Socially Responsible Procurement Programme - Coursework Example

What is Socially Responsible Procurement? Today, more than ever, corporations are compelled to do good while they do well. The man upon businesses to ethically operate and become socially and environmentally responsible, particularly in the three key areas of human rights, labour standards and environmental practices, is driven by an ever-expanding definition of corporate stakeholders. (McCudden at 5). Whereas stakeholders traditionally referred to the national government, shareholders and employees, the definition has now expanded to include “consumers, human rights and environmental non-governmental organizations and inter-governmental organizations, in addition to the classic three.” (McCudden at 5). In other words, there are many different groups who see themselves as having a vested interest in how a corporation operates. The corporate mandate to act responsibly is known as socially responsible procurement. Procurement is “the acquisition of goods and/or services at the best possible total cost of ownership, in the right quantity and quality, at the right time, in the right place for the direct benefit or use of governments, corporations, or individuals, generally via a contract.” (Butter at 2). There are generally four levels of procurement. At level one, needs are identified, as far as the specific good, service or work that needs to be procured. On the next level, suppliers are evaluated. On this level, the supplier must meet certain criteria to receive the contract, and they are evaluated according to their technical, financial and professional qualifications. At the third level, bids are evaluated, looking at “life-cycle costs, environmental impacts, innovation, user-friendliness and delivery of additional benefits.” At the fourth and final level, the contract is awarded and the supplier winning the bid must comply with any and all parameters set forth in the contract, such as mode of delivery, training of the staff and disposal of products. (Carpe Guide at 10-11). Socially responsible procurement is the act of procuring goods while taking into consideration the ethics of how they operate. Corporations must ensure that they or the corporations with whom they work receive appropriate wages and other fringe benefits and that employees are provided with safe working conditions (Socially Responsible Procurement). They must also consider the impact their operations have on the environment (Environmentally and Socially Responsible Procurement Working Group). Furthermore, corporations and government entities must consider the global context “and see purchasing as embedded in a global supply chain.” (Catlaw at 2). They therefore have a great responsibility that extends past their local chain into the global supply. There are three levels of strategic commitment to socially responsible procurement, according to Stanly and Thelen (3). The first one is the fundamental business protection model, that encompassess corporations and organizations that comply with legal and regulatory requirements, and do not go beyond this. The second one is the proactive level, where businesses mitigating unfavorable social risks “by anticipating them and heading them off before they become problems that can affect brand and reputation.” The third level is the “business enhancement” level, in which a business can actually use socially responsible procurement as an opportunity to become more efficient and innovative, and actually enhance their bottom line. A good example of this is a car company that leads the way in producing energy efficient vehicles that are popular and attractive to consumers. (Stanly & Thelen at 3). Closely related to the levels of strategic commitment are four basic models of corporate responsibility. The first is a instrumental model, which states that a corporation must seek to maximize profits, and a corporation may only consider socially responsible factors if it increases the bottom line. (McCarthy at 3). The second is political, which postulates that corporations’ first priority should not be wealth, but societal benefit. (McCarthy at 3). The third is integrative, which explores the symbiosis between business and society, and theorizes that one cannot exist without the other and each relies upon the other for “validity, status and survival.” (McCarthy at 3). The fourth is ethical, which states that businesses must treat individuals fairly, contribute to the sustainability of the environment, and keep “common good” in mind when conducting business affairs. (McCarthy at 3). Both stakeholders and citizens are putting pressure on corporations to adopt the ethical business model and the business enhancement level of commitment. In other words, corporations can no longer operate under the model of short-term greed and the maximization of profits at the expense of the environment and human rights. Ways to Encourage Socially Responsible Procurement While socially responsible procurement is an admirable goal, it isnt easy for companies to implement, due to the fact that socially