Chasing the ETHICAL Sourcing Path

In recent years, sustainability has become the front and the center for both consumers and brands in an effort to reduce the impact and effect of climate change. A big part of these sustainability initiatives includes imbibing Ethical Sourcing practices. According to a survey, 81% of customers value and prefer to buy from organizations who embrace sustainable and ethical sourcing. Several research have indicated that companies prioritizing social and sustainable procurement enjoy faster growth and higher valuations than other players in their sectors by a margin of 10%-20%. How can companies step up change, internally and in collaboration with partners, to ensure that responsible and sustainable procurement becomes the global norm? Through this perspective story, sourcing & procurement leaders explore emerging approaches to measure, engage, and manage ethical sourcing, and supplier diversity that create sustained value.

What are your views on ethical sourcing? Are there any success stories you would like to share on the front?

Saurabh Palsania, Joint President – Strategic Sourcing, Shree Cement: According to me, ethical sourcing is about bringing complete transparency and equal participation of all stakeholders while sourcing maximizes efficiency in the system. Wherever digitization and participative sourcing is being practiced, this is being experienced. In my earlier experiences, I have come across many such experiences post implementation of complete transparency in sourcing through digitization of procurement to award of contract. We discovered new pricing benchmarks of spares and services, leading to accurate study of cost of manufacturing & delivery of sourced material & sourcing. Ethical sourcing is not only digitization, but also developing the system where equal opportunity is provided to each stakeholder in the process of sourcing, which is key to achieve best results.

Nikhil Puri, Vice President – Sourcing & Planning, Yokohama Off-Highway Tires: Ethics have always been the part of sourcing, but it was never talked about so vocally before. But with the globalization coming up and supply chain getting moved out to various parts of the world, it started becoming more and more relevant. We are taking conscious efforts to create awareness among the buyers and customers on the ethical standards, be it labour laws, compliance, or sustainability concerns. There have been many success stories around it over the years. One of the cases, which come to top of my head, was regarding sourcing of one product. We have not awarded the business to the lowest supplier as the approach that he followed was unethical. The buyer who brought this to the notice was awarded by the management, which also helped in setting up standards across the board.

What are the challenges that you foresee in monitoring sourcing practices?

Saurabh Palsania: Spent analysis is the heart of monitoring of sourcing practices. The data availability is too much, while analytical reports available are too low for monitoring. When high volume of data is in the system in sourcing, it becomes more important to get the right insights at right time for timely & correct decisions. Also, it is important that the software pulls out exceptional information and sends it to the concerned person for timely action.

There may be two ways of utilizing the digitization –

1. To highlight the exceptional things and
2. The other way is to identify immediately & force corrective actions.

The challenge today in monitoring sourcing practices is thus the large data with no right tool to raise right exceptions & corrective action. With AI technology on board, we foresee right solution to be in place shortly.

Nikhil Puri: The challenge is the cultural difference. When we want to deploy ethical sourcing, it’s a completely uncharted territory, as soon as we start speaking with the teams, people get apprehensive and start thinking that their workload might increase. This thought has come up from the buyers. Such challenges stop us from implementing such practices. I firmly believe that there needs to be regulations to enforce the same, but before that, there needs to be adoption from the top management. If the culture change has to be brought in, it has to be a top-down approach. The same dilemma was there when we were in the digital transformation transition phase a decade back, but it has become the critical element for business survival.

I am sure in a few years from now, ethical sourcing would also become an integral part of our businesses. The thrust is coming from the overseas players. They have a clear mandate to follow global ethical sourcing standards.

Himanshu Maloo, Managing Partner, ImpactEazer Consulting: Many of us have an intent to work towards achieving ethical sourcing practices. I feel somewhere government policies can be further strengthened in such a way that it pushes everyone to comply to the norms. Globally there are companies like EcoVadis, who has been doing a commendable job of monitoring such initiatives including sustainability practices. Still there is a long way to go in following such standards across industries. Another important element towards ethical sourcing is providing labor-friendly environment at workplaces like at manufacturing sites, warehouses, etc. Earlier there used to be a 12-hours shift at workplaces, but now it has been reduced to an 8-hour shift. Additionally, workers today are demanding better conditions at workplace. If we want to retain the labor, it’s not just about the wages, it’s also about providing them better working conditions. Ethical sourcing is also about humanity and take care of people who are working for you.

What ethical sourcing can do to your brands? How does ethical sourcing build a brand and how do you communicate the same to your customers?

Saurabh Palsania: Ethical sourcing brings all competitive stakeholders on board and creates healthy competition. The opportunity with transparency creates a brand value through all stakeholders. Available time is invested in vendor & material / service development, which also adds to the brand value, otherwise would have been used in non-standard practices or manual interventions. The communication to customers is spontaneous & through various physical and digital platforms.

Nikhil Puri: Ethical Sourcing is becoming an important mandate for the overseas customers. Ethical Sourcing is also part of the sustainability itself. Customers are looking for the sustainable initiatives that their suppliers are providing. Sustainability has started becoming a vital criterion in supplier selection along with the standard parameters of Cost, Quality & Delivery. When discussing with the customers, you can always mention the practices that are followed in your organization, one being Ethical Sourcing. Policies & procedures should be in place for Ethical Sourcing, which can be showcased to the customers.

Customers are always looking for those partners, which are ethical in nature, and are in line with their values. If you have a written down procedure and policy and you are exercising the same, then the companies want to partner with you. As they are aware that come what may the buying decision will be taken on merit, and it will be ethical. It helps in strengthening the brand image.

