M W E L ( 2550385) FOOD INDUSTRY A COMPARISON BETWEEN THE CLOTHING AND MANAGING SUSTAINABILITY OF SUB-SUPPLIERS:

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FACULTY OF ECONOMICS AND BUSINESS MSC INTERNATIONAL BUSINESS AND MANAGEMENT

MASTER THESIS

MANAGING

SUSTAINABILITY

OF

SUB-SUPPLIERS:

A

COMPARISON

BETWEEN

THE

CLOTHING

AND

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2 I declare that this dissertation is my own work and that the work of others is acknowledged and indicated by explicit references.

Evangelos Leris

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Abstract

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Acknowledgements

The accomplishment of this dissertation was one of the most challenging parts of my academic life. Thus, now, I would like to take the opportunity to thank all those people who contributed to the completion of this project in any way.

First and foremost, I owe sincere and earnest gratitude to my supervisor Ms Miriam Wilhelm, for her guidance, willingness and support that she has provided during our cooperation.

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Table of Figures

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1. Introduction

Due to globalization, the world economy has changed significantly, especially in the areas of international trade and industrial organization. For this reason, the global scope of production and trade has fuelled the growth of industrial capabilities in a wide range of developing countries (China, Taiwan, India) along with the vertical disintegration of multinational enterprises, and of transnational corporations (Gereffi, et al., 2005). All the aforementioned have led large multinational companies to outsource most of their production activities to third parties in order to focus on their core competencies such as product marketing and strategy (Gereffi et al. 2005).

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8 infants and nearly caused serious health problems to approximately 300 thousand children (Spencer & Foster, 2008).

Due to all the above scandals, and many more, society has become less tolerant to unethical and unsustainable practices that usually take place within the lower tiers of the supply chains (Arenas et al., 2009; Adams & Zutshi, 2004). In addition, during the last decade, governments around the world have started taking action to prevent and punish these kinds of practices. Nowadays, a large number of new environmental regulations are coming into force, with a significant number being international in nature, often with little warning (Krawczyk & Warren, 2013). Furthermore, there are many NGOs (non-governmental organizations) such as Fairtrade and Greenpeace that are constantly putting pressure on focal companies to implement more sustainable production processes within their supply chain (Arenas et al., 2009; Adams & Zutshi, 2004; Islam & Deegan, 2010)

Consequently, in order to comply with all these new regulations and the activity of the NGOs, focal firms must start controlling their sub-suppliers (Usher & Newitt, 2009). The fact that a constantly growing number of consumers request more sustainable products and production methods (Young et al., 2010; Kotler, P., 2011) along with the increased customer demand for “green” companies (Wossen Kassaye, 2001), creates the necessity for the focal companies to manage the manufacturing processes that take place within the indirect suppliers‟ production line (Mann et al., 2010).

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9 to reach out to those key suppliers that lie beyond their top-tier suppliers1. In addition, by managing and controlling indirect suppliers2, retailers can even better control the production costs, and ensure that their suppliers are operating in a socially and environmentally sustainable way.

As a result, it can be concluded that the management of suppliers (both direct and indirect) has significant importance for focal companies in order to improve their suppliers‟ sustainability performance (Reed & Chiang, 2012). Despite the fact that governance mechanisms3 towards direct suppliers have already been studied extensively (Gimenez & Tachizawa, 2012; Wu et al., 2010; Vackon & Klassen, 2006; Pala et al., 2014; Bordonaba-Juste & Cambra-Fierro, 2009), there has not been much research into the governance mechanisms that focal firms use to manage their sub-suppliers. Only very recently have Mena et al. (2013) developed a theory that takes into consideration a multi-tiered supply4 chain that consists of a focal firm, a supplier and a sub-supplier. However, unfortunately, papers that study the approaches of the focal firms in their attempt to manage the sub-suppliers‟ production practices are very limited.

Therefore, the main motivation of this Master Thesis is to fill the existing gap in the literature. By using the literature on sustainable supply chain management practices and by conducting exploratory research in order to gain useful information from three case studies within the food and clothing industry, my research aims to increase the

1_{Top-tier suppliers are those that supply components or finished products directly to the buyer}

company (Doran, 2003)

2

Indirect suppliers are those near the beginning of the product chain who sell not to the buyer but to other suppliers (Bradford, 1994)

3_{Governance mechanisms are the practices that are used by firms to manage their suppliers (Gimenez}

& Sierra, 2013)

4_{Tiered supply chain is the supply chain that is arranged in tiers that represent production stages,}

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10 understanding of how focal firms govern their indirect suppliers, why the governance mechanisms differ between these two industries and to which degree they utilize the first tier suppliers for the management of the lower tier ones. There are a few papers (Mena et al., 2013; Grimm et al., 2014) that present how companies in the food industry manage their sub-suppliers. So, it is very interesting to compare the governance mechanisms that are used in the food industry with those that are used in another one. The reason why the clothing industry was chosen is because no previous research has been done into the sustainable management of the sub-suppliers in this industry. Therefore, my research question is: “How do buyers in the clothing and food industry differ in their approach to managing sub-suppliers (tier 2 and below) and what could the possible explanations for these differences be?”, with a sub-question about the degree to which the buyer companies delegate the sustainable management of the lower tier suppliers to the first tier ones.

