Is Apple the industry’s whipping boy when it comes to supply chain culpability?

Apple feature in the BBC's Panorama documentary

Prompted by a post on Procurious by Kate Nicholl, I sat down and watched the BBC’s Panorama program that discussed some disturbing practices in the much-lauded supply chain of Apple, the worlds most valuable company. The BBC Panorama investigation originally aired Dec 2014, it has since been shown in Australia on ABC’s Four Corners.

The show highlighted that while Apple does a fantastic job of maintaining positive customer relationships, the same cannot be said for those working in the organisation’s supply chain.

Shortly after the original broadcast – Apple senior vice president of operations Jeff Williams sent an email to UK Apple employees stating that both he and CEO Tim Cook were: “deeply offended by the suggestion that Apple would break a promise to the workers in our supply chain or mislead our customers in any way”.

The program sent workers undercover to expose some troubling practices at a factory of a major Chinese supplier (Pegatron) and further down the company’s supply chain by investigating the dangerous, illegal and environmentally worrying tin trade that is occurring in the Bangka region of Indonesia.

The documentary has been criticised by some of being sensationalised and biased against Apple. However, its findings are truly concerning.

Some of the breaches of Apple’s supplier responsibility are listed below:

Concerning findings at Pegatron factory in China

  • Government issued personal identity card were illegally taken from workers.
  • Factory dormitory rooms were overcrowded. Despite making a commitment to only housing 8 staff members per dorm, the documentary shows examples of 12 people being crammed into these very dormitories.
  • Workers are working up to 16-hour shifts.
  • Workers are working up to 18 days consecutively.
  • Workers are so exhausted that they are falling asleep on the assembly line prompting significant health and safety concerns.
  • Workers are routinely working more than 70 hours a week. Apple’s standards state workers work no more than a 60-hour week.
  • Juveniles are working overtime and night shifts despite Apple’s commitment to the contrary.

Concerning findings in the company’s supply of tin included:

  • The detrimental impacts of tin mining sediment on local coral reefs.
  • Illegal tin operations are supplying the companies that Apple buys tin from.
  • These illegal suppliers are utilising child labour.
  • Safety conditions in the tin mines are incredibly dangerous.
  • Workers operate under the constant threat of landslides and death.

Clearly these are complex issues and it’s difficult to determine exactly were Apple’s responsibility begins and ends.

The Industry’s Whipping Boy

Apple and indeed many Apple fans have been quick to point out that the company is being held up as the whipping boy for an issue that permeates across the entire tech industry. Apple’s competitors are all likely culpable of the same indiscretions. I believe however there are legitimate reasons as to why Apple bears the brunt of these accusations.

The sheer size, value and market penetration of Apple means that our collective eyes focus on it. Our expectations of Apple are higher than those of their competition. Apple reported profits in excess of 39 billion dollars last year and the company is valued at half a trillion dollars. As the former US presidential candidate Ralph Nader points out in the documentary, there is no one better positioned to eliminate these sorts of practices than Apple.

Apple also spends a large percentage of its marketing budget positioning the company and its supply chain as sustainable. If the company wants to ride the brand benefits of being perceived as sustainable, surely it must expect some criticism when it is discovered that its commitments are not being followed through.

Keep the criticism constructive

It’s easy to over react to these sorts of programs and proclaim that you’ll never buy another Apple product. The fact of the matter is that as long as consumers want the price of their devices to remain low and as long as company’s like Apple are answerable to shareholders, they will continue to chase the lowest production costs which will unfortunately, more often than not, carry an environmental or human rights cost.

While I think it’s our obligation to continue to hold a spotlight to and criticise organisations like Apple, our criticism needs to remain constructive and cannot be done without mentioning the steps these companies are taking in their commitment to supply chain sustainability.

Last year Apple carried out 633 audits that covered over 1.6 million workers, a 40 per cent increase on the previous years figures. The company is open and transparent with its commitment to supply chain sustainability and what it expects from its suppliers. It also admits that while progress is being made, there is still a long way to go and that supply chain sustainability is something that the company needs to revisit constantly.

An issue of implementation

The most concerning elements of the documentary for me were the means that Pegatron had gone to appease Apple’s sustainability efforts without actually changing its operations.

The documentary shows that employees were ‘coached’ in how to fill out shift request forms (documents used in Apple’s supplier auditing process). Employees that did not respond by saying they were happy to work long shifts, night shifts or shifts where they must remaining standing, were told to fill in new forms, and failure to comply resulted in expulsion.

Another workaround developed for the benefit of Apple’s auditing process is the renaming of ‘overtime’ on employee pay checks to ‘bonuses’, thus hiding the amount of overtime employees have been forced to work.

