Boots has staked its reputation on finding a better way to manage ethical supply chain risks. But will its gamble pay off?
Richard Ellis has a lot of explaining to do to ethical trade campaigners. In June, he withdrew his employer, UK retailer Alliance Boots, from a major industry effort to improve supply chain labour conditions.
Boots quit the Ethical Trading Initiative after six years as a leading member of the group. Its departure came as ETI was celebrating 10 years of helping companies to address poor working conditions among suppliers.
Boots was accused by campaigners of giving up on ethical trade in the recession, a move that would send a poor message to hard-up suppliers. Some activists claimed the retailer was cutting costs to please its new private-equity boss, Italian billionaire Stefano Pessina, who bought the company for £11bn in 2007.
ETI said it was “deeply disappointed” by Boots’ decision. “In our view it is not the right time for major brands to be rolling back their commitments on labour standards, nor does it make good business sense,” says executive director Dan Rees (in a press statement).
Ellis, who is Boots’ head of corporate responsibility, is unfazed by the criticism. Calm and considered, he is known as one of the most skilful corporate responsibility directors in UK business. Without a budget to speak of, he has turned Boots into a recognised leader in ethical supply chain management. So why put this reputation on the line now?
The reason, he says, is that ETI fails to consider environmental issues when assessing corporate supply chain practices. “We want the whole of our supply chain and processes to be as sustainable as possible. ETI is really interested in labour issues and not in broader sustainability issues,” he says. After six years of improving labour conditions at suppliers, he now wants Boots to green its supply chain too. But ETI would not help the company to do this.
Ellis reveals that he asked senior figures at ETI whether they would expand their service to cover environmental issues – such as where product materials come from, how much packaging is used, how far goods travel to stores, and so on. They refused. Simply getting companies to improve supply chain working conditions is still enough of a challenge, the group believes.
So Boots has found a new partner to advise it on managing ethical supply chain risks: Business in the Community. Ellis has contracted the UK membership group to “audit the whole of the supplier verification process from labour standards right through to the materials being used”.
Boots will pay £25,000 for BITC to be a “critical friend”, overseeing its supply chain practices. The move is a gamble for Boots because BITC has no experience of providing a supply chain advisory service at the level of detail the company wants. But it is a risk worth taking, Ellis believes, for the chance to find a better way to manage supply chain impacts. “It’s about being assessed more rigorously on a broader agenda,” he says.
Boots will continue to audit its suppliers itself, with BITC looking on. “We are reviewing the current supply chain practices, including auditing,” says Toby Shillito, director of BITC’s CR index and advisory services, who is managing the project. Boots audits all 652 of its suppliers that make its own-brand health, beauty and food products.
Until now, Boots has audited these suppliers against the labour standards in the ETI base code. Principles include paying for overtime and ensuring staff have safe working conditions. ETI would then review the company’s performance and suggest improvements, as it does with all corporate members. Now Boots wants to broaden the ethical criteria on which its suppliers are assessed, and so the standards on which it will itself be reviewed, using BITC. That means going beyond labour standards to include the materials being used in products and packaging, for example.
First the company must work out what these criteria are – a significant challenge, says Shillito. His team has spent two days at Boots’ headquarters in Nottingham to understand how the company manages its supply chain. Desk-based research will show how Boots’ systems match up to those of other UK companies. This phase of the project is due to be completed by the end of 2009.
The chance to benchmark its performance against other companies on a broad range of sustainability performance criteria was a key reason for Boots’ choosing to contract BITC.
Boots first started working with BITC after winning the group’s supply chain leadership award in 2005. Boots is now held up by the group as an example of excellence. It has helped to train 500 BITC member companies on sustainability in a series of “beacon days” held twice a year, for the past five years, at its Nottingham HQ. Boots explains to the companies its approach to sustainability, including how it manages ethical risks in its supply chain.
Shillito hopes that, in time, the Boots project will create a benchmark for managing social and environmental supply chain risks that other companies can use. Provided Boots succeeds, Shillito hopes BITC will then convene a roundtable of companies keen to follow the retailer’s example. Together these companies could devise a comprehensive framework for managing supply chain risks that could be shared across business.
A Boots-led model for creating such a framework already exists in the area of employee health. The retailer has spearheaded BITC’s Business Action on Health Campaign since its launch two years ago. This gives employers best practice tools and advice for improving the health of staff, explaining why this is good for business. The campaign has been chaired by Alex Gourlay, chief executive of Alliance Boots’ health and beauty division.
