KPMG & Sedex’s Australian Responsible Sourcing Conference 2017 Highlights

In May 2017, Sedex and KPMG hosted a joint conference in Sydney themed “Demystifying responsible sourcing”. The conference brought together a range of industries and experiences to discuss social responsibility throughout global and local supply chains. This included identifying the key human rights issues that responsible businesses need to be aware of, whilst considering what effective supplier engagement looks like, both now and in the future.

The key question raised at this conference was ‘What is the Australian context for responsible sourcing?’. To explore this topic, Richard Boele, Partner, Human Rights & Social Impact, KPMG, was joined by; Mans Carlsson-Sweeny, Head of ESG Research, Ausbil Investment Management; Jaana Quaintance-James, Ethical Sourcing Manager, David Jones; and Robert Price, Director of Regional Services and Young Workers, Fair Work Ombudsman.

They focused their discussion on five key areas:

  1. Putting supply chains in order: Mans Carlsson-Sweeny talked about the issue of investors using a company’s treatment of ethical issues as a gauge of how it deals with their general business issues. Janna Quaintance-James went on to talk about the problem of ‘public attitude’, research has shown that the Australian public is unwilling to pay more for ethically sourced products which means that cultural change must come from within a business and from those directly involved in the supply chain.
  2. Fixing unethical franchise models: The Fair Work Ombudsman is seeing evidence that some of the recent franchise worker pay issues come from businesses applying an overseas culture in Australia, according to Robert Price, Director of Regional Services and Young Workers. Carlsson-Sweeny added that Ausbil promotes the premise that if a company has a poor ESG (environment, social and governance) profile, they might be valued at a discount. “After all, a business model that is reliant on underpaid workers is not sustainable,” he said.
  3. Agricultural harvesting’s reputation: Australian agricultural hand-harvest supply chains have been exposed for their exploitation of workers. The panel discussed the causes of this, from a shortage of regionally based skilled workers, coupled with increased price pressure to Australian consumers caring more about ‘Australian made’ produce and animal welfare issues than worker rights. Jonathan Ivelaw-Chapman, CEO, Sedex, said the UK public has been educated about pricing by a campaign illustrating what farmers need to charge to cover their costs and receive a modest profit. He suggested that a similar awareness-raising initiative could help in Australia.
  4. Environment taking a back seat: Carlsson-Sweeny acknowledged that the environment seems to have dropped off as an issue in the West. However, he thought that fast fashion is at an inflection point regarding environmental and workers’ rights issues. “The problem is that any cost inflation needs to be absorbed. If environmental cost rises are absorbed by the manufacturer, there is less chance of a living wage for workers,” he said.
  5. Negotiating better outcomes: Both Quaintance-James and Carlsson-Sweeny think it’s important for Australia to learn from other Western countries. Carlsson-Sweeny acknowledged that vertically integrated brands have more leverage in negotiations and advised companies to consolidate their supply chain to increase their influence.

The complexities from the start to the end of a supply chain were discussed at the conference. The opening keynote speakers Jonathan Ivelaw-Chapman (Sedex CEO) and Sally Freeman (Partner in Charge, KPMG) exemplified how important responsible sourcing is for business today. This included discussions over:

  • Data mining and technology increase transparency: Jonathan Ivelaw-Chapman acknowledged that while this is useful for an audit, the real challenge is to start using data to predict and mitigate the identified risks. By combining 14 years of empirical data with analytics, Sedex can identify whether a risk has been seen before, predict future risks, and identify where an organisation’s main interventions should be. “With smartphone technology and blockchain, companies have fewer excuses for being hoodwinked today,” he said.
  • Audits as a starting point: Compliance fatigue is a major issue for suppliers and buyers, partly due to the oversupply of protocols and standards. Partners such as KPMG can help companies choose the right mix from more than 200 existing supply chain related standards. While Sedex is standard agnostic, it is contributing to the development of professional standards for social compliance auditors.
  • Global supply chain discussion: The conference featured a discussion on the complexities of monitoring global supply chains, which included Amanda Steele, Managing Director of Asset Services, CBRE; Walter Lin, Operations Director China, Sedex; and Kevin Franklin, Senior Vice President, Elevate. The panel discussion was hosted by Richard Boele, Partner, Human Rights and Social Impact, KPMG. Boele asked what leading global practice in terms of responsible sourcing looked like. The panel agreed that it was about real-world experience and impact, and not just numbers on paper.
  • One customer, two voices: Walter Lin from Sedex explained that in China, suppliers often hear multiple expectations from one customer. The buyer is requesting the same quality goods for a lower price, whilst the ethical sourcing team is asking for better pay and conditions for workers. Thus, managing transparency is an issue for both suppliers and buyers.
  • Using your audit as a starting point: Nowadays, the selection of facilities to audit is and needs to be based more on up-front risk assessment and supplier segmentation based on exposure and influence. “Standards and protocols can lure companies into a false sense of security where emerging issues [e.g. migrant workers] take a longer time to get addressed. Responsible sourcing has to be an ever-increasing cycle of improvement,” Franklin said. Sedex’s Walter Lin gave the example of how recent outsourcing and cross-border labour sourcing by Chinese factories are creating new risks. Lin emphasised that understanding how to use existing programs in China is important. He advised buyers to spend more time engaging with suppliers and building long-term relationships. “This helps break through audit fatigue and begins the process of remediating risks. It also limits factories telling a client what they want to hear instead of the truth,” Lin said.

