Expert Collaboration

In 2006, IBM took a number of steps to continue to initiate steady, meaningful change in the labor practices of its suppliers around the world. IBM’s involvement with supply chain issues is extensive. Not only does the company’s consulting unit advise clients on optimizing their businesses through innovative supply chain transformations, but the company also manages a $39 billion supply chain of its own, involving 30,000 businesses in more than 130 countries. In addition to ensuring the ethical operation of its own chain, IBM hopes to be able to influence other suppliers’ practices, and even to entice governments in developing nations to improve laws, where possible. The issue is crucial not merely because IBM does business directly with the suppliers, but because IBM is moving rapidly to sell products and services in these developing countries.

In 2006, IBM continued third-party audits in such countries as Taiwan and Brazil and reaudited suppliers in Mexico, for a total of more than 80 audits in these countries. To build momentum for the goals and objectives of supply chain social responsibility, IBM also developed a Web-based internal education class that covers all aspects of the firm’s supply chain social responsibility efforts. The Web information project is available 24/7 to the nearly 6,000 IBM procurement professionals.

“Developing a set of supplier conduct principles was in itself not remarkable,” says John Gabriel, manager of Supply Chain Social Responsibility at IBM. “Auditing our suppliers demonstrates a greater commitment. Educating our employees who interact with suppliers on a daily basis is essential to our goal of making supply chain responsibility part of the normal course of business.”

Audit results have shown strong supplier performance in many areas, with continued need for improvement in others.

The results from audits in Mexico have been especially instructive. First audited in 2004-2005, IBM’s Mexican suppliers in 2006 showed a 95 percent improvement in compliance with Non-discrimination provisions of the Electronic Industry Code of Conduct, an 85 percent improvement in compliance with respect-and-dignity provisions of the code and full compliance with the Communications provisions.

To bring about these improvements, suppliers implemented revisions to their hiring and employment processes and communication activities, and they created written internal policies to supplant informal processes that had existed previously.

Supplier Assessments (2005-2006—percent noncompliant, base=200 audits)

But all was not perfect on the reaudits of IBM’s Mexican suppliers. The third-party audit teams that IBM has retained saw increases in noncompliance in the critical area of health and safety, the result of an expanded set of audit questions implemented after the first round of supplier audits in Mexico in 2004-2005. And there was an increase in noncompliance in wages and benefits (inadequate contribution of social benefits) and in working hours (lack of proper time records in place).

IBM has audited more than 315 supplier factories across Mexico, China, India, Thailand and the Philippines and has recently begun audits in a number of Eastern European countries such as Hungary, Romania and Poland. The company will soon begin audits in the Czech Republic, Slovakia, Belarus, Latvia and Russia. The improvements IBM seeks cover everything from curtailing discriminatory practices and excessive overtime to ensuring adherence to health code regulations and proper record keeping.

IBM and the non-governmental organizations with which it is working on the supply chain problem agree that much remains to be done: to inform IBM shareholders of the audit results in a predictable fashion; to systematize audit results; and to lay down a more concerted, detailed plan of expectations for supplier labor improvements in the years ahead.

“IBM is really trying to embed corporate social responsibility and supply chain compliance into its standard business processes,” says Rev. David M. Schilling, director of the Interfaith Center on Corporate Responsibility in New York City.

IBM, in fact, has been focused on improving supply chain practices for many years, with particular focus on the issue since 2004. In that year, IBM, following the lead of the footwear, apparel and retail sectors, created its own supplier conduct principles. In 2005, IBM launched supplier audits and helped develop the Electronic Industry Code of Conduct (EICC), a dramatic move that helped suppliers by ensuring they could follow one identical code of standards for their work in the electronics industry.

“One immediate and sustainable result, we believe, is that our suppliers can better spend their time and money on instituting long-term improvements in their offices, factories and among their employees, rather than on costly and repeated audits each of which asks for different things to be fixed,” Gabriel says.

Other companies in the EICC are Hewlett-Packard, Intel and Dell. In addition, suppliers from which IBM and other firms purchase product worked on the codes and remain as members of the EICC, including: Celestica, Flextronics, Jabil, Sanmina SCI and Solectron.

For more background on IBM’s procurement policies, visit: www.ibm.com/procurement. For more information on the EICC, visit: www.eicc.info