Ellis for now is more cautious about scaling up the project, saying: “We don’t want to run before we can walk.” Boots is hedging its bets. It will review the BITC contract after a year. “If we feel it is not working from our point of view then we can [go back to] work with ETI on labour standards,” Ellis reveals. The company is still on good terms with senior figures at ETI, he says.
Other companies are keen to see whether Boots’ gamble pays off. “People are watching from the sidelines with interest,” says Ellis. Boots feels confident enough to leave ETI because, after six years, it believes it has the right processes in place for handling labour challenges in its supply chain, Ellis says. As demands on companies to green their supply chains increase, Boots’ work could create a new standard by which sustainability in corporate supply chains may be judged.
But where does this leave ETI? The group has reacted to losing one of its leading members by putting on a brave face. Rees says: “We are deeply disappointed that Boots have taken this decision, particularly at such a crucial time for the world’s most vulnerable workers, who are bearing the brunt of the global downturn.”
ETI does not expect to find it harder to recruit new members as a result of Boots’ move. The retailer’s departure was “counter to the prevailing trend, which is seeing companies adopt the ETI base code in ever greater numbers”, according to Rees. ETI membership is increasing at a rate of 25% a year, he says. But the exit of such a prominent member raises questions about the future of the initiative.
Ellis believes that ETI will continue to play an important role in promoting supply chain responsibility – especially for companies new to ethical trade. Labour abuses remain the biggest supply chain risk to brands, he says. Ten years of experience means ETI is well placed to serve the many companies only starting to manage these risks. “For brands that haven’t considered these things, ETI would be the ideal point of contact,” Ellis says.
The next level
But for a smaller group of companies with experience in responsible business, ETI may not have all the answers. “Businesses that have taken these things seriously for a longer period of time are moving on to the next level,” Ellis explains. To him, that means a broader sustainability agenda covering both social and environmental issues in one.
The trend for integrating social and environmental concerns into a single initiative is occurring in other sectors. The Equator Principles for project finance, for example, began as a largely environment-focused initiative. The revised principles, launched in 2006, beefed up the social requirements placed on signatories to consider communities affected by big infrastructure projects.
In the area of ethical supply chains, membership group Sedex has grasped the integration trend. The group runs a database that allows retailers to survey non-financial data on suppliers. After years of providing detailed information about labour conditions, Sedex is improving environmental data for members. Demands of companies such as Boots for integrated ways of measuring and managing sustainability will only accelerate this shift.
Boots’ move could also be a game-changer for BITC as the organisation debates how best to serve members. Many corporate responsibility directors feel that, at £12,500 a year for big companies, membership could offer better value for money.
Shillito admits there is a “tension” within BITC over its future. A traditional, old guard feel the group should stick to products and services open to all members. Others, including many new arrivals, believe in offering more bespoke services for individual companies, such as advisory work.
Shillito, a former consultant who joined BITC two years ago, says the group should be more than an award-giver. He says: “I am personally very keen for us to advise members … so we’re not just standing on a podium with a bag of sweeties, saying: ‘Come and get it!’” BITC is starting to plough resources into advisory services, he explains.
The next 12 months will be crucial for BITC and Boots, and for the future of ethical supply chain management.
If the project works, it could set a new benchmark for corporate efforts to make supply chains truly sustainable. This in turn would require membership groups and other sustainability service providers to change their offerings to companies.
But if the project fails, Boots may have to endure an embarrassing return to ETI. That gives Ellis all the more reason to ensure his gamble pays off.
Boots and BITC
As part their first £25,000 deal, Alliance Boots has contracted Business in the Community to:
- assess its supply chain strategy;
- offer “critical friend” feedback on supply chain strategy and practices;
- widen the audit criteria for sustainability on which suppliers are judged to include environmental, as well as labour, issues; and
- create an action plan to implement these new criteria.
This work should be done by Christmas 2009, according to BITC.
Boots: the private equity timeline
- 2006: merged with Pessina’s Alliance UniChem pharmacist chain.
- 2007: bought by Italian billionaire Stefano Pessina for £11bn in a record private-equity deal backed by US buyout giant Kohlberg Kravis Roberts.
- January 2009: achieves £100m cost savings target since being taken private, 18 months ahead of schedule. Savings were made by “exploiting cost synergies” in UK businesses.
- May 2009: reports full-year turnover of £20.5bn for 2008-09, up 11.3% on the previous year; trading profit is up 11.6% to £953m.
*Please note that an earlier version of this story misquoted Alliance Boots' turnover figure for 2008-09.