A Supplier Summit in Shanghai Our Suppliers, Supplier Audit, Supplier Diversity, Supplier Program / Features

In November 2010, GE held a Supplier Summit in Shanghai. Leaders from GE’s global and business sourcing, labor, and environment health and safety (EHS) teams came together with peer companies, suppliers, and government and trade union officials to share experiences. They discussed the challenges faced in securing safe and fair working conditions, as well as a better environment for workers and local communities in global supply chains.

“We are continually refining our Supplier Responsibility Guidelines Program. Much of the learning happens through the one-on-one relationships with suppliers, when we work together to solve problems. But it is important also to take time to reflect and to hear from fellow companies and other experts to make sure we are on the right path. The Supplier Summit was an opportunity to listen and learn, to hear good ideas, and to help us understand how better to work with suppliers to create sustainable change.”

— Ann Condon, EHS Director, GE

The Shanghai Summit was GE’s second Supplier Summit and the first held outside the United States. China was selected as the venue not only because it is a major part of GE’s supply base, but also because it offers a distinct set of challenges. China’s manufacturing industry has grown immensely over the past decade, faster than its environmental controls and the availability of skilled managers. Thirty percent of GE’s suppliers covered by the company’s Supplier Responsibility Guidelines Program are in China, yet more than half of the environmental and labor standard findings under the Guidelines Program have been identified in the country. Many factories continue to struggle to meet standards and local laws regarding overtime, occupational health, and environmental permits.

The Limits of Annual Auditing

 

GE and its peer companies shared effective methods at the Summit that go beyond auditing to build supplier capacity for human resource and EHS management.

GE Supplier Summit

Over the past 15 years, supply chain responsibility programs at GE and other multinational companies have focused on the development of increasingly sophisticated supplier auditing systems. Rigorous audit processes are important for measuring compliance, however, they are not sufficient to ensure continuous improvement. Suppliers often have to comply with a variety of different codes and standards for different customers, each with their own requirements, paperwork, and auditors. This is an expensive and time-consuming process. Moreover, it does little to build the capacity of local companies to proactively manage EHS issues or to empower workers to secure their workplace rights and take responsibility for safety.

Many of the peer companies and experts at the Summit reported the same problems, both in China and beyond, and highlighted the twin concerns of “audit fatigue” and the overall limitations of auditing.

“As international buyers, we don’t want to audit all the time. We want to encourage self-governance. We work on this through capacity building and partnerships.”

—Bill Anderson, Asia Pacific Head of Social and Environmental Affairs, adidas

Reports of factories turning to specialist firms to help them pass audits were of particular concern. Representatives from supplier factories reported such tactics as maintaining double sets of books that falsify data on wages and working hours, and coaching employees on what to say when interviewed. In addition, there were some reports of suppliers maintaining two factories, one for show and one where the real work is done. This kind of deception undermines the very basis of trust and negotiated agreement upon which any business relationship depends. More importantly, it leaves workers unprotected.

“The transactional approach to auditing compliance–what we call “comply or die”– just drives suppliers into non-transparency. You get into an arms race of better auditing and more and more ingenious ways of hiding problems. Instead, you need to look at the root causes of problems. Is it lack of capacity for human resources management? Is it linked to the price and timing of orders? Is it a problem with local institutions for occupational health? You need to be honest about what is really going on in the supply chain and assure your suppliers that if they are honest with you, you will work with them to solve problems.”

— Ian Spaulding, Managing Director, INFACT Global Partners

The suppliers who attended the Summit shared with GE that the most helpful aspects of the audit process were the individual coaching they receive at the end of an audit, the training GE periodically conducts for them, and the sharing of best practices with other suppliers. To really improve conditions on a day-to-day basis, they advised GE that, as senior managers, the focus on “how to” solve problems–as opposed to how to pass an audit–helped them understand the importance of treating their employees fairly and the need to systematically manage the environmental impacts of their operations. Suppliers also highlighted the business benefits that resulted from this maturing approach to labor and environmental standards, including improved worker efficiency and morale, an enhanced reputation, and increased customer orders. The most advanced suppliers reported that they are developing management systems or integrated processes to address issues and risks before they develop into problems.

 

Leaders from GE’s global and business sourcing, labor, and environmental health and safety (EHS), teams came together with peer companies, government and trade union officials, and suppliers to share experiences.

GE Supplier Summit Group Photograph
“At first we were resistant. We saw EHS requirements as an extra cost, but we did not see the potential benefits. But we found that it has been helpful to establish the good reputation of our company and better relations with stakeholders. There is higher morale, and we have been able to create a positive culture. After we put such efforts into EHS, we also saw that it was something other customers expected too.”

— Yang Dingjie, General Manager, Wuxi Qiushi Special Tooling Ltd.

“We are focused on achieving ‘scientific development.’ To do this, our key priorities are filling in the gaps in government regulation, rationalizing and standardizing government behavior, setting up a supervision system, clarifying legislation, closing loopholes, and encouraging the public to take part in law making.”

— Wang Wei, Director of Department of Policy and Law, China Ministry of Environmental Protection

Learning from others

The Summit also included presentations by government officials and peer companies.

