Editor's Note: This story is part of a spotlight series on supply chain risk management. To see all of the stories in this series, please click here.
Jack Barker had little clue of the risks he would have to manage when he became CEO of Hooli.
When a quality defect caused the latest Hooli phone to explode, Barker went to the Board of Directors with a plan: Recall 9 million devices and replace them all within 3 days. The Hooli board knew it was impossible, citing high expenses, contract manufacturing capacity limits and labor concerns. But Barker pursued his plan anyway, convinced he could coax his suppliers into compliance.
A few days later, workers at a Hooli supplier factory in China declared a strike. The factory had already been at full capacity before Barker’s orders, and the workers would not accept longer hours. Even Barker’s words could not persuade them as they demanded better treatment.
Barker’s unlikely story aired in the latest season of Silicon Valley, a fictional TV series by HBO on the life of a startup in California. The show may be a satire, but it offers a grim sight of what may happen when a company fails to assess labor risks within their supply chain.
How labor concerns can affect the bottom-line
Barker’s story is not that far off course: In the rush to bring new products to market, executives must balance competing priorities and take measured risks to ensure success.
However, this may translate into an unfavorable environment for suppliers. Or, in the words of Tesla CEO Elon Musk, creating a sort of “manufacturing hell.” Increased demands on the design-to-market product cycle tend to ripple upstream and place greater stress on suppliers, transportation providers and their workers.
At best, such pressures may lead to missed deadlines or costly delays. Recent reports reveal Apple’s iPhone 8 will be delayed due to supply chain shortfalls, which could cost the company $17 million in lost sales. At worst, however, timelines set downstream may encourage suppliers to take shortcuts and make costly mistakes. Samsung’s spontaneously combusting Galaxy Note 7 fiasco, for example, was later attributed to a failure of quality controls as the company rushed to beat Apple with a new product.
The industry that we’re talking about is a highly regulated industry.
Partner, Barnes & Thornburg LLP
Behind each of these shortfalls, however, are people. “Labor is the backbone of any supply chain operator,” Kara Maciel, chair of the labor and employment practice group at Conn Maciel Carey LLP, told Supply Chain Dive. “Those are the employees that are getting the product out into the marketplace … and ultimately down into consumers.”
Just as a company ensures every detail is correct when rolling out a new product, a company must be complying with federal rules at every step of an employee’s time with the company. “The industry that we’re talking about is a highly regulated industry,” said David Ritter, partner at Barnes & Thornburg LLP. Failing to comply with labor rules is a recipe for financial disaster.
Ritter told Supply Chain Dive how one of his clients once terminated an employee, who later alleged they were not paid overtime, during their time with the company. Ritter and his client argued the employee was exempt from overtime pay. However, after settling the case, he admits they got lucky in the end. “I didn’t know how this one was going to end,” he said.
“That’s a sort of case that could have easily gone the wrong way,” but the employee admitted to various judgments that freed the company from responsibility. “If we got a bad ruling, then the company would have had a real issue with all of its operators everywhere, because they all do everything the same.”
The various types of labor risk
Ritter’s example is but one way companies can get caught in tough waters due to labor concerns.
“There are a lot of issues right now in the business community for supply chain operators that will affect their labor concerns,” says Maciel. Businesses’ bottom line may be affected by various types of labor concerns, ranging from third-party disruptions to worker safety concerns or legal employment battles.
The first step to managing risk, then, is being aware of the various ways labor concerns may affect supply chains. Five types of labor risk come to mind:
- Third-party risk — “Beyond tier 2 and 3 is where the biggest risks lie,” according to Dave McClintock, marketing director of research at Ecovadis, which sells supplier risk maturity rating software. Suppliers are an extension of a company, and a failure to acknowledge downstream working conditions, the use of child and forced labor, or discrimination and harassment by suppliers could cause serious damage to brands, according to McClintock.
- Workplace safety — As automation continues to spread across the supply chain, so too should safety concerns. “Workplace safety needs to be a paramount concern,” according to Maciel. “The penalties for a fatality, or even a serious injury or accident can really pose a large risk for operators.”
- Union management — Not all strikes are caused by associated workers, but many of them are. Most recently, East Coast ports suffered a scare as the dockworkers’ union threatened to strike over concerns of automation and regulation. When working with unions, Maciel recommends paying special attention to workers’ needs, or if the risk is third-party based, providing employees with “a good education on how to handle that situation.”
- Regulatory shifts — There’s a laundry list of regulations affecting labor in supply chains, but Ritter says the top three legal concerns are wage and hour issues, employee classification, and rules on what information former employees can use or share. Ritter recommends updating the employee manual with the same diligence as going to the doctor.
- Talent concerns — Alongside the rise of automation is also the need for skilled labor. Employers should also pay attention to their pipeline, to ensure a talent shortage does not befall the industry as baby boomers retire.
In other words, so long as people run supply chains, so, too, can they affect them.
Final tips for managing labor risk
Labor issues “are not expensive things to fix,” according to Ritter, likening labor issues to self-inflicted wounds. “That's the crazy thing. What these are, is no-one pays attention to them."
Managing labor risks is less complex than other types of risk, like shifts in regulation cybersecurity issues. Often, it comes down to being aware of new compliance issues, paying attention to worker concerns, and handling them methodically.
“You need to invest the time and effort to making sure your employees are happy,” says Maciel, “so that they can be productive. So that they can work safely, and they can come into work and keep the production lines open. That they’re not disgruntled so that they don’t seek third parties, or cause accidents on their trucks," Maciel added.
Labor is the backbone of any supply chain operator.
Chair, Labor & Employment Practice Group, Conn Maciel Carey LLP
The thing about risk is, “it’s not a matter of if, but when,” according to McClintock. “If you haven’t started thinking about it, and you’re not managing it, you are at a massive brand and reputational risk.”
Labor risk may often be seen as the responsibility of Human Resources, but at the end of the day, it takes a village to build resilience. After all, supply chain managers, not HR, are the ones interfacing with drivers, warehouse or shop-floor workers, and suppliers.
Maciel adds it’s extremely important to make sure middle managers feel empowered to voice labor concerns and have a “sit-down meeting and dialogue with Human Resources,” which can address it with more expertise.
But when it comes to supply chain partners, “I think that really it’s a responsibility of the purchasing company — because they’re the ones that have all the data,” McClintock added. Working with suppliers and partners to reduce their risk level will bring payoffs in the long-run, he notes. At minimum, it may avoid costly mistakes.