Principles of Supply Chain Management (5e)

Chapter 4
ETHICAL AND
SUSTAINABLE SOURCING

Prepared by Cynthia Wisner, MBA

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 Principles of Supply Chain Management (5e)

CHAPTER 4
LEARNING OBJECTIVES, PART 1
You should be able to –
• Understand and appreciate the trends in ethical and sustainable
sourcing
• Define and describe the terms used in ethical and sustainable
sourcing
• Describe the differences in ethical and sustainable sourcing
• Understand how ethical and sustainable strategies are
developed and implemented

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 Principles of Supply Chain Management (5e)

LEARNING OBJECTIVES, Part 2

You should be able to:

• Understand the use of environmental supplier
certifications
• Discuss the benefits of strategic supplier alliances
• Describe how and why sourcing practices are
benchmarked
• Discuss why firms would want to assess their sourcing
capabilities
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 Principles of Supply Chain Management (5e)

CHAPTER OUTLINE
• Introduction
• Ethical and Sustainable Sourcing Defined
• Developing Ethical and Sustainable Sourcing Strategies
• Ethical and Sustainable Sourcing Initiatives
• Early Supplier Involvement
• Strategic Alliance Development
• Rewarding Supplier Performance
• Benchmarking Successful Sourcing Practices
• Assessing and Improving the Firm’s Sourcing Function

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 Principles of Supply Chain Management (5e)

Introduction, Part 1
• Purchasing personnel impact their companies’ costs and
reputations through ethical and sustainable sourcing practices
• World events have impacted supply chain strategies

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 Principles of Supply Chain Management (5e)

Introduction, Part 2

Modern Goals Include:

Reducing Improving
• Dependencies on foreign • Quality
suppliers • Customer service
• Delivery cycle times • Ethical reputations
• Carbon footprints

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 Principles of Supply Chain Management (5e)

Introduction, Part 3

Strategic sourcing - managing the firm’s external

resources to support firm’s long term goals.
Drivers of Strategic Sourcing
• Development of ethical & sustainable sourcing
initiatives
• Managing and improving supplier relationships &
capabilities
• Identification and selection of environmentally &
socially conscious supplier
• Monitoring & rewarding supplier performance

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 1

▪ Business Ethics - the application of ethical

principles to business situations
▪ Utilitarianism - an ethical act creates the
greatest good for the greatest number of people
▪ Rights and duties – a theory stating that some
actions are right in themselves without regard for
the consequences

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 2

▪ Corporate Social Responsibility is the

practice of business ethics

▪ Ethical Sourcing is that which attempts to

take into account the public consequences of
organizational buying or bring about positive
social change through organizational buying
behavior

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 3

Ethical sourcing practices include –

• Promoting diversity by intentionally buying from small
firms, ethnic minority businesses, and women-owned
enterprises
• Discontinuing purchases from firms that use child labor
or other unacceptable labor practices
• Buying from firms in underdeveloped nations.

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otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 4

Ethical Policies should include –

• Determining where all purchased goods

originated and how they were made
• Knowledge of the suppliers’ workplace principles
• Inclusion of ethics as a performance rating
• Independent verification of vendor compliance
• Report of supplier compliance to stakeholders
• Provision of detailed ethical sourcing
expectations to suppliers

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 5

• Ethical Trading Initiative (ETI) - an alliance of

organizations seeking to take responsibility for
improving working conditions and agreeing to
implement the ETI Base Code
• Fair trade product - manufactured or grown by
a disadvantaged producer in a developing country
that receives a fair price for their goods

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 6

Table 4.1 The Ethical Trading Initiative’s Base Code
Clauses Abbreviated Explanations Clauses Abbreviated Explanations

1. Employment is No forced, bonded or 6. Working hours are not excessive Working hours comply with
freely chosen involuntary prison labor. national laws and benchmark
industry standards
2. Freedom of Workers have the right to 7. No discrimination is practiced No discrimination in hiring,
association and the join trade unions and to compensation, access to
right to collective bargain collectively training, promotion, termination
bargaining are or retirement
respected

3. Working conditions Accommodations shall be 8. Regular employment is provided Work performed must be on the
are safe and clean, safe and meet the basis of recognized employment
hygienic basic needs of workers relationships established
through national law and
practice

4. Child labor shall not Persons under 18 shall not 9. No harsh or inhumane treatment Physical abuse or discipline, the
be used be employed at night or in is allowed threat of physical abuse, sexual
hazardous conditions or other harassment or other
forms of intimidation shall be
prohibited

5. Living wages are Wages should be enough to Empty cell Empty cell
paid meet basic needs

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Strategies

• Sustainable Sourcing should focus on
• Respecting human rights & reducing poverty by creating profitable trading
• Working within the finite limits of the planet’s resources
• Moving towards a low carbon economy

• Green purchasing ensures products or materials meet

environmental objectives e.g. waste reduction, hazardous material
elimination, recycling, remanufacturing, and material reuse
• Sustainability - ability to meet current needs of the supply chain
without hindering the ability to meet future needs in terms of economic,
environmental, and social challenges
• Supports the three P’s - people, planet, and profit

