Principles of Supply Chain Management (5e)

Chapter 4
ETHICAL AND
SUSTAINABLE SOURCING

Prepared by Cynthia Wisner, MBA

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
 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

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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)

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
• 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
• Assessing and Improving the Firm’s Sourcing Function

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 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

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 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

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 3

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
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 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

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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)

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 - new software applications, or new
robotics systems
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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)

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

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 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
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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 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

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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)

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

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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)

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

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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)

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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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)

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

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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)

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.
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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)

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

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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)

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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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)

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

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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)

Assessing & Improving Firm’s Sourcing Function

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
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
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)

End of Chapter 4

© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website or school-approved learning management system for classroom use.
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