Firms and supply chains

Issues

The changing dynamics of global production and trade has major implications for people living in developing countries. Global value chains (GVCs) have become the dominant trading model in many sectors with poor people are being integrated as producers, workers, and consumers into global and regional markets and production processes (See Kaplinsky and Morris 2002; Coe, Dicken and Hess 2008; Kaplinsky and Farooki 2010; Roduner 2005). Many formally employed workers in developing countries are part of value chains, as well as some groups of informally employed workers.

Though poor people are being integrated into value chains, their participation does not always guarantee positive development outcomes. A key challenge for the development community is to improve or ‘upgrade’ the position or poor people within value chains. Upgrading typically refers to supporting higher value activities in production to improve knowledge and skills, and increase the benefits of participating in value chains (Gereffi 2005, p. 171-175). There are two specific types of upgrading identified in the literature:

• Economic upgrading is a process by which firms ‘improve their position in terms of value added and productive capacities within value chains’ and producers have been able to move to higher-value activities (Barrientos, Mayer et al. 2011, p. 301).
• Social upgrading refers to ‘improving the rights and entitlements of workers as social actors, which enhances the quality of their employment’ (Barrientos, Gereffi et al. 2011, p. 324).

Access to supply chains

Incorporating SMEs and small-scale producers in supply chains has the potential to reach significant numbers of poor people and achieve positive social impacts through increased income generating opportunities (Seville, Buxton and Vorley 2011). However, a series of challenges can hamper producers’ effective involvement in supply chains (Vorley, Fearne and Ray 2006; Tschirley 2010; Heierli 2008):

• Transaction costs: Small-scale agricultural producers can face significant transaction costs in marketing their products, often due to the small or irregular volumes of their yields (Heierli 2008). Unless they have the ability to organise marketing efforts, they may not be able to access markets, or secure the best prices for their goods (Heierli 2008).
• Accessing credit: An inability to access credit can prevent producers from investing in the technology and know-how necessary to improve their productivity and meet the needs of buyers in value chains (Heierli 2008; Wilshaw 2013).
• Meeting standards: Some producers may face challenges in meeting buyers’ commercial demands and quality standards (Barrientos, Gereffi and Rossi 2011). To sell their goods to markets, for instance, producers may need to pay more attention to sorting, packing and grading, which can add significant transaction costs (Heierli 2008).

There is also some debate among the literature as to whether SMEs should be integrated in global value chains, or whether the focus should be on regional value chains (Stamm and von Drachenfels 2011).

Labour conditions

The growth of global production has created new job opportunities in developing and emerging economies, particularly for people who may have had difficulty obtaining wage employment previously. The expansion of global production in labour-intensive industries such as manufacturing, for instance, has been an important source of employment for women and migrant workers (Barrientos, Gereffi and Rossi 2011).

When employment is regular and generates protection and rights for workers it can contribute to social upgrading (Barrientos, Gereffi and Rossi 2011). However, much evidence indicates that employment in value chains can fall short of these requirements; is vulnerable, insecure and lacks adequate social protection (Newitt 2013; Fair Wear Foundation 2012; Barrientos 2011).

The governance of value chains can have important implications for the social impacts of business activity, including the regulation of global standards (Riisgaard and Hammer 2011). The complexity of global production and trade means that it can be difficult for companies – even those with comprehensive auditing and monitoring processes – to adequately monitor labour conditions within their suppliers (Riisgaard and Hammer 2011).

Some of the key issues relating to labour conditions within supply chains include:

Remuneration and conditions

• Poverty and low wages: Recent ILO evidence finds that approximately 839 million people worldwide are employed on US$2 or less per day, representing 26.7 per cent of total global employment (ILO 2014, p. 12). Cost pressures in many sectors, including retail and electronics, mean that when costs in supply chains are squeezed, there are often direct wage implications for workers.
• Hours of work: Evidence indicates that some people employed in value chains work long hours. A case study example from Madagascar, for instance, finds that workers employed in apparel manufacturing face moral pressure to work long hours and often have challenges claiming overtime pay (Staritz and Morris 2013).

