Implications Of Unethical Practices In Global Supply Chain: Essay On Sustainability Initiatives.

Background of Unethical Practices in Manufacturing Operations

Assume you are a newly appointed accountant in a local computer company. This is a private company with 30 shareholders, and it has a highly integrated industrial value chain. Currently, the company has 6 departments namely, the Research and Development, Manufacturing, Finance, Sales and Marketing, Distribution and Human Resources department with a total of 150 employees. Managers in each department are given the authority regarding operational decisions and their performance is measured based on the company’s profit. In order to cut down costs, the manufacturing department manufactures computers locally using parts that are mostly imported from different suppliers in Bangladesh and China. Recently, the manufacturing department manager heard that some of their suppliers are exploiting their workforce in order to produce these parts. These workers are forced to work long hours in unsafe working conditions on very low wages. The former accountant is unsure who should be responsible to ensure the quality of working conditions and wages to the local staff of suppliers and so she has decided to ignore it.

As well as the manufacturing manager, the CEO of this company has noticed the unprecedented awareness from customers on the company’s social responsibilities. Many customers expressed the idea that they would not purchase any unethically produced or environmentally unfriendly products. So the CEO is passionate about the social and environmental issues, and wonders what positive or negative social and environmental impact his company’s computers might have. 

1. After the CEO has discussed his view on social and environmental awareness of customers, the manufacturing department manager approaches you to seek your advice on whether an investigation into the working conditions of the factories of their overseas suppliers should occur. You believe that the manager should take action immediately as it is important to work with ethical suppliers. Give either one or two real life examples to discuss how a business could be negatively impacted if they are working with unethical suppliers.

2. The CEO is considering an investment of $1m to establish a sustainability department. The CEO uses the five step process (see Module 2 Topic 1) to make decisions, and is wondering how you as an accountant could assist in the decision making process. Advise the CEO on how you can assist with his decision making. Be specific and in your response make reference to the five step process.

3. Subsequently a plan to establish a sustainability department is agreed upon. Some important shareholders attempted to block this proposal. Their belief as the owners of this company is that the company should aim to maximize the value of their shares, however, the new sustainability department could significantly increase the costs and therefore reduce the profit. Think of a potential sustainability project and explain whether and how that project could potentially increase the value of their shares in the long term. Further, discuss how value could be created for other
stakeholders (if any) when the project is implemented. 

1. In order to save on manufacturing costs, it is a common practice to outsource the manufacturing operations to low cost destinations located mostly in Asia. However, it is essential that these foreign supplier must follow ethical practices which is rarely the case considering the weak labor laws existing in these countries and thus the manufacturing facilities effectively developed as sweat shops. The major characteristics include poor wages, poor working conditions, very long work hours and are extremely vulnerable to workplace hazards (Oxfam Australia, nd).

The above behavior of suppliers has immense implications for the brand as Nike and Adidas learned the hard way over the last two three decades as activism has set in on the unethical practices observed by global supplies backed by the free flow of information on the oppressive conditions in which the employees are forced to work.  In the 1990’s when the working condition of the Asian sweatshops of Nike came to light, there was global boycott of Nike which adversely impacted the business of the company. As a result, the company’s brand was also tarnished and the executives were forced to take necessary measures to improve the working conditions of the labor in these foreign suppliers. Further, the company also increased the frequency of inspections conducted on these suppliers so as to ascertain that workers are not exploited. Besides, the company total also shares various reports in relation to the foreign suppliers and their facilities (Birch, 2012). Similar problem has been faced by Adidas which prompted the company to release workplace standards which all suppliers are supposed to comply by. As a result, there has been a significant improvement in the practices over the last two decades. Hence, the company needs to be proactive in this regard and ensure that the suppliers follow ethical practices (Marks, 2012).

2. With regards to the establishment of the sustainability department, the accountant can be helpful in taking decision as each step of the five step process that the CEO wishes to use in resolving the issue at hand (Sisaye, 2015).

Step 1: Problem Identification

In this regards, the accountant could highlight the current unsustainable aspects of the business particularly with regards to the adverse impact of the business on various stakeholders as the company should target the sustainability initiatives to such sections. Besides, the accountant could also highlight the social and environmental impact of the business activities using the various frameworks such as GRI (Global Reporting Initiative).

Impact of Unethical Practices on Business

Step 2: Relevant information collection

In order to decide on the focus area of the sustainability program, it is pivotal that the CEO must be provided with reliable information preferable quantitative so that the CEO could understand the avenues which require urgent attention and thus need to be prioritized. This may be made available through the usage of GRI as any equivalent reporting framework.

Step 3: Possible courses of action and impact

The accountant could provide incremental options based on the best practices which might be followed by the industry players. Further, critical information can be provided by the accountant on the precise impact of a particular course of action in regards to the area of focus identified In the above steps.

Step 4: Evaluate each of the option and take the decision

In order to take a prudent decision, a CEO would prudent and credible information preferably in quantifiable data which outlines the impact of the various options that are on the table. Once the accountant provides the relevant information, decision can be made.

Step 5: Implementation of decision and evaluation of performance

The accountant could provide vital information with regards to the impact of the sustainability initiative and the same could be compared with the estimated impact at the beginning and thus a comparison can be made based on which feedback may be extended for improvement of performance.

3. It is common thinking on the part of the shareholders that sustainability initiatives tend to direct cost for the good of society while it hurts the interest of the company. But in most sustainability initiatives this understanding is not true.  These initiatives tend to be in the interest of the shareholders as well as the other stakeholders particularly the society (Sisaye, 2015). For instance, one of the key concerns regarding the company is that in the manufacturing process which takes place in the developing world, there is usage of child labor which tends to violate the ethical principles and thus may provide to a PR (Public Relations) issue for the company going forward. As a result, the company can formulate model workplace norms which have to be necessarily followed by all the suppliers and back this with frequent inspections. In the process, it is possible that the cost may increase slightly on account of inspections and incremental payment to the suppliers but still it would create immense value for the company (Hopwood, Unerman and Fries, 2010).

The company can propagate to the customers that it indulges in ethical sourcing and should raise the awareness levels of the consumers on this aspect thus effectively differentiating the products from the competitors and hence generate incremental revenues. These incremental revenues would be enough to offset the incremental costs incurred initially and also lead to enhancement of the brand of the company coupled with strategic advantage in the form of market share gains. Hence, it is quite possible that sustainability initiatives tend to result in win-win situation for all stakeholders including the shareholders (Sisaye, 2015).

References

Birch, S. 2012 How activism forced Nike to change its ethical game, The Guardian, [Online] Available at https://www.theguardian.com/environment/green-living-blog/2012/jul/06/activism-nike [Accessed April 30, 2017]Hopwood, A. , Unerman, J. and

Fries, J. 2010, Accounting for Sustainability, London: Earthscan

Marks, K. 2012 Factory workers are 'forced to lie' during Adidas safety inspections, Independent, [Online] Available at

https://www.independent.co.uk/news/world/asia/factory-workers-are-forced-to-lie-during-adidas-safety-inspections-7644018.html [Accessed April 30, 2017]

Oxfam Australia n.d.  Are your clothes made in sweatshops?, Oxfam Australia,  [Online] Available at https://www.oxfam.org.au/what-we-do/ethical-trading-and-business/workers-rights-2/are-your-clothes-made-in-sweatshops/ [Accessed April 30, 2017]

Sisaye, S. 2015, Ecology, Sustainable Development and Accounting, New York: Routledge