Preparing For the Future

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1 Preparing For the Future Footwear Sourcing Risks and The Need for a Prequalification Assessment Brittney De Stefano Business Development Manager Tony Pelli Senior Global Intelligence Analyst

2 Agenda BSI Professional Services Overview SCREEN Intelligence Footwear Sourcing Risks Industry Challenges and the Need for a Prequalification Assessment Scenario: Sourcing a New Athletic Shoe Copyright 2015 BSI. All rights reserved 2

4 BSI Professional Services Holistic Supply Chain Risk Management BSI Supply Chain Solutions sits within the Professional Services organization. The Supply Chain Solutions organization is the leading global provider of supply chain intelligence, auditing services, audit and risk management compliance solutions, as well as advisory services. Our charter is to help corporations, governments and associations identify, manage and mitigate global supply chain risks and maintain world class governance risk and compliance programs. Our holistic supply chain risk management suite is designed to predict and visualize risk, and develop robust risk mitigation and compliance management programs to protect your supply chain, brand and reputation. Copyright 2015 BSI. All rights reserved 4

6 Increasing Labor Unrest in China Labor Strikes in Guangdong Labor Strikes in Select Provinces Jiangsu Zhejiang Shanghai Shandong Fujian Labor strikes are increasing in all of the major exporting provinces in China 6

7 Increasing Labor Unrest in China Strikes and GDP Growth in Zhejiang Province Strikes and GDP Growth in Guangdong Province 9.5% % % 8.5% 8.0% 7.5% 7.0% 6.5% % 8.0% 6.0% 4.0% 2.0% 0.0% GDP Growth Strikes GDP Growth Strikes In some provinces this may correlate with decreasing GDP growth In other provinces different factors may be driving the strikes 7

8 Increasing Labor Unrest in China Strike Profile Strikes are concentrated in heavy manufacturing, electronics, and garments Strikes by Industry in China Year-to-Date 2015 Footwear strikes see some of the largest numbers of employees participating 40,000 in 2014 strike, direct losses of $27 million Strikes with 1,000+ workers occur regularly Other, 7.5% Not Specified, 4.0% Pharmaceutical, 2.8% Automotive, 5.3% Footwear, 5.9% Heavy Manufacturing (steel, machinery, etc.), 20.9% Working conditions are typically not a cause of strikes in China Wage arrears, compensation, and benefits much more commonly cited as causes Food, 6.9% Consumer Goods and Retail, 10.3% Garment and Textiles, 16.9% Electronics, 17.5% 8

9 Increasing Labor Unrest in China - Causes China s economic catch-22 Fast growth: Wages increase Emboldens workers Leads to relocations that drive strikes Slow growth: Wage increases stall Increases employer wage withholding 9

10 Increasing Labor Unrest in China Causes Lower-end manufacturing increasingly moving elsewhere Wages lower in Vietnam, Cambodia, Myanmar Primarily in the garment industry, with electronics following Increasing factor in strikes 12 relocation-related strikes in Q2 10

11 Increasing Labor Unrest in China Government Response Police Response to Strikes All Strikes in China Police Response to Strikes Hong Kong-, Macau-, Taiwan- Owned Factories, Police Response to Strikes Foreign, Joint-Venture Factories, Other Outcom e 46.0% Police Respons e54.0% Other Outcom e 46.0% Police Respons e62.0% Other Outcome, 63.0% Police Respons e 37.0% Moves towards empowering official government unions CCP becoming more intolerant of unofficial organizing Mainly driven by migrants Harsh police responses, including arrests or organizers, are less common when the factory is foreign-owned, but more common when owned by a Hong-Kong/Taiwan-based contractor Crackdown on civil society may extend to NGOs that aid in unofficial labor organizing 11

China s Inward Shift Implications for CSR An increasing number of industries are manufacturing in inland provinces Pros: Lower labor costs Fewer concerns associated with migrant labor

12 China s Inward Shift Implications for CSR An increasing number of industries are manufacturing in inland provinces Pros: Lower labor costs Fewer concerns associated with migrant labor Cons: Spot use of child labor in eastern provinces Use of undocumented migrant labor in eastern provinces Labor law innovation and enforcement Copyright 2015 BSI. All rights reserved 12

Vietnam Social Responsibility Challenges Footwear exports increased nearly 25% threat rating for human rights Health and safety a primary concern 75% of factories had weak roofs or

