Why Companies Should End the Supply-Chain Secrecy

Christopher S. Tang

When something bad happens at a contract manufacturer in a developing country such as Bangladesh or China, the press and consumer watchdogs often take the western customers to task.

Just last month, the Wall Street Journal reported that a factory in Chongqing used by Hewlett-Packard violated labor laws that limit the hours that student interns can work. Critics accused H-P of having turned a blind eye. Last year, Apple got bad press after a supplier of iPad cases was caught dumping untreated metal-cutting liquid into Shanghai’s rain water drainage system.

Revelations about unethical and illegal activities by contractors put pressure on western firms to improve their screening, monitoring, and control over supply-chain partners. However, the direct and indirect costs of all those efforts around the world can be high. And even when a company is willing and able to pay, it can still end up losing what amounts to an endless cat-and-mouse game with contractors.

I think there’s a better and more effective strategy: supply-chain transparency.

For years, many western firms guarded the identities of their supply-chain partners as a trade secret to maintain their competitive advantage. But as long as the suppliers could stay out of sight, many were eager to violate environmental and labor laws and increase their profit margins. In effect, the contractors have reaped the profits of their bad behavior, while their western corporate buyers suffer the punishment of public exposure. By hiding their contract factories and suppliers from the public, these western firms are actually increasing the risk to their public reputations and their brands.

So, instead of hiding the supplier identities, why not make them public? If the public can see that a western company isn’t trying to hide anything, people are more likely to be more forgiving when something goes wrong. Perhaps even more important, outside groups – nongovernmental watchdog groups, government agencies — can do much of the monitoring themselves. In effect, transparency allows companies to use crowd-sourcing as a way to both reduce the cost and increase the effectiveness of their compliance monitoring.

As it happens,the supposed competitive benefits of supply-chain secrecy are rapidly becoming illusory. In today’s highly networked world, industry competitors increasingly know most of each other’s suppliers. In fact, they often use some of the same ones. If competitors are likely to know who the contractors are, why shouldn’t the public?

In 2005, Nike became the first company in the apparel industry to disclose the names and addresses of its contract factories worldwide on its corporate website. Since then, HP, Intel, and Apple have released the names and addresses of their suppliers to the public.

Patagonia, the outdoor-clothing company, expanded the scope of its “Footprint Chronicles” in 2012; it now discloses not only the original supply chain behind its 17 products but the entire supply chain for the whole company. Patagonia wanted to provide more information about its textile mills and factories, including more information about the contractors’ full range of policies on corporate social responsibility.

When firms make their supply chains more transparent, they gain public trust. But by tapping the collective power of the public to keep watch, companies also reduce the cost and improve their confidence about what happens in their supply chains.

This is already happening in some arenas. Out of concern about food safety, Chinese volunteers utilize mobile apps and the internet to expose unsafe food-preparation practices. The risk of negative exposure creates powerful incentives for these factories to clean up their practices. In the same vein, the Institute of Public and Environmental Affairs, a non-profit organization, exposes the identities of Chinese contract factories (as well as their western customers) that violate environmental regulations.

This kind of public exposure makes it more difficult for contract factories to do bad deeds, but it also makes it easier for western companies to take corrective action.

It may seem like an intrusion, but it is likely to be in the company’s long-term self-interest. The old saying is still true: Sunlight is often the best disinfectant.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s