The Shenzhen dimension

6.3.1 Multinational company supply chain structure and its operation

Multinational company B has a highly transparent supply chain structure; it relies on 570 factories worldwide in producing its products. In Asia alone, it has suppliers in 18 countries. It sources garments from China, India, Indonesia, Thailand, Turkey and Vietnam. 60% of the factories are in Asia, 20% are in America, another 20% in Africa and Europe. These factories are audited at least once every year. 954 audits were carried out in 2004, 301 factories were audited excluding 62 external audits conducted by external auditors. Multinational company B has also started to promote a new strategy of reducing the number of suppliers.

Environmental and social posture

The multinational company is serious about sustainability both in its own practice and that of its suppliers. It perceives “outsourcing supplies does not mean outsourcing moral responsibility”. The expectation of suppliers, contractors and subcontractors are clearly written in its corporate CoC (See Appendix D). All of its business partners have to conduct business in a fair, honest and responsible way.

In terms of internal institutional structure, it has a dedicated social and environmental affairs team in this region. The auditing procedure involves interviewing managers and workers, reviewing the documentation and inspecting facilities. Before a business relationship is formed, an internal audit will be

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performed by the social and environmental affairs team in order to ensure the working conditions are acceptable with regard to the corporate codes of conduct.

Then the factory manager has to sign an agreement declaring that the factory will comply with the details of the CoC at all times and that it has to take responsibility for its subcontractors. If the supplier refuses to make the necessary improvement as suggested, the company will end its business relationship with the factory. In a longer time frame, the company also looks beyond the policy level in improving the workers’ life, delivering training courses for the factory personnel to attend throughout the year for capacity building. Ten percent of its factories are externally monitored by national NGOs, universities or private auditing firms.

This company has integrated environmental and social concerns into its supply chain process. It defined sustainability in terms of the five main areas stated in table 6.5:

Area of sustainability Definition

1. Legislation • complying with the social and environmental legislation

2. Management • managing social and environmental impacts of the new products, technologies and processes at design and development stage 3.Supplier and customer relationships • comply with their corporate codes

of conduct

4. Support • For social and environmental projects

• Partnerships with businesses and organisation to contribute to sustainable society

5.Stakeholder dialogue • Communicate with stakeholders in building mutual trust and respect

Source: (Multinational company B) Table 6.5 Definition of sustainability

The importance of social and environmentally responsible practice is stressed in the section on corporate mission. “We are dedicated to socially responsible, safe and environmentally sustainable practices in the company and its supply chain and to enhancing the value of our brands by guaranteeing the ideals of the company for the consumer and for those making their products, strengthening their image and reputation, making the supply chain more effective and helping to provide a long-term future for sport” (Multinational company B, 2004). They also have high internal organisational competence. Their global head of Environmental and Social Affairs was based in the Hong Kong sourcing office and he directly reported to the board of directors in the German headquarters about continuous improvements of suppliers in employment, health and safety and environmental conditions in Asia, Europe and the USA. Multinational company B provides suitable internal and external training on health and safety, freedom of association, worker-management communication and general compliance awareness for workers, supervisors and managers, and support on a continuous basis for their employees and suppliers.

Three training sessions and compliance training were conducted in Vietnam, China and Indonesia with 40 representatives from suppliers in the year 2004 (Multinational company B, 2004). The company has a clear structure in reflecting social

responsibility concern.

The company has published a sustainability report annually since 2000. In September 2002, its progress towards sustainability is recognised by the Dow Jones Sustainability Group Index (DJSGI) as the industry leader on reporting social, environmental and

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progress in improving the social and environmental conditions in the factories that supply its product. The company social and environmental report indicates clearly that it puts its corporate CoC into practice, takes actions and develops corrective action plans for its suppliers. The company also takes a proactive role in moving beyond reporting.

Structured dialogue with stakeholders was initiated from 2001 in Asia and Europe in discussions on CSR concepts and sustainability reporting.

This company has undertaken nine stakeholder dialogues within the last few years.

Discussions with major stakeholders were facilitated by an expert or independent organisation in Hong Kong (2001 and 2004), Turkey (2004), El Salvador (2004), Honduras (2004), Thailand (2004), China (2003), Belgium (2003) and the United Kingdom (2002). The findings from stakeholder dialogues are publicly available and also summarized in the annual social and environmental report. Currently, the company is in partnership with the World Business Council for Sustainable Development (WBCSD) to share the experience of managing sustainability issues with its stakeholders. It also published the minutes of stakeholder dialogues both on its corporate website and its sustainability report. In addition, the company is also in partnership with the World Federation of Sporting Goods Industry (WFSGI) to phase out child workers from football stitching, strengthen school education and provide supplements to assist in local family incomes.

