Ethical sourcing in China
Consumer awareness of sustainability issues in the West is ever-rising. More and more companies want to serve consumer groups that demand ethically produced and ethically sourced products or have sustainability and ethical principles as their core values. Ethical sourcing is crucial for many small importers from brands that serve conscious buyers. Many brands in today’s market want to make an impact and communicate about this as one of their brand values.
I will explain the fundamentals of ethical and sustainable sourcing from China. Sustainable and ethical sourcing and procurement involves taking social and environmental responsibility. By integrating Environmental, Social and Governance factors into purchasing, companies can benefit over the long run. We will explore how sourcing from China can help you in your ethical sourcing goals.
By adopting an approach that considers the principles of people, planet, and profit, businesses can increase their profitability and brand value while simultaneously positively impacting society and the environment.
This article describes two sections:
- Getting started with ethical sourcing
- Strategies and tactics for ethical sourcing and procurement in China
What is ethical sourcing?
Ethical sourcing means considering the entire supply chain’s real impacts, risks, and costs on people and the planet. It includes evaluating the benefits and costs for society and people and the environmental impact while maintaining a healthy profit and cash flow.
Sustainable sourcing aims to minimise the environmental impact and to promote circularity. Circularity includes ensuring that materials and resources can be reused or used for an extended time. Ethical sourcing also includes taking the social impact of your product into account. Ethical sourcing entails considering all ESG (Environmental, Social, and Governance) factors in the supply chain.
ESG refers to three central factors in measuring supply chain operations’ and decisions’ sustainability and ethical impact. Environmental factors include material and energy use, the impact of waste, and environmental impact due to production. Social aspects include issues like labour standards and community impacts. Governance factors cover ethics, transparency, and accountability.
These ESG factors are all related to the UN’s Sustainable Development Goals (SDGs) [1]. They focus on the environment, society and economy. Companies make choices that are good for people and nature through ethical sourcing and procurement. This helps goals like climate action, fair jobs, responsible usage of things, and collaboration. Companies benefit from lower costs and happier customers.
Corporate Social Responsibility (CSR) for small businesses
CSR (Corporate Social Responsibility) is another term often used when discussing ethical sourcing. This involves integrating social and environmental concerns into a company’s business operations and stakeholder interactions. While CSR is a term that is mainly used in big corporations, small businesses can also apply CSR principles.
For small companies, CSR means engaging in activities that positively impact the local community. This may include supporting local charities or implementing sustainable practices. Small businesses can prioritize fair labour practices, ethical sourcing, and responsible waste management. By incorporating CSR into their business strategies, small companies can demonstrate their commitment to social and environmental responsibility. This may enhance the company’s reputation and that of its brands.
what is ethical and responsible sourcing policy?
An ethical and responsible sourcing policy is a set of guidelines and principles that an organization establishes to ensure that its sourcing practices align with ethical standards and social responsibility. It outlines the company’s commitment to sourcing products, materials, or services in a manner that minimizes negative impacts on workers, communities, and the environment.
The meaning of an ethical sourcing policy for companies sourcing in China can vary depending on the context and the specific organization, but it generally includes topics like labour standards, sustainability standards and how the company cooperates with suppliers.
Advantages of ethical sourcing for small companies
Ethical and sustainable sourcing doesn’t only potentially have a positive impact on the environment and communities, it also benefits small companies engaged in this. Implementing ethical sourcing practices offers several potential advantages for small