Safe Supply Chains Help Produce Sustainable Businesses

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2 Safe Supply Chains Help Produce Sustainable Businesses While international supply chains have created tremendous business opportunities for companies, they have spurred great risks, too. It is no longer enough for organizations to manage their own exposures. They should be equally concerned with their suppliers exposures especially their suppliers supply chains. Simply selecting the lowest cost supplier and closing your eyes to how they produce their product is no longer acceptable. An organization can be directly impacted by their primary and sub-tier suppliers performance, operations, environmental practices, labor force treatment or workplace safety, said Linda Conrad, Director of Strategic Business Risk Management for Zurich Services Corporation and contributor to Companies face major financial and reputational risks if their operations are interrupted by, or even associated with, supplier negligence in a multitude of areas. Supply chain safety is one such area gaining attention, as safety violations, preventable industrial accidents and mistreated laborers can result in costly fines, company downtime and negative news coverage that can impact profitability. Companies put the value of their brands at stake when they fail to abide by society s expectations that they will act as good corporate citizens, Conrad said. When a major organization s supplier or supplier s partner is exposed for unsafe or unethical practices, it s typically the outsourcing organization that faces consumer backlash. More companies are implementing comprehensive corporate social responsibility or corporate sustainability programs that address everything from reducing energy use and waste to monitoring worker safety throughout their entire supply chains both upstream and downstream, said Steve Ludwig, Safety Programs Manager for Rockwell Automation, global provider of automation, power, control and information solutions for manufacturers. Companies should expect their suppliers to abide by the same product quality, environmental and worker safety standards that they follow, regardless of location, Ludwig said. Simply selecting the lowest cost supplier and closing your eyes to how they produce their product is no longer acceptable. Supplier safety significance While supplier worker safety is only one component of corporate sustainability programs, it is an important one. Every year throughout the world, approximately 337 million people are victims of work-related accidents, and more than 2.3 million people die because of occupational injuries or work-related diseases, according to information from the International Labour Organization. 2

3 Analysis of over 2,500 disruptions Accidents Production Problems Labor Unavailability and Shortage of... Natural Disasters Sabotage, Terrorism, Crime and War Financial Losses and Premiums Demand Variability/Volatility Physical and Regulatory Industry-wide (i.e., Market) Challenges Lawsuits Source: Zurich s supply chain loss event database These events are not only tragic, but they can also cause significant damage to the brand and sales of affiliated trading partners. This is echoed by output from Zurich s proprietary supply chain loss event database, which contains over 2,500 disruptions from the past 12 years across multiple geographies and industries. The database indicates that accidents and production problems were the two leading causes of supplier disruption. Further, a Zurich-sponsored survey with the Business Continuity Institute (BCI.org) shows that only 8 percent of firms have continuity plans with their suppliers, so there is much room for improvement, Conrad said. These statistics have prompted action: Forty-three percent of 600 major U.S. companies have implemented supplier codes of conduct, according to information from Ceres, a Boston organization that advocates corporate sustainable leadership and business practices. The information was highlighted in The Road to 2020: Corporate Progress on The Ceres Roadmap for Sustainability. However, only 25 percent of those companies assessed perform even minimal monitoring to determine if suppliers are abiding by the codes. Further, only 10 percent have codes that explicitly reference the International Labour Organization conventions internationally recognized standards for fair labor treatment. Merely policing suppliers to make sure they are meeting the minimum safety standards may result in compliance, but it won t necessarily promote the secure work environment that employees, stakeholders and consumers expect, said Kristen Lang, manager of corporate programs for Ceres. 3