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2. Literature review

During the last two decades, supply chain management has received a great deal of attention from both businesses and scholars. Due to the fact that outsourcing has become a very important part of modern business operations, the supply chain management is nowadays vital in order to ensure the competitiveness and the sustainability of supply chains. Cox et al. (2001) argue that the management of suppliers is possible and desirable. Firms should manage their relationships with their suppliers and work with them in a closer and more coordinated way in order to achieve efficiency gains which will consequently lead to a competitive advantage and an improved sustainability (Wu et al., 2012; Bai & Sarkis, 2010; Morali & Searcy, 2013).

2.1 Managing supplier-supplier relationships

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13 Nowadays, a major part of the Supply Chain Management literature argues that buyer companies need to manage both their direct and indirect suppliers. Choi & Linton (2011), Wu et al. (2010) and Tse & Tan (2011) warn that relying heavily on direct suppliers –by delegating the production to subcontractors- is not only wrong but also very dangerous for the buyers. This is because when buyers extensively delegate production to subcontractors, they tend to lose control over costs (Wu et al., 2010). They gradually lose the ability to do research and development, falling behind the new technology trends and they also face complications in ensuring the ethical and sustainable operation of their suppliers (Choi & Linton, 2011). The solution to this problem is to create direct relationships with some selected suppliers that are located on lower-tiers (second tier and below). By getting a clearer picture of the relationships among the suppliers, focal firms can positively affect their supply chain operations. Research has shown that, in cases where the buyer is not involved in this relationship, the possibility of losing control of the supply chain increases (Choi & Linton, 2011; Wu et al., 2010).

Companies need to manage not only direct suppliers but also the indirect ones for two main reasons; firstly, in order to reduce the risk of introducing products of ambiguous quality into a multi-tier global supply chain and secondly, to increase the visibility of the risk in the supply chain. The supplier selection process should focus not only on selecting the immediate suppliers but also on closely examining the supply network that lies behind the potential supplier (Tse & Tan, 2011).

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14 unfortunately, they have not covered the governance mechanisms that could assist in effectively promoting sustainability in the supply chain.

2.2. Managing supplier relationships for sustainability.

During the last three decades or so, there has been a movement within the supply chain management literature towards sustainability (Sarkis et al., 2011; Vachon & Klassen, 2006; Walton et al., 1998; Pagell & Wu, 2009; Walker & Jones, 2012; Christopher et al., 2011; Wu et al., 2012). Authors became more and more interested in implementing sustainability within the supply chain. This part of the literature deals with various governance mechanisms that companies could use to manage their suppliers in order to improve their sustainability. Governance mechanisms are the practices that are used by firms to manage relationships with their suppliers in order to improve their sustainable performance (Gimenez & Sierra, 2013). This stream of literature classifies three practices that companies could utilize to manage their suppliers; assessment, collaboration and a mixed approach that combines the two aforementioned practices.

2.2.1 Assessment

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15 Some authors argue that an assessment approach is more effective in extending sustainable practices to suppliers than collaboration (Yu, 2008; Tse & Tan, 2011; Stigzelius & Mark-Herbert, 2009; Ciliberti et al., 2009; Foerstl et al., 2010).

2.2.2 Collaboration

On the other hand, collaboration refers to working directly and closely with suppliers by providing them with training and support (Gimenez & Tachizawa, 2012; Gimenez & Sierra, 2013). Many authors argue that a collaborative approach can have a more positive impact on supply chain sustainability than a supply chain assessment approach (Vurro et al., 2009; Attaran & Attaran, 2007; Darnall et al., 2008; Gimenez et al., 2012). Based on case study analysis of companies such as Nike and Bodega Pirineos, Lim & Phillips (2008) and Bordonaba-Juste & Cambra-Fierro (2009) respectively propose that buyer companies should move to a more collaborative approach in order to improve the sustainability of their supply chains. However, recently there has been a move in the supply chain literature towards the implementation of a mixed governance approach that utilizes both assessment and collaboration mechanisms.

2.2.3 Mixed Approach

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16 In addition, Wu et al. (2012) and Lee & Klassen (2008), support that the joint use of evaluation and collaboration is the basis of more sustainable supply chain management practices. Similarly, Reuter et al. (2010); Gimenez & Sierra (2013) and Foerstl et al. (2010) found that relying only on assessment or collaboration is not very effective. They support that the implementation of both assessment and collaboration management mechanisms simultaneously have a positive effect on environmental performance and that supplier assessment enables the effective implementation of sustainable supplier development.

Despite the number of authors that have started to be concerned with the need to manage the suppliers in order to improve the sustainability of their supply chains, the vast majority of papers within the sustainable supply chain literature just highlight the need to manage direct and indirect suppliers without providing clear proposals on how to manage the indirect suppliers.

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17 MSC. In the “Transitional MSC”, the buyer and the indirect supplier approach each other so as to start the building of the link between them and initiate the move towards a “Closed MSC”. This kind of structure can be found, for example, in the automotive industry (Choi & Hong, 2002). The latter found that HP and Migros utilize their first tier suppliers to manage the lower tier suppliers in order to improve the sustainability of their supply chains.

