ETHICAL PROCUREMENT

A SUPPLIER’S PERSPECTIVE

LEIGH THOMASSONMANAGING DIRECTOR

ROBINSON HEALTHCARE LIMITED

[REPRESENTING THE SDMA]

Aims of Presentation

Define:Ethical tradeFair tradeEnvironmentalismSustainability

Aims of Presentation [contd.]

Sourcing from the Third World

Schemes

Potential solutions

Practical difficulties

Discussion points

What is Ethical Trade?

An all-encompassing term for business practices which promote socially responsible trade.

Can include environmentally responsible trade.

Applies to procurement, production, sales and marketing or any business activity.

Today we will discuss ethical procurement.

What is Fair Trade?

The development of trading partnerships based on dialogue, transparency and respect that seek greater equity in trade.

Contributes to sustainable development by offering better trading conditions and securing the rights of marginalised producers and workers in the developing world.

Retail foodstuff, textile and cosmetic ingredient focussed.

What is Sustainability?

Sustainable trade/economics

Sustainable communities and culture

Sustainable ecological practices

Is There Much Difference?

They all have a different emphasis

But many of the concepts are increasingly overlapping

Focus on Ethical Procurement

What are the concerns?That labour, generally in the Third World, is being abused in some way.

Third World Sourcing

Is sourcing from the Third World or ‘low cost countries’ commonplace?

Yes, in unbelievable quantities.

Third World Produce

Why is there so much produce sourced from the Third World?

Because it is cheaper.Because a supplier may have no option – source or die.

Sector Sourcing

Is sourcing from the Third World concentrated in a particular sector?

No, it is common across many business sectors.

Sourcing from Low Cost Countries

Is it a bad thing to source from low cost countries?Not necessarily:

Lowers cost for the importing country.Suppresses inflation.But it can lead to de-industrialisation in the importing nation.Need to be extremely diligent on quality.

Positive for the Producers

Provides employment and income.

Reduction in poverty-driven problems:Food/Education/HealthcarePolitical strife [extremism]

Improves international relationships based on mutual understanding.

Done correctly it can be win/win.

Third World Production

Is production in Third World countries focussed in just one or two countries?

No, but of course, huge quantities of goods are produced in China.

Third World Production

Why is production in the Third World cheaper than in developed western nations?

Labour is cheaper.All support services are cheaper.Land and buildings are cheaper.Legal/regulatory burden much lower.In some cases exports are heavily subsidised.All standards are lower.

Third World Production

But it may be cheaper because they are cutting corners at the expense of the workers or quality.

What is The Cycle?

Increase export production based on lower costs.Increased wage demands from workers.Increased demands for better working conditions from employees and customers.Increased environmental awareness and pressure from customers.Increased standards and increased costs.Production shifts to another undeveloped country.The cycle starts again.

Medical Devices

Are there many medical devices produced in the Third World?

Yes, and in huge quantities.

SMEs

Is this practice confined to SMEs?No, in fact the practice started with larger businesses.

Devices

What type of devices are produced?Almost everything you can think of, and more:

Consumables, reusables and now capital equipment.

Responsible Device Manufacturers

What are the main concerns of a responsible medical device manufacturer when buying from the Third World?

Quality and Design

Goods must meet quality and design specifications:Why?

Risk to patients.Legal compliance with Medical Devices Directive.Risk of loss of certification.Damage to reputation and brand.Business loss.

Cost Targets

Goods must hit cost targets:Why?

Business could fail if not competitive.Customer procurement practice was and, in many cases still is, heavily cost weighted.

On-Time-In-Full

Goods must be delivered on time and in full:Why?

Customer service critical.Lengthy supply chains.

Ethical Production

Goods must be produced ethically:Is this really fourth on the list?

Yes

Why is Ethical Production Fourth?

No right minded person wants their goods produced in an unethical way:

But it is a question of priority and emphasis.

Why?

Because there was little concern from the customer base.

Producing ethically costs money and takes time.

Nothing is for nothing.

The best suppliers are usually the most expensive.

But Will The Customer Pay The Extra?

Only if he knows what he wants.

If he does not you will lose the business.

Can The Costs Be Mitigated?

To some degree – yes.

Improved conditions give better quality.

Improved conditions give more labour motivation.

Remember – decent working conditions – not First World – may not cost much.

The Importance of Volume Commitment

Drives productive efficiency.

But it must be over the long-term.

Short-term = no investment or commitment.

Relationships

Need a relationship of trust and openness:Purchaser needs to pay a reasonable price.Purchaser does not wish to be taken advantage of.If the purchaser cannot compete = loss/loss.

Remember

Ethical procurement takes time and costs money for the purchaser.

But once rolling, additional costs are not too prohibitive.

Codes of Conduct/Certification

Codes of conduct/certification:Can be very confusing for everyone.There are many different organisations around the world.Increasing overlap in objectives.Many have a particular niche.

ETI – Ethical Trade Initiative

Working to improve the lives of poor and vulnerable workers.

Produce the ETI Base Code [guidelines].

Based on the conventions of the International Labour Organisation.

ETI – The Ethical Trade Initiative

What do they do?Define best practice.Help workers help themselves.Build strategic alliances.Influence key decision makers.Drive improvements.

ETI – The Ethical Trade Initiative

What they do not do:AuditIssue Certificates of Compliance

SEDEX

Aim to drive improvements in ethical and responsible business practices.

It is an information sharing exchange.

An on-line collaborative platform for sharing ethical supply chain data.

They do not audit or issue certification.