To me, the Panorama documentary points to a fundamental breakdown in the implementation and execution of Apple’s sustainability project. While the commitments are in place on paper and efforts to implement them have been made, the company has not yet (and I stress the word ‘yet’) managed to instil these practices within its supply chain. If the evasive practices Pegatron has implemented to falsify Apple’s auditing documents are anything to go by, the road to implementing these measures will be a long and challenging one.

What are your thoughts on Apple’s supply chain? Where does its responsibility end? Is it fair that Apple bears the brunt for the whole tech industry? How does your organisation implement sustainability measures in its supply chain?

The UK High Street – terminal decline or natural change?

Another traditional high street store has announced store closures due to falling revenues and profits – is this the latest step in the terminal decline of the UK high street?

Is the UK high street in decline? Thorntons in the news

UK chocolate retailer Thorntons has reported a fall in revenues for the six months to January 2015 of 8 per cent to £128.2m. This comes hot on the heels of the pre-Christmas profit warning issued by the company and the closure of just under half of its stores.

Thorntons has suffered from falling sales and unprofitable stores for a couple of years and made the decision to move more of its sales to other outlets and retailers. This move has since been compounded by the announcement of the loss of shelf space at two major UK supermarkets.

High-profile casualties

Thorntons are far from alone. According to a report issued by PwC, there was an average of 16 shop closures per day in the UK in 2014. Coupled with a reduction in the number of new shops opening, this is leaving many high streets full of empty units.

In the past year alone, a large number of high-profile names have either been forced to close high street stores or have collapsed entirely. Phones4U and La Senza both collapsed last year, while 2015 has already claimed its first big victims in Bank, USC and Austin Reed (all fashion retailers) and Radio Shack in the US.

Why is this happening?

For many, the main cause is seen as the out of town retail parks, complete with free parking and everything in one place. However, even these shops aren’t immune to the changing environment.

The Office of National Statistics retail statistics have shown an average 12 per cent increase on online sales to the same period the previous year throughout 2014.

Many organisations have failed to keep up with the pace of the digital economy. Poorly designed shops with unclear offerings, poor customer service and unsuccessful marketing just don’t cut it against the convenience of shopping online and having everything delivered to your door.

Organisational Benefits

It’s not just the consumers who are benefiting either. There are major positives for organisations and supply chains for having an online operation. Not having to run a high street store means reduced overhead costs and monthly outgoings and the ability to be located in low-rent areas.

With fewer staff required, the goods or services can be offered at a lower cost, as companies require less mark-up to make a profit. Stock can also be ordered in bulk, further reducing costs, while at the same time ensuring that there is sufficient stock to cover customer orders.

Hope for the Future?

All is not lost though. Many consumers still want shops that they can visit and often, the convenience of online shopping is outweighed by the risk of not getting what they want first time, or not being able to see what it is they are buying.

It is widely felt that organisations that successfully merge the two worlds of digital and physical shopping can help to save the high street. For example, the John Lewis Group now offers ‘click-and-collect’ to any of their department stores or Waitrose supermarkets for online orders.

Special offers can be sent to a smart phone when customers are in store, while augmented reality (think Google Glass) can be used to show you what a sofa would look like in your house. The companies who can tailor their offering best will be the ones who populate the high streets of the future.

So, terminal decline? Probably not. Natural state of change? Arguably yes. And it looks as though it will be for the better.

Read on for the other procurement and supply chain stories making the headlines.

MoD spent £33 million on ‘botched’ defence procurement outsourcing

  • The Ministry of Defence (MoD) must “sharpen up” its reform of procurement, after “throwing away” £33m on botched changes.
  • This follows a report from the National Audit Office (NAO), Reforming Defence Acquisition, which examined the MoD’s plans to improve the skills of Defence Equipment & Support (DE&S) staff, its systems and the way it interacts with the armed forces.
  • The NAO concluded that improving the performance of DE&S remained the most challenging part of the department’s strategy, although progress has been made. “There is now a clearer separation of responsibilities between the commands, which request equipment, and DE&S as the organisation responsible for delivering the equipment,” the report said.
  • It also outlined how the department had spent two-and-a-half years and £33 million trying to implement its preferred option of a government-owned, contractor-operated (GoCo) model to reform DE&S, before it was deemed undeliverable and halted in 2013.

Read more at Supply Management 

Will a new UK law eradicate supply chain slavery?

  • Whether it is high street fashion, bedding from a department store or eggs from a supermarket, few British shoppers would stop to ask whether slave labour was involved in making their goods.
  • Yet forced labour often lurks along the supply chain as a product and its individual parts are manufactured, packaged and distributed in a process linking multiple suppliers in many different countries, business ethics experts say.
  • Globally, the International Labour Organisation estimates that 21 million people are victims of forced labour. In Britain alone, the Home Office (interior ministry) says up to 13,000 people are forced into manual labour, sold for sex in brothels, or kept in domestic servitude, among other forms of slavery.
  • A government-backed draft law aims to tackle exploitation by requiring businesses in Britain to disclose what action they have taken to ensure their supply chains are slavery free.
  • The clause will provide guidance to companies about the kind of information they could disclose. However, the Home Office said firms will not be told what must be included, and that it expects disclosures to differ from company to company.

