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Case Study SCM - HP PDF
Case Study SCM - HP PDF
Based on turnover and replacement costs per worker from Corporate Social Responsibility in Chinas Information
and Communications Technology (ICT) Sector, July 12, 2007, by Business for Social Responsibility.
http://www.eicc.info/downloads/FIAS_ICT_Report_ENG.PDF
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see long-term business benefits from certain environmental process or technology investments. Resource
reduction can reduce costs, and designing for the environment can help create differentiated products,
which can enhance revenues through price premiums, increased orders, or both. While continuous
improvement of conformance should remain a primary goal, suppliers should implement practices such as
the ones mentioned those that are simply good for business.
To better understand business success stories going forward, consistent evaluation is needed. Certain
standard SER metrics and potentially related business benefits should be measured over time, either in
absolute values or percentage change. This will enable suppliers to focus resources on high-impact
projects. To incentivize suppliers to execute high-return SER projects and improve overall compliance,
customers should establish cooperative mechanisms to reward all of these efforts. For example, customers
and suppliers can consider some of the following: co-investing in SER projects, allowing suppliers to
reinvest SER-related savings into future SER programs, splitting cost savings, and increasing the
weighting of SER on supplier scorecards. By better aligning enforcement with incentives, supplier SER
practices should continue to strengthen in China and across the world.
http://www.eicc.info
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major HP suppliers with significant operations in China. We researched AU Optronics and Flextronics,
visiting their Suzhou and Zhuhai sites, respectively. We conducted two-day visits at each site, interviewing
personnel devoted to environment, health, and safety, other SER operations, plant managers, HR
personnel, manufacturing supervisors, and line workers. Interviews were conducted with over 25 people
during these visits. A representative from Delta Electronics was also interviewed for supplementary
findings; however, we did not visit any Delta facilities for the study.
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http://www.ism.ws/files/RichterAwards/RichterWinnerBroch08.pdf
See http://www.hp.com/hpinfo/globalcitizenship/gcreport/index.html for more details on HP citizenship activities.
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Delta Electronics
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Views and CommonWealth magazines. The company recently opened a green factory in Rudrapur,
Uttarakhand, India. The facility uses low VOC (volatile organic compound) paints to reduce toxic
emissions; solar panels; green materials such as brick cova, fly ash, and gypsum in construction; R 407, an
environmentally friendly gas for air conditioning; and incorporates various energy-conserving techniques
in the building design to reduce energy consumption.
The Business Case: SER Activities That Have Generated Quick Supplier Benefits
Flextronics and AUO have both significantly improved environmental, labor, and health and safety
practices over the last few years. While formal supplier SER programs at both companies are only two to
three years old, certain short-term business benefits have already been realized. Delta began SER work six
years ago at HPs request but didnt report seeing concrete business benefits during this time period.
SER can help a company become a supplier of choice. SER has changed the mindset of suppliers
to be better citizens. Both Flextronics and AUO felt that SER could enhance their reputation with
many stakeholders. A Flextronics executive mentioned that an effective SER program can easily
be an enabler for us to be an employer of choice, an investor of choice, and a partner of choice.
According to an AUO executive, SER is a ticket for entrance also, a company wont want to
award business to a supplier with high overtime because it indicates that the supplier is already at
capacity.
Certain environmental investments can have short-term payoffs. In 2007, AUO implemented
several environmental projects that delivered financial benefits. Investment costs related to water
recycling and reduction projects, dormitory solar panels, and exhaust recycling were outweighed
by savings from most of these projects in the first year alone. In the last few years, AUOs energy,
water, and waste per substrate (a standard unit of glass used to manufacture computer panels) has
significantly decreased. Meanwhile, overall energy, water, and waste has increased due to higher
production output.
o Energy/substrate size: 352 kWh/m2 in 2003, and 141 kWh/m2 in 2006
o Water/substrate size: 3.4 ton/m2 in 2003, and 1.0 ton/m2 in 2006
o Waste/substrate: 10.1 Kg/m2 in 2003, and 4.3 Kg/m2 in 2006
Sometimes, roadblocks can appear along the path toward environmental conservation. Delta had
established a goal in 2007 to reduce fuel usage by 10 percent. However, due to electricity
shortages in the Dongguan, China, area (the location of one of Deltas factories), the company had
to self-generate power using fuel, and so fuel conservation goals were not met. While external
factors may impact such projects from time to time, the company continues to set aggressive goals
each year.