The government plays the most important role in maintaining labor and EHS protection in China’s factories. They do this by writing laws that are pragmatic and straightforward in their implementation and by maintaining the robust public institutions, such as the labor and environmental inspectorates, planning departments, and occupational health authorities, needed to enforce them.

China’s government and its people recognize the need to protect the environment by reducing pollution and increasing energy efficiency. At the same time, the country is seeking an economic transition–from low-wage jobs to highly skilled competitiveness. Summit participants heard from government officials, who described the key steps taken in China to reform regulation and strengthen controls during this transition.

“We recognize the need to have implementable standards and workable processes. In many cases, Chinese standards are in line with the relevant U.S. standards, such as the Occupational Health and Safety Act (OSHA). However, one-third of occupation health and safety standards in China are even stricter than OSHA. The key challenges in China are the enforcement and solid implementation of laws and regulations that have been published.”

— Zhou Anshou, Deputy Director of National Institute of Occupational Health & Poison Control, Chinese Center for Disease Control and Prevention

GE and its peer companies shared their experiences of going beyond auditing to build supplier capacity for human resource and EHS management. Bill Anderson from adidas highlighted how his company is starting to shift towards supplier self- governance.

Learning from others: adidas’s approach

Since 2005 adidas has been developing and rolling out a set of Key Performance Indicators (KPIs) for suppliers which not only assesses whether their factories are in compliance on the day of the audit, but also whether they have the capacity for ongoing continuous improvement and performance management.

The KPIs look at the commitment of senior management and whether there are effective systems in place for performance management, worker communication, training and transparent reporting. Suppliers are rated on a 5-point scale, which is used to inform sourcing decisions and serves as the basis for negotiating plans for progressive improvement with strategic suppliers. Suppliers that reach the highest level on the scale, demonstrating best practice, are able to transition towards self- governance.

Wal-mart’s Wilson Lau also highlighted how his company has divided its supply chain into bands according to risk and strategic importance and is shifting from a one-size- fits-all routine audit approach towards strategic supplier development.

Learning from others: Wal-mart’s approach

In 2009 Wal-mart announced a change of direction with its responsible sourcing approach, deciding to stop focusing on routine audits and instead use third party service providers for these checks. At the same time the company set up a Supplier Development Program to help suppliers develop capacity for self-evaluation, root- cause analysis, and continuous improvement. Wal-mart associates continue to conduct spot checks and investigation audits in response to external allegations.

While the company aims to have all its direct suppliers sourcing 95 percent of their production from factories receiving its highest ratings, they also recognise that at times factories may have problems and fall below the expected level. The company has therefore made transparency the cornerstone of the program and offers suppliers the commitment that they will work with them to resolve issues as long as they are honest about problems.

“We train suppliers in Wal-mart standards and local laws and work with them to identify high-risk issues. We would rather they are 100% transparent in identifying these issues and commit to solve them, than having 100% “clean” audits. If they are found to be non-transparent, they are dropped from the Supplier Development Program and risk losing our business altogether.”

— Wilson Lau, Ethical Sourcing Regional Manager, Wal-mart

“Previously we had a passive reaction to incidents, but now we have improved our EHS management. Health and safety has to start with a senior commitment and be linked to the production process, as well as design and transportation, so that it becomes a daily habit to eliminate hazards before they happen. By doing this, we have reduced pollution and the time lost through workplace injury. We are able to work more efficiently and have a better reputation.”

— Ruan Jianguo, General Manager, Shanghai Peitong Machinery Co., Ltd

Moving forward

The Supplier Summit provided GE with a number of quality ideas to consider, many of which reinforced supplier program modifications the company had already begun. The input from suppliers and the experience of the other companies supported GE’s experience that suppliers need coaching and best practice sharing with a focus on “how to” manage labor and EHS issues effectively.

For example, the need to reduce worker exposure to chemicals and other physical hazards was one of the challenges discussed. Since 2005, GE has been sharing its safety practices and expertise with the Chinese government’s Disease Control and Prevention Center to share GE safety practices and share expertise with both officials and business counterparts. In August 2009, GE signed a cooperation agreement with the Shanghai Municipal Health Bureau, becoming a training and practice base for occupational health inspectors. The company will continue to work closely with the Health Bureau on this important effort.

GE has also been working with peer companies, including Wal-mart, adidas, Honeywell, Citibank, and SABIC Innovative Plastics to support a new EHS Academy in China’s Guangdong province. The Academy is training a cadre of EHS managers who are working in supplier factories.The leadership of the Academy, as well as the Institute for Sustainable Communities (a nonprofit organization focused on community-based solutions) participated in the Supplier Summit and collectively identified several supplier needs that could be met by the Academy.

GE also benefited from the case studies presented by peer companies. In 2009, GE began including management systems questions in its audits. Now, the company is reviewing the adidas KPI model, the Wal-mart Supplier Development Program, and our own lessons learned over the past two years. The goal is to improve GE’s current management system focused approach and create a tool to recognize suppliers that are developing their own commitments and performance systems. GE will also be piloting a Supplier Partnership Program to identify key suppliers that would benefit from more focused capacity building.

We are very grateful to the government officials, the suppliers, and the peer companies that were generous with their time and experience at the Summit. Given the scale of the challenge, this collaboration and best practice sharing will be critical to making sustained progress in the global supply chain.

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