The Corporate Social Responsibility (CSR) field has been searching for simple ways to measure the social compliance of companies and their supply chains. The environmental side of CSR has come up with the “carbon-footprint.” Simple. Quantifiable. Memorable.

Social compliance in the supply chain is a highly complex issue. It is dealing with issues that are of grave importance to people’s lives. It is rooted in the ongoing struggle to bring fairness and dignity to workers.

The challenge is to communicate these highly complex, emotionally charged issues to people outside the CSR field. The communication needs to be simple, quantifiable and memorable. Plus, it needs to be credible.

I believe that one of the most important indicators is the degree to which a company has truly integrated their social compliance policy into the day-to-day activities of their merchandising and sourcing departments. Just as brands, retailers and original equipment manufacturers (OEMs) have developed ways to measure the social performance of their suppliers, I propose that the brands, retailers and OEMs be measured based on the level of integration between sourcing and compliance.

The companies that take corporate social responsibility in the supply chain seriously are those that are on the road to integrating CSR into their sourcing. It is that simple.

Suppliers are often sent two distinct and contradictory messages from the buyers at brands, retailers and original equipment manufacturers (OEMs). We hear this all the time. We hear it from suppliers. We hear it from candid brands, retailers and OEMs.

The compliance department pushes suppliers to meet social standards. Reduce overtime. Pay a living wage. They monitor. They audit.

Then the sourcing department comes in and pushes for cheaper prices and faster delivery. - especially during peak season.

Who do you think the supplier will listen to if you send a mixed message? Put yourself in the shoes of the factory manager. Who would you listen to if a customer’s sourcing department tells you to do one thing and the compliance department asks you to do something else? Of course they will listen to the department that is issuing the almighty Purchase Order.

The only way you can send a consistent message to your suppliers is if your company actually comes to an internal agreement on what that message will be.

You need to have complete internal agreement between the departments before you can present a unified front to suppliers. Only then can all communications from all departments reinforce the message that compliance is an integral part of sourcing.

It is impossible for companies to send a consistent message to suppliers unless social compliance measurements are completely integrated into both the sourcing and merchandising departments’ supplier evaluation system.

Easy to say. Hard to do.

There is an urgency to this. You need to get moving. Supply chain management is increasingly driven by information technology. As the supply chain management systems become more established it will become harder and harder to integrate the compliance data in a meaningful way. CSR will be relegated to a secondary role. Kept down by legacy information technology (IT) systems. It will continue for most companies as a public relations risk mitigation strategy.

Leading CSR companies are now including some type of compliance measurement in the key performance indicators they use to measure suppliers (external) and the job performance measurement of their purchasing department (internal).

The companies that make the investment now to integrate CSR into their sourcing and merchandising will gain a competitive advantage over the next decade. The effort will be worth it. It truly is the move that will put you on the path to continual improvement in your supply chain. You will get a return on your investment.

It is the move that will help you to build a business case for social compliance. A business case to convince every department in your company that CSR is an investment and not a cost. A business case to convince your suppliers and your investors and your customers that you are serious.

OK, but what do you do? (This part gets more technical.)

The first step is to look at the information tools and measurements being used by the sourcing and merchandising departments. Look at internal performance measurements for the compliance, sourcing and merchandising departments. Look at performance measurements for suppliers.

Internally, you need to make sure that there are no inherent conflicts in how people are expected to perform in your company. Go to the sourcing and merchandising departments. Collect their job descriptions, their performance measurements and compensation plans. Compare them with those of the compliance department. Look at them in light of your supplier code of conduct. Are there conflicts between the departments? Are there fundamental problems between the way your company operates internally and the expectations for your suppliers? If there are conflicts they need to be eliminated in order to push for change in your supply chain.

You also need to review the key performance indicators for suppliers – typically they are measuring things like price, lead-time, on-time delivery, quality level, defect rate and product development capabilities.