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3. Methodology

An exploratory case study research was chosen, due to the fact that research into the governance mechanisms that firms use to manage their lower tier suppliers is still at a very early stage of investigation. Therefore, the governance mechanisms that buyers use to manage lower tier suppliers can be revealed only by conducting a case study analysis. These mechanisms will be identified by comparing the relationships between the buyer- tier one suppliers, the buyer-tier two suppliers and those between the tier one and tier two suppliers.

As Eisenhardt (1989) argues, the main strength of theory building from case studies is the likelihood of generating a novel theory. A second strength is that the resultant theory is likely to be empirically valid. The possibility of the validity of this theory is high because the theory-building process is so intimately dependent on evidence, that the resultant theory is expected to be consistent with an empirical observation. Therefore, a theory that has developed from case study research is likely to have important strengths such as novelty, testability, and empirical validity, which come from the intimate linkage with empirical evidence. The theory-building approach and its independence from prior literature or past empirical observation, is particularly well suited to new research areas or research areas for which existing theory seems inadequate.

3.1 Case Selection

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19 mechanisms that buyers implement to manage the lower tier suppliers in the food industry (Mena et al., 2013; Grimm et al., 2014). Though, a research gap still exists in the respective field of the clothing industry. Consequently, the latter was selected, aiming to produce new knowledge on this field. In addition, the food and clothing industries are characterized by: a) vertical disintegration because both industries have outsourced the majority of the production lines; b) these industries are very important for customers and NGOs because food and clothing are two basic biological needs for human beings and the consumers want to be informed about the quality and the production methods that are used. Therefore, they have already started to exert significant pressure on companies in order to comply with the legislation and code of ethics in production (Roberts, 2003; Young et al., 2010); and c) these two industries have suffered three of the most serious scandals that have taken place in the last 20 years; Nike‟s child labour within sub-contactor‟s factories (Cushman, 1998), Zara‟s Brazilian contractors‟ sweatshop conditions within its production sites (Burgen & Phillips, 2011) and Fonterra‟s Group milk scandal in China (Mooney, 2008).

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20 clothing and the food industry respectively. They have both formed alliances with various NGOs in order to improve the sustainability of their global supply chains. Moreover, Unilever was named the Global food and beverage sustainable leader of 2012 by DJSI (Sustainable Asset Management and S&P Dow Jones Indices. 2012) and Puma was ranked as the leading company with regards to its sustainability programme in the DJSI Tex Clothing Accessories and Footwear sector for the first time in 2010 (Puma, 2010).

As such, they tend to initiate trends towards the improvement of the sustainability of their operational environment by managing suppliers that operate in lower tiers. More crucially, these companies are very transparent about their sustainability actions so more relative information about the governance mechanisms that they use to manage their suppliers was gathered.

3.2 Data collection

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21 industry. The comprehensive view on the research objects was very important in order to be able to compare the food and the apparel industry effectively. Furthermore, in order to increase validity semi-structured interviews conducted with key purchasing managers of Unilever were used. These interviews are focused on Unilever‟s dairy and tea sectors and they provide better insights into the importance that sustainability has within every sector of Unilever‟s products and the governance mechanisms that

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4. Case study A: Clothing Industry

4.1 Industry Overview

In general, the apparel industry is buyer-driven (Gereffi & Memedovic, 2003), which means that large retailers, marketers and branded manufacturers play the crucial role of setting up decentralized production networks. As a result, tiered networks of third world contractors make end products for foreign buyers, who are usually large western companies. Furthermore, according to Gereffi & Memedovic (2003), the apparel commodity chain is organized in five main segments: the supply of the raw materials, such as natural and synthetic fibres; the provisions of components, such as fabrics that are manufactured by textile companies; the production networks that consist of garment factories; the export channels established by trade intermediaries and finally, the marketing networks at the retailer level. The following figure presents the structure of the clothing supply chain (Puma, 2013).

Figure 1: Structure of the clothing supply chain

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23 In order to find out more about the different ways the companies within the apparel industry use in their attempt to manage their indirect suppliers, the analysis of Puma‟s case study follows.

4.2 Case company: Puma

Puma is not only one of the leading sports brands in the designing, developing, selling and marketing of footwear, apparel and accessories but is also an early industry leader of supply chain sustainability action. In 2013, the company ranked second in the Dow Jones Sustainability Index and received the silver class ROBECOSAM sustainability award (Puma, 2014; ROBECOSAM, 2014). Puma has already implemented the PumaVision and Puma.Safe initiatives that aim to improve the firm‟s social and environmental impact. In addition, since 2004 Puma is a participant company in the Fair Labour Association (FLA) which aims to help companies improve their supply chains‟ sustainability (Appendix 1).

4.3 Puma’s sustainability requirements

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24 already implemented some initiatives that aim to reduce the environmental impact of the supply chain.

This is the reason why the company established an Environmental Profit and Loss account (E P&L) in 2009 (Appendix 2). The use of the E P&L helps Puma to monitor and manage its supplier‟s operations. The suppliers in every tier are obligated to report the environmental impact of their activities. In this way, Puma is able to supervise, evaluate and offer guidance to its suppliers (Puma, 2012).

Keeping in mind the aforementioned initiatives, it can be concluded that although Puma takes action to improve both the environmental and social sustainable performance of its supply chain, the focus is put on the latter.

