rest).

Weighting of individual sub-indicators: differentiation between ecological and social aspects is not measureable or categorizable here since both key aspects are incorporated into one criterion. How should we approach weighting? Can an auditor change a weighting? On what basis should the enterprise perform weightings? Answer: the auditor should peruse the supply portfolio of the enterprise and perform weightings within the framework of the proposed limits as he/she deems best, depending on what risks are associated with social or ecological aspects (see above).

Regionality: our enterprise procures goods and services almost exclusively from regional suppliers and providers. There are hardly any risks involved. Is this aspect relevant for our enterprise? (feedback from pioneer enterprises) Answer: regionally procured products and services are connected to advance services as well (for ex. regional cabinet makers buy their raw materials from somewhere else); potential effects often merely lie farther upstream in the value-added chain. In the German-speaking region, there are still many sectors with precarious working conditions. Thus negative effects cannot be ruled out on the basis of regionality alone (this applies to such sectors as the construction industry, human resources, trade etc.).

Fixed assets (year of acquisition – depreciation): how are fixed assets evaluated? Economy for the Common Good aspects certainly play a role here as well. Use of equipment beyond the period of depreciation results in avoidance of waste. Social/ecological effects should be relevant for decision-making processes when acquisitions are made as well. On what basis are acquisitions taken into account: only during the year of acquisition, the period of depreciation or not at all? (Question raised at a peer-group meeting in Stuttgart). Answer: of course acquisitions are taken into account as part of the “procured operational resources.” For questions concerning year of acquisition and/or period of depreciation, no rule has been laid down yet. It is difficult to decide in favour of A or B. The decision to purchase a certain product from a certain supplier is made in the year of the acquisition process; thus this period of time offers the best possibility for taking social and ecological aspects into account. But if one focuses on the period of acquisition alone, the picture of the “operational resources” employed by an enterprise is distorted. Depreciation elicits a more balanced picture of the “social and ecological backpack” of past procurement processes. 

Reduction in cases of critical materials with no superior alternative:  what does the concept “no superior alternative” mean here? Answer: this refers to materials which cannot be replaced by other ecologically/socially/ethically more sustainable materials in a technically or economically purposeful way. Let us take Tantal as an example, a conflict resource which plays a key role in the telecommunications industry and is irreplaceable; there is no ecologically/socially superior alternative. This sector has convened and is attempting to take a first step towards producing “conflict-free” Tantal through processes in the procurement chain. The dilemma is that we as a society require enormous amounts of Tantal. The best thing would be to reduce the required amounts of this material (for ex.: forced extension of actual service life of mobile phones, research on use of secondary raw materials). From an ethical perspective, this would be more effective than merely securing conflict-free raw materials.

Company car: which category would evaluation of a company car fall under - A1, C3? Answer: this would fall under A1 (with the focus being on effects of upstream processes, for ex. manufacture) as well as D3 (with the focus being on aspects of use, for ex. consumption data). C3 exclusively takes getting to work into account, not business trips or similar aspects. Thus it would only play a marginal role if the acquisition were concretely connected to getting to work (for ex. if company cars are used for car sharing and car pooling).

E) Definitions and background

For many enterprises, interaction with and selection of suppliers and their products/services constitute a significant sphere of influence for increasing the Common Good. The spectrum of aspects which should be considered extends from positive elements (such as cooperation, long-term collaboration, mutual development of strategic solutions for social and ecological aspects) to social and ecological risks (for ex. employee rights, environmental impact) which – on the basis of price battles – are located in upstream added-value chains.

The division of labour which accompanies globalization and specialization creates complex structures in the added-value chains of the global economy (see, for example, the Südwind Studie: Die Wertschöpfungskette bei Handys).

For this reason, it is important for every protagonist to have or actively procure information on upstream creators of added value so as to be able to select them according to ethical principles. Everyone carries a responsibility for the entire supply chain. At present this perspective is only taken in regard to certain critical product divisions (such as coffee and cocoa). Specific raw materials (for ex. Coltan) and relatively complex products (for ex. electronic products) are gradually becoming the subject of economico-ethical discussions, however. Contrary to what one might initially presume, such risks are not limited to countries with low legal and/or practised standards since they are often found in Western countries too (for ex. as regards precarious working conditions in trade, cleaning companies, the manufacturing industry, the construction sector etc.). So far measures have often only been initiated due to the pressure of various stakeholders (among them civil society, consumers, unionists) as a reactive process, with active access to ethical aspects of supply management being limited to niche suppliers.

In addition to social and ecological factors, supply procedures are often influenced by competitive, price-driven purchasing processes. Employees in supply management are often encouraged to minimize purchase prices by being offered variable reward components. At present, framework conditions (for ex. advanced trainings in this area) and incentives for ethical supply management are not very widespread.