Health and safety programs can reduce accident rates. Both AUO and Flextronics have made
improvements to their health and safety programs over the last few years. They found that
strengthening safety training, improving/installing machine guards, and improving or providing
protective gear such as masks and gloves for workers resulted in accident rates declining over
Business Benefits to HP Suppliers from SER Practices A China Case Study
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time. This saves costs by reducing the time a worker is unproductive, and could also reduce health
care costs.
o The average accident rate at AUO declined by 71 percent from 2006 to 2007, and by 31
percent from 2007 to 2008, year to date. The result was fewer lost work days.
o Flextronics accidents have declined from 0.4 accidents per 200,000 worker hours in 2006
to 0.1 accidents per 200,000 worker hours in 2007. (The rate is well below the industry
average.)7
Delta did not share accident data. Before 2008, the company only recorded major accidents. This year, they began
recording all injuries and studying their causes.
8
Corporate Social Responsibility in Chinas Information and Communications Technology (ICT) Sector see
footnote #1.
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rates. One could also expect lower sickness rates in the future from certain wellness activities. By reducing
injury and sickness rates, it is feasible that productivity, quality, and costs could improve.
Environmental projects can provide revenue enhancement opportunities. While it was too early to gauge
the payoffs of certain investments at the factories we visited, it was clear that opportunities do exist for
technology or process investments to reduce waste, water, and energy costs. Flextronics is pursuing a more
robust green strategy going forward, the details of which are currently confidential. The company
currently employs packaging recycling and other efforts to save costs.
As designing for the environment becomes more popular, suppliers should be motivated to conduct
long-term research on environmentally friendly product design to create components that use fewer
resources, contain recyclable materials, and consume less energy during the product life cycle. Given that
many electronics components contribute to energy consumption in the end-product (e.g., power cords,
printed circuit boards), electronics suppliers have an opportunity to redesign products to utilize less energy
once the product is in the hands of the consumer. Such products can justify price premiums and help
differentiate a supplier, which can lead to increased orders. AUO is currently working on developing new
products that consume considerably less energy, for which it believes it can charge a price premium.
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Positive
Hypotheses
Qualitative
Data
Quantitative Data
Comments
Increased worker
morale = increased
retention
Improved safety =
lower accident and
illness rates and
insurance
premiums
Stronger
management
systems = improved
supplier
performance
Supplier
profitability =
supplier SER
investment
Higher supplier
performance =
higher supplier
SER performance
AUO direct and indirect labor attrition compared with data from an AUO benchmark study conducted from
January through May 2008. Direct labor attrition also compared with a benchmark study conducted by HP from
September 2007 through August 2008.
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Exhibit B contd
Negative
Hypotheses
Qualitative
Data
Quantitative
Data
Comments
Excess overtime =
productivity and
quality decreases
Higher percentage of
migrant workers =
higher financial
investments for
supplier
Supplier location in
more emerging markets
= higher SER risk due
to differences in local
laws and rapid
development
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While it is clear that meeting certain requirements involves costs, companies can play a role in
educating suppliers about the costs involved when a company does not follow good business
practices. In her work with various China-based suppliers as part of the BSR project titled
Corporate Social Responsibility in Chinas Information and Communications Technology (ICT)
Sector, 10 Ms. Commike Gitman encountered some suppliers that felt that high attrition was not a
problem that needed to be rectified since labor supply is plentiful in China. They failed to
recognize the full cost of attrition that in addition to hiring and training costs, companies face
lost productivity and efficiency while employees are being fully trained.
Suppliers fear that disclosing SER-related cost savings data may result in price cuts. This lack of
transparency on the successes of SER activities hampers what could be a more cooperative
relationship between customers and suppliers to improve and strengthen SER practices.
Improvement targets become harder over time. As mentioned earlier, AUO has significantly cut
water, energy, and waste per unit from 2003-2006. This year, their targets are to further cut water
and energy consumption by 20 percent. Continual cuts such as this can be difficult to sustain.
Up-front investments for environmental projects can be large. Furthermore, since benefits of
certain environmental investments are not always clear, one supplier mentioned that more
customer guidance was needed to evaluate benefits, justify projects, and implement them.
The number of audits a supplier faces over time may actually increase as more customers begin
to enforce SER. While EICC members are now being encouraged to conduct joint audits, one
supplier feared that non-EICC customers and new customers may continue to conduct individual
audits. An excess amount of time devoted to audits versus SER program management could
distract from continuous improvement efforts and lead to audit fatigue.
