Beyond Tier 1: Why you should monitor your remote suppliers

Published
December 2016

Supply chains are getting increasingly complex in today’s ever-specializing world. Large corporations can have as many as 10 000 suppliers directly under contract, and those suppliers have their own suppliers as well. Even smaller companies deal with hundreds of firms in their supply chains. Keeping track of the standards these suppliers, and their suppliers, uphold might feel impossible. And is it really necessary?

There have been many scandals in recent years which exposed human rights abuses or environmental lapses in the supply chains of major brands. Think Nike and sweatshop labor, the textile factory collapse in Bangladesh, Apple and factory worker suicides. These scandals exposed grave human rights abuses, and cost millions to the affected brands in reputational damage, lost sales, and occasionally, product recalls. Sometimes, like in the case of Apple and Nike, the incidents happened at direct (tier 1) suppliers. But these days, the scandals often involve second, third or even fourth tier suppliers. This was the case in the Tesco horse meat scandal and the Walmart apparel in the collapsed factory in Bangladesh. Brands often didn’t even know that their tier 1 suppliers further outsourced their orders. But the public outcry and reputational damage to the brands were nonetheless significant. Why is that?

Research shows that if an incident (such as a human rights or environmental violation) occurs, consumers feel that the brand is to blame, even if the supplier is several tiers removed from it. Or, as the study put it, “Responsibility attributions do not differ with varying organizational distance from the supplier, firm size, strategic importance of the supplied product, or the existence of environmental management systems.” The research also found that the worse the impact of the incident (on people or the planet), the more likely people are to take action (like organizing boycotts or protests). For brands, this means that they need to monitor all suppliers in their chain closely and ensure basic standards are met – even if they do not control or do not even deal directly with the company involved. The risks to the reputation and even to the existence of the business are too high to ignore.

Awareness of the social and environmental impacts of products is growing. For example, the Natural Marketing Report recently found that 59% of American consumers prefer to purchase products that are sustainably manufactured, an 8% increase from 2009. Worldwide, the share of consumers saying that they care about companies’ corporate social responsibility is high and growing. The same report found that it is 69% in the US, 70% in the UK, 85% in Brazil and 94% China.

Not all of these attitudes translate into actual purchase behavior, but the trend towards consumers expecting more transparency and higher standards from companies is clear. And companies are taking notice. Several major fashion brands have started to publish their supplier lists in 2016, including GAP, C & A, and Marks and Spencer. They were heeding the call of advocacy groups calling for greater transparency into the supply chains of clothing companies. This year one such group, Fashion Revolution, published a Fashion Transparency Index, ranking apparel brands based on their commitment to supply chain transparency. H&M, Inditex (owner of Zara) and Levi’s scored best, while Prada and Chanel were among the least transparent companies. Overall, the report identified traceability as one of the weakest areas for all companies. It noted that “Only five brands (Adidas, H&M, Levi Strauss & Co, Nike – which includes Converse) reflect best practice in holding a publicly available list of all or the vast majority of their CMT (cut, make and trim) suppliers.” They also conclude that “The ‘second tier’ of the supply chain (and third, fourth, etc.) seems to remain largely unknown territory for most companies surveyed.”

Of course, the companies disclosing their supplier lists are thus inviting closer scrutiny, and need to be prepared to answer questions about their suppliers, including those beyond the first tier. This is a major challenge, but one they need to address soon. According to “The State of Sustainable Supply Chains” report published by Ernst & Young this year, emerging technology will play a major role in tackling this challenge. Solutions like Inspectorio can help companies check and measure the performance of their suppliers, track improvements over time, and ultimately improve business processes.

With the standards for supply chain transparency set ever higher, and leading companies stepping up to the challenge, sitting it out will soon no longer be an option.