Hi, in this lecture, I want to introduce some of the impacts generated by the upstream portion of a company's supply chain. I'm going to talk about four broad categories of impacts. This list isn't going to be comprehensive, but it should give you a good start to think about supply chain impacts. The four categories I want to talk about are unsafe work conditions and child labor, that's one. Environmental impacts, that'll be a real brief overview, illegal sourcing, and unsafe products. 1,129 people died in the Rana Plaza tragedy in Bangladesh in 2013. Another 2,500 were injured when the building collapsed. The upper floors of the building were garment factories, employing about 5,000 workers. When cracks were discovered in the building, the banks and shops on the lower floors closed. But the garment factory workers were ordered back to work. In developing countries, people who are desperate for work will take unnecessary risks to get in to keep a job. They don't have the luxury of quitting a dangerous situation. This tragedy showed the world the conditions that some people are forced to work under. A report on the the Rana Plaza tragedy by scholars at New York University concluded that a major factor causing unsafe work places was indirect sourcing. Many companies use indirect sourcing. For example, a clothing retailer in the United States or Europe goes to Bangladesh and finds a purchasing agent. The companies might actually approach several purchasing agents with the specifications for the products that they want. They take the lowest price and that agent then contracts with the factory to produce the goods. If the factory is close to capacity, they subcontract part of the order to another factory. So the retailer often doesn't know where the clothing is made, what the factories look like or who's doing the work. Since the purchasing agents are competing on price, the factories that get the jobs are working on very thin profit margins. This leaves very little money to invest in making a factory safe. Even if the retailer didn't choose the low-cost producer, there's no guarantee that the extra funds would go toward a safer or healthier workplace. How can another tragedy like this be avoided? One way is for retailers to have direct communication with factories. And establish long-term relationships that would encourage investment in better facilities and worker safety and health. If a factory owner knew they would get repeated orders from a customer if they upgraded their facilities. And if the customers were willing to pay a price that included a charge for facility improvement, then making those investments would be a good business decision for the factory owner. There would also have to be limitations on subcontracting to second or third tier factories. Those factories have to come under some sort of regulatory umbrella that will assure worker safety. And we don't hear much about child labor these days, but it continues to be a problem. The International Labor Organization, the ILO estimates that 168 million children age 5 to 17 are involved in child labor. More than half of them, 85 million, are in hazardous work. Now to understand the problem, you need to understand how child labor is defined. Child labor is usually defined as work that deprives children of their childhood, their potential, and their dignity and is harmful to physical and mental development. It's work that's mentally, physically, socially or morally dangerous, that interferes with schooling or prevents children from going to school. And in its most extreme forms, can involve enslavement, human trafficking and separation from families, leaving children to fend for themselves on streets of large cities. Now an after school job at a shopping mall is not child labor in this sense. Nor is work done by children helping around the house, or on a farm, as long as it doesn't interfere too much with school or have adverse health effects. Passing laws doesn't solve the problem because many children work in the shadow economy. Those would be like the secondary or the tertiary subcontracting factors we mentioned already. They are largely hidden, they're unregulated and unexamined. Here's a map of where child labor is likely to occur, and you can see the countries that are highlighted in red. Now what can be done? Just like addressing dangerous work conditions, the purchasing companies, the ones that are contracting, need to do direct sourcing. They need to do factory visits and they need to eliminate sub-contracting that can't be tracked. But the root cause of child labor is almost always poverty. Children work instead of going to school because their families need the money to survive. And in many countries, education is expensive. So, taking a child out of school and having them work, reduces cost and increases income. In Nepal for example, the monthly cost for a C grade primary school, this is about the lowest quality school, can be $10, $20 a month for tuition, plus a one time admission fee, plus uniforms. And those can cost $20 to $40 for small children. This is for a C grade school. The cost gets much higher for better schools. Making education accessible at low or no cost would change the equation. Then parents would think about the value of education in the long term, rather than its immediate costs. Clearly, companies can't solve world poverty. But they can help by making sure people working in the factories, supplying their products, are paid a locally fair wage and children are not being exploited. The second big category I want to talk about in terms of impact is environmental damage. This can come from deforestation, which I'll highlight. It can come from dumping pollutants from mining or oil and gas extraction operations in water or on land, or waste from hazardous chemicals and manufacturing. Despite many efforts to save the rain forest, deforestation continues to be a problem. I'll post a New York Times article about this. Deforestation displaces local or indigenous people, it weakens ecosystems, it threatens endangered species with habitat loss or fragmentation. And it reduces the carbon uptake, so it affects global warming. Many companies have signed pacts, like the New York declaration against deforestation, about not sourcing from newly deforested farms. But again, not knowing the exact source of their supplies allows damage to continue. This is particularly true for soybeans and palm oil. This leads us to illegal sourcing. In the US, we have the Lacey Act, a law that prohibits the illegal importation of fish, wildlife, plants, wood, and forest products. And the Dodd-Frank Act requires companies to publicly reveal if their products might contain conflict minerals from Africa. Again, companies having direct contact with suppliers would reduce these problems. Certification is also helpful. But as we've mentioned already, there have to be penalties for noncompliance. Also, the certification has to be done by independent third parties with expertise in the subject. Often, working with Local NGOs can help identify hotspots or problem areas. But first of all, companies have to want to address the problem. There's sometimes willful or a convenient ignorance on the part of companies about these issues. The last topic I want to mention very briefly is unsafe products. The best example was Mattel Toy Company importing toys coated with lead paint. This is a huge PR and health problem. As already mentioned, better engagement with suppliers, eliminating subcontracting and making sure that suppliers comply with specifications would eliminate or reduce these types of problems. Supply chains can have serious impacts on the lives of people and on the environment. Companies and end consumers need to pay attention to these impacts and accept responsibility for them. It's our desire for low cost products, and companies' desire for profits that push distant factories to exploit workers including children, and not have safe or healthy workplaces. We need to think about the goods we buy and whether they're hiding dirty secrets we'd rather not know about. Thanks.