Himanshu Maloo: Now-a-days overall consumer awareness also has been increasing. Thanks to social media, consumers are expecting brands to be more ethical and sustainable. There are several brands who are leveraging ethical sourcing to their advantages and building trust element with consumers. E.g., there are brands, who are using plastics taken out from Sea to make shoes. They are charging premium rates for such products and people are ready to pay for it. That shows how awareness is building up towards ethical and sustainable sourcing.

Kindly shed light on the e-waste policy being followed in the retail industry…

Nikhil Puri: In the electronics industry, at the retail store, they have dedicated places where consumers can deposit their mobiles / tablets / laptops for recycling. There has been an advent of recycling aggregators to collect these goods. They ensure to follow the compliances for e-waste disposal / recycling. If we talk about other wastes, there is an interesting concept emerging – zero waste to landfill. Every manufacturing company, irrespective of the industry they are operating in, is generating some kind of process waste. Out of this, most of the waste material is getting recycled, but some still remain as it is and can’t be recycled and is hence sent away to landfill. In my previous organization, during the operational process, we used to generate glass as one of the wastes.

Incidentally it was going to landfill for decades across the globe. We worked with cement industry and realized that the cement industry wanted that waste product for reinforcement. This way we were able to now recycle every waste by-product. It became the biggest pitching point overseas as we were the only few companies globally who were not disposing any waste product to landfill.

Where is the line between being legally right and ethically right?

Nikhil Puri: There is a very thin line between being legally right and ethically right. There are numerous examples across the industries wherein they are legally right and following all the compliances. But are they ethically right, is a grey area. As an organization, you often see that there is a lot of impetus given on following all the legal obligations and compliances. But you will not find companies branding them as ethical. It is believed to be there. But are there are written down policies around it, so the answer is a big NO. In my opinion, “A legal entity may or may not be an ethical one, but an ethical one will always be a legal one.”

How can we start introducing transparency into the visibility of end-to-end supply chain?

Saurabh Palsania: Transparency and visibility are the outcomes of participative management of supply chain and high level of digitization. Building trust amongst all stakeholders by online sharing of information, more and more interaction, standard practices of sourcing and timely delivery of services, materials, payments, and acknowledgements will bring visibility and transparency across the supply chain.

Nikhil Puri: Companies are taking conscious efforts to bring in transparency in the visibility of end-to-end supply chain. Today the customer is very intelligent, and he does not want to buy a product which is stained in any way. Traditionally, companies often check their tier I suppliers and are aware about what is going on there such as, are they following the ethical practices, are they following the labour laws, working conditions and so on. But are the companies going up to tier II & III & IV also. It was assumed that it is the responsibility of the tier I & tier II respectively. But the onus is on the company who is selling the end product.

Organizations must start checking all the tier suppliers so that they are aware about the processes that they are following. Also, we are all aware that listed companies in India have started bringing their annual reports on sustainability. This report describes each and every activity that the business is conducting and the amount of discharge/waste getting generated out of each process. In lieu of this, they also showcase the efforts that the company has been taking to mitigate emissions and precisely reflecting their green practices. This helps in creating awareness among stakeholders / investors / global suppliers. The ethical practice should start from the RFP stage and not at the contract stage. Companies need to educate / train their suppliers in following ethical practices. Companies must have a separate sustainability audit checklist than the regular audit list that they adhere to while finalizing a prospective supplier.

Himanshu Maloo: Building transparency towards sourcing practices today is voluntary for companies. There are very few companies who are ready to publish details about their sourcing practices, about their supplier qualification / management strategies, etc. This is doable for companies who are able to embrace ethical sourcing. But most companies who are yet to move is this direction, it is not doable in current environment. But slowly we will see a progress towards ethical sourcing, more and more companies will start getting more transparent. This will be important element to build trust for brands.

How do you foresee the scope & expanse of ethical sourcing growing from here on with companies waking up to the cause and taking pertinent measures?

Saurabh Palsania: There is a big shift now, which can be foreseen from traditional sourcing to ethical sourcing. This is possible because of the high availability of services providers and requirement of exchange of information to all stakeholders. Frequent requirement of audit trails of transaction, consistent uncertainty in the market also influenced by geopolitical matter, high competition within and across sector, continuous requirement of innovation for cost control, all the above is pushing for quick shift to ethical sourcing.

Nikhil Puri: Scope is immense of ethical sourcing. The important thing is to create awareness. Also there are no clear guidelines that are there on this topic. Every company proclaims and aspires to be an ethical company. Industries should come together and formulate the guidelines around this topic. It is not that companies do not want to do it. It is just that the rules of ethical sourcing are not defined properly. I foresee, that with so much globalization, companies will make it an important priority that is being discussed openly and widely so that it can be implemented.

There is a clear sign that top class multinationals are moving the needle in the right direction, insisting on sustainable and ethical procurement practices with their major vendors, their tier-I and Tier-II suppliers. This is helping the organizations to change the mindset of consumers who are more aware and conscious of the brands they purchase. The young cohort (Gen X and Gen Y) make decisions that support environmental and sustainable enterprise in a serious manner. According to (SIG) Sourcing Industry Group Survey (2021), these are some of the interesting statistics.
67% of consumers prefer to work for socially responsible companies.
56% of consumers will pay extra for products and services from socially responsible companies.
52% of consumers made at least one purchase in the past six months from socially responsible companies.
52% of consumers check product packaging to ensure sustainable impact.in the past six months from socially responsible companies.
49% of consumers prefer to volunteer/ donate to organizations engaged in social and environmental programs.