Complexities of Sourcing
I have a laptop that was “Made in America”. Etched right into the casing, some factory (likely in rural Tennessee) churned out this sophisticated piece of technology. But that etching tells only a slice of its manufacturing story. The final assemblage was indeed in Tennessee, but what about the glass in the monitor? That was produced in a factory found in suburban Hyderabad of central India. The CPU was made in Taiwan, the battery in Germany, and the keyboard in China.
But break down the components even further, and more countries are represented. The battery was made with a mix of ingredients. The lithium was mined in the Democratic Republic of Congo, the copper for the wires in Canada, and the aluminum from Russia, previous to 2022 sanctions. Even though the laptop was “made” in America, it was not made just in America.
Sourcing is complex. And while many companies have many different approaches to finding material, this post is not about those specific methods. What this post covers is a relatively new interest in monitoring and regulating where goods are sourced from, and what led to these laws being adapted.
The Catalyst
“Regulations are written in blood,” and our story begins with the deadliest garment-factory disaster in history. An 8-storey linen factory collapses in Bangladesh, killing over 1,100 workers. The primary output of the factory? Cheap cloth for cheap clothing. 1
The disaster was preventable, too. 2 In interviews with survivors and employees at the factory, it was revealed how management ordered employees into the building and granted no time off despite growing cracks literally being seen in the cement. The safety concerns were reported, documented- but ignored. Bangladesh saw mass protests and faced introspection on how to balance the need for economic stability with safety concerns in a growing economy.
But the linens were not produced for domestic use. The garments being produced were for fast fashion or cheap fashion companies such as Zara, Benetton, Sears, or Walmart. 3 These companies even tried to deny any association at first- Benetton initially claimed no relationship, that "none of the companies involved are suppliers to Benetton Group or any of its brands." This was a lie, and one changed only after law enforcement activities began. 4
But for the sake of understanding sourcing, Benetton was only a half-life. None of these brands had an official, direct relationship with the Bangladesh factory. It was an indirect, sub-contracted procurement system. That is to say, Zara had no idea who made the cloth. Zara could tell you they purchased cheap cloth from a company, say “Bangladesh Exports,” but could not tell you where “Bangladesh Exports” got their cloth. This issue allowed this factory to operate with virtually no oversight, and fixing this subcontractor sourcing issue was a major recommendation from NYU’s Stern School of Business, who offered solutions to the problems via a case study. 5
But companies were slow to offer genuine change. Five years later, factory fires from overloaded circuits were still wrecking under-regulated factories, employees were still dying from accidents, and companies like Zara had no obligation to fix what was subcontracted in their supply chain. 6
The Legislation
French Vigilance Law 7
On the 27th of March, in 2017, a historic piece of legislation was enacted: The French Vigilance Law. A global first, the law required “any corporate entity, above certain thresholds, to implement a ‘vigilance plan’ to identify risks and prevent sever violations of ‘human rights and fundamental freedoms, serious bodily injury or environmental damage or health risks results directly or indirectly from the operations of the company and of the companies it controls.’” The thresholds for companies included at least 5,000 employees employed directly and located in France, and/or 10,000 employees worldwide.
Most importantly were the controls. Those found to be non-compliant could be impacted by a court injunction from “any person with legitimate interest” (including NGO’s), and a victim could sue for damages, but only in civil court.
Though non-compliance did not mean criminal charges, this law was regardless a new tool to ensure human-rights were respected in global sourcing. A quick summary would be:
- First law of its kind
- Requires risks to humans rights and more be identified
- Could result in civil liabilities if companies neglect requirements
The Netherlands Child Labor Due Diligence Act 8
Alse proposed in 2017, but only enacted in 2020, the Child Labor Due Diligence Act 9 focused on child labor. Unique compared to the French law, and the subsequent German law which echoes France, this legislation applies to any Dutch company, or any company that operates with consistency within the territory of the Netherlands. What is unique about this law is the criminal liability- repeated violations could lead to the criminal liability of company directors, who fail to improve their supply chain despite notifications. Also noteworthy is a small fine for companies who simply ignore the law wholesale, ensure basic and immediate verification.
German Duty of Care in Supply Chains 10
Starting on the 1st of January in 2023, Germany became the third country to enact a duty to care sourcing law. Echoing the French act, the German law applies to any company with more than 1,000 employees, enforces sourcing standards via fines or barring companies from working with government contracts, and can allow authorities to require a company change its due diligence system if deemed harmful.
EU Corporate Sustainability Due Diligence Directive (CSDDD) 11
Lastly in Europe is an EU-wide directive that requires due diligence for all companies operating within the bloc. To side-step the intricacies of EU adaptation, member countries are to implement due diligence processes that mitigate adverse human rights impacts AND environmental impacts within a company’s supply chain. This was written with the Paris Agreement in mind, but touches on human rights just as much as environmental concerns.
The law impacts approximately 13,000 companies split between 2 groups: EU Large Companies, employing more than 500 people with € 150 Million worldwide turnover; and companies outside the EU, which operate within the EU, and operate in defined “high impact” sectors, such as textiles, mineral extraction, or agriculture.
Each member state will determine enforcement protocols, and will be known within 2 years per requirements.
American Uyghur Forced Labor Prevention Act 12
This is not a due diligence act in the same tradition of the above. However, from June 2022 onward, companies that sourced from the Uyghur region of China were operating under the “rebuttable presumption” (that is assumed to be true until proven otherwise) that goods sourced from that area were made with slave labor. That meant that they could not be sold in the US until a supply chain audit was conducted to show otherwise.
China accused the US of “fabricating” the allegations 13, but act resulted in an interesting result- some companies proved the cleanliness of their supply chain, whereas others stopped operating in Uyghur all together. Though perhaps unfairly targeting a specific area for political reasons, this act does represent the first American quasi-due diligence effort for sourcing.
In Conclusion…
With the adaption of the EU’s CSDDD, sourcing will become more prominent and discussed for businesses worldwide, especially those in category 2. Sourcing is a messy, messy business- oil pollutes, lithium mines collapse and kill, and diamonds are funding conflict regions worldwide. These laws aim to address these concerns, and provide insights to consumers while also improving conditions in the developing world.
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What are your thoughts? Has recent history proven that regulation is necessary? Is the EU overstepping its boundaries by requiring this?
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4: Benetton admits link with firm in collapsed Bangladesh building | Bangladesh | The Guardian
6: NYU Stern Center for Business & Human RightsFive Years After Rana Plaza
7: 201704_french_law_corporate_duty_care.ashx (linklaters.com)
9: T W E E D E K A M E R D E R S T A T E N – G E N E R A A L 2 (mvoplatform.nl)
11: Corporate sustainability due diligence: Council gives its final approval – Consilium (europa.eu)
12: Uyghur Forced Labor Prevention Act | U.S. Customs and Border Protection (cbp.gov)
13: https://english.news.cn/northamerica/20211224/debcd2faa15b4994a95ab5afdcc9a31d/c.html
Posted by rr215