Video: Story of Stuff (general awareness information on the life cycle of products focusing on many aspects of the added-value chain)

F) Implementation

To assess ethical supply management one must start by systematically compiling a list of all procured products/services in terms of their monetary proportion to the company’s overall procurement volume and their origin in terms of region and enterprise. Then the social and ecological effects are to be evaluated and alternative courses of action conceptualized. In engaging in this process, it is helpful to categorize products/services according to their positive/negative social effect and risks. The following table sketches out only one of many possible forms of representation:

Depiction of procurement expenditures (raw materials, auxiliary materials, rent, electricity, fossil energy carriers etc.):

Procured product/service (% of overall expenditure)

Relevant social and ecological risks

Status quo + targets (factors taken into account)

Potential (superior alternatives, possibility for exerting influence etc.)

Raw materials A1 (approx. x% of expenditures) from enterprise XY

 

 

 

Raw materials A2 (approx. x% of expenditures) from enterprise XY

 

 

 

Electricity B1 (approx. x% of expenditures) from enterprise XY

 

 

 

List of most essential capital goods over the past years (machines, vehicle fleet, buildings, equipment, IT hardware etc.) and ethical aspects which were taken into account during acquisition.

Capital goods (% of overall investments)

Relevant social and ecological risks

Status quo + targets (factors taken into account)

Potential (superior) alternatives, possibilities for exerting influence, etc.)

Acquisition costs

 

 

 

Capital good A1 (approx. x% of expenditures for investments) from enterprise XY

 

 

 

Capital good A2 (approx. x% of expenditures for investments) from enterprise XY

 

 

 

For purposes of illustration, several potentially critical sectors will be depicted in detail below to raise awareness for relevant aspects:

  • Extraction of raw materials: massive violation of employee and human rights, heavy metal emissions and chemicals in water and soil, reduction of control which municipalities have over land and resources, loss of traditional sustenance of indigenous population etc.
  • Foodstuffs industry: effects of conventional agriculture (soil erosion, impact of pesticides, changes in use of land, loss of species diversity etc.), working conditions (wages, child labour, temporary contracts, detriments to health through use of pesticides, etc.)
  • Fossil energy carriers: political conflicts over resources, corruption, massive impact on eco-systems through release of fossil materials as a result of exploration and transport etc.
  • Electronics industry: massive violation of employee and human rights (concerning migrant workers, for ex.), hazardous substances (such as polyvinylchloride, brominated flame retardants, phthalates), conflict raw materials (for ex.: Coltan) etc.

G) Best practices

Depending on the sector, a large number of examples could be given, which is why the focus should be placed on labelling processes, multi-stakeholder initiatives and similar aspects (see H).

H) Bibliography/Links/Experts

  • The Self-Assessment-Tool[1] developed by the Ethical Trading Initiative provides a clear introduction to the topic, as does the publication “CSR in the Supply Chain”[2]. Other background information on ethical aspects is usually concentrated on sector-specific problems; thus it often has a specific focus. The EU Eco-Label for paper, for example, takes the ecological quality of raw materials into account along with the use of environmentally harmful and health-damaging materials while failing to consider which type of energy (renewable energy or electricity generated by coal or nuclear power plants) is used for which energy-intensive production processes. One must realize that labels and other forms of certification often only take partial consideration of ethical aspects. Moreover, the standards applied and the spectrum of aspects considered can vary substantially. Regarding the future development of the Matrix and preparation of background information, it will be necessary to take a closer look at potentials and risks on the sectoral level.
  • For an overview of social and/or ecologically oriented labels go to: http://www.bewusstkaufen.at/label-kategorien.php and http://www.label-online.de/
  • An overview of labels including background information and evaluations can be found on the following label database: http://www.label-online.de/
  • Brochure issued by the Werkstatt Ökonomie Heidelberg: Sozialveranstwortliche Beschaffung: Wegweiser für den Einstieg 
  • BS8903: the British “SustainableSupply” standard (fee-based)
  • Other certification processes: for ex. SA8000, AA1000
  •  Südwind-Kampagne Clean-IT: http://www.clean-it.at
  • Greenpeace Green IT: http://www.greenpeace.org/international/en/campaigns/climate-change/cool-it/Guide-to-Greener-Electronics/
  • Greenpeace Marktcheck: http://marktcheck.greenpeace.at/
  • Clean Clothes: http://www.cleanclothes.at/

[1]www.ethicaltrade.org/sites/default/files/resources/ETI%20Management%20benchmarks.pdf


[1] ETI Self Assessment Tool: www.ethicaltrade.org/sites/default/files/resources/ETI%20Management%20benchmarks.pdf

[2] Loew (2006): CSR in the Supply Chain; http://www.4sustainability.de/fileadmin/redakteur/bilder/Publikationen/Loew_2006_CSR_in_der_Supply-Chain.pdf

I) Appendix – Excursus

Currently none

Editor: Christian Loy, christian.loy@gmx.at