At a breakout discussion, Aaron Hill, Membership Manager, Sedex; Stephan Gabadou, Risk Assurance Consultant, KPMG; and David Mullen, Supply Manager of food manufacturer Simplot Australia, explored supplier engagement challenges and shared examples on how to master it.

The first topic included conversations around the stability of a vendor base. Mullen said the objective of supplier engagement should be to take your primary suppliers along the responsible sourcing journey.

Aaron Hill said: “If suppliers continue to refuse any attempts at education or engagement, perhaps a contingency plan should be discussed.”

Secondly, the panel discussed where a business’ focus should lie. Another call to arms was for organisations to know their supply chain more intimately. Hill said, “avoid being an organisation who [simply] sifts through invoices to figure out where their spend goes”.

A key takeaway from the third topic focused on education, and that crucially it starts in-house. The panel discussed that it is critical that buyer teams understand what ethical sourcing is before they approach suppliers. If the procurer has no idea what ethical sourcing is, then the ethical sourcing program will fail. Once this has been established, education occurs collaboratively with suppliers. This benefit of dual education for procurers and suppliers ripples down the supply chain.

Finally, the panel discussed how business should deal with seasonal workers – a common issue in Australia. Brainstorming between suppliers and procurers is a great way to create ideas around how to make the risk mitigation initiative work for all parties.

“Risk thresholds are important for organisations in determining action. A company must determine whether they’re comfortable with their level of risk and whether they accept or approve known or potential activities along the value chain”

Stephan Gabadou, Risk Assurance Consultant, KPMG

Auditing supply chains – are there better solutions?

Nathan Robertson-Ball and Tim Stamp from KPMG’s Human Rights and Social Impact team; Rona Starr, Executive Director, APSCA; and Walter Lin, Operations Director China, Sedex, explored the validity of an audit as the best approach to building sustainable supply chains.

Their discussion focused on the purpose and barriers to a good audit, and how to effectively manage the audit outcome. They asked, are there alternative or parallel solutions to affect sustainable change? Here are some key takeaways.

  1. Audits are necessary to enable a business to grow. They are a measurement tool for compliance, validation and progress. The panel discussed how audits can help businesses to understand their suppliers, build relationships and gain transparency across their value chain.
  2. Auditors must possess the appropriate skills, including a sound understanding of the individual organisations they are auditing. Additionally, audits are heavily dependent on the extent to which the supplier has been engaged in the process.  Many suppliers are small businesses and do not have adequate resources to meet audit requirements. Therefore, an ongoing issue to explore is, who is responsible for educating suppliers? And who is responsible for capacity building?’
  3. The panel offered ideas on how to approach a supply chain audit. These included conducting a risk assessment to determine where to focus effort and resources, who to audit, and which non-conformances to follow up on first. They said to start with focusing on a small group and engaging them thoroughly.
  4. Once the audit is complete, the panel emphasised how important it is to consider how to manage the audit data, which can include managing follow up audits, corrective action plans, and closing off non-compliances. In summary, the panel said managing auditing in a very large supply chain can be daunting and costly. Seeking third-party advice to help navigate the associated complexities is often the best approach.

 

Remediation in supply chains

In a breakout session, led by Amelia Bruce and Madeline Greer, both from KPMG’s Human Rights & Social Impact services, a panel and attendees discussed what ‘access to remedy’ means, what remediation looks like, who is out there to help, and the key steps to take.

The UN Guiding Principles define ‘access to remedy’ as businesses having a responsibility to respect human rights, prevent human rights issues from happening, and to provide reparation if a human rights issue has occurred. The discussion made it clear this involves responding to issues as soon as they are identified.

A key theme was ‘transparency’ in supply chains and the importance of understanding what the potential issues are. This means that building trust with suppliers becomes critical, to encourage sharing of information.

It was clear from the discussion that businesses need to consider the role that information sharing can play in understanding the root cause of non-compliance. Not having enough ownership, and placing too much onus on auditors to complete audits in compressed timelines can have an impact on compliance.

The UN Guiding Principles have guiding criteria on what an effective grievance system should include. It should be fair, trusted, legitimate, known, culturally compatible, easy to use and be rights-compatible.

The panel explored the role of access to remedy and said there needs to be a channel in place for workers or people affected by the supply chain to raise issues and seek remedy. They agreed that remedy can also mean providing support.

It was discussed how access to remediation is key, however, workers have different levels of access in different organisations and countries. Access to technology such as computers and mobile phones can play a key role in remediation opportunities.

The panel agreed that when there is strong management buy-in to the grievance mechanism, the system works well. Where management is not prepared to engage, tools like whistleblowing can be more successful. It is important to have multiple ways to raise issues.

 

The Sedex and KPMG conference covered a wide range of current issues that explored ‘Demystifying responsible sourcing’, with key insights and solutions being discussed and debated at length. This information has been taken and edited from parts of the KPMG Australia website summary of the conference, to read a more detailed summary, please click here.

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