responsible procurement is perceived as “inherently more expensive than other methods” of procurement. (Walker and Brammer at 130). Therefore, corporations and organizations must be encouraged procure in a socially responsible way. Companies may be driven to act socially responsible by external and internal factors. External motivating factors include outside pressure to act responsibly, such as through legislation, boycotts, negative media attention, and pressure from socially responsible investors. (Mont & Leire at 13-14). Internal factors include a desire to maintain their reputation, internal organizational values, and the desire to achieve social outcomes. (Mont & Leire at 15-16). On the flip side, corporations may also encounter barriers to acting socially responsible. Internal barriers include the need to justify their actions to the Board of Directors, additional costs associated with SRP, a lack of training and information, the lack of top management commitment, and the lack of legislation. (Mont & Leire at 16-17). Both suppliers and focal organisation encounter further barriers, including the fact that audits are expensive and time-consuming, cultural barriers and a lack of supplier understanding. (Mont & Leire at 18-19). For further explication of these barriers, please consult figure 1 at the end of this document. Because of the significant barriers explained above, and the fact that not every corporation experiences external and internal drivers to act responsibly, there often must be methods to encourage reluctant companies to procure responsibly. The first way is the use of voluntary codes. This takes the form of labeling products to show consumers that the products comply with social and environmental standards and shareholder initiatives that require shareholder initiatives to ensure that the corporation upholds these standards. (McCrudden at 3). Companies achieve the goal of ensuring that their products are up to standard by putting corporation social responsibility requirements into their supply contracts. (McCrudden at 3). Compliance with these codes is driven by the marketplace, as consumers demand that these standards are met. (McCrudden at 3). One example of this was the public outcry over tainted food and defective toys from China. (Catlaw at 3). Another example is the rise of the organic food industry, as citizens become more sensitive to the pesticides in their food and the ethics regarding treatment of animals. (Catlaw at 3). Newspapers run front page stories about companies that work with global companies that violate the environmental and social norms, such as the New York Times front page story about ConEd, a major New York public utility, purchasing manhole covers from a foundry in India with horrific working conditions. (Catlaw at 3). Consumer demand for a socially responsible marketplace has been quantified. In the summer of 2009, Consumers International commissioned a survey on consumer attitudes to socially responsible procurement in six European countries. (Consumer’s International). The countries were Belgium, Denmark, France, Spain, Greece and Poland. (Consumer’s International). The following results were found: 1) That the majority of consumers in all but one of the surveyed countries were willing to pay more for goods if it meant that workers were paid fairly; 2) That consumers were aware of human rights issues regarding procurement in France and Denmark, somewhat less in Spain and Belgium, lesser still in Greece and Poland; 3) That the majority in all the countries only occasionally noticed fairly traded products to be available in shops; and 4) As far as sources of information on how fairly supermarkets treat their suppliers, the majority in all countries put their trust most in consumer organisations, followed by independent verification and labelling organisations, with supermarkets the least trusted in all countries but Greece. (Consumer’s International). While the consumers have driven corporations to voluntarily comply with human rights standards, voluntarism can only go so far. Consumers can force corporations to do the “right thing.” Unfortunately, the “right thing” is not the easy thing with corporations, as equity, ie. “more equal distribution of income or wealth” comes at the expense of efficiency, which means less economic growth. (Catlaw at 18). It also results in more expensive products. (McCrudden at 4). Corporations needed a better push in the direction of social responsibility. This has come in the form of incentives, such as the European Commission’s approach in 2006, which stated that if the regulatory environment in Europe was to remain business-friendly, then businesses must act responsibly. (McCrudden at 6-7). Another incentive is the Global Compact launched by Kofi Annan in July 2000. (McCrudden at 7). This was both way of sharing good voluntary practice and a recognition of corporations that were using good voluntary practice, with a goal of corporate compliance with socially responsible practices in the areas of human rights, labour, environment and anti-corruption. (McCrudden