Reports of dreadful working conditions at FoxConn. Claims that cotton suppliers of Victoria’s Secret employ children. A new California law will force more than 3,000 manufacturers and retail chains to report on efforts to keep human trafficking and slave labor out of global supply chains.
The issue of supply-chain accountability is coming to a head — and landing on the CFO’s desk. How should a company audit its supply chains? What steps should it take if a vendor is violating human-rights standards? If a company uncovers violations, how does it manage the release of potentially reputation-damaging information to customers and the public?
The following case study was developed by Dhananjay Nanda, a professor at the University of Miami’s MBA program. Designed to help finance chiefs think about such issues, the study focuses on Indian Kraft Export Enterprise (IKEE), a fictitious wholesaler. The owner is encountering a dilemma for which there are no easy solutions.
The following is a letter from the owner of IKEE explaining the problems facing his business — and asking for help. What would you do? Leave your solutions, comments, and opinions in the Comments section below. CFO will soon publish some possible answers and a discussion of the case study by a panel of experts, including Nanda, at the CFO Leadership Summit in Orlando.
I am the owner of Indian Kraft Export Enterprise (IKEE). My company acts as a middleman in the supply of handcrafted silk products to large U.S. and European retailers. Small, rural handicraft firms located in Northeast India supply my products. These firms are typically owner-run and employ 20 to 100 craftsmen who design and produce clothes, art, and handbags. All products are entirely handmade and depict the artwork local to the community in which the producer is located.
One of my suppliers, Grameen Samaj (GS), is a producer of women’s handbags and is located in Chhatisgarh, a rural and poor province in India. GS was founded by a local women’s activist, Sujata, who was motivated to rescue local village women that were at risk of being sold into prostitution. Sujata hired these local women to hand-stitch silk handbags that are now sold all over the world. The local women are extremely skilled and display a high degree of artisanship. GS workers live in dormitories at the facility so that they are safe from their families who wish to recapture them and sell them to human traffickers. The workers are housed in extremely clean surroundings and are provided food, clothing, and healthcare free of charge.
But something changed. A French magazine ran a feature on Grameen Samaj about a month ago. Their article uncovered that several workers at GS were between the ages of 7 and 14. These were young girls whose families tried to sell to the local gangs that deal in human trafficking. Sujata rescued the girls and provided them shelter at GS while also employing them in producing handbags.
I have just received a phone call from my largest European customer, RETMART, a very large discount retail chain. Because of their concerns regarding the use of child labor at GS they wish to cancel their existing supply contracts with IKEE. Apparently, according to Article 32 of the United Nations Convention on the Rights of the Child, French firms cannot do business with firms that employ children below the age of 16 if these firms do not also provide the children free schooling. I am also afraid that I will lose my major U.S. customers once the negative publicity comes to light.
I have just spoken with Sujata and shared the bad news. She is very disappointed because the loss of the business would lead to GS closing. She is worried about the future of the young women if she cannot take care of them. There are also no government institutions or non-governmental organizations that will take these girls in and protect them from human traffickers.
I am torn. I want to help GS as Sujata is doing really important work, but if I lose my main customers I cannot help her anyway. I can look for customers in other countries who are less likely to care about child labor laws. But, these retailers supply very small African markets with low purchasing power. In these markets I would lose money on every handbag, and eventually go out of business. I need a solution to this matter. What can I do?