Forms of contracting

• Vulnerable and precarious employment: Workers employed in vulnerable and precarious employment are typically less likely to have access to social protection, cannot join trade unions, and have no means of collective bargaining with their employer for improved working conditions and pay (ILO 2014).
• Outsourcing: Recent evidence points to the increasing use of outsourcing and agency workers in global supply chains (Newitt 2013). Agency workers are ostensibly used to provide flexibility in the workforce. However, they often lack a contractual relationship, may have less bargaining power, and endure poorer wages and conditions than directly employed colleagues (Newitt 2013). A case study example from South Africa shows that contract workers in the horticultural sector have been subject to workplace abuse, had wages withheld, and experienced serious accidents at work (Barrientos 2011).
• Informality: A review of literature finds a predominance of informal employment in value chains, particularly in processing units, pack-houses, and commercial farms (Chan 2013). A high rate of informality hampers poverty reduction efforts, typically involves lower and more volatile rates of pay, and often makes it difficult for workers to acquire generic skills that can be used in a variety of occupations (Bacchetta, Ernst and Bustamante 2009; ILO 2014). At the macro level, countries with large informal economies tend to experience lower export diversification, which has been linked to reduced economic growth (Bacchetta, Ernst and Bustamante 2009). Bringing workers out of informality has the potential to reduce working poverty, improve working conditions, and generate much needed tax revenue (ILO 2014).

Occupational health and safety

Throughout the world, the poorest and least protected – often women, children and migrants – are among the most affected by poor occupational health and safety. Developing countries have particularly high rates of deaths and injuries at work, due, in part, to the prominence of hazardous activities such as mining, fishing, and agriculture. Businesses have a role to play in ensuring that workers within their supply chains experience adequate social protection and safety in the workplace. The ILO has identified the following areas as of critical importance to occupational health and safety:

• Improving productivity and working conditions in SMEs;
• Protecting workers from unacceptable forms of work;
• Promoting more and better jobs for inclusive growth;
• Supporting jobs and skills for youth;
• Creating and extending social protection floors;
• Supporting decent work in the rural economy;
• Formalising the informal economy;
• Strengthening workplace compliance through labour inspection.

Interventions

Supply chain interventions have gained some traction among donors as a means to promote inclusive private sector development and support poverty reduction. They have also gained an appeal among some businesses who, seeking to demonstrate their social and economic impact, view value chain interventions as ‘a lever through which businesses can boost their development impact’ (Ashley 2009, p. 1).

Interventions by firms

Interventions by firms to support inclusive supply chains typically involve close collaboration and partnership with donors (Humphrey and Navas-Alemán 2010). A comprehensive review of GVC approaches identifies three types of lead firm interventions: i) supplier development programmes in manufacturing; ii) programmes that link lead firms with agricultural producers; and iii) interventions that focus on labour conditions (Humphrey and Navas-Alemán 2010).

Supplier development programmes typically aim to link local SMEs with large multinational companies, with the aim of increasing the potential of the SME to be a supplier for the larger enterprise. In some interventions, MNCs have adopted a mentoring role – providing technical assistance and direct support to the SME (Humphrey and Navas-Alemán 2010).

Lead-firm based interventions in the agricultural sector range from enhancing producers’ bargaining power and ability to bulk produce, to supporting market linkages between producers and processors (Stamm and von Drachenfels 2011). Some donors have provided on-site storage to allow farmers to benefit from seasonal price fluctuations, or have offered technical assistance to strengthen public-private partnerships and deepen collaboration with NGOs (Stamm and von Drachenfels 2011).