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 7

Sustainable Sourcing should seek to –

• Grow revenues
▪ New sustainable product introduction
• Reduce costs
▪ Increase resource efficiencies
• Manage risk
▪ Link brand to social consciousness of consumer
• Build intangible assets
▪ Build social and environmental responsibility

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Sourcing Defined, Part 8

• Sustainability is moving from voluntary to legally

mandated initiatives
• Three-quarters of U.S. companies on the S&P
500 issued some type of corporate sustainability
report in 2014
• European Union requirements for sustainability
reporting went into effect in 2017

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 Principles of Supply Chain Management (5e)

DEVELOPING ETHICAL AND SUSTAINABLE

SOURCING STRATEGIES, Part 1
Functional Products - MRO items & other
commonly low profit margins with relatively
stable demands & high levels of competition
Examples - equipment maintenance & office
cleaning products
Innovative Products - characterized by short
product life cycles, volatile demand, high profit
margins, & relatively less competition
Examples - Tesla’s Model S automobile, new
software applications, or new robotics systems

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 Principles of Supply Chain Management (5e)

DEVELOPING ETHICAL AND SUSTAINABLE

SOURCING STRATEGIES, Part 2
Framework for ethical and sustainable
sourcing strategy development –
Step 1 – Establish corporate ethical and sustainable sourcing
policies
Step 2 – Train purchasing staff and implement policies
Step 3 – Prioritize items based upon ethical and sustainability
opportunities and ease of implementation
Step 4 – Develop performance measurement system
Step 5 – Monitor progress and make improvements. Increase
use of green and fair trade products
Step 6 – Expand focus to include other departments

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Supplier Certification Programs,

Part 1
Supplier certification programs are used to
identify strategic supplier alliance
candidates

Strategic alliances - more formalized type of

collaborative relationship involving
- commitments to long-term cooperation
and trust
- shared benefits and costs
- joint problem solving
- continuous improvement
- information sharing

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 Principles of Supply Chain Management (5e)

Ethical and Sustainable Supplier Certification Programs,

Part 2
Firms use in-house formal certification
programs, & most require ISO 9000 /
14000 or similar certifications as part of
the certification process

Ethical and environmental

certifications - used by various
organizations to identify rogue suppliers
and suppliers who fail to certify
according to ethical requirements

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 Principles of Supply Chain Management (5e)

Supply Base Rationalization Programs

Supply base rationalization (AKA supply base
reduction or supply base optimization) – firms
seek to reduce purchases from poor-performing
suppliers while concentrating purchases among their
top-performing suppliers

Buyer-supplier partnerships are easier with a

rationalized supply base & result in –
• Reduced purchase prices
• Fewer supplier management problems
• Closer & more frequent interaction between buyer & supplier
• Greater levels of quality & delivery reliability

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 Principles of Supply Chain Management (5e)

Outsourcing Products and Services

Outsourcing – firms purchase materials or services
instead of producing them in-house
Allows a firm to -
• Concentrate on core business activities
• Reach its sustainability goals

The Supplier Ethical Data Exchange (Sedex)

• Focuses on responsible and ethical business practices
• Helps reduce risks associated with outsourcing

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 Principles of Supply Chain Management (5e)

Early Supplier Involvement, Part 1

Early supplier involvement (ESI) highly effective supply
chain techniques where key suppliers become more involved
in the internal operations of their customer, which may include
• Managing inventories at their customers’ points of use
• Participating in their customers’ new product & process
design processes
Value engineering activities help the firm to reduce cost,
improve quality & reduce new product development time

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 Principles of Supply Chain Management (5e)

Early Supplier Involvement, Part 2

Vendor managed inventory (VMI) –
Suppliers manage buyer inventories to reduce
inventory carrying costs & avoid stockouts for buyer
From the buyer-firm’s perspective –
• Supplier tracks inventories
• Determines delivery schedules and order
quantities
From the supplier’s perspective –
• Avoids ill-advised customer orders
• Supplier decides inventory set up & shipments
• Opportunity for supplier to educate customers
about other products

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 Principles of Supply Chain Management (5e)

Early Supplier Involvement, Part 3

Co-managed inventories - buyer and supplier reach

an agreement regarding how information is shared, order
quantities, when order is generated and delivery timing
• Preferable for high value items
• When customer desires more input into the day-to-
day supply activities
• When customer is still assessing a supplier’s ability
to take full responsibility

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 Principles of Supply Chain Management (5e)

Strategic Alliance Development, Part 1

Strategic alliance development - refers to improving the
capabilities of key trading partners

Strategic supplier alliances result in

• Better market penetration
• Access to new technologies & knowledge
• Better service

Alliance development eventually extends to a firm’s second-

tier suppliers, as the firm’s key suppliers begin to form their
own alliances.

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 Principles of Supply Chain Management (5e)

Strategic Alliance Development, Part 2

Table 4.4 Maintaining a Successful Strategic Alliance Program
Steps Discussion

1. Determine the key strategic Can be based on business units, geographic areas,
parameters to organize industries, key alliance partners, or combinations of
around. these.
2. Facilitate the dissemination Alliance management and development information
of information. should be centrally controlled and available through
internal Web sites, pamphlets, and workshops.