at 7). Closely related to these initiatives is one formed by Interagency Sustainable Procurement Group, which was formed by multilateral development banks (MDBs), United Nations organisations and a “variety of non-governmental organisations.” (Environmentally and Socially Responsible Procurement Working Group). The objectives of this group are “1) to share organisations’ experiences to date on sustainable procurement and receive feedback on strategies under development 2) identify new sustainable procurement partners in developing and developed countries 3) encourage ownership of sustainable procurement.” (Environmentally and Socially Responsible Procurement Working Group). Another way of ensuring compliance with human rights standards is the development of an international body that mandates human rights compliance on its participating member states. The international body that is responsible for enforcement of human rights standards is the International Labour Organization, or the ILO, which concerns “contracted supplies and services from developing and emerging countries.” (Socially Responsible Awarding of Public Contracts). The ILO focuses on “labour standards, the social and fair shaping of globalisation, and the creation of decent work as a central condition for combating poverty.” (Socially Responsible Awarding of Public Contracts). The fundamental principles that the ILO has made mandatory for its member states are “1) Freedom of association and the effective recognition of the right of collective barganing; 2) Elimination of all forms of forced or compulsory labour; 3) Effective abolition of child labour; 3) Elimination of discrimination in respect of employment and occupation.” (Socially Responsible Awarding of Public Contracts). The ILO’s member states comply with the ILO mandates by the use of contract clauses. For instance, a contract may stipulate that the supplier must comply with the principles of the ILO. (Socially Responsible Awarding of Public Contracts). The penalty for non-compliance under such a contract can be either a 10% penalty on renumeration or be considered in breach of contract, in which case the contracting authority may void the contract and demand compensation for damages. (Socially Responsible Awarding of Public Contracts). Another way of enhancing socially responsible procurement is through the use of public contracts. (Socially Responsible Awarding of Public Contracts). Public contracts for goods and services may have stipulations that child labour laws are complied with, or that long-term unemployed persons, disabled persons or older persons are hired. (Socially Responsible Awarding of Public Contracts). Other stipulations could be that women are hired in equal rates as men, and that women receive the same pay as men for equal work. (Socially Responsible Awarding of Public Contracts). Important Elements of a Socially Responsible Procurement Program While companies may have a broad goal of being socially responsible, they need to know the important elements of a socially responsible procurement plan in order to implement one. These are some of the most important elements of a successful socially responsible procurement plan: 1) Driving forces and key issues; 2) Prioritisation; 3) Supply chain communication and 4) Operational processes. (CIPS Australia at 10-13). The “driving forces and key issues” element compel a corporation to consider what is driving their particular socially responsible procurement strategy. It must take into consideration the values of the community, the internal values of the corporation itself and the way to manage risk within the organisation. (CIPS Australia at 10). The “prioritisation” element involves deconstructing the supply chain: “starting in areas of significant or strategic spend, identifying the products...that are purchased, mapping the supply chain for each of these products and looking for any potential SRP impacts.” (CIPS Australia at 10). “Supply side communication” dictates how an organisation must communicate its SRP goals with its suppliers. For the “high risk” suppliers, a face-to-face meeting is required. For the “medium risk” suppliers, each supplier would be asked to demonstrate its adherence to the SRP goals by a reporting system. For the “low risk” suppliers, only “passive communication” is required, for example putting in standard terms and conditions for that supplier to follow. (CIPS Australia at 11). “Operational processes” refers to “tangibly measuring SRP” via some sort of benchmark to be met, such as “100% of ‘high risk’ suppliers will be SRP compliant by 2007.” (CIPS Australia at 12). In conclusion, corporations and organizations must think about more than their bottom line. They must act as socially responsible global stewards, acting in the best interest of human rights and the environment. While this is not the easy choice, as it sometimes means a sacrifice of profits, it is the right choice. However, it seems that regulation and laws are not the preferred way to institute socially responsible procurement. Rather, a global array of initiatives