Now look at the social compliance performance measurements that your company keeps on its suppliers. A lot of leading companies use a tiered rating system for measuring a supplier’s social compliance performance. A tiered system will provide you with the best data over time for tracking performance links.

A few examples of tiered systems in use:

• 3-tier (Red-Yellow-Green)

• 4-tier (Critical - Needs Improvement – Good – Excellent; excellent = SA8000 certified)

• 5-tier (1 Star to 5 Stars; 5 Stars = SA8000 certified)

Next, you need to design a matrix that intelligently overlays the social performance with the key performance indicators (KPIs) With greater integration of information from the compliance and sourcing departments, it is possible to track supplier performance based on the level of social compliance. This tracking can be done looking at changes in the performance of an individual supplier, or looking at aggregated performance for all suppliers at a certain social compliance level.

Experiment with different ways of doing this so it works inside your company. The key thing is to see and report links between business performance and social performance. If you track this over time it will build your business case.Companies that started this integration two or three years ago are now starting to report a clear correlation between a supplier’s level of social compliance and their business performance. Higher social compliance seems to mirror higher overall KPI scores.

There are so many interesting questions for you to track.Some examples:

1. Does on-time delivery rate improve when social compliance improves?
2. Do suppliers with a higher compliance rating have higher quality ratings?
3. Do suppliers with higher social compliance have better R&D capabilities?
4. Is there a correlation between lead-time scores and social ratings?
5. Do suppliers with higher social compliance have higher costs?

Pretty cool stuff. Jointly tracking business performance and compliance is a critical foundation for building the case that CSR is an investment and not a cost.

More important, this is also laying the foundation for continual improvement. You can look at the aggregate business and social compliance level for your merchandising and sourcing departments. You can look at this by the number of suppliers and/or the purchasing volume.

This chart shows an example to illustrate the point. Let’s say you use the 4-tier social system and a 5 point business KPI rating scale. You can easily adapt this type of report to 3 or 5 tier social rating systems and various business KPI schemes. Let’s say that the integrated report for one of your product groups looks like this:

Example Integrated Report: Merchandising/Sourcing Department #1: 2008

As you look at this report, think how it could be adapted for your company. Think about the value of being able to see it all in one place. Think about how useful this would be to share with management throughout your company. Think about how you could use this to convince suppliers to improve.

Now - for the final step. With this level of integrated reporting you can set specific targets for improvement.

Think about using this integration to drive continual improvement.

What if you work with the merchandising and sourcing departments to set annual targets to improve the percent of product coming from suppliers with a “Good” or “Excellent” social rating?

What if the performance rating and annual bonus for their departments was tied to meeting improved social compliance by percent of suppliers and purchasing volume?

What do you think will happen?

Now you see why integrating compliance into your core sourcing and merchandising activities is the single most important thing you can do to drive change. Now you see why your level of integration is a key performance indicator of your social compliance commitment.

It is in this measurement of internal and external integration where we will find the social compliance equivalent of the “carbon-footprint.” Something simple, quantifiable, credible and memorable.

The degree of integration is the Social KPI for measuring a company’s social compliance performance in its supply chain. We need to measure the degree of internal integration between departments and the related incentive system. We need to measure the consistency of the communications between the company and their suppliers and the related incentive system. We need to measure the aggregated social compliance of the company’s supply base. We need to see if they are setting annual targets for improvement. More details on this in the near future.

The challenge is to distill the measurements in a way that is credible to all parties in the multi-stakeholder community: To distill without losing the essence: To distill without forgetting the true purpose of our battle for continual improvement in the supply chain.

About Craig Moss

Craig Moss is Director of Corporate Programs and Training, at Social Accountability International (SAI). As Corporate Programs Director, Mr. Moss develops and manages programs to assist companies with continuous improvement in their supply chain. As Director of Training, he oversees SAI training for auditors, suppliers and buyers on social compliance in the supply chain and the SA8000 standard. He has extensive experience in international business development, focusing on export development and investment attraction for emerging market companies and governments. For more information please contact Jhwang@sa-intl.org.

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