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Strategies for Improving Global Labor Practices

Strategies for ensuring acceptable working conditions in the global supply chain.

(originally published by Booz & Company)

Title: Virtue out of Necessity? Compliance, Commitment and the Improvement of Labor Conditions in Global Supply Chains
Authors: Richard Locke, Matthew Amengual, and Akshay Mangla
Publisher: MIT Sloan, Research Paper No. 4719-08
Date published: October 2008

Although most global corporations attempt to adhere to international labor standards, many of them find it difficult to ensure that their suppliers are meeting the same requirements. That is because the compliance programs of many multinational firms are ineffective; they rely on factory audits and the threat of sanctions to motivate suppliers. After studying a large U.S. apparel company whose garments are produced in more than 30 countries, and interviewing hundreds of factory owners, workers, union leaders, and U.S.-based senior executives, the authors of this study conclude that it is better to focus on joint problem solving and coaching than on inspections and intimidation.

Using factory audits from more than 1,000 suppliers, the authors found that although the apparel company was considered a leader in regulating offshore working conditions, it still had significant labor compliance problems. For example, 72 percent of its suppliers in East Asia had violated either health codes or overtime policies. But factories were rarely punished for failing to live up to labor standards, nor were they rewarded for meeting them. Moreover, because factory managers were reluctant to cooperate, it was difficult for inspectors to gather accurate information. These managers knew that the apparel company was unlikely to pull out if orders had already been placed, and they therefore had little incentive to change their practices.

However, the researchers found evidence that working conditions improved when the inspectors and the factory managers agreed to work together to address labor issues. In one instance, a Bangalore-based supplier’s employees were considerably exceeding the state-mandated 60 hours per workweek, sometimes working seven days in a row. Instead of simply writing them up, a company auditor worked with the supplier’s management to develop a plan to smooth out the production process and eliminate the need for excessive overtime. The cooperative approach to problem solving proved to be a more effective and cost-efficient way to engage factory managers in an ongoing dialogue about improving labor conditions.

Bottom Line: Existing labor codes don’t do enough to ensure acceptable working conditions in the global supply chain. Instead of relying on factory audits and the threat of sanctions, companies should pursue an approach focused on cooperation and incentives.

Author profiles:

  • Bridget Finn is the Web editor of strategy+business.
  • Michal Lev-Ram is a freelance journalist based in the San Francisco Bay area. She is a former reporter for Fortune and has covered technology and business news for Fast Company, Business 2.0, and, among other publications and Web sites.
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