4.4 Managing sustainability at direct suppliers

Puma has connections with around 180 direct suppliers – tier one production factories – and one of its main targets is 90% of these suppliers to have a grade of A or B+ in the company‟s sustainability scorecard by the end of the 2015 (Puma, 2012). In order to reach this target, Puma uses auditing programmes to assess suppliers‟ compliance with Puma‟s sustainability standards. These auditing programmes usually include onsite audits and visits, and are conducted by the company in cooperation with NGOs like Fair Labor Association (FLA).

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25 knowledge and, improving the abilities, the skills and the behaviour of the supplier production management (Appendix 3).

4.5 Managing sustainability at sub-suppliers

Puma‟s products are processed in more than 500 active facilities in 42 countries, from factories producing finished goods (tier-1) to factories supplying materials (tier-3). The firm sources finished products from around 180 first tier suppliers, therefore the number of factories that are located in the second or in a lower tier is approximately 320. Aiming to maintain control on their supply chain, Puma assesses potential sub-suppliers before conducting business with them. According to Puma‟s handbook of social standards (Puma, 20131), the company does not allow any unauthorized subcontracting production. Each subcontractor must cover certain criteria; first, to be verified and approved by the Puma Sourcing Group and secondly, to be registered with the Puma.Safe initiative.

The company does not require from tier-1 suppliers to conduct audits on lower tier suppliers. Rather, in order to gain a better insight of the supply chain, Puma prefers to conduct audits in lower tier suppliers, especially on those who pose a risk for the company. All subcontractors that participate in the production cycle are subject to audits in order to assess and verify the effectiveness of the production mechanisms that they use, as Puma shows zero tolerance for critical issues such as child labour and human trafficking (Puma, 2013).

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26 where critical issues had been identified. During 2012, Puma.Safe carried out 422 factory audits covering 380 facilities. Across all tiers and sourcing partners, 62 % of all audited facilities globally were rated with A or B+, while 16 % of the currently active facilities achieved C or D ratings and the rest 22% failed the audits. As a result, Puma terminated their partnership with 29 tier 1 facilities (Puma, 2013).

Nevertheless, as Puma has pointed out, the social auditing has limitations and does not automatically lead to sustainable improvement. For this reason, they combine auditing with training programmes in order to improve the sustainability of their suppliers. Therefore, the company focuses on providing and facilitating capacity building and training projects to its sub-suppliers in order to improve their social and environmental sustainability. These programmes are not only focused on the manufacturers but also on the material suppliers. All factories within the supply chain are expected to provide training to every worker. These training programmes should cover the following topics: health and safety in the workplace; environmental friendly production methods and skills such as waste management and energy use; industrial relations and worker management for supervisors (Puma, 20131).

The company usually prefers to collaborate closely with each supplier rather than request from tier-1 suppliers to train the suppliers that are located in lower tiers. Therefore, Puma does not entrust the training programmes to suppliers, rather the company prefers to conduct them on their own or with the help of NGOs by participating in international campaigns (Puma, 2013) (Appendix 5).

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5. Case study B: Food industry

5.1 Industry Overview

Nowadays, food buying organizations are usually very large, vertically integrated multinational enterprises with a focus on low cost and high efficiency (Gereffi, et al., 2006). This fact has led the food industry to become more and more dominated by very large players such as Unilever, Nestlé, Carrefour and Wal-Mart. Based on the interviews that were conducted with Unilever‟s purchasing managers of tea and dairy products, the structure of the tea and dairy products industry is the same and consists of two tiers. The lowest tier is occupied by the farmers – suppliers of tea and dairy products, while the first tier is occupied by factories in which tea and dairy products are processed to final products (Appendix 12. 17).

The following figure presents the structure of the tea and dairy supply chain.

Figure 2: The structure of the tea and dairy supply chain

• Unilever

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29 5.2 Case Company: Unilever

Unilever is one of the world‟s leading fast-moving consumer goods companies. Their products are sold in more than 190 countries. While they choose to offer their massive production of goods at relatively low prices in order to maintain their market share, at the same time they invest money and resources in improving their sustainability performance. They are constantly integrating sustainability into their strategy, brands and innovation. According to a survey that was based on 887 stakeholders from business and NGOs, among firms like Nestle, Nike, Puma, and Ikea, Unilever leads the way on sustainability (Coulter & Guenther, 2014). Two major examples of Unilever‟s sustainability integration within its brands are the Lipton brand in the tea industry and the Ben & Jerry‟s brand in the dairy industry (Appendix 6).

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5.3 Unilever’s Sustainability Requirements

5.3.1 Tea supply chain

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30 sustainable agricultural code includes best practices on managing the social and the human capital, along with proposals for training and qualifying the workers.

For all these reasons, Unilever requests that all suppliers, both direct and indirect, should implement the Sustainable Agricultural Code (SAC) (Unilever, 20142) which is based on 11 social, economic and environmental indicators (Appendix 7). Furthermore, since 2007, Unilever has been committed to the Rainforest Alliance (RA) Certification which evaluates farms based on 10 principles which cover issues such as worker welfare, farm management and environmental protection (Unilever, 20142). This is the reason why suppliers do not only have to comply with Unilever‟s supply code of conduct but also to cover RA‟s standards. If a supplier refuses to comply with the aforementioned standards, then Unilever will stop buying tea from him (Appendix 8).

