This is an excerpt from the recently published Guide to Supply Chain Compliance Laws and Regulations, which is part of The Corporate Social Responsibility Series.
Supply chain management as a center of excellence within corporations emerged as a professional vocation in the 1980s. This need arose as the dual concepts of outsourcing and globalization gained prominence. During this time, specialization in supply chain disciplines emerged to meet the needs of businesses seeking to expand their operations into these emerging global markets. As this expertise developed, the power of the global market was unleashed and resulted in a decreased cost of production driven by higher efficiency, specialization, and having manufacturing facilities migrated to low-cost labor regions. As a result, the cost of goods decreased, access to goods and services increased, and profit margins rose over the following decades.
While profitability increased, so did supply chain complexity. No longer were traditional supply chains limited to local or regional hubs to find expertise in manufacturing and services. Modern supply chains now stretch across the globe. The diverse physical locations of parts and assembly services required to produce goods often mean that the components required to produce finished products will have come from multiple continents and traversed the globe several times before a product is completed. These global supply chains have established critical shipping lanes, ports, a need for logistics expertise, and service providers who specialized in moving products and materials across and through multiple jurisdictions. Shipping, air freight, rail, and truck transportation have also boomed, as goods traveled longer distances, requiring many modes of transportation to arrive at the customer’s desired location.
Another central motivation for outsourcing and globalization has been an increase in the cost of production resulting from increases in wages and regulatory controls in developed economies. While the cost of compliance has been studied and cost-conscious decisions were readily made, other considerations were rarely assessed. For example, consideration was rarely given to the reason the developed economy put the regulations in place by either the organization seeking to shift operations or the new country that was to become the new hub for manufacturing. As a result, not only were the manufacturing operations and associated jobs outsourced but also were the underlying pollution, safety/labor concerns, and product hazards.
This reality created a conundrum and generated the need for a new regulatory regime that was reoriented around the complexity of modern supply chains and the associated harms in the new production ecosystem. Regulations rarely occur in real time but will always follow innovation by business. Once the business processes have been established, industry standards will align around best practices and seek to deter undesirable and unethical actions. In time, this pattern and/or the resulting cases that highlight the consequences of failing to abide by industry norms will lead to defined laws. The laws, in turn, will establish rules that businesses and their suppliers are expected to abide by.
This pattern of regulatory evolution was coined the “race to the top,” meaning that once a best practice or undesirable activity was identified and regulated, others would all adapt to incorporate the new best practice. Historically, this trend has also led to traditional environmental and commerce regulation focused on the manufacturing process or point source regulations on facilities. Unfortunately, these existing point source laws were found to be insufficient by many major economies, as cases and problems began to emerge around supply chain actors or the finished products entering into a country. To close this gap, regulators began to establish a new series of laws that regulated the sale of products into the country that was receiving the goods.
To overcome issues of jurisdiction, regulations were oriented around the import of physical products and goods. Therefore, the jurisdictional hook became a call for transparency regarding what was in a product, what party/parties produced the product, and how the product was produced before it was imported into the country. These new regulations can be categorized into three groups:
- Product Compliance: Regulations that mandate compliance with material restrictions in products, safety standards, and conformance with norms within the region. Failure to meet these product regulations results in a loss of the ability to sell into a market.
- Vendor Management: Regulations that increase the cost of goods by requiring certain classifications and/or costs through the imposition of tariffs, fees, or sanctions. Failure to consider these vendor regulations results in an increased cost of goods and/or a loss of margin.
- Corporate Social Responsibility (CSR): Regulations that mandate transparency disclosures if a business sells into a given market. Failure to perform adequate due diligence or to disclose the use of inhumane practices, engage in unethical practices, or environmental degradation during production can commonly result in fines, a loss of customer goodwill, and a net decrease of future sales opportunities.
In totality, these regulations have created market forces and legal obligations that frequently demand rapid changes and coordinated efforts from suppliers, contract manufacturers, distributors, logistics providers, customers, and solution providers. As a result, a growing need has emerged to have internal and external expertise dedicated to the supply chain compliance function within most businesses. These supply chain compliance professionals have emerged over the last decade as a critical component of managing the emerging risks associated with outsourcing and/or globalization strategy. To mitigate risk, companies have attempted to extend and shift the burden of compliance onto the supply chain and the importer of finished goods through warranties, contracts, and/or certifications of compliance. To accomplish this burden shifting, complex databases that can track, evaluate, and disclose due diligence records must be maintained and accessible by key personnel. These databases establish chains of custody and support the identification of where supply chain breakdowns are occurring through systematic record keeping.
