Governance of occupational safety and health in supply chains

Introduction

Occupational safety and health (OSH) has a natural focus on the workplaces where humans work. Yet, the development of international supply chains during the last decades is challenging the traditional approach. Contemporary production – both material and immaterial – is organised in extensive supply chain networks where the individual producer controls only a limited part of the complete production process and is very dependent on buyer requirements. Furthermore, downstream multinationals often have the power to govern upstream suppliers. The consequence is that the specification of a product to a considerable extent is decided by – not the producer – but the downstream buyer, and the decision latitude for the producer to control OSH is getting still more constrained. 

The challenge for the suppliers is that the buyers in the supply chain do not necessarily have an explicit interest in safety and health of workers at the production site. As long as the suppliers fulfil the expected requirements for cost, quality and delivery, the buyers are in principle satisfied. The result has been the development of millions of unhealthy jobs with uncertain employment conditions and low salaries. First in the global south with well-known examples in the garment industry with the Rana Plaza accident in 2013 as the key incident^[1] and the electronic industry with low paid and intensified work resulting among others in suicides in the Chinese electronics industry^[2], but increasingly also in industrialised countries where outsourcing creates precarious jobs^[3]. The development is partly driven by the liberalisation of the global economy in the last decades of the 20^th Century and the rapid technological development creating still new possibilities for global exchange of services and products. 

Heavy criticism of the poor working conditions and the emerging sustainability agenda have since the Millennium changed the agenda. UN has set the agenda with Global Compact, the UN guiding principles and not least the Global Sustainability Goals (SDG) pushing Governments and business to adopt social sustainability policies. ILO has in parallel published a large number of labour conventions, which as guidelines for national regulation, multistakeholder initiatives and buyers. The European Union is following with ‘Corporate Social Reporting Directive’ requiring larger companies (from 2024 >500 employees) to report on ESG (Environment, Social and Governance indicators. 

In particular multinationals and international buyers face a severe reputation risk if they do not secure OSH and working conditions in their supply chain. They therefore require their suppliers to comply with Code of Conducts (CoC) building on the UN and ILO guidelines and they subsequently use internal or external audits to monitor whether suppliers comply with the CoCs. 

Decoupling

However, both practitioners and researchers criticise this system for window dressing and failing to secure decent work in supplier companies^[4]. A key problem is a double decoupling between policy and practice of both procurement and CSR units in buyers and suppliers (fig. 1)^[5].

The figure illustrates that the attention to OSH and working conditions is decoupled in both buyers and suppliers. Procurement focusses on price, quality and delivery and tend to believe that the CSR unit takes care of working conditions. Procurement has close contact to the production/sales units at the supplier, and the two parties take their decisions independent of social compliance. For the buyer CSR unit, they try to secure compliance with the supplier, who has established a unit to receive requirements from the buyer CSR, but both units have weak links to their internal colleagues, and they have limited influence on the supply chain decisions made by procurement and supplier. The challenge is therefore not just a question about relations between buyers and suppliers but also the relations between internal units operating with quite different logics. 

Integration of human factors into supply chain management

Even though most supply chains have the form of an extended network of buyers and suppliers, the supply chain basically consist of a dyad between a buyer and a supplier where they exchange resources in the form of a product and money. The relation between the two parties are regulated by contractual governance and/or relational governance^[6]. Contractual governance includes all the formalities such as tenders, contract, monitoring, and sanctions. Relational governance includes communication, partnerships, values, trust, and support. In simple transfers, relational governance (making a vocal deal) may be sufficient, while the more extensive transfer in terms of size, time, and complexity the more weight on contractual governance. Yet, contractual governance is never sufficient to secure the satisfactory transfer – even in cases where only the traditional price, quality and delivery are the priority. The transfer cost of securing all possible deviations in a legally binding contract and the subsequent monitoring will raise dramatically. Relational governance is therefore always necessary, and the governance of supply chain dyads develop into hybrids of the two forms^[7].

