Tescos Management of Supply Chain and Its Human Resource - Essay Example

Ethical Issues in Business: Tesco’s Management of Supply Chain and Its Human Resource. An increasing call for corporate social responsibility to be incorporated in to the decision making process is prompting the corporate world to reevaluate their business practices which are predominantly driven by profit making motives. Campaigns of world bodies such as WTO, Ethical Trade Initiative, NGOs such as Oxfam & Caux Round Table Forum are examples of increased lobbying for human rights and ethical practices in corporate dealings. Oxfam and Friends of the Earth are some of the campaigners who have in recent times criticised, large-scale global retailers such as Tesco on their global purchase practices and manner of exploiting the supply chain. A host of human rights issues have associated with work conditions have been attributed to unfair purchasing practices adopted by retailing empires such as TESCO & Wall Mart. Oxfam in recent a report “Trading Away your Rights” accuses that these firms, of exploiting their bargaining power at the top of the global supply chain to push down the pressure for shorter lead times and higher margins, to the bottom end of the supply chain. It is therefore imperative that business enterprises, while pursuing profit maximisation goals and competitive strategies, combine their commercial policies with ethical policies. Tesco which is worlds 3rd largest retailer and Britain’s market leader in the retail trade is one of the most successful business enterprises in Britain. The recent annual profit declared was an impressive £ 2 billion, which makes Tesco the first ever retailer in Britain to achieve such profits. Tesco employees over 366,000 staff in 13 countries who serve over 30 million customers each week. Tesco’s supply chain is made up of over 2,000 own-brand primary suppliers based in 98 countries. In its bid to maximize profits, Tesco places high focus on the supply chain management through which costs of inventory has been driven down and margins available have been maximized through aggressive purchasing practices. The company purchases a bulk of its wine and fruit products from South Africa whose wine industry has developed impressively in the past decade. South Africa’s wine exports have grown dramatically from a mere 22 million litres in 1992 to close on 200 million litres in 2004. Britain’s main retailers take up more than 40 per cent of South Africas bottled wine exports. With this large stake of imports, the manner in which these companies conduct their trading activities with the South African wine suppliers impact the whole industry. Key ethical issues surrounding the purchasing practices of retail giants as Tesco, revolves around the demand for shorter lead-times and best quality at cheapest possible prices. With the vast demanding power of the buyers, the suppliers are squeezed to deliver at unrealistic lead-times and sometimes at below the cost prices. This pressure on suppliers is dumped immediately onto the workers, in the form of ever-longer hours at faster work rates, often in poor conditions and with no job security (Oxfam 2004). Undue pressure for shorter lead-times, lack of order forecasting, last minute changes to packaging requirements have been identified as key pressure factors resulting long working hours without overtime pay. Due to lack of long-term purchase contracts the industry workers suffer from job uncertainty and mainly hired as daily paid wage workers (Garnet 2005). These multinational retailers pass on the risk of price fluctuations and poor forecasting on to the small and medium scale suppliers who are left with no choice but to comply with these demands and often easily sacrifice respect for workers’ rights in the face of such pressure (Dhanarajan, 2005). Some of the aggressive purchasing practices adopted by retailers as Tesco which are ethically questionable includes, delayed payments and payment being determined only after product arrives and in the case of fresh produce, if the product is unsatisfactory or not needed by the supermarket, the farmer has to bear the cost of it being sold on the wholesale market. Any costs of tchnical and packaging requirements such as change of packaging has to be absorbed by the supplier. Placing smaller orders more frequently add on to the cots of order processing to the suppliers. Threats of relocating supply sources is used as a means of bargaining down the price and often when the volumes increses, demands for increased margins take away any hope for suppliers in making sufficient profits from the venture. Requsting supplier contributions towards product advertising and sales promotional campaigns also adds to the unfair distribution of economic profits wihin the supply chain. In order to