Idea is to avoid duplication of effort and cost.

Used extensively by UK retailers.

SMETA – SEDEX Members Ethical Trade Audit

An audit methodology developed by SEDEX using principles of:

ETI base codeILO conventionsSA 8000ISO 14001They do not audit

SMETA Audits

SMETA audits are carried out by professional auditors:No Certificate of Compliance issued.Look at the manufacturing site listed as producer.Do not go back down the supply chain.

SAI – Social Accountability International

Aim to improve workplaces and communities by developing and implementing socially responsible standards.

Developed the SA 8000 Standard.

SA 8000

The first auditable social certification standard.

Recognised internationally.

SAAS authorise third party auditing firms to audit to SA 8000.

SAAS are a sister company to SAI.

Authorised audit firms check the suppliers and issue Certificates of Compliance.

LSAS – Labour Standards Assurance Scheme

Commissioned by the Department of Health and NHS Supply Chain.

Bespoke standard developed by SGS.

Requires an audit.

Very similar principles to the other conventions and schemes.

Introduced for surgical instruments.

LSAS is Different

It requires much more information and control over the audited suppliers’ supply chain.

It has a phased introduction to allow suppliers to get up to speed.

Meeting phased targets is mandatory.

LSAS

What it does not do:Concern itself with other aspects of supplier performance.Require the supplier to visit and audit their supply chain to confirm accuracy of information.

System based and relies on accurate and truthful returns.

At the highest level of compliance, arrangements for labour standards assurance submitted for third party review.

But a good start and it will probably develop.

SA 8000 and LSAS

LSAS audits the supplier not the supply chain.

SA 8000 audits the production unit.

SA 8000 Certification

If we specify that SA 8000 certification is mandatory for the suppliers and their entire supply chain, what is the problem?

SA 8000 is not a guarantee that everything will be fine.Corruption is widespread in the Third World.Significant problems of reliance on Third World certification even when reputable auditing bodies are involved.Comment applies to Medical Devices Directive compliance as well as ethical certification.

Recent Problems

RINA which is a large auditing firm based in Italy audited a production facility to SA 8000 in Karachi, Pakistan in August 2012 and approved the facility.

Three weeks later an horrific fire killed almost 300 workers.

The Response

No new SA 8000 certificates are being issued until investigations have been completed.

All certified facilities are being re-inspected for compliance with fire requirements by audit firms.

SAAS will do audits themselves.

Inspectors will make unannounced visits.

Food for Thought – Comments by SAI

We are not a police force.

We do not have statutory powers.

Any system is open to abuse by the company.

SA 8000 is not a substitute for enforcement of local laws.

Food for Thought – Comments by SAI [excerpt]

‘We do not assert that audits create change.’

‘Audits gather data that can identify the need for change.’

My View

Nothing is perfect.

Where is the line drawn?

Systems evolve.

It is better to try.

Our pressure can force a change in behaviour.

Manufacturer or Distributor?

Manufacturer [from raw material]

Manufacturer [part finished goods]

Manufacturer [fully finished goods]

Distributor [selling other companies’ brands]

Distributor [selling sub-contracted own branded goods]:In law, he becomes the manufacturer

Manufacturer or Distributor? [contd.]

They all have different levels of knowledge of design, production and regulatory compliance.

Can they cope?

Practical Considerations

Not many people want to travel to the Third World.

Distance, cost, security, health and time considerations.

Travel is necessary to put everything into context.

The Third World is not the UK.

The problems exist everywhere – not just Pakistan.

Not everyone tells the truth.

Practical Considerations [contd.]

Do not rely exclusively on returns from suppliers or from certification bodies.

When you arrive at a city in the Third World everyone knows you are there.

It is possible to have unannounced visits.

It is not possible to have unexpected visits.

The quick double shuffle.

Use your own eyes and ears.

What Suppliers Find Amazing

That public tenders are let without visiting the supplier.

Reputable manufacturers would never do this.

The garage at the back of the three bedroom semi-detached house – FACT.

Recommendations

Introduce ethical management requirements into tenders.

Insist on the suppliers regularly visiting and auditing their supply chain.

Set targets and monitor progress.

Suppliers to preferably have their own employees or independent inspector resident in source country:

Check ethical compliance regularlyCheck quality regularly

Recommendations [contd.]

Employee/inspector activities checked by their employer.

Backed-up by third party audits of supply chain.

Phased requirements to recognise that everyone is on a journey.

Other Benefits

Checking production schedules, quality and ethical compliance can all be done by one inspector.

Additional cost of monitoring ethical compliance minimised.

Improved quality reduces QA checks in the UK.

Conclusion

We can apply pressure to improve standards.

They will not do it alone.

Suppliers need a rule book and a level playing field.

Potential Discussion Points

Do recommendations sit well with procurement policy and law?

Does contract duration meet continuity requirements?

How do you know that the audited Third World supplier is actually being used and the goods are not being sourced from a cheaper source?

Will UK vendors share Third World supplier data?

Do the recommendations make it problematic for SMEs?

Potential Discussion Points [contd.]

How will the playing field be levelled?

Should SMEs be auditing anyway to ensure quality and compliance to the Medical Devices Directive?

How frequently should Third World suppliers be audited?

Do you agree that this drives more complexity and cost?

Do you think that cost can be mitigated?

Do you think we have a problem at all?

Potential Discussion Points [contd.]

How will distributors handle this issue?

What are the trade associations doing?

Which system should NHS Scotland use?

Which sectors should ethical procurement be applied to - all or just some?

THANK YOU