For integration of human factors both contractual and relational governance are of relevance and for both constructs they can have either a direct or an indirect influence on human factor (fig 2). The main focus for OSH advocates has been on measures, aimed directly at securing safe and healthy workplaces. The direct approach covers contractual measures such as CoC (Codes of Conduct), certificates (ISO 45001, Global GAP, BSCI or SEDEX) and audits of compliance with CoC and certificates. Yet, this command – control element in contractual governance is not always effective, and relational governance is now getting more common for buyers, who support suppliers to develop their safety and health performance, mostly by training but also other kind of support such as advice and access to networks. 

Less interest has been on the indirect effects of procurement and other supply chain management activities, which also have an effect on OSH and working conditions. The effects on OSH have mainly been studied in a cost perspective with the focus on the multinational buyers pressuring prices to such a low level that suppliers feel necessary to maintain salaries below living cost^[8]and to expose workers to unhealthy working conditions^[9][10]. Shopping around to get the lowest possible price may backfire as this practice initiate opportunistic behaviour among suppliers. Buyers therefore tend to focus more on long term relationship where the lowest possible cost is not the final decisive factor^[11]. Other factors such as quality, delivery and flexibility get more importance. Next to the salary levels, the indirect effects of contractual governance include among others forecasting (long term makes it easier to provide good working conditions – short term push towards precarious work). For the indirect effects of relational governance one example is direct communication by telephone and personal meetings between buyer and supplier. The possibility of finding shared solutions to problems and sharing expectations will make it easier for the supplier to plan the work with overtime and high work intensity.

Examples from construction and agri-food

A recent study of best cases gives some information about how these possibilities play out in practice^[12]. Case studies show that hybrid governance with elements of both contractual and relational governance are used in practice. 

Construction is a peculiar sector compared to agri-food and other sector, by the construction site as the revolving point for buying and supplying. Data from case studies in the sector show that the proximity of building clients, main contractors and subcontractors give possibilities for a close cooperation at the construction site to securer OSH. Clients and main contractors use contractual governance in tender specifications to require a high level of OSH and specification of OSH management, including also fines for OSH failures. Yet, it is the daily cooperation at the site, which is most important. For the safe sites clients and main contractors follow up on OSH with subcontractors, make safety rounds, toolbox meetings, get regular OSH reports and others. 

For agri-food with a focus on fruit and vegetable, the buyers and suppliers are geographically separated, and buyers mainly rely on certificates supported by third party audits. Especially the Global GAP standard is applied widely in Europe. However, the case studies show that the quality of audits vary considerably and the existence of a certificate does not necessarily prove a high level of OSH and working conditions. Some supermarket chains choose to take a high road strategy in the cooperation with their suppliers where they use relational governance to develop good cooperation and trust. By regular personal contacts both parties can gain transparency and flexibility, which the suppliers can use for better planning af their delivery and thereby get the possibility to offer more stable employment and working hours for their worker. 

For both sectors, a particular critical point is that good performance during the present construction project or the present agri-food delivery contract carries the promise of new additional business, and the case studies in both sectors show the subcontractors and fruit and vegetable suppliers continue to have businesses with their larger buyers for decades. This practice gives the incentive to deliver a strong performance both on business and OSH. 

Conclusion

As presented above there are practices being utilised, which can support improvement of OSH and working conditions in supply chains. The best results can be achieved by a combination of contractual and relational governance. The contracts should include OSH measures as well as transparent and fair conditions for suppliers. The direct contact between buyers and suppliers is essential for building mutual trust and create better conditions for suppliers and their workers. However, the case studies referred here, cover best cases, and in most companies, OSH does probably not get a similar priority, but these companies can get inspiration for a stronger focus on OSH from the cases presented above. Furthermore, many buyers rely on the value of certificates. Although certificates with third party audits can be useful, they are not always fully reliable, and buyers should therefore check by themselves the level of OSH at their suppliers. 

The EU green deal with new extensive requirements for reporting of ESG^[13] (Environment, Social and Governance) includes OSH and working conditions and these requirements can be expected to push for a much higher priority in supply chains governance.