change such unethical practices as oulined above, companies need to incorperate ethical policies and practices in to their decision making and managerial process. While many schools of though on ethics and morality exists, some appeal to the decision makers intutive beliefs of what is right and what is wrong while other approaches such as utilirianism focus on the balance of benefits for all those who are affected by the decisions or actions. Uutilitarianism in its simplest explanations holds that the morally right course of action in any situation is the one that produces the greatest balance of benefits over harms for everyone affected. Utilitarianism offers a relatively straightforward view of ethical practices. (Velasquez et al. 2005) Utilitarian principles holds that what is ethical and morally right is to choose policies that would bring about the greatest net benefits to society once the harms had been taken into account. This principle is reflected in the utilitarian’s motto of "the greatest good for the greatest number" (Vincent & Belmont 1986) If Tesco were to adopt a utilitarian approach in their purchasing practices, the outcomes may be mutually beneficial to all parties affected. Based on utilitarian principles, current practices of undue pressurization for shorter lead-times, unreasonably low prices and other unethical demands placed on suppliers which were outlined in preceding sections, are beneficial to only a selected segment of those who are affected, and a greater number of people are harmed in the process. In this scenario the harm is born by the suppliers and their work force while the benefits are mainly reaped by the company’s ownership. If a change of approach is adopted in line with utilitarian way of thinking, then decision-making and purchasing practices can change in following manners, which would be of mutual benefit and with lowest possible harm. One of the changes can be implemented in providing long-term supply contracts to selected suppliers than expecting them to react to short term demands by burdening the workforce with unreasonable working hours and faster work rates. Such long-term purchase agreements would also allow suppliers to offer job security to the workers by offering permanent jobs or annual contracts instead of daily wage arrangements. Minimum order quantities can be decided taking in to consideration the costs incurable by suppliers in shipping small orders and the optimum shipment levels. Payment terms should be reasonable and should not be dragged on which place the suppliers in critical working capital difficulties and associated interest costs. By adopting an utilitarian approach decisions pertaining to pricing also may change. For example, a cost-plus-margin pricing scheme can be adopted by Tesco and its affiliate suppliers if they are working on a long-term relationship. Cost plus margin pricing is a common practice in the apparel industry where most of the manufacturing is carried out in the developing countries in Asia and purchased by apparel retail giants in USA and Europe. Free promotion of products and supporting brand building exercises of suppliers should be seen as a responsibility of Tesco and should not require any contributions from suppliers. The support Tesco extends in this area would benefit “a greater number” as per the utilitarian principle in that, it would help develop the South African Wine Industry on which many of the economically deprived families depend upon for their livelihood. Considering the above outlined changes in purchasing practices which may result in if Tesco adopts an utilitarian approach in selecting the ethically correct course of action, "the greatest good for the greatest number" will become not a mere utilitarian motto but a viable reality. Tesco’s Human Rights Policy outlines its policy on treatment of employees and claims to have been drawn up to uphold the basic human rights and supports in full the United Nations Universal Declaration of Human Rights and the International Labour Organisation Core Conventions. Tesco is also a founding member of Ethical Trade Initiative since its inception. The Ethical Trading Initiative (ETI) is an alliance of companies, non-governmental organisations (NGOs) and trade union organisations promoting and campaigning for improvement and implementation of corporate codes of practice which cover supply chain working conditions.  