Read more at Reuters

SLG’s SCOR expert recognized for supply chain leadership

  • Satellite Logistics Group (SLG), a leading supply-chain solution provider for the beverage industry, announced today that Dan Swartwood, the company’s vice president of process and technology, has been named one ofSupply & Demand Chain Executive magazine’s 2015 Pros to Know.
  • The annual Pros to Know Awards recognize select supply chain executives who have helped their clients, companies, or the supply chain community at large to prepare for the significant challenges in the year ahead.
  • “This honor highlights the many thought-leaders who are helping to shape the Supply Chain industry and advance Supply Chain as a respected discipline in the enterprise,” said Barry Hochfelder, editor of Supply & Demand Chain Executive. “Their efforts in developing the tools, processes and knowledge base necessary for Supply Chain transformation, and in promoting new approaches to supply chain enablement, have earned them a place on this year’s Pros listing.”
  • Swartwood has guided a number of U.S. and international companies in various industries through the methodologies and has seen the results firsthand. On average, opportunities for improvement equate to two to six per cent of revenue.

Read more at PR Newswire

Apple under scrutiny in Labor’s tax loophole crackdown proposal

  • Large international tech companies operating in Australia such as Apple and Google could come under increased fire over their local tax treatment under a new proposal by the federal Labor Party to clamp down on loopholes.
  • In what Shadow Treasurer Chris Bowen described as an “opening salvo in the battle of ideas”, Labor’s first major policy announcement in opposition is to introduce a range of measures to stop billions of dollars of tax from bleeding offshore.
  • “This announcement today sets a blueprint for Labor’s approach in office,” Bowen told reporters in Canberra on Monday. The federal opposition’s tax package, which has been costed by the independent Parliamentary Budget Office, is worth AU$1.9 billion over four years in additional revenue.
  • It includes tightening of the so-called “thin capitalisation” rules, which allow companies to offset profits against debt servicing costs in high-tax jurisdictions such as Australia to reduce their taxable income.

Read more at ZDNet

Drones still useful in supply chains despite FAA regulations

  • Last week the Federal Aviation Administration published its rules and regulations for the oversight of drone usage within the United States. Many will and have argued that these rules are too restrictive for companies such as Amazon or Google to truly take advantage of the technology. The basic parameters of the guidelines set by the FAA:
    • Drones must be less than 55 lbs in weight
    • Can only fly during the day in good weather
    • Must not fly close to airports
    • Cannot fly faster than 100mph
    • And must be within visible site of the operatorLast week the Federal Aviation Administration published its rules and regulations for the oversight of drone usage within the United States. Many will and have argued that these rules are too restrictive for companies such as Amazon or Google to truly take advantage of the technology. The basic parameters of the guidelines set by the FAA:
    • On the surface these restrictions severely limit the dreams of the likes of Jeff Bezos. One of the great opportunities for drones within the supply chain and particularly with the delivery side is the ability to enhance the last mile portion. The last mile is always a challenge since you have to break down the orders to the individual level. Drones seem to offer an affordable and flexible solution – but not if the FAA rules are in place. This does not mean there are not some use cases that supply chains can take advantage of immediately:
    • These include: Asset monitoring and remote delivery… read more over at ZDnet

What can board games teach us about procurement?

I was listening to a HBR podcast a couple of weeks ago and it highlighted several parallels between games and business strategy

What can board games teach us about procurement?

We have probably all played Monopoly at one time or another (it was a Christmas staple in my household)… Well, when it was first designed it was meant to be a teaching tool to teach players about the evils of monopolies and private land ownership (property is theft?!). As such this article discusses what can we learn from the modern version of Monopoly…

The article also suggests that other board games centre on creativity, innovation, teamwork, empathy, and resource management but also emphasize outcomes more closely resembling the collaborative wins that have become so desirable within and between organizations.

  • Pictionary comes to mind as clearly requiring observational and empathy-based skills
  • Cluedo (or whodunit) helps sharpen our deductive-reasoning skills.
  • Trivial Pursuit, especially when played with teams, can teach us the value of diverse knowledge sets

Next I want to talk about Game theory. We teach game theory on our advanced negotiation programs and one of the takeaways is to understand the type of game for negotiation you are in. From a business point of view companies can succeed spectacularly without requiring others to fail. And they can fail miserably no matter how well they play if they make the mistake of playing the wrong game.

