How To Make the Chinese Supply Chain Safer

Multinational firms need to incentivize Chinese suppliers to look for and disclose manufacturing deficiencies themselves, say the authors of a new MIT SMR article.

Image courtesy of Flickr user jurvetson.

Are multinational companies giving their Chinese suppliers the incentives necessary to comply with standards in environmental and health safety?

In the new Winter issue of MIT Sloan Management Review, authors Erica Plambeck, Hau L. Lee and Pamela Yatsko explore this question in “Improving Environmental Performance in Your Chinese Supply Chain.”

“Given how much of the world’s manufacturing takes place in China and the damage it has wrought on that country’s environment,” starts the article, “most analysts expect that multinational brands’ supply chains will face increasing scrutiny in the coming years.”

And how. Today’s New York Times, for instance, has a 5,207-word investigative piece about manufacturing conditions in Apple’s Chinese supply chain. “In China, Human Costs Are Built Into an iPad,” by Charles Duhigg and David Barboza, is based, the authors say, on “interviews with more than three dozen current or former employees and contractors, including a half-dozen current or former executives with firsthand knowledge of Apple’s supplier responsibility group, as well as others within the technology industry.”

The Times authors write that the Chinese workers assembling iPhones and iPads “work excessive overtime, in some cases seven days a week, and live in crowded dorms. Some say they stand so long that their legs swell until they can hardly walk. Under-age workers have helped build Apple’s products, and the company’s suppliers have improperly disposed of hazardous waste and falsified records, according to company reports and advocacy groups that, within China, are often considered reliable, independent monitors.” As well, “Two years ago, 137 workers at an Apple supplier in eastern China were injured after they were ordered to use a poisonous chemical to clean iPhone screens. Within seven months last year, two explosions at iPad factories, including in Chengdu, killed four people and injured 77.”

Apple has a supplier code of conduct and issued a 2012 progress report about “efforts to improve worker protections and factory conditions” (see both at apple.com/supplierresponsibility). Still, says the Times story:

More than half of the suppliers audited by Apple have violated at least one aspect of the code of conduct every year since 2007, according to Apple’s reports, and in some instances have violated the law. While many violations involve working conditions, rather than safety hazards, troubling patterns persist.

“Apple never cared about anything other than increasing product quality and decreasing production cost,” said Li Mingqi, who until April worked in management at Foxconn Technology, one of Apple’s most important manufacturing partners. Mr. Li, who is suing Foxconn over his dismissal, helped manage the Chengdu factory where the explosion occurred.

“Workers’ welfare has nothing to do with their interests,” he said.

The MIT SMR article also cites Apple, noting that “in August 2011, a consortium of five Chinese environmental NGOs focused attention on Apple, the beloved U.S. technology giant, for using Chinese suppliers with outstanding public pollution violations and ignoring the NGOs’ earlier entreaties to redress the problems. International headlines soon reported ‘Apple Attacked Over Pollution in China’ and ‘Apple Cited as Adding to Pollution in China.’”

One key to getting buy-in is to “incentivize suppliers to look for and disclose deficiencies themselves,” says the MIT SMR article. Levi Strauss, for instance, “normally gives a supplier that provides false or inconsistent records a ‘zero tolerance’ violation. After two or three such warnings, the apparel company usually terminates its relationship with a factory. However, suppliers know that if they volunteer the correct data about a problem, Levi Strauss will not give them a zero-tolerance violation and will work with them to fix the problem.”

Another key, suggests the Times story, is one that appears to be anathema to most companies: give suppliers a larger margin.

“Most suppliers are allowed only the slimmest of profits,” says the Times. “So suppliers often try to cut corners, replace expensive chemicals with less costly alternatives, or push their employees to work faster and longer, according to people at those companies. ‘The only way you make money working for Apple is figuring out how to do things more efficiently or cheaper,’ said an executive at one company that helped bring the iPad to market. ‘And then they’ll come back the next year, and force a 10 percent price cut.’”

Both Plambeck and Lee are professors at the Stanford Graduate School of Business, and Lee directs the Stanford Global Supply Chain Management Forum. Yatsko is a former Shanghai bureau chief for the Far Eastern Economic Review. Read “Improving Environmental Performance in Your Chinese Supply Chain” for more of their take on what companies doing business in China need to know and how they should act on it.