and incentives are guiding corporations in their efforts to act responsibly. While these initiatives are allegedly voluntary, they do come with a subtle threat that, if the corporations do not reform their practices, regulation might be the next step. Furthermore, CIPS Australia as put forth an excellent guideline on how corporations can comply with their social responsibilities. Businesses might be reluctant to comply with efforts that affect their bottom line, but they should view their responsibility as an opportunity to innovate and lead the way for other corporations and organizations to become responsible as well. Figure 1 – Internal and External Barriers for Focal Organisations and Suppliers (Mont & Leire at 20). Internal barriers for focal organisation External barriers for focal organisation External barriers for suppliers Lack of information on how to develop and implement SRP. High costs of auditing suppliers and poor quality of external auditors due to increasing competition Customers practices of short-term orders and increasing speed of deliveries facilitate poor working conditions Lack of top management commitment for initiation and implementation phases of SRP. Difficulties with establishing long-term and cooperative relations with suppliers .Numerous, often contradictory requirements, from different customers. Additional costs for education, training in focal organisation. Suppliers employees may support current practice, eg, overtime. Difficulties with influencing beyond the first tier suppliers. Lack of educational material for personnel training due to specificity of each sector and company. Lack of clear legislation for customers on how to integrate social issues in supply chain .Time spent on preparing for audits and inspections, keeping several sets of accounting books .Need to justify the activity and its cost based on profit and business benefit .Lack of understanding of the importance of social aspects by suppliers and double-bookkeeping and cheating at audits .Lack of legislation or its enforcement for suppliers in various countries Signficant changes in the focal organisation might be needed .Difficulties with influencing beyond the first tier suppliers and high costs of switching suppliers. Conflict between higher social performance standards and diminishing margins for products.. BIBLIOGRAPHY Butter, F. 2007, “Procurement: the Transaction Costs Perspective in a Globalising World, ” Social Science Research Network, pp. 1-25. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1032152. Carpe Guide. “Carpe Guide to Responsible Procurement,” pp. 1-48. Available at: http://www.kozbeszerzes.hu/static/uploaded/document/CARPE_guide_to_responsible_procurement_2nd_edition.pdf. Catlaw, T. “Socially Responsible Supply Management: Thinking Globally in Local Government Purchasing During a Fiscal Crisis, Social Science Research Network, pp. 1-4. Available at: http://www.transformgov.org/files/whitepaper/4c_Innovating_with_Socially_Responsible_Supply_Management_Tom_Catlaw.pdf. CIPS Australia. “Socially Responsible Procurement: Corporate Social Responsibility in a Supply Chain Context,” pp. 2-15. Available at: http://www.hes.edu.au/resources/655/HES-21951%20CIPSA%20White%20Paper%20-%20Social%20Responsibility.pdf. Corporate Procurement. “Socially Responsible Procurement.” Available at: http://web.worldbank.org/WBSITE/EXTERNAL/OPPORTUNITIES/EXTCORPPROCUREMENT/0,,contentMDK:21821083~menuPK:5156860~pagePK:64147231~piPK:64147158~theSitePK:438017,00.html Consumer’s International. “Consumer Attitudes to Socially Responsible Procurement by Supermarkets.” Available at: http://www.consumersinternational.org/files/100407/FileName/CIsurveyonconsumerattitudestosociallyresponsibleprocurementbysupermarkets.pdf. “Contribution to the Guide on Social Considerations in Public Procurement.” Available at: http://cms.horus.be/files/99935/MediaArchive/pdf/20090115%20Contribution%20to%20Social%20Procurement%20Guide.pdf. Environmentally & Socially Responsible Procurement Working Group. “Welcome to the Environmentally and Socially Responsible Procurement Working Group.” Available at: http://www.sustainableprocurement.net/. McCrudden, C. 2006, “Corporate Responsibility and Public Procurement,” Social Science Research Network, pp. 1-27. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=899686. Mont, O. & Leire, C. 2008, “Socially Responsible Purchasing in the Supply Chain: the Present State in Sweden and Lessons for the Future,” pp 1-70. Available at: http://www.msr.se/Documents/rapporter/MSR_2008_E8.pdf. “The Socially Responsible Awarding of Public Contracts,” pp. 1-14. Available at: http://www.bmas.de/portal/37958/property=pdf/a172__Vergaberecht__englisch.pdf. Stanly, M. & Thelen, B. “Socially Responsible Procurement - Doing the Right Things for Everyone,” pp. 2-6. Available at: http://www-935.ibm.com/services/us/gbs/bus/pdf/ socially_responsible_procurement_9-14-09.pdf. Walker, H. & Brammer, S. 2007 “Sustainable Procurement in the United Kingdom Public Sector,” pp. 1-20. Available at: http://vlc.bath.ac.uk/management/research/pdf/2007-15.pdf. Read More