4 Safety and success Companies can find guidance for their broader risk management efforts by following the principles established in ISO 31,000, by the International Organization for Standardization. These helpful guidelines can help organizations achieve their objectives by establishing a flexible framework to manage a variety of risks across the entire enterprise, including worker safety and compliance exposures at all locations or with suppliers, Conrad said. By requiring safe, sustainable practices throughout the supply chain, companies can protect and even differentiate their brand... These standards will support organizations in embedding best practices across their entire supply chains even supply chain safety and business continuity and then reap the benefits, Conrad said. While direct return on investment can be difficult to measure, companies that promote secure work environments among their suppliers work forces and beyond can clearly experience distinct business benefits, according to Lang. Ultimately, these companies experience fewer costly business interruptions of their own and enjoy a positive image by contracting with suppliers considered to be employers of choice because of their high retention, safe work environments and solid reputations. By requiring safe, sustainable practices throughout the supply chain, companies can protect and even differentiate their brand, improve productivity and efficiency, and support their workforces, Conrad said. Conversely, companies face great risk by failing to support a safe supply chain. Suppliers and their vendors that mistreat or overwork laborers, or operate with unsafe practices or machinery, often face labor shortages disrupting production and sacrificing product quality. Poor working conditions in any part of the supply chain could also generate bad press and reputation damage for an organization. Organizations that ignore supply chain safety are jeopardizing their brand, their products and their people, Ludwig said. For more information on machinery safety and establishing a corporate-wide safety program, see page 7. 4

5 Recognizing risk To minimize the negative effects from supply chain safety risks, companies must first assess how potential suppliers inherent vulnerabilities could threaten their businesses success. Senior leaders are recognizing the need to become more aware of the spectrum of risks and uncertainties associated with modern supply chain issues, including brand reputation and regulatory compliance, Conrad said. In order to select viable suppliers, a contracting organization should consider the following criteria: How well-managed and well-developed is its relationship with the supplier? How well does the supplier manage its own supply chain? What is the risk to the supply of products, material or services as a result of regulatory issues, and how well are they managed? How well does the supplier handle its machinery and safety protocols around its machinery? What is the risk to the supply of products, material or services as a result of accidents or errors in the supply chain, and how well are they managed? What are the risks associated with skills or labor supply, and how well are these managed by the supplier? Supplier safety criteria should stem first from global safety standards, as well as company policies and codes that protect its direct workforce. Supplier safety should go beyond bare minimum requirements, however, and reference International Labour Organization standards, as well as the United Nations Universal Declaration of Human Rights, according to Lang. Beyond those standards, companies should enlist suppliers committed to ensuring that their own vendors which companies have less direct influence over are adhering to the same practices and policies. Suppliers can achieve this through their own monitoring and training programs. Pre-screening and qualifying suppliers on criteria like employee safety and health, reinforces the expectation that they conform to established supplier sustainability standards. To demonstrate leadership in corporate social responsibility, companies must look to how they can educate and build supplier capacity, Lang said. A shift from a do not harm approach to one that is focused on worker well-being will help to ensure long-term and sustained change. Monitoring supplier safety Ensuring suppliers and their supply chain are focused on worker well-being requires an open dialogue between both the contracting company and supplier, which should continue long after the vendor selection process has occurred. There needs to be a two-way conversation whereby companies work directly with suppliers, as well as local NGOs (non-governmental organizations) on the ground, to understand the needs of their workforces and how they can improve employee wellbeing, Lang said. 5

6 Suppliers are more likely to get on board with a corporate social responsibility directive through collaboration and education, as opposed to policing. Not only is an open dialogue needed, but persistent monitoring of suppliers and their supply chains is necessary to help meet safety criteria highlighted in a company s corporate sustainability program, according to Lang. Companies need to have a diverse approach to improving supplier sustainability, Lang said, one that includes monitoring, open dialogue and capacity building, as well as business incentives for suppliers to improve their practices. Conrad also emphasized the importance of collaboration to develop safer and more socially responsible supply chains. Suppliers are more likely to get on board with a corporate social responsibility directive through collaboration and education, as opposed to policing, Conrad said. By working together on safety and other components of business resilience, companies and their suppliers can both gain a competitive edge together. Beyond monitoring working conditions, companies also need to monitor the machinery that suppliers and their vendors operate to ensure it is safe. Suppliers and their vendors should also have established safety programs around machinery operation. Safety doesn t cost more, Ludwig said. Implementing an effective machinery safety program is less expensive than injuries. Current global machinery safety standards improve both safety and productivity. Spurring change From human rights issues to machine hazards, supplier safety presents a wide range of risks that should be managed within an organization s broader risk and corporate sustainability programs. Since the supply chain represents such major financial and reputational exposures, it is imperative that the portfolio of supplier safety risks is integrated into a comprehensive enterprise risk management process at the company, Conrad said. In addition, Lang said collaborating with other comparable organizations even competitors with the same or similar suppliers to develop industry-wide supplier safety standards is an innovative way to further streamline the supply chain, achieve meaningful impact for laborers, and potentially even realize cost savings. A thorough analysis of the entire supply chain not only helps protect a company s reputation and avoid supply chain breakdowns, Conrad said. It also can reveal ways to help reduce waste, save money and spur innovation. 6