5.3.2 Dairy products

Despite the fact that Unilever started working for more sustainable products during the early 90‟s, there were not many initiatives to make dairy products more sustainable until very recently (Appendix 9).

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31 Secondly, suppliers are obligated to use a self-assessment tool that is called Quickfire and is provided by Unilever. The objective of this tool is to quantify suppliers‟ progress against the 11 social and environmental indicators in Unilever‟s SAC (Muddyboots Software, 2014). In addition, suppliers are required to follow the environmental requirements that each government has already implemented and obey the environmental laws and regulations. For example, in Europe dairy producers are not allowed to deposit waste into rivers untreated.

Finally, according to Unilever‟s purchasing manager of dairy products, for dairy there is no recognized certification. Therefore, despite the fact that there is no recognized certification from any NGO, suppliers are still obligated to earn a Global Food Safety Initiative (GFSI) scheme certification (Appendix 11).

5.4 Managing Sustainability at direct suppliers

5.4.1 Tea supply chain

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32 According to Unilever‟s tea purchasing manager, the firm sources tea from approximately 350 suppliers globally. For example, in Kenya, Unilever buys tea from 40 processing factories, or agents that buy tea from approximately 600.000 small farmers. Within the first tier suppliers there is one cooperative –managing agency- which is in charge of 500.000 farmers. In addition, Unilever usually buys tea directly from farmers; therefore, in the tea supply chain the distinction between first and lower tier suppliers is unclear (Appendix 12).

Due to the fact that Unilever sources tea from a very large number of suppliers, it is very difficult for the company to evaluate their sustainable performance. Therefore, Unilever tries to reduce the supply base and stop buying tea from auctions in order to create closer and more direct relationships with farmers and cooperatives (Appendix 13).

Unilever aims to source all of its raw materials sustainably by 2020 (Unilever, 20141). Therefore, and due to the unique structure of the tea supply chain – the production of tea is based on emerging countries that lack sustainability awareness and the number of tea farmers is greater than half a million - the company makes use of a third party certifier for auditing the tea producers. The Rainforest Alliance is responsible for auditing farmers and making sure that they implement the SAC within their operations (Appendix 14).

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33 provide help to the suppliers and the length of the training depends on how sustainable each supplier is (Appendix 15).

In addition, Unilever, apart from the Rainforest Alliance (RA), utilizes also some of their first tier suppliers in order to provide training to smallholder farmers. For example, in 2006 Unilever and RA partnered with suppliers in Kenya and they formed the Kenya Tea Development Agency (KTDA) in order to co-fund farmer field schools. Unilever and RA provide training to a cooperative of farmers and then they become responsible for training smaller farmers. Usually, the expenses of these initiatives are paid by the firm (Appendix 16).

5.4.2 Dairy supply chain

Unilever sources dairy products from 20 cooperatives and almost 40 smaller, privately owned farms that are located in Europe (Appendix 17). As Unilever‟s purchasing manager of dairy products has pointed out, they avoid sourcing from emerging markets. Due to the fact that the dairies in Europe are usually large companies and have already implemented sustainable production methods – to conform with the already established environmental laws - Unilever only requires them to follow the company‟s SAC and SAC for dairy (Appendix 18). Therefore, the firm assesses the

suppliers with reference to the use of sustainable production methods. They try to identify the deviations from the SAC and to develop, with the cooperation of the supplier, a way to bridge those gaps (Appendix 19).

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34 farm where the animals are kept. As a result, Unilever focuses mainly on the operation of the farms rather than in the first tier production (Appendix 20).

5.5 Managing sustainability at sub-suppliers

5.5.1 Dairy supply chain

Unilever‟s first tier suppliers source raw materials from approximately 100.000 farmers in Europe (Appendix 17). Those farms are usually very small in size with an average farm size of about 80 cows (Appendix 21), so the firm has a very difficult task securing the sustainability of their operations. As a result, in order to assess and improve farmers‟ sustainability, the firm utilizes the first tier suppliers and especially the cooperatives that control a large number of farmers (Appendix 22).

The first tier suppliers have to make a benchmark study on their suppliers‟ current production practices comparing them to the requirements of the SAC, identifying gaps or possible deviations and working towards their elimination. Additionally, the tier one suppliers need to follow a verification process to make sure that their suppliers comply with the SAC.

Every tier-one supplier needs to have a farmer advisor as well. Unilever provides them with training on the implementation of the SAC. Therefore, the first tier suppliers are responsible for monitoring their suppliers through self-assessment and training them on sustainable production methods with the assistance of Unilever (Appendix 23).

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35 farmers on how to implement the SAC with the help of the farm advisors. They visit farms on a regular base and advise them on agricultural raw materials and on agricultural chemicals.

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6. Cross case analysis and Discussion

By conducting the above case study analysis the management approaches that buyers use and the relationships between them and the suppliers in each of the three cases (clothing, tea and dairy supply chains) were revealed. In the following sector a comparison of the relationships between the buyer and the first and second tier suppliers, and those between the suppliers within the clothing, tea and dairy products supply chains is presented.