Meeting overtime law limits continues to be a
problem for a myriad of reasons. Prior to Chinas
new 2008 labor laws that stipulate workers cannot
exceed 36 hours of overtime per month, it was
already challenging for suppliers to meet the EICC
rules of 60 hours worked per week (which equates to
80 hours of overtime per month). Some reasons for
high overtime include a lack of accurate order
forecasting, high attrition, a belief that reducing
AU Optronics
overtime always results in higher headcount and
higher costs, a belief that workers will leave if not
given sufficient hours, and a lack of standardized government enforcement (which can lead
employees to switch employment to a company that is not facing strict enforcement). AUO has
made great strides in reducing overtime hours through lean manufacturing practices. These
practices have increased efficiency and reduce the need to increase headcount when working hours
are cut. Now, 90 percent of workers are working less than the 36 overtime hours limit. Delta plans
to comply with the 36-hour rule by improving productivity, storing more raw materials and
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finished goods buffer stock, and working with customers to store more buffer stock at their
locations to reduce the need to produce high volumes over a short time period.
China continues to face ethics challenges with corruption, bribery, and kickbacks.
Attrition is costly, and yet efforts to decrease attrition rates have inherent obstacles in China.
One supplier noted that Attrition costs companies millions of dollars every single year,
specifically in China. In addition to hiring and
training costs, there are significant costs involved
with lost efficiency while the worker is being fully
trained. Due to the young workforce at most
electronics suppliers in China (for example, the
average direct labor worker at AUO is 22 years old)
and the fact that the majority of workers are female
(57 percent of workers at Flextronics, and 76 percent
Flextronics
of workers at AUO), workers often leave their jobs
after two to three years to return to their rural homes,
get married, and begin a family. Due to Chinas one-child policy, the responsibility for caring for
aging parents is also squarely on the only child, making it more likely that a worker will return to
his/her family after a number of years of working away from home. Finally, there is a labor
shortage in many regions, giving workers the opportunity to switch jobs easily. For example, Delta
noted that there is a 3 million worker shortage in the Guangdong region. The suppliers we spoke
with understood the costs of attrition but also reported operating employee wellness and
satisfaction programs because treating their workforce well was simply a part of company
philosophy. One Flextronics SER executive said, The benefits [to SER] are when you establish
yourself as an employer of choice. We want employees to feel like they are part of our Flextronics
community. We encourage desirable working and living conditions and are taking great steps
toward this end. Both Flextronics and AUO felt that employee satisfaction efforts were important
to preserving and improving retention; however, evidence linking the two was not found.
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Easy wins:
o Environmental projects that can deliver some of the highest returns (as seen at AUO)
include water reduction and exhaust recycling.
o Other environmental projects that can deliver relatively quick paybacks (as seen at AUO)
include solar panels, waste water recycling, and reverse osmosis water recycling.
o Health and Safety practices make business sense. They dont have high costs and can
contribute to lower injuries, which can lead to increased productivity and lower health
care costs. Projects to prioritize include better protective gear (PPE) and better machine
guarding. While building a strong H&S training program can take time, it is critical for
employees to internalize safety practices. Suppliers should look to industry peers and
customers for guidance on best practices for developing and managing training programs.
Big wins:
o Given rising resource costs, potential increases in future environmental regulations, and
increasing end-customer demand for environmentally responsible products, suppliers
should be proactive and look for long-term opportunities to save energy, water, and waste
throughout the entire product life cycle.
o In addition to complying with wage and overtime rules, suppliers should invest in good
dormitories, canteens, internet cafes, gyms, libraries, and other amenities. Creating a good
living and working environment makes business sense given the opportunity to save costs
related to attrition. While measuring ROI for such labor practices can be difficult, workers
interviewed reported that these types of benefits affected their choice of employment.
See Exhibit D for a list of the EICC requirements that suppliers felt had high-return potential.
Develop standardized metrics where possible, evaluating percentage change over time.
While suppliers felt that stronger SER labor practices (e.g, paying workers minimum wage or more,
limiting overtime to be in accordance with EICC and Chinese rules, non-discrimination, humane treatment,
child labor avoidance, freedom of association, freely chosen employment) should reduce attrition, improve
efficiency, and raise product quality and employee satisfaction over time, it may prove difficult to link
strong labor practices with direct business benefits. Many factors other than SER can influence attrition,
efficiency, product quality, etc. For example, other job opportunities in the area can influence attrition
rates, lean manufacturing practices can improve efficiency and product quality, unpredictable customer
demand can influence overtime hours, and the Chinese culture of company loyalty can make employee
satisfaction surveys less informative than in other countries. Regardless, measuring key metrics of SER
labor practices over time, alongside measurement of business outcomes, could illuminate the impacts of
SER over time.
