Responsible purchasing, in practice

The recent approval of mandatory human rights due diligence approaches such as the European Corporate Sustainability Due Diligence Directive in May 2024 represents an opportunity to reignite the conversation around responsible purchasing and how to implement it practically as a core part of responsible business conduct. The Directive text explicitly mentions responsible purchasing practices and pursuant to the Directive, requirements around preventing potential adverse impacts on the part of companies include, where relevant and appropriate, “adapt(ing) business plans, overall strategies and operations, including purchasing practices, and develop(ing) and us(ing) purchasing policies that contribute to living wages and incomes for their suppliers, and that do not encourage potential adverse impacts on human rights or the environment”, and “mak(ing) necessary modifications of, or improvements to, their design and distribution practices”. This requirement could significantly impact purchasing departments existing and future supplier contracting, purchasing and distribution practices.

Now, more than ever, purchasing practices are seen as a key to a company’s social performance. Large companies and brands can have a significant ability to affect working conditions in supply chains due to their purchasing power. In the last year, benchmarks and reports released on the social performance of companies have included an assessment of or relating directly to purchasing practices. World Benchmarking Alliance’s recently published Social Benchmark sets out that the commitment of companies to meeting the responsibility to respect human rights involves the development of operational policies and procedures that cut across business functions (e.g. procurement, sales, lobbying, operations), which are governed by appropriate controls, and are supported by performance incentives, training and communication of company expectations. KnowTheChain, another benchmark, assesses whether the company discloses adopting responsible purchasing practices such as:

·       planning, forecasting and ringfencing of labour costs, which refers to the setting aside of amounts necessary for workers’ wages during pricing negotiations;

·       committing in its contracts with suppliers to sharing responsibility for preventing and addressing human rights impacts in its supply chains; and

·       relevant quantitative data points, such as average lead time provided to suppliers, or payment terms.

Despite this, companies may be struggling to move the needle on the implementation of these purchasing practices. The KnowTheChain 2023 benchmarks show that company purchasing practices was one of the lowest scoring themes across sectors. In the case of the food and beverage sector, companies scored an average of just 2/100 for purchasing practices and have undertaken limited improvements in this area since 2020. Not a single company in that sector disclosed committing to responsible purchasing practices in its contracts with suppliers. Despite the presence of best practice commitments within the apparel and footwear sector such the Dindigul Agreement, the Pakistan Accord and the Bangladesh Accord on Fire and Building Safety, brand disclosures around responsible purchasing practices are at best  vague and without further explanation or clarification, in the use of  terms such as “advance notice” given to suppliers, “appropriate” amount for cancelled orders and “sufficient” production lead time and “excessive” overtime hours, signalling a reluctance to disclose information or a lack of action. Companies also expressed their inability to change order prices due to market mechanisms such as commodity exchanges, auctions or demand and supply fluctuations. Beyond inaction on responsible purchasing practices, harmful practices persist. Recent reports reveal that companies continue to push suppliers for discounts and highlight “open costing” procurement methods which encourage a race to the bottom in pricing among suppliers, as well as practices of overbooking supplier capacity only to cancel orders. At the same time, out of any party’s control, evolving and accelerating production cycles in certain markets like luxury are exacerbating new production-related pressures on workers.

Relevant to the discussion but less addressed are the impediments presented by corporate organisational challenges such as silos between purchasing and corporate responsibility teams that have a significant bearing on  human rights due diligence outcomes and remedy. Silos can occur because of highly technical knowledge and/ or separated decision-making processes, or even perceptions that the other team has little value-add to the specific process. In practice, the alignment of processes may pose numerous challenges to both purchasing and corporate responsibility teams, several of which are illustrated below:

·       Corporate responsibility teams must be kept in the loop with regard to final supplier selection as supplier lists are often used for risk-based assessment or monitoring of responsible recruitment practices even as procurement teams change suppliers based on procurement-related performance or business needs.

·       While stabilising lead times and inventory forecasting are paramount in responsible purchasing practices, depending on the time to market of certain products and market responsive business strategies, providing suppliers with information about future business far enough in advance and in enough detail for the supplier to act, as well as giving suppliers steady and predictable business across the year, may pose challenges in practice for a procurement team. Procurement lead times may also be much shorter than the time needed for the meaningful engagement of suppliers on their risk management.

·       The diversity of categories and goods and the workload of both corporate responsibility teams and procurement can also be a challenge for capacity building of suppliers related to human rights due diligence. Moreover, if business strategies and materials change, responsible business policies must be socialised once more among new suppliers.

·       Buyer-supplier relationships managed by the procurement team can also differ based on category management strategies, but these relationships are sometimes crucial for the leverage of corporate responsibility teams related to human rights due diligence and remediation.

In short, silos impede and block the flows of knowledge and feedback needed for human rights due diligence and the ability for responsible purchasing to work in practice.

Whether these silos can be overcome hinges on the business’ leadership’s ability to activate collaboration and alignment of incentives. While no company in the 2023 KnowTheChain benchmark disclosed ringfencing labour costs, better practice examples include brands in the agriculture sector starting to lean into features of business models such as the Fair Food Program or Equitable Food Initiative which ensure a premium supplementing wages for workers. Within the apparel and footwear sector, certain companies have stipulated that overtime premium payments and social insurance payments must be costed within the product price or have allowed for labour costs to be automatically adjusted for negotiations based on raises in local minimum wage levels and other factors. Better practices also include discussions on estimated lead times in advance with suppliers. Importantly, these discussions are two-way and iterative, with certain brands committed to monthly discussions with the supplier to determine where adjustments are necessary. Additionally, some brands have committed to cancellation of only 1% to 3% of orders and paying suppliers for “any liability” associated to cancellation. Better payment terms include paying suppliers 15-30 days after the submission of invoice and delivery of goods.

There is also an increasing exploration and more targeted guidance for industry approaches to responsible purchasing practices focused on collaboration amongst buyers and suppliers. Ethical Trading Initiative has now developed the Common Framework for Food, giving an overview of what is meant by ‘responsible purchasing practices’ for the food industry, building on the previous Common Framework for Apparel and Textiles. The organisation is further exploring issuing guidance around responsible purchasing practices in the manufacturing sector. The aim of this Common Framework for Food is to provide a common language and structure for discussion and action which represents one of the important first steps towards collaborative production planning between teams.

Mandatory human rights due diligence laws explicitly calling for responsible purchasing presents a watershed moment for suppliers and rightsholders. In our line of work, TRP also finds that purchasing practices have adverse impacts on the lives of workers. On the one hand, a low volume order issued to a supplier can lead to unpredictable reductions in hours worked per worker, affecting salaries already inadequate to meet rising living costs. On the other hand, a high production volume can lead to a supplier instating mandatory overtime, which has the potential to impact  the health and well-being  of workers in light of the pace of work and pressure. For companies and their business partners to work together more collaboratively, and better outcomes for rightsholders, organisational silos must be overcome and common incentives created between purchasing and corporate responsibility teams. There is much to gain for all by a better alignment of incentives.