It can be noted that Tesco’s human rights policy, which is outlined below, is closely aligned with the ETI’s Base Code covering human rights standards. However there are areas in the Tesco policy, which are presented without clear specifications, which allows for loop holes for deviations. Reported cases on violation of these policy standards by Tesco, have been widely publicised in the media. As per the Tesco policy, all employees are treated fairly and honestly regardless of where they work. This adheres with the ETI’s base code 7.1, which states that there should not be any discrimination in terms of human resource practices. However it can be noted that Tesco’s policy on indiscrimination is very loosely constructed without specifically and categorically stating areas of discrimination, which they aim to avoid. On standards applicable on provision of regular employment, Tesco commits to provide all staff with a written contract of employment, with agreed terms and conditions, including notice periods on both sides. The ETI standards 8.1 & 8.2 require that employers should ensure that work performed must be on the basis of recognised employment relationship established through national law and practice and that obligations to employees under labour or social security laws and regulations arising from the regular employment relationship shall not be avoided through the use of labour-only contracting, sub-contracting, or home-working arrangements. In deviation with the ETI standard, there have been several media reports on Tesco’s contract labour and home worker arrangements, which have replaced normal employment contracts. Many foreign workers such as Polish workers have been recruited on temporary basis through recruitment agencies. Tesco’s Human Rights policy advocate that all staff are entitled to reasonable rest breaks, access to toilets, rest facilities and potable water at their place of work, and holiday leave in accordance with the legislation of the country where they work. An article titled “Tesco’s new policy that punishes the sick,” which appeared on Socialist Worker on 9th Oct 2004 revealed some shocking practices which Tesco applies on its workforce including restricted tea and toilette brakes in their ware house operations, half hour non paid lunch breaks and stringent holiday and leave approval systems. It also revealed highly unethical practices pertaining to sick leave and sick employees who are placed on “sickness procedure” are at most times dismissed on grounds which the management refers to as a contractual dismissal. Tesco’s Human Rights policy also upholds a fair wage reflecting the local markets and conditions should be paid to the workers. National minimum wage is a key factor which Tesco take into account when looking at pay and conditions Working hours shall not be excessive and these hours shall comply with industry guidelines and national standards where they exist. Overtime shall be voluntary. While these standards are in adherence of ETI’s standards referred to in section 6.1 & 6.2 for working hour regulations and section 5.1 to 5.3 which stipulate the required standards of practice for administering a fair wage, deviations in reality have been sited. As a highly profitable venture, whether Tesco abides by ethical practice of reasonable sharing of wealth created between its stakeholders such as the employees is questionable. It was reported in the media that the top 8 executives in the Tesco board walked away with £ 26 million each from the £ 2 billion annual profits while the supermarket staff are paid barely above the legal minimum wages for hard and boring work which leaves them drained at the end of work (Blythman 2004). Tesco upholds employment needing to be freely chosen which is in compliance with the ETI Base Code’s section 1.1 & 1.2. Tesco’s policy outlines that it will not employ illegal child labour, forced or bonded labour or condone illegal child labour, which is forced or unpaid. This is in line with the ETI’s standards stated in section 4.1 through 4.4. Another article included in the Tesco’s human rights policy is that they uphold the employees’ right to freedom of association and the right of joining a recognised trade union where this is allowed within national law. While this adheres to the standards mentioned in ETI code under section 2.1 to 2.4, it was reported in the media that the leading British retail multinational Tesco has embarked on a union-busting action in Turkey. UNI Commerce affiliate Tez-Koop-Is reports that pressure is put on union members to resign, to push down membership under the all-important fifty-one percent level. The Izmir-based Tesco management has reportedly refuses to meet with union leaders to discuss the issues (Union Network Org. 2004). The company’s human rights policy also incorporates requirements for safe working environment for the employees and instilling proper governance for health and safety. This is in compliance with the ETIs standards on working conditions and safety and hygiene mentioned under 3.1 to 3.5. Tesco’s policy on use of corporal punishment, mental or physical coercion or verbal abuse complies with the ETI’s standards of not allowing harsh or inhumane treatment of