Although suppliers have different starting points and individualized metrics based on size, industry,
geography, and other factors, some standard SER metrics can and should be evaluated, either in absolute
amounts or by percentage change. Some suggestions for SER labor metrics include: average wages,
number of hours worked per month, and average number of days off per week. Some possible business
outcomes to measure could be: percentage of employees satisfied, number of overtime hours desired by
employees, attrition rates, and percentage of employee complaints about canteen, dormitory conditions,
Business Benefits to HP Suppliers from SER Practices A China Case Study
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and other amenities. Additional examples of metrics for labor, health and safety, environment, and general
measures are provided in Exhibit D on page 17.
Take the extra step to quantify cost savings or revenue enhancements where possible.
As mentioned earlier, customers should try to develop cooperative arrangements with suppliers to
encourage suppliers to share SER cost savings and revenue enhancement data. Once a cooperative
arrangement is in place, suppliers should focus on quantifying benefits on a periodic basis. For example,
the cost savings from reducing the number of accidents can be calculated by looking at the reduction in
lost days from injury x average daily wage. With environmental projects, calculation of savings can be
even clearer. For example, total tons of water saved x cost of water per ton = total water conservation
savings. These savings can be analyzed against initial investment costs.
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Other methods to incentivize suppliers: One supplier interviewed felt that sub-tier suppliers would more
easily adopt the online E-TASC tool (Electronics - Tool for Accountable Supply Chains), a system for IT
companies to manage corporate responsibility throughout their supply chain in an efficient manner, if it
was free and the software was made available in Chinese. This same supplier suggested that the industry
consider offering EICC certification, modeled on ISO (International Organization for Standardization)
certificates issued for general management and environmental management. While the EICC wants to
encourage continuous improvement instead of a one-time certification, and has concerns about suppliers
buying certifications on the black market in countries such as China that are plagued with ethics problems,
this supplier suggested that, like other certificates, EICC certificates could be renewed every few years to
ensure that suppliers are always focused on high achievement. Suppliers could then show this certification
to new customers without having to undergo increasing numbers of audits.
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Dependent Variables
Attrition rates vs.
benchmark
Independent Variables
% employees satisfied
vs. benchmark
Avg. dormitory room
occupants
Number of complaints
per worker
Data Needs
Online and/or paper
employee
satisfaction surveys
(% satisfied, #
complaints/worker)
Dorm room
occupants survey
Excess overtime =
productivity and
quality decreases
Average
overtime/worker
Average days off per
week/worker
Timesheet data
Quality reports
Productivity
reports
Higher percentage of
migrant workers =
higher financial
investments for
supplier
Investments per
worker for
dormitories/canteens/
other facilities
Operating expenses
per worker for the
above
Number of injuries
per 100,000 worker
hours
Hours of lost
productivity per
100,000 worker hours
Percentage of direct
labor that is migrant
Investment and
operating expense
reports for
dorms/canteens/
other
H&S training
hours/worker
H&S training
cost/worker
H&S training
records
H&S training cost
budget
Injury and related
productivity
records
Factory-level and
overall corporate net
income
Factory and
corporate financial
statements,
including SER
detail
Improved safety =
lower accident and
illness rates and
lower insurance
premiums
Supplier profitability
= supplier SER
investment
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Exhibit C contd
Hypothesis
Higher supplier
performance = higher
supplier SER
performance
Higher supplier SER
performance = higher
supplier performance
Dependent Variables
Supplier scorecard SER score
Supplier SER audit
score
Supplier scorecard overall score
Independent Variables
Supplier scorecard overall score
Data Needs
Supplier
scorecards
SER audit reports
Supplier
scorecards
SER audit reports
Which high return-on-investment projects can suppliers prioritize? We have discussed some
projects in this report that can produce easy wins, and some that may produce big wins in the
future. As SER programs evolve and mature, a more in-depth analysis of SER practices to
prioritize can be conducted. One way to better understand high-impact SER practices is by testing
the last hypothesis in the table above (Exhibit C) Does higher supplier SER performance drive
higher supplier performance? The table below lists metrics that could serve as a starting point for
testing such a hypothesis in a more detailed fashion.
Exhibit D Does Higher SER Performance Drive Higher Supply Chain Performance?