7 Machinery Safety is Good Business In light of global safety standards and technology development, implementing machinery safety programs throughout the entire supply chain is emerging as a powerful competitive advantage. Establishing a corporate-wide safety program and using safety automation technology not only helps reduce injuries, it also can provide significant improvements in manufacturing productivity and efficiency through improved machine uptime, said Steven Ludwig, Safety Programs Manager for Rockwell Automation, global provider of automation, power, control and information solutions for manufacturers. Global and multinational manufacturers increasingly demand that machinery meets internationally accepted standards from the International Organization for Standardization (ISO /2: Safety of machinery Safety-related parts of control systems ) or the International Electrotechnical Commission (IEC 62061: Safety of machinery Functional safety of safety-related electrical and electronic and programmable electronic control systems ). Already, machinery shipped into or out of Europe must comply with these co-existing standards that allow for newer technologies and design techniques to help improve worker safety, minimize scheduled and unscheduled downtime, and reduce safety-related shutdowns. The standards also require machine designers to document risks and the control systems abilities to reduce those risks. Global and multinational manufacturers requiring certain levels of safety from their machine builders and suppliers must have strong global corporate safety programs of their own. This means first identifying existing risks in manufacturing facilities globally, as well as navigating the ever-changing compliance landscape to determine which local and international safety standards apply often calling for outside expertise. Machinery safety is a long-term solution to helping manage operational costs like worker s compensation, lost worker productivity and product liability, according to Ludwig. In addition, machinery safety can help a manufacturer increase employee retention and morale, and improve brand reputation. Around the globe, manufacturing leaders are beginning to realize safety is good business, Ludwig said. To establish a corporate-wide safety program, a manufacturer should follow these key steps: 1. Take an inventory. Build a comprehensive list of all machinery that exists in all facilities to help categorize machinery based on its level of safety. 2. Categorize and audit. Define categories and categorize each machine. For example, Type A machines might have significant risk of potential injury, while Type B machines might have low risk of potential injury but high potential for being exposed to that risk. Categorize similarly across all facilities. Audit machines compliance with appropriate safety standards. 3. Conduct risk assessments. A thorough assessment helps identify the areas of risk at both a machine and facility level. It also helps identify the best people and technologies to minimize those risks, establish an acceptable level of risk for each operation, and chart a safety strategy to address those areas of risk. 4. Take a hierarchical approach. Use a qualitative scale for safeguarding machinery: Design out the risk, or substitute to minimize the risk. Use fixed enclosing guards or distance guarding. Use interlocked guarding or other safety devices. Use awareness methods like lights and horns, etc. Develop safe procedures, focused safety training and operator awareness. Institute personal protective equipment and policies. 7

8 A B (10/12) Zurich 1400 American Lane, Schaumburg, Illinois The information in this publication was compiled from sources believed to be reliable for informational purposes only. All sample policies and procedures herein should serve as a guideline, which you can use to create your own policies and procedures. We trust that you will customize these samples to reflect your own operations and believe that these samples may serve as a helpful platform for this endeavor. Any and all information contained herein is not intended to constitute legal advice and, accordingly, you should consult with your own attorneys when developing programs and policies. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication and sample policies and procedures, including any information, methods or safety suggestions contained herein Zurich American Insurance Corporation