Buyer-tier one supplier Relationships: In the case of the clothing supply chain, Puma has developed close and direct relationships with their tier one suppliers. These relationships are driven by an assessment approach which means that the firm only audits the tier one suppliers and does not collaborate with them in order to audit or train the tier two suppliers. On the other hand, in the dairy supply chain, the buyer has developed relationships with the tier one suppliers that are driven by a collaborative approach (the buyer provides training to tier one suppliers on how to manage the tier two ones), while in the tea supply chain the relationships are characterized by both assessment and collaboration.

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37 certain requirements, for example adopt green production methods that will limit the water and energy consumption. The firm directly audits and trains those suppliers to ensure their compliance with the preset criteria. In the cases of tea and diary supply chains, the relationships between the buyer and the tier two suppliers are not direct. In detail, in the tea supply chain, the buyer does not audit the tier two suppliers. The auditing is conducted by a third party (Rainforest Alliance) while the training is conducted either by Rainforest Alliance in collaboration with the buyer or by a tier one supplier. On the other hand, within the dairy supply chain the buyer does not conduct either the auditing or the training of the tier two suppliers.

Proposition 1: In the apparel industry, the management of the second tier suppliers follows a direct approach with the buyers auditing and providing training themselves to their sub-suppliers. On the other hand, the buyer companies in the food industry opt for an indirect approach, delegating the auditing and the training of the sub-suppliers to a NGO or a tier one supplier.

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Proposition 2: Buyers in the clothing industry do not utilize tier one suppliers in the management of the tier two suppliers while buyers within the food industry either delegate both the assessment and collaboration (dairy supply chain) or part of them (tea supply chain)to their tier- one suppliers.

In the following figures the relationships between the buyer and the suppliers are graphically presented:

Figure 3: Relationships between buyer and suppliers in the clothing supply chain

Figure 4: Relationships between buyer and suppliers in the tea and dairy supply chain

Buyer

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39 The proposed relationship structures are in line with the three possible multi-tier supply chain structures that Mena et al. (2013) proposed in their paper which is one of the first papers that considered the vertical relationships between buyer – supplier -supplier‟s supplier. In detail, the clothing supply chain is characterized as “closed”,

due to the fact that there is a link between the buyer and the tier two suppliers, while the tea and dairy supply chain are characterized as “open”, as there is no direct link

between the buyer and the lower tier supplier.

Factors that lead to the above differences: Based on the above cross case analysis, it can be deduced that there are significant differences in the approaches that buyer firms within the clothing and food industry use in order to manage their tier two suppliers. In the following sector the factors that lead to these differences are presented.

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40 Unilever‟s dairy suppliers are operating in Europe which has a strong institutional environment and the European consumer markets are increasingly sensitive to environmentally sound products (Vermeulen & Ras, 2006). In addition, European countries are constantly changing the standards of products in order to meet environmental targets. For example, based on the 2009 Lisbon Treaty firms have a legal objective to work for the sustainable development of Europe (Aldson, 2011). Therefore, the dairies are obligated to follow certain laws and rules with the European Union being very strict in their implementation (Vermeulen & Ras, 2006). As a result, Unilever manages their dairy suppliers indirectly and delegates the sustainability management tasks to tier one suppliers. Τhis is due to the fact that these suppliers are already operating in a strong institutional environment that ensures the implementation of more sustainable production methods and the establishment of relationships of trust between them. These findings are in line with the findings of Yaibuathet et al. (2008) who propose that companies with similar institutional environments were observed to have a common approach with respect to sustainable supply chain management.

Proposition 3a: The stronger the institutional environments that the suppliers are operating in the, less direct governance mechanisms will the buyer companies use to manage their tier-two suppliers.

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41 On the other hand, the tea and the clothing supply chain consist of suppliers that operate within emerging markets where the institutional environment is weak. The government regulations in sustainability matters are very few. For example, the farming practices in India are in conflict with the Rainforest Alliance standards over two main issues, child labour and the use of pesticides. The RA‟s standards do not permit certified farms to employ anyone under the age of 15, but the Indian and the United Nation‟s Labour Organization permits the employment of 14 years old in developing countries (Henderson & Nellemann, 2011). In addition, the cultures within these countries are usually not supportive for more sustainable supply chains (Roth eth al., 2008). For example, the Chinese are very cost conscious in their spending. They are relatively new to the idea of paying for attributes that do not have immediate perceivable impact and they are focused on keeping the cost low. Chinese organizations still lack a long-term perspective in their business thinking and surpassing such attitudes can require extensive training and formal process monitoring (Roth et al., 2008).

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42 delegate a part of the sustainability management of the lower tier suppliers (tea supply chain).

Proposition 4: Weak institutional environments lead buyer companies to implement a direct, assessment based management approach. They manage their tier two suppliers either personally by not delegating any management task to tier one suppliers (clothing supply chain) or by delegating only a part of the collaboration practices (tea supply chain).

In addition, a very important factor that can significantly affect the management approach that buyers will use to manage tier two suppliers is the kind of sustainability

that each industry is focused on. On the one hand, buyers within the clothing industry

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Proposition 5: The “type” of sustainability that each industry is focused on affects the management approach that buyers use to manage tier two suppliers. In the clothing industry it is more likely that buyers will use direct management approach in order to secure that labor laws are followed while in the food industry an indirect approach can ensure that the environmental laws are followed.