Labor
Environment:
Overall
Average # OT hours/month
Average wage
% employees satisfied or % complaints
Attrition/month or year
Average tenure
# of Labor audit nonconformances
Water/unit, Energy/unit, Waste/unit
% Packaging, etc. that is recycled
Greenhouse gas/unit
# of Environmental nonconformances
Lost workday rate
Recordable incident rate
% of workers aware of safety protocols
# of Health & Safety nonconformances
SER audit score13
Supplier scorecard SER score
13
Note: We attempted to compare supplier scorecards with EICC audit results for the companies studied but did not
find enough historical supplier scorecards to compare with EICC audit results for two of three suppliers. The third
suppliers SER scores were found not to correlate with supplier scores over time.
Business Benefits to HP Suppliers from SER Practices A China Case Study
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Conclusions
While formal supplier SER programs are relatively new, it is clear that certain short-term benefits have
already been realized. Suppliers have achieved risk reduction
and are improving the standardization of compliance practices
in the industry. They are realizing that SER goes along with
good business practice, since theyve seen cost savings from
certain environmental initiatives and from stronger health and
safety programs. While remaining focused on meeting minimal
compliance standards on all fronts, suppliers should also seize
opportunities where SER can have financial benefits in both
AU Optronics
the short and long term.
It is clear that suppliers are making great strides in improving SER practices, and that customers should
work hand-in-hand with suppliers on collaborative solutions to challenges. Suppliers can look to the
success stories of the companies we studied as motivations to make continuous improvements. As one
Flextronics executive said, Using a China-based supply chain requires a relationship-based
collaborative effort. Its a culture thats willing to change, but we need to be clear on requirements and
show them we want to help them achieve SER success and have patience. We believe we know how to
get there its a journey.
____________________________________________________________________________________
Sonali Rammohan is a Project Director with the Socially and Environmentally Responsible Supply Chains (SER)
Program at the Stanford Global Supply Chain Management Forum. She can be reached at
[email protected].
We would like to thank the many staff at Flextronics, AU Optronics and Delta Electronics that contributed to this
research project. In particular, the extensive cooperation provided by Seb Nardecchia, Tony Khaw E. Siang, and
Jayesh Menon (of Flextronics), Eli Yang, Dominic Chen and Jackie Hsu (of AU Optronics), and Joe Kao (of Delta
Electronics) was incredibly valuable. We would also like to thank Lindsey Ridgeway of Hewlett-Packard for her
guidance and management of many aspects of the project.
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The provisions that suppliers interviewed felt could have a cost -reduction benefit are highlighted.
SECTION A: LABOR
A1 - Freely Chosen Employment
A2 - Child Labor Avoidance
A3 - Working Hours
A4 - Wages and Benefits higher wages involve more costs, but can reduce attrition costs
A5 - Humane Treatment
A6 - Non-Discrimination
A7 - Freedom of Association
SECTION D: LABOR/ETHICS MANAGEMENT SYSTEM helps with overall risk reduction
D - Labor Ethics Management System Overall
D1 LE Company Commitment
D2 LE Management Accountability and Responsibility
D3 LE Legal and Customer Requirements
D4 LE Risk Assessment and Risk Management
D5 LE Performance Objectives & Implementation Plan and Measures
D6 LE Training
D7 LE Communication
D8 LE Worker Feedback and Participation
D9 LE Audits and Assessments
D10 LE Corrective Action Process
D11 LE Documentation and Records
SECTION B: HEALTH AND SAFETY
B1 Occupational Safety
B2 Emergency Preparedness
B3 Occupational Injury and Illness
B4 Industrial Hygiene
B5 Physically Demanding Work (ergonomics)
B6 Machine Safeguarding
B7 Dormitories and Canteens
SECTION D: EHS MANAGEMENT SYSTEM helps with overall risk reduction
D EHS Management System Overall
D1 EHS Company Commitment
D2 EHS Management Accountability and Responsibility
D3 EHS Legal and Customer Requirements
D4 EHS Risk Assessment and Risk Management
D5 EHS Performance Objectives and Implementation Plan and Measures
D6 EHS Training
D7 EHS Communication
D8 EHS Worker Feedback and Participation
D9 EHS Audits and Assessments
D10 EHS Corrective Action Process
D11 EHS Documentation and Records
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SECTION C: ENVIRONMENT
C1 Environmental Permits
C2 Pollution Prevention and Resource Reduction can reduce treatment costs
C3 Hazardous Substances
C4 Wastewater and Solid waste lower disposal fees
C5 Air Emissions
C6 Product Content Restrictions can raise costs at times
SECTION E: ETHICS helps with overall risk reduction
E1 Business Integrity
E2 Improper Advantage
E3 Disclosure of Information
E4 Intellectual Property Protection
E5 Fair Business Advertising and Competition
E6 Protection of Identity (Whistleblowers)
E7 Community Engagement
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