13 Vietnam Social Responsibility Challenges Footwear exports increased nearly 25% threat rating for human rights Health and safety a primary concern 75% of factories had weak roofs or walls 90% use outdated equipment that could lead to worker injury Other risk areas (child and forced labor) are less of a concern for footwear Copyright 2015 BSI. All rights reserved 13

14 Vietnam Labor Unrest social unrest rating 1200 Labor Strikes in Vietnam Labor unrest driven by lack of an official outlet for grievances threat to freedom of association and collective bargaining Official trade unions tightly controlled Leads to more volatile wildcat strikes Wage increases have increasingly become a cause for strikes Inflation in drove strikes Copyright 2015 BSI. All rights reserved 14

Cambodia Social Responsibility Challenges threat rating for human rights Labor organizers have been killed, beaten, and threatened with criminal charges Crackdowns have poisoned labor relations

15 Cambodia Social Responsibility Challenges threat rating for human rights Labor organizers have been killed, beaten, and threatened with criminal charges Crackdowns have poisoned labor relations Strikes up 74% Q over previous year Other violations common Forced overtime Mass fainting Fixed-duration contracts source of some of these problems Fewer protections Workers unable to join unions Copyright 2015 BSI. All rights reserved 15

Myanmar Social Responsibility Challenges threat rating for human rights Interim minimum wage ($57) was often ignored, real wages between $25-$35 New minimum wage is roughly $67/month, on par with

16 Myanmar Social Responsibility Challenges threat rating for human rights Interim minimum wage ($57) was often ignored, real wages between $25-$35 New minimum wage is roughly $67/month, on par with Bangladesh threat rating for working conditions Outdated health and safety laws Old and unsafe equipment in factories Labor inspectors lack independence Copyright 2015 BSI. All rights reserved 16

Supply Chain Lengthy Process to Validate and Onboard New Suppliers Global Diversification

18 The Challenge & Need for a Prequalification Assessment Common Industry Challenges: Enormous complexity around prequalification Little Visibility into a Direct & Multi-Tier Supply Chain Lengthy Process to Validate and Onboard New Suppliers Global Diversification No reliable country risk intelligence available Lack of Collaboration within the Organization 18

19 Supplier Prequalification Assessment PAS 7000 Utilize a Global Standard of Excellence PAS 7000 provides flexibility for tailoring the information to particular organizational needs: Steering group composed of over 40 organizations based in US, Europe and Asia Review panel composed of over 200 organizations based in US, Europe and Asia 9 PAS 7000 Core Modules: Organization Profile Health & Safety Supplier Capabilities & Capacities Data Protection 6 PAS 7000 Additional Modules: Financial Information & Insurance Environmental Management Business Governance Quality Management Employee Policies 9 core modules are always included 6 additional modules can be selected as per the business nature and buyers procurement policy. Business Ethics Disciplinary Practices & Abuse Supply Chain Traceability Business Continuity Management Supply Chain Security Equal Opportunities 19

the Assessment Methodology that best suits your

Fantastic Footwear, LLC PAS 7000 Onsite Audit

you identify the methodology, use an automated,

20 Supplier Prequalification Assessment Implementing the PAS 7000 Standard Implement the Assessment Methodology that best suits your resources and needs: PAS 7000 Self-Assessment Fantastic Footwear, LLC PAS 7000 Onsite Audit Or Combination of Assessment Methodology Once you identify the methodology, use an automated, risk-based solution to increase the efficiency of the process. 20

Scenario: Identifying a Supplier for a New Athletic Shoe

Risk-Based Approach to Supplier Sourcing Traditional Sourcing

and Pricing requirements Determining Factors: o Total Cost o

On-Time Delivery o Service Supplier B: China Higher Total Cost

look at geographic risk and prequalification results

22 Scenario: Identifying a Supplier for a New Athletic Shoe Traditional vs. Risk-Based Approach to Supplier Sourcing Traditional Sourcing Program RFI Identifies Qualified Suppliers for Product Spec and Pricing requirements Determining Factors: o Total Cost o Product Quality o Technical Capability Supplier A: Indonesia o On-Time Delivery o Service Supplier B: China Higher Total Cost Child Labor Elevated Risk-based Program Sourcing will also look at geographic risk and prequalification results Additional Sourcing Factors: Lower Total Cost Child Labor High 90% Compliance o Country Risk 70% Compliance o Supplier Compliance 22

23 Review of the Key Elements in a Risk-Based Sourcing Program Step1: Identify Qualified Suppliers Step 2: Analyze Geographic Risk Step 3: Prequalification Assessment Result: Holistic Risk Scoring for Suppliers 23