Finally, a factor that affects the buyers‟ management approach is the complexity of the

supply chain in terms of the number of suppliers that each buyer firm has to work

with. In the clothing industry, Puma works with approximately 500 external manufacturing partners located primarily in Asia. Around 180 of them are tier one suppliers, therefore, Puma works with 320 suppliers that are operating in the second or lower tier. Consequently, it can be argued that this amount of second tier supplier is manageable. As a result, buyers within the clothing industry can use a more direct and assessment based approach in order to manage their second tier suppliers sustainably. This notion is supported by previous research that has found that the overall costs of monitoring is expected to be lower with a smaller supply base which encourages more active monitoring (Vachon & Klassen, 2006). On the other hand, Unilever works with 350 and 60 first tier suppliers in the tea and dairy industry respectively. In the tea industry, some of those 350 suppliers are cooperatives that manage more than 500.000 farmers while in the dairy supply chain the 60 first tier suppliers are buying dairy from more than 100.000 smaller farmers. As a result, it is clear that it is unfeasible for buyers to manage this amount of second tier suppliers directly. Consequently, buyer firms within the food industry prefer a more indirect and collaborative based approach in order to manage their second tier suppliers sustainably.

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44

7. Conclusion

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45 7.1 Managerial implications

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46 7.2 Limitations and Future research

In order to conduct the research of this Master Thesis, the focus was put only on two focal firms-Puma and Unilever-and their global supply chains in two industries; Food and Clothing. Therefore, the sample is relatively small – as mentioned before only two companies were examined - thus the results of this research cannot be generalized. Any upcoming research could make use of a larger number of case studies, including multiple companies from each industry, in order to examine the existence of different governance mechanisms between the selected industries.

In addition to the above, the large Multinational Enterprises (MNEs) were also placed in the centre of attention for this research. Nowadays, large MNEs can make use of various methodologies to manage their sub-suppliers such as I.T solutions and professional auditors, whereas smaller companies that operate within these industries usually do not, as these mechanisms demand significant investments that smaller companies cannot afford. For this reason, future research could include the perspective of smaller firms that do not have the adequate resources to spend in managing sub-suppliers.

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48

8. Appendix

Appendix 1:

Sustainability Action

Targets

Data Source

Fair Labour Association Since 2004 Puma has been a participant company in the FLA in order to improve the social impact of its operations.

(Fair Labour Association,

2010)

PumaVision It describes Puma‟s conception for

contributing to the amelioration of

the quality of everyday life. Puma‟s

Sustainability Report 2012 (Puma, 2013)

Puma.Safe Firm‟s commitment for

environmental protection and

improved working conditions.

Zero Discharge of

Hazardous Chemicals

It describes Puma‟s conception for contributing in the amelioration of the quality of everyday life.

Appendix 2:

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49 The importance of this tool can be proved by taking a closer look at the 2010 E P&L results. As the following figure indicates, only 6% of the total environmental impact arises from Puma‟s own operations while a further 9% has been originated by first-tier (direct) suppliers. The remaining 85% has been caused by the suppliers that are located in the lower tiers (two to four) of the supply chain.

Figure 5: Puma's total environmental impact

Appendix 3:

In 2012, the company held training sessions, workshops and events to intensify the cooperation with their direct suppliers and to enable them to further reduce their energy and water consumption, waste production and carbon emissions. For example, that year, presentations, open discussions, training sessions and optimum practice sharing took place in high risk countries like Bangladesh, Taiwan, Vietnam and China.

Appendix 4:

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50

Figure 6: Total amount of Puma's contract manufacturers

Appendix 5:

International

Sustainability

Campaigns

Target

Data Source

Asia Floor Wage

Campaign

This initiative helps companies to implement fair salaries in their supply

chains. Puma‟s Annual

Sustainability Report 2012 (Puma, 2013) Sustainable Action and

Vision for a better Environment (SAVE)

By forming a partnership with the German Development Corporation, Puma aims to co-finance the build of more environmental friendly facilities across the developing markets of Asia

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51 Appendix 6:

Unilever is the world‟s largest tea company. It purchases almost 12% of the world‟s total tea production. Approximately 26% of all Unilever tea comes from Rainforest Alliance certified farms (Unilever, 2014). In addition, in 2005, Ben & Jerry‟s became the first ice cream company in the world to use Fairtrade certified ingredients. Therefore, it can be concluded that Unilever is an innovative company in the area of sustainability production that focuses on the establishment of sustainability in their operational supply chain.

