Many purchasing executives say that the amount of risk in the electronics supply chain has increased over the past 10 years as more companies outsourced and the supply chain became more global.
As risks increased, purchasers had to become more proactive in developing strategies to avoid or mitigate risk in their companies’ supply chains. Catastrophic natural disasters that shut down production of key components, counterfeit or substandard parts that infiltrate the supply chain, long lead times or shortages of parts resulting from unexpected demand, and the tenuous financial health of some suppliers are some of the front-and-center supply chain risks that purchasers deal with regularly. But a risk that is sometimes downplayed is failure to adhere to corporate social responsibility (CSR) guidelines and rules.
Most large electronics OEMs and electronics manufacturing services (EMS) providers understand that if they don’t conduct business in a socially responsible manner they run the risk of tarnishing their brand and losing business—as well as investor confidence. They know that reports of mistreatment of workers, poor working conditions, forced excessive overtime, and use of child labor tend to make worldwide headlines and can damage a company’s reputation.
As a result, most major electronics companies have adopted a CSR code of conduct. Many use the Electronics Industry Citizenship Coalition’s (EICC) code of conduct and require their suppliers to adopt the code as well.
The EICC code is wide ranging. It forbids companies from using child labor or forcing workers to work excessive overtime. It also requires companies to provide safe working and living conditions for workers, comply with environmental laws and regulations, and not to use conflict minerals mined from the Democratic Republic of Congo (DRC).
Although most major global electronics companies have adopted the code, many say the challenge is making sure that their suppliers adopt it and adhere to it. This can be an issue for smaller suppliers, which may not fully understand how to comply with the code or lack the resources to comply with some of the requirements.
Identifying CSR problems and finding ways to correct them can be costly to small suppliers, so some OEMs and EMS providers find it is in their best interest to work with smaller suppliers when it comes to achieving CSR initiatives.
Electronics manufacturers often use small, local suppliers in low-cost regions. Some small suppliers may not have adopted the code, or may have adopted it, but don’t always adhere to parts of it. For instance, smaller companies may require employees to work excessive overtime or long work weeks. An executive of a U.S.-based electronics OEM told me this often happens when a small supplier gets a large contract from a big company. The supplier may not have enough employees to fulfill the order. Rather than hiring more people, the supplier requires existing employees to work excessive overtime, a violation of the code.
In other cases, a small supplier may have volatile demand, and company managers are reluctant to add more people to the payroll because demand may drop off.
In these cases, the supplier may need help with forecasting and production planning in order to have the right size workforce to handle orders.
Some smaller suppliers may need help showing compliance to laws related to CSR, such as Section 1502 of the Dodd Frank Act, which covers conflict minerals. The section requires companies to disclose whether they are using conflict minerals from the DRC, including tantalum, tungsten, tin, and gold.
A smaller supplier may buy components that contain one or more of those metals, but are unclear of what documentation is needed or how to obtain the documentation to show compliance with the law.
Some CSR-conscious electronics manufacturers offer suppliers formal training on such CSR issues. In addition, OEMs often do audits of suppliers that expose CSR problems and make recommendations on how those problems can be corrected. Some OEMs and EMS providers also include CSR in their supplier performance scorecards to make sure that CSR remains a front-and-center issue for suppliers.