Partnerships have been established with NGOs in China, Vietnam and Germany, which is aimed at helping the factories, establish health and safety committee and trained personnel such as workers, managers and NGOs representatives. The

company is also in partnership with the Prince of Wales Business Leaders’ Forum, the Vietnam Chamber of Commerce and the Vietnam Business Links Initiative in integrating environmental management into making purchasing decisions, storage, handling, use and disposal of chemicals used in production process. A practical manual was also drafted to help factory management in dealing with energy and resource management problems from raw material sourcing to product end-life cycle in the supply chain through partnership with the Bavarian Ministry of Environment.

6.3.2 Evergreen Garment Factory background and operation

Evergreen Garment Factory comprises three factory buildings and two dormitory buildings situated in the rural area of Shenzhen. It is owned by a Taiwanese Group, which obtained ISO 9002 in 1997. The managers believed that obtaining the certificate would gain a competitive edge in the market. The group owner is not only a garment and footwear manufacturer, but also a producer of fabrics and other raw materials such as neoprene rubber in Thailand and Taiwan factories. The raw materials are then distributed to this factory for processing finished goods. The major production process is shown in fig. 6.5.

Multinational B is a minor customer of the factory as it orders 1% or less than the total factory capacity of 270,000 pieces. Other major customers are Quicksilver, Sepa, Roxy and Alder. A total of 858 workers are paid at piece rate, a large proportion being migrant workers from Guangxi and Hubei. The audit took place in

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May 2004, which is the end of their peak production period. The detailed factory profile is shown in the table 6.6.

Geographical location Shenzhen

No of factory buildings 5

Total factory area 129171 square feet Total production area 58127 square feet Number of dormitory buildings / area 2

Year established 1991 (the previous factory has been relocated to this new factory in October, 2003 without prior notice to multinational company B)

Ownership Type Facility owned by a Taiwanese Group Company B labels produced Knit items (e.g. shirts)

Others labels produced Other American brands: Quicksilver, Sepa, Roxy and Alder diving suits, vulcanized sole or zipper boots and diving gloves

Monthly production 270,000 pieces

- 200,000 garments - 70,000 boots Low production period June to September Peak production period Oct to May

% of factory’s capacity to production of multinational company B products

Less than 1%

Total number of employees at factory 1008

Number of office staff 150

No of piece rate employees 858

Other factories 1 Mexico factory

2 Taiwan factories 2 Thailand factories

Language spoken Cantonese and Mandarin

Sub-contractor information No subcontractors Any environmental policy? No

Any existing certification system such as - ISO 9002

- ISO 14001

Yes No Table 6.6 Evergreen Garment Factory background

Fig 6.4 Basic production process flowchart of garments and floor layout at Evergreen Garment Factory

Summary of observations

At the very beginning of the audit, the management team was surprised that the multinational company B, which only places approximately 2000 garments on an annual basis, would like to check their factory conditions. It is important to note that multinational company B is a minor customer of the factory as far as the factory management is concerned.

1. CoC and factory regulation awareness

From direct observation, neither the CoC nor the factory regulations are posted in the factory production area. From documentation, it is clear that the factory has its own factory regulations that were drafted from the Taiwanese headquarters. When the factory manager was interviewed, he declared that the factory regulations would be given and introduced to the factory workers at the very beginning of their employment period. It is unnecessary to post it on the factory wall, as they are worried that workers will copy it and sell it to another factory. When interviewing

Area 3 Area 4 Area 2

Area 1 Cutting

section Packaging

Screen printing

Sewing &

binding of neoprene

section

Quality assurance

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the workers, it transpired that, seven out of 12 did not know about the existence of the multinational company’s CoC and the factory regulations. Only two were aware of some aspects such as working hours and rules of the factory within the internal factory regulation.

2. Wages and benefits

The minimum wage specified by the local government was changed from RMB 465 to RMB 480 in May 2004, and the audit took place in the same month. Overtime compensation is 150 percent of the normal wage. A hardworking bonus is RMB 260 per month. From the timecard, it appears that most workers work nine hours per day, six days per week and they work 200 hours per month. It appears that the wages calculation does not match with the number of hours of overtime worked. There is a probability that the company is faking the wage records. In reviewing the payroll record, workers are paid ranging from RMB 650 to 1350 per month (See table 5.6).

But the basic wage has not increased from RMB 465 to RMB 480, since the payroll record is in March of the same year. The number of hours worked exceeds the legislative requirement which is 40 hours work per week with eight hours a day, five days a week.

Wages are paid on a monthly basis on the 15^th of each month by cash. It is compulsory for employees to obtain personal insurance of RMB 183 per month where 40% is deducted from their monthly wages, and the company pays 60% of the sum. Other monthly salary deductions are RMB 12 for their dormitory