Appendix 7:

The following figure presents the 11 sustainability indicators that SAC is based on

SAC indicators

Target

Data Source

The soil health Improving the quality of soil and its ability to support plant and animal life

Unilever, 2013

Soil loss Reducing soil erosion which can lead

to loss of nutrients

Nutrients Reducing the loss of nutrients through

harvesting, leaching, erosion and emissions to air

Pest management Reducing the use of pesticides

Biodiversity Helping to improve biodiversity

Farm economics Improving the product quality and

yield

Energy Reducing the greenhouse gas

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52

Water Reducing the loss and contamination

of water supplies from agriculture

Social and Human capital Ensuring the capacity of people to earn and sustain their livelihoods as well as enhancing farmers‟ knowledge through constant training

Local economy Helping sustain local communities

Animal welfare Ensuring animal standards are based

on the „five freedoms‟ defined by the Farm Animal Welfare Council

Appendix 8:

“Should a supplier refuse to confirm that they work within our code of conduct, we will not buy any tea from them”

Data Source

Unilever‟s tea purchasing

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53 Appendix 9:

“In tea and vegetables, we have been sourcing sustainably for a number of years, but for dairy it is a new initiative on the mass line of products that we buy. For example, we have not placed a sustainable source of milk for Ben & Jerry’s”

Data Source

Unilever‟s purchasing manager of dairy products,

personal communication

Appendix 10:

Sustainable Agricultural code for dairy

Data Source

The SAC for dairy is a guide that contains extra interpretation for Unilever‟s dairy suppliers and their farmers on the requirements of the Unilever SAC, and guidance on how to fulfill those requirements. This guide is particular relevant to dairy cows and the calves they produce, pasture management, and the management of manure, silage, run-off and other nutrient sources, as well as pesticides and veterinary medicines that can be used.

Unilever Sustainable Livestock Implementation

Guide (Unilever, 2013)

Appendix 11:

“We require a GFSI recognized scheme and it is basically a kind of standard certification that you require from your suppliers”

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54 manager of dairy products,

personal communication The GFSI scheme does not provide guidance on food

safety standards and food companies cannot be audited by it. It only defines the key elements for the production of safe food.

GFSI Guidance Document: (GFSI,2013)

Appendix 12:

“We have tea plantations in Kenya and in Tanzania. We also have a number of processing factories in Turkey but we do not own the tea that grows in Turkey but we buy green tea and processing it in our own tea processing factories”

Data Source

Unilever‟s tea purchasing

manager, personal communication

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55 Appendix 13:

“We are trying to buy less and less through the auction and trying to go more to direct contracts with suppliers, because that way we can get into better relationships”

Data Source

Unilever‟s purchasing

manager of dairy products, personal communication

Appendix 14:

“The Rainforest Alliance has the role of monitoring the compliance with our standards, they have certification criteria and they have auditors in going visit and auditing on annual basis. As a result, we do

not audit”

Data Source

Unilever‟s tea purchasing manager, personal

communication.

Appendix 15:

“The trainings are done by a combination of my team and Rainforest Alliance trainers. They go out to farmers and train them to the standards and work with

them so they can gain certification”

Data Source

Unilever‟s tea purchasing manager, personal

communication

“It is about 9 to 12 months process to go from not really understanding to getting the position where you

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56 Appendix 16:

“The KTDA is an organization that manages small holder farmers in Kenya. So between us, RA, farmers and some support from other organizations we have conducted something we call a farm field approach. That is a trainer-trainer approach, so we train co groups of farmers who then start up their own training groups within their own communities and they get everybody up to required standards”

Data Source

Appendix 17:

“In Europe we source from about 20 cooperatives and

maybe another 40 privately owned suppliers who are not cooperatives. On the second tier there are approximately 100.000 farmers.”

Data Source

Appendix 18:

“If you look at Europe, there are already

environmental laws, regulations which suppliers have to adhere to, so, there are controls already in place. I mean we are not throwing waste into rivers untreated, there are controls already in place”

Data Source

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57 Appendix 19:

“By doing a benchmark study on what their current

are versus what the agricultural code requires, we identify the areas where the gap needs to be closed and we take measures to close the gap”

Data Source

Appendix 20:

“What we want to do is influence what is happening at the farm, how the animals are kept, how the farm is managed”

Data Source

Appendix 21:

“The average farm size in Europe is about 80 cows, it is not one of these American models where there are 3.000 cows”

Data Source

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58 Appendix 22:

“We source from quite a large number of farms with

roughly that number of animals, therefore we have to reach out each and every one of them and that is the challenge and we can only do it via our suppliers, via

the dairies”

Data Source

Appendix 23:

“We are not doing the audit. What we do is that we

work with the first tier suppliers and their farm advisors. We have them trained with regard to the

SAC. So, once the benchmark is done and improvements are made, there is self-assessment of the farms by the suppliers. As a result, you could say

that it is based on trust”

Data Source

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59

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M W E L ( 2550385) FOOD INDUSTRY A COMPARISON BETWEEN THE CLOTHING AND MANAGING SUSTAINABILITY OF SUB-SUPPLIERS:

MANAGING

SUSTAINABILITY

OF

SUB-SUPPLIERS:

A

COMPARISON

BETWEEN

THE

CLOTHING

AND

Abstract

Acknowledgements

Contents

Table of Figures

1. Introduction

2. Literature review

3. Methodology

4. Case study A: Clothing Industry

5. Case study B: Food industry

• Unilever

6. Cross case analysis and Discussion

7. Conclusion

8. Appendix

Sustainability Action

Targets

Data Source

International

Sustainability

Campaigns

Target

Data Source

SAC indicators

Target

Data Source

Data Source

Data Source

Sustainable Agricultural code for dairy

Data Source

Data Source

Data Source

Data Source

Data Source

Data Source

Data Source

Data Source

Data Source

Data Source

Data Source

Data Source

Data Source

9. References