3. Elevate the importance of Assign a director or vice president of alliance programs,

the strategic alliance program. reporting to top management. Establish consistent
procedures for alliance programs throughout the
organization.
4. Provide continuous Management can increase the value and acceptance of
evaluation of alliance alliance programs when successes are made visible to
performance, visibility, and the firm’s lower level managers and employees. Alliance
support. management requires resources and ongoing
reevaluation.
5. Reward suppliers as Rewards typically include increased business and other
performance merits. nonmonetary awards.

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 Principles of Supply Chain Management (5e)

Strategic Alliance Development, Part 3

For successful strategic alliance programs:
• Organize a program that cuts across functional
boundaries
• Disseminate program information quickly & effectively
• Acquire the necessary resources
• Create program acceptance by the line managers &
employees
• Achieve concrete, measurable success
• Reward supplier performance

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 Principles of Supply Chain Management (5e)

Negotiating Win-Win Strategic Alliance

Agreements, Part 1
Collaborative negotiations (aka integrative
negotiations) –
Both sides work together to maximize the
outcome or create a joint optimal result
▪ Requires open discussions and a free-flow of
information between parties

Distributive negotiations –
Refers to a process that leads to self-interested,
one-sided outcome

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 Principles of Supply Chain Management (5e)

Negotiating Win-Win Strategic Alliance

Agreements, Part 2
Steps Description
1. Build preparation Gain an understanding of both parties’ interests;
process brainstorm value-maximizing solutions; identify
objective criteria to evaluate fairness of agreement.

2. Develop Review previous negotiations to catalogue

negotiation standards, practices, precedents, metrics, creative
database solutions used, and lessons learned.

3. Design Create an environment to work together to create a

negotiation launch shared vocabulary, build working relationships, and
process map out a shared decision-making process.
4. Institute feedback Create process to provide feedback to negotiating
mechanism teams and capture lessons learned.

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 Principles of Supply Chain Management (5e)

Rewarding Supplier Performance

Rewarding suppliers provides an incentive to
surpass performance goals

Punishment is a negative reward, may be to reduce

future business; or a billback penalty equal to the
incremental costs resulting from a late delivery or poor
quality

Strategic supplier agreements can reward

suppliers by allowing –
• A share of the cost reductions
• More business and/or longer contracts
• Access to in-house training seminars & other resources
• Company & public recognition

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 Principles of Supply Chain Management (5e)

Benchmarking Successful Sourcing Practices,

Part 1
Benchmarking – measuring what other
businesses do best and matching their
performance

Examples of obtaining benchmarking data

• Using surveys distributed to customers and
suppliers
• Discussing sourcing strategies with colleagues
• Collecting published trade information

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 Principles of Supply Chain Management (5e)

Benchmarking Successful Sourcing Practices, Part 2

Common Successful Sourcing Practices
• Use of a central database to access information on
parts, suppliers, lead times
• Software applications for sharing information with
suppliers
• Use of the Internet for supplier searches;
• Alliances with key suppliers for specific components
• Reducing the firm’s supply base

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 Principles of Supply Chain Management (5e)

Benchmarking Successful Sourcing Practices, Part 3

Common Successful Sourcing Practices
• Supplier certification & eliminating need for incoming
quality checks
• Involving suppliers in research & development
processes of new products
• Continuous measurement of supplier performance, &
establishing supplier improvement targets
• Creating an ethical and sustainable supply chain

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 Principles of Supply Chain Management (5e)

Assessing & Improving the Firm’s Sourcing

Function, Part 1
The sourcing function is one of the most value-
enhancing functions in any organization

• Performance is periodically monitored against set

standards, goals, and/or industry benchmarks

• Surveys or audits can be administered as self-

assessments as part of the evaluation process

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 Principles of Supply Chain Management (5e)

Assessing & Improving Firm’s Sourcing Function, Part 2

Assessment criteria include –
1. Participating/leading 8. Creating strategic supplier
multifunctional teams alliances
2. Participate in value engineering 9. Contribute to new product
efforts development
3. Finding/evaluating ethical and 10. Initiate supplier cost
sustainable suppliers reduction programs
4. Optimize supply base 11. Improvement of purchased
5. Managing local, regional and product & service quality
global suppliers 12. Improve time to market
6. Early supplier involvement 13. Maintain internal
initiatives cooperative relationships
7. Further supplier integration
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 Principles of Supply Chain Management (5e)

Assessing & Improving Firm’s Purchasing Function

Purchasing Professionals Skill Set Requirements

Top three responsibilities Cost-controlling activities

• Negotiating contracts • Reducing supply base
• Selecting suppliers • Negotiating global
• Managing supplier agreements
relationships • Adopting new purchasing
technologies

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 Principles of Supply Chain Management (5e)

End of Chapter 4

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otherwise on a password-protected website or school-approved learning management system for classroom use.
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