Some of the key challenges for scaling inclusive agri-food supply chains include (Woodhill in Butler et al. 2013, p. 34):

• Strengthening relationships and intermediary functions: Inclusive business depends on good partnerships and relations. Trusted agents and platforms are needed to broker relations and stimulate investment; however, these can be difficult to establish.
• Improving mechanisms for collaboration and pre-commercial financing: An injection of finance is often needed to kick-start inclusive business in the agri-food sector before it becomes commercially viable. Providing this type of financing in such a way as to drive entrepreneurship without excessive bureaucracy is a key challenge.
• Strengthening agri-cluster and networked business initiatives: Inclusive development in the agriculture sector depends on the development of clusters in agri-services, processing and logistics that can support multiple supply lines and create economies of scale. These can be difficult and complicated to establish.
• Improving mechanisms for joint learning and research between all groups: There are limited mechanisms for joint learning between key players in inclusive supply chains, such as business, government and producer organisations. New approaches are needed which have the appropriate efficiency and responsiveness.

Interventions that focus on labour conditions

Interventions aiming to improve labour conditions within supply chains range from supporting dialogue models between workers and employers, to providing technical assistance to improve terms and conditions.

Businesses can draw on the expertise of civil society organisations when seeking to improve labour conditions in their supply chains. Some CSOs have been advocating for the payment of a living wage – defined as that which meets basic needs and provides some discretionary income (Fair Wear Foundation 2012). The case for companies to pay a living wage is driven by a variety of factors; reputational risks and pressures on companies to demonstrate corporate social responsibility are matched by growing evidence that paying a living wage can contribute to higher production rates and better product quality (Thompson and Chapman 2006). Some of the barriers to raising wages in supply chains include lack of collective bargaining processes and limited dialogue between stakeholders.

Skill development is crucial to both poverty reduction and private sector development, and can impact on competitiveness in value chains. The private sector can play an important role in meeting growing demand for training opportunities within and beyond supply chains (Dunbar 2013). Recent evidence suggests that businesses are more likely to engage in skill development when the benefits are clearly apparent, there is minimal bureaucracy attached, and the business environment is favourable (Dunbar 2013).

The modalities of private sector engagement in skill development include: joint efforts of businesses, international institutions, and government to support national skill development strategies; and programmes to improve the capacity of private sector training providers (Dunbar 2013). Some companies have developed their own in-house training programmes in response to weaknesses in national training provision and when national training is not aligned to the needs of the private sector. Research shows that the most effective programmes incorporate both soft and technical skills, on-the-job and off-the-job training, and take into account the skills required in the informal sector (Dunbar 2013). The best results have been achieved in initiatives where employers have been involved at the beginning of the planning phase (Dunbar 2013).

Examples of business and donor agency support to skill development include:

• Public Private Partnerships (PPPs) between multinationals and training providers: SIDA has been one of the most active agencies supporting PPPs for skill development (Dunbar 2013). In Bangladesh, for instance, SIDA has recently begun working with the ILO and clothing company H&M to train an estimated 5,000 people in the garment industry by 2016.
• Partnering on national strategies in skill development: DANIDA has been working with the Bhutanese Department of Occupational Standards to introduce national occupational skill standards. The programme has found it difficult to establish strong participation from employers due to a highly fragmented labour market (Dunbar 2013).
• Involving private sector training providers: Private companies have been involved in the delivery of training programmes in various countries. In some cases, this is stimulated government action. DANIDA experience in Bhutan, for instance, found that private providers provided the initiative for change, obliging state technical training institutions to follow (Dunbar 2013).

Interventions by donors

The ILO’s Better Factories Cambodia (BFC) programme aims to develop local suppliers for US buyers with an explicit commitment to improve working conditions (Humphrey and Navas-Alemán 2010). The programme monitors factories, trains management and workers, and provides advice on factory improvements that can help businesses preserve profits, while respecting workers’ rights.

Some donors have been supporting social enterprises – organisations that typically combine key features of private sector enterprises, with an addition focus on achieving social and/or environmental impact (Rogerson et al. 2014). A stocktake of donor support to social enterprises finds that in this rapidly evolving area of work, donors are supporting a variety of business models intended for social impact. The main rationale for social enterprise programmes reviewed is to support greater inclusion of the poor, of women, and other vulnerable groups in the growth process (Rogerson et al. 2014).