employees. Tesco has incorporated disciplinary procedures for any member of staff whose conduct or performance falls below the required standard and formal grievance procedures are in place through which staff can raise personal and work-related issues. Tesco policy concludes with an assurance on proper investigations of any allegations of infringements of the human rights policy and corrective actions being implemented. However, several news reports which publicised the strike carried out by Polish temporary workers of Tesco Ireland, reported gross exploitations of foreign labour and summery dismissal for two of the workers who has raised questions against the unreasonable demands for increased productivity at warehouse operations. One of the participants of the strike was quoted saying: "In Tesco people were treated very badly. Used very much not as people but as a product. The target of work was increased all the time and there was no more pay for it, even when people worked harder than previously. Some of them do not agree with this situation and they will fight for the rights which they have" (indymedia.ie 2005) Such violations and unethical labour practices may contradict with what is contained within Tesco’s human rights policy. It is therefore essential that Tesco understands that value of a policy lies in not the expressed standards but adhered standards and should therefore endeavor in minimising and avoiding violations as sited. In a bid to address the negative publicity the company has received over the past couple of years on its unethical trade practices, Tesco has in effect taken up some measures to realign their purchasing policies with ethical policies. Some such measures involve their membership of the Ethical Trading Initiative, UK Government’s statutory Supplier Code of Practice as well as the South African Wine Industry Ethical Association (WIETA). They have implemented number of action plans and programs, which is aimed at educating and directing their suppliers into adhering with human rights standards of the ETI and improving of the worker conditions. However, it has to be questioned whether Tesco it self has imposed any self regulations on how their own purchasing practices are conducted in ethical manner which undoubtedly will be the basis on which the suppliers ethical treatment of workers will depend upon, driven by financial viability. Furthermore, violations of their own Human Rights policy standards through unethical employee practices which have been reported raises the question whether profit motivation is the only driving force in Tesco’s rise to success in the retail industry. Bibliography Barry, V. E. 1986, Moral Issues in Business, Wadsworth Publishing, California. Behrman, J. N. 1988, Essays on Ethics in Business and the Professions, Prentice Hall W Englewood Cliffs, New Jersey. Bowie, N. E. 1999, Business Ethics, A Kantian Perspective, Blackwell, United Kingdom. Blythman, J. 2004, “The Great Supermarket Rip Off”, Socialist Worker, Oct 9. Cavanagh, G.F. 1988, Ethical Dilemmas in the Modern Corporation, Prentice-Hall, E Englewood Cliffs, New Jersey. Dhanarajan, S. 2004, “Winning profits, losing rights: the causal link between buying practices a and poor working conditions” Proceedings of ETI Members RoundtableForum - u Purchasing practices: marrying the commercial with the ethical, London. Available at: httphttp: //www.ethicaltrade.org/Z/lib/2004/07/rt-purprac/index.shtml Ethical Trading Initiative, availabel at http://www.ethicaltrade.org/Z/lib Shaw, W. H. 1992, Business Ethics, Wadsworth Publishing, California. Seglin, J. L . 2003, The Right Thing: Conscience, Profit and Personal Responsibility in T Todays Business, Spiro Press. Velasquez, M., Andre, C., Shanks, T. & Meyer, M.J. “Calculating Consequences: The Utilitarian Approach to Ethics” available at: http://www.scu.edu/ethics Tesco Social Responsibility, 2004 “Managing our supply chain ethically” available at: http://www.tescocorporate.com Gernet, M. 2005 “The power of supermarkets: low prices, low standards?” Eldis, Oct 18, a available at: pmhttp://community.eldis.org/webx?14@237.mazsaA8igYx.0 Niel, R. 2004, “Tescos new policy that punish the sick” Socialist Worker, Oct 9. “Polish Wildcat Strike In Dublin: Workers Refuse To Break Their Backs For Their Tesco Bosses”, 2005, available at http://www.indymedia.ie/newswire.php?story_id=71189 Trading Away Your Rites – Oxfam report, available at: http://www.maketradefair.com/en/assets/english/taor.pdf “Tesco goes union-busting in Turkey: Social responsibility commitments are ignored by Izmir management”, Available at : http://www.union- network.org/unicommerce.nsf/0/E6E7552CE94D7D32C1256 South African Wine Industry Ethical Association, WIETA News, 2005, Available at: http://www.wieta.org.za/4_new_worksites_accredited_by_WIETA Read More