The game of business is all about value: creating it and capturing it, at the Faculty we take our clients through the value matrix, a tool designed to help business and procurement speak the same language, HBR talked about a value net to identify customers and who the players are. There is a tinge of Porter’s 5 Forces (unsurprisingly really) to it but it’s worth a read. Take a step back, consider who the players are in your procurement or organisation, and then decide on the type of game you want to play.

Talking of strategy, according to My Purchasing Centre: Over 95% of purchasing or supply management organizations do not have a long-term strategic plan

Many of the plans that are completed are done once, and then put away in a ring binder or on a hard drive – never to be referenced again. My Purchasing Centre provides some tips on creating and living the strategy:

  • Create a vision and mission statement that aligns with the organization’s vision and mission
  • Be bold and make sure people realize that you are aiming for supply management not traditional bureaucratic purchasing.
  • Try to gain a broad consensus and gather input from surveys, one-on – one meetings, research and as many employees, suppliers and customers as possible
  • Keep it dynamic, up to date and a living document

Finally, I’d like to draw your attention to this particular article that examines the strategic decisions surrounding extending the scope of procurement. It suggests that there are three main questions that need to be asked:

  • How will your customers and procurement staff collaborate?
  • Do your procurement professionals have sufficient category expertise to add value?
  • Are there enough skilled procurement professionals within the team to handle the volume of buying?

The article goes onto say that until recently the answers to these questions have been routine: policy, process, technology, hiring, and training. However, the reality of execution is more complex.

However some of the learnings can be applied into designing our internal strategies for greater collaboration with the business. For example, it mentions that strategy documents comprising more than 50 pages in length rarely resonate with the internal stakeholder.

I think the key thing with all strategies is applicability; rarely does one size fit all. In today’s volatile environment where economic, political and technological change runs rife, greater flexibility and agility is required in our strategic choices – making the games we decide to play and enter into all the more important.

Thanks for reading. You can subscribe directly to the sources I have identified here and nothing is my copyright. If you wanted to discuss more, please feel free to contact me via Procurious, or follow me on Twitter @gdonovan1971.

Are direct and indirect spend classifications relevant any more?

Direct vs indirect procurement

Like many before me, I started out in procurement without knowing much about what procurement actually was. One of my meetings in my first week as a graduate procurement analyst was with the head of direct spend. I entered his office with no idea of what direct spend was and left an hour later no more enlightened.

After the meeting I Googled indirect and direct spend and although I thought it seemed like an odd way to classify spend, proceeded to use the terms for the next decade of my career.

However, I recently found myself revisiting the oddities of these terms and questioning why we use them at all.

As business models and procurement operations continue to change and diversify, I feel that addressing spend as either direct or indirect is has become far less relevant.

In order to consider this more fully, it’s worth reviewing the following definitions from CIPS around direct and indirect materials.

Direct materials

Materials that are converted or processed to make the finished product.  In category management in a manufacturing business, the most basic classification of categories is between direct and indirect materials.  As direct materials usually account for a greater share of total spend, and affect the quality of the final product, direct materials are usually seen as the more demanding of the two groups.  Indirect spend includes stationery, printing, office supplies, pest control, telephone costs etc., while direct materials will be whatever is used to create the finished product.

Indirect material

Goods which are purchased to support the operation and which are not converted into finished products or resold.  Many manufacturing organisations separate direct materials, which are raw materials from ‘indirects’ such as cleaning, MRO supplies, travel, catering, printing, stationery etc. which are needed to support the operation.  Many indirect acquisitions are low value and low risk and so lend themselves to simple acquisition systems and e-Commerce, such as online ordering through catalogues.

Two things jump out at me about these definitions and their relevance to modern procurement:

The first is that both definitions seem to be trapped in our industrial past – in that they only address firms that manufacture actual products. So, while I think these classifications would have held some relevance during the industrial revolution, I question whether they still stand up in today’s service driven economy?

Is direct more important?

The second concerning part of these definitions is the importance CIPS has attributed to each of these areas.

The CIPS definition suggests that “As direct materials usually account for a greater share of total spend, and affect the quality of the final product, direct materials are usually seen as the more demanding of the two groups”. It follows then, that direct procurement is the more demanding of the two groups.

I would argue that this is a huge generalisation.

We live in a service driven world

Look at banks, investment firms, lawyers, consultancies and tech organisations, these companies now make up a huge percentage of our economy but don’t produce a clearly defined, manufactured product. I would suggest that for these firms, indirect spend is infinitely more complex, demanding and risky than direct spend. Do they even have direct spend?

I guess what I am suggesting here is that while these classifications may have made sense in the past, they now seem like an antiquated way to classify spend.

Do we really think that a spend classification that groups pest control and advertising spend together has any real relevance in today’s procurement landscape?