Impacts

There is limited evidence about the impact of firms and supply chain interventions. Some project documents provide anecdotal evidence of positive impact; however, there is a broad lack of systematic assessment. Some authors attribute the lack of impact evaluations to the complexity of supply chains, the high cost of evaluation studies, and the significant methodological challenges involved in attributing changes to any one single factor. Supply chains are continuously adapting to new market and non-market forces; evaluators thus face a challenge of designing methodologies that are suitable to rapidly changing dynamics and reflect the fluctuations inherit in supply chain systems (Kidoido and Child 2014). Recent approaches have attempted to tackle evaluation deficits and include the use of value chain monitoring and client mapping.

Impact of inclusive supply chain interventions

There is mixed evidence about the impact of inclusive supply chain interventions. One case study example from Kenya finds that commercial producers have been able to move to higher-value activities in horticultural chains through meeting private industry standards (Evers et al. 2014). However, for smallholders’ such standards – which are particularly stringent in European supermarkets – can hamper their ability to access global supermarket value chains (Evers et al. 2014).

Evidence indicates that less stringent supply chains can be easier for smallholder horticultural producers to access. A study on South African horticultural value chains, for instance, notes that the expansion of South African supermarkets and the growth of South-South trade provide new channels for fruit and vegetables (Barrientos and Visser 2012). These typically require less stringent standards than European markets but pay comparable prices (Barrientos and Visser 2012). The Babban Gona franchisee model in Nigeria provides small holder farmers with access to investment capital, as well as agricultural and marketing services, to help them supply grain for animal feed companies.

Some of the general guidance and lessons emerging from inclusive supply chain interventions include:

• Identify access routes: Strategies to enhance the capacity of poor producers to engage with market-orientated activities must identify access routes to the markets and the agents involved (Humphrey and Navas-Alemán 2010).
• Analysis of supply chains: Supply chain interventions should begin with an analysis of the characteristics and constituent elements of the chain, and match the requirements of the potential markets with the capacity of potential suppliers (Humphrey and Navas-Alemán 2010).
• Lead-firm changes: Changing the behaviour of lead firms in supply chains can have notable impacts on small producers (Humphrey and Navas-Alemán 2010).
• Access to assets: Evidence indicates that access to assets – and the ability to accumulate and use those assets effectively – is critical to the effective participation of poor people in supply chains (Seville, Buxton and Vorley 2011).
• Support sectoral and national platforms for dialogue: Building the capacity of sectoral actors and supporting the establishment of platforms of dialogue can help to improve understanding between actors and provide a conduit for dialogue and change (Newitt 2013).

Impact of interventions to improve labour conditions

Evidence on how initiatives have contributed to improving labour conditions within value chains is also limited, with few organisations having published evaluations of voluntary initiatives (Newitt 2013). The research that is available suggests that initiatives are more likely to have an impact in areas where non-compliance is most visible and action more easily attainable, such as in health and safety violations (Newitt 2013).

The available evidence on the issue of collective bargaining suggests that interventions have made limited progress. Trade unions often lack capacity, companies can be distrustful of workers organisations, and barriers are particularly prominent in countries where legislation does not guarantee freedom of association. However, some private sector voluntary initiatives have been successful in opening up space for dialogue between the private sector, trades unions and NGOs (Newitt 2013). Building capacity and awareness of workers’ rights and supporting the capacity development of workers’ organisations can help them defend to these rights and represent workers’ interests (Newitt 2013).

An independent evaluation of the ILO’s Better Factories programme identified both positive and negative impacts (Merk 2012). While the programme was operated on a sector-wide basis and achieved some improvements in labour conditions, a number of concerns were raised including:

• No law enforcement powers: The BFC does not have powers of enforcement, and is instead tasked with verifying the conditions in participating factories, reporting on them, and providing information and advice on compliance. The lack of enforcement powers has been frustrating for unions and workers who report violations (Merk 2012).
• Freedom of association: Freedom of association, which is central to collective bargaining, remains under threat, particularly due to the prominence of fixed term contracts (Merk 2012).
• Limited scope and coverage: The BFC is not looking into violations that occur in small factories that subcontract to bigger companies, meaning that they can evade monitoring. The BFC also does not cover garment factors that produce solely for the domestic market and are not engaged in export activities (Merk 2012).

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