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Ethical sourcing: do companies and consumers give it importance?

March 25, 2022

Businesses are increasingly moving towards ethical and sustainable sourcing within their supply chain management strategies.

But what exactly is ethical sourcing, how important is it to consumers and global companies, and how can you maximise its benefits?

What is ethical sourcing?

Ethical sourcing can sometimes be challenging to understand because there are various definitions. However, they all have the same ideas and values relating to ethical business practices at their foundation. The Chartered Institute of Purchasing & Supply (CIPS) is one of many organisations to have a detailed, actionable guide for businesses to follow.

At its heart, ethical sourcing is about ensuring that your suppliers, both direct and downstream, are themselves working in an ethical and sustainable way. You might ensure this happens by choosing only suppliers who can demonstrate they follow sustainable working practices. Alternatively, you might work with your existing supplier base to establish ethical practices and measure their performance via audits and other means.

Ethical sourcing ensures that your suppliers adhere to several principles, including:

  • Upholding and promoting their employees’ human rights
  • Not using child labour
  • Ensuring safe and hygienic working conditions for their teams
  • Taking action to ensure trafficking and modern slavery isn’t occurring, such as paying a fair wage to employees
  • Working to minimise the environmental impact of their operations

All of these are achievable if you have a robust supplier management strategy.

In recent years, ethical and responsible sourcing has also come to include things like finding suppliers who use sustainable manufacturing methods or sourcing fair trade and sustainable products.

Do consumers care about whether you follow ethical sourcing practices?

This appears to be the case. Numerous case studies highlight how consumers care about the ethical practices of the brands they buy from.

  • In 2015, Mintel found that 56% of consumers in the United States would stop buying from brands they thought were unethical. The same research also identified that 35% of Americans would stop buying from a brand they thought was unethical even if there wasn’t a substitute product available.
  • A 2021 Deloitte study found that, in the past 12 months, 43% of consumers in the United Kingdom had chosen a brand because it had environmentally sustainable values. The same study also found that 39% had actively chosen to buy from a brand because of its ethical values. Meanwhile, 34% had stopped buying from a brand due to concerns about their ethics.

How consumers view ethics and the broader social impact of their buying decisions doesn’t stop at simply whether they want to buy something or not. For example, in 2015, Nielsen research found that 66% of consumers worldwide were happy to pay more for a sustainably produced product.

So, while many businesses continue to focus on cost but decline to focus on sustainable procurement practices, there’s a genuine competitive advantage to be had by ensuring you’re focusing on ethical sourcing.

Another notable finding from Nielsen, and one that is increasingly apparent in newer case studies, is that sustainability is a priority for millennials and other younger age groups. Therefore, these generations gradually become the world’s biggest spenders, it will become increasingly vital that businesses adapt their supply chains accordingly.

Do companies view ethical sourcing as a priority?

As with consumers, it certainly looks that way. While it’s easy for businesses to talk a good game regarding corporate social responsibility (CSR) in general, more companies than ever before are throwing significant resources into sustainability reporting.

A 2020 KPMG analysis found that:

  • 96% of the world’s biggest 250 companies produce an annual sustainability report
  • All of the top 100 companies in Japan and Mexico do so
  • 80% of all companies worldwide report their sustainability performance
  • Most businesses use third-party audits and verification to assure sustainability data is accurate

Perhaps most significantly, an October 2020 GRI-GlobeScan poll found that, for the first time, more than half of global consumers said they trusted global sustainability reporting.

So, not only are both consumers and businesses making ethical sourcing and overall sustainability a priority, companies are increasingly transparent about it and taking steps to get data verified, and consumers trust what the reports say.

A win-win!

What are the benefits of embracing ethical sourcing processes?

1. Customer satisfaction

You’ve seen the numbers above - customers will love you if you commit to ethical sourcing and sustainability.

2. Risk mitigation

Assessing and mitigating risk is a fundamental pillar of supply chain management.

Embracing ethical sourcing can mitigate supply chain risks in many ways. For example:

  • Well-run locations will have happier and more motivated teams, improving delivery rates and the quality of your products.
  • Ethical and sustainable suppliers are less likely to suffer unexpected disruptions that impact supply to your business.
  • You reduce the risk of dealing with public relations nightmares or defending legal action because of the actions of a supplier.

3. Employee satisfaction

Several case studies have shown that organisations with a strong focus on CSR have high employee satisfaction rates and are also far more attractive to potential new employees.

In a post-pandemic world where the competition for global talent is hotter than ever, you need to give your recruitment specialists every competitive advantage possible.

4. Lower operating costs

In years past, many businesses were guilty of using higher costs as an excuse not to go down the sustainability path. While it is true to say that ethical and sustainable products generally cost more to source and produce, a World Economic Forum report from 2015 suggests that ethical sourcing processes can reduce supply chain operating costs by up to 16%!

5. You’ll be using tech across your procurement process

If you haven’t already embraced supply chain digital transformation, you will likely need to in the coming years. Adopting ethical sourcing practices can be a significant part of this because it’s impossible to stay on top of what all your suppliers are doing by conducting manual audits every few months.

Instead, use automation tools to track your supply chain performance and measure the ethics and’ ethics and sustainability standards.

How can you bring ethical sourcing initiatives into your supply chain?

1. Create a code of conduct for your suppliers to follow

Agreeing to a code of conduct with your suppliers is an excellent way to clarify your expectations around ethics and sustainability, especially if you are working with existing suppliers to improve their internal practices.

Your supplier code of conduct can contain everything from our earlier list about working conditions, employees’ human rights, adherence to environmental policies, and much more. Depending on your industry, you may be able to find industry-wide standard codes of conduct online ready to use. If not, creating your own is as simple as setting out what you want your ethical supply chain to look like and adapting it to fit your suppliers.

2. Rethink CSR and ethical procurement

As well as finding business partners who work ethically and sustainably, could you rethink who those partners are?

For example, say you need to replace a supplier for whatever reason. Instead of searching for another “traditional” business, could you perhaps look at sourcing from a social enterprise, diverse supplier, or charity? Of course, you will still need to hold these organisations to the same standards as any other supplier, but this can be a fantastic opportunity to gain added benefits from an ethical procurement strategy.

3. Ensure all stakeholders are aware and bought into your CSR objectives

You won’t boost employee satisfaction if your teams don’t know what’s going on! If you’re starting your ethical sourcing journey from nothing, involve your teams from day one and discuss what you want to achieve and how you plan to achieve it.

In addition to getting more ideas than you ordinarily would, you’ll guarantee team buy-in from the start and ensure that everyone knows what your goals are, what expectations are on them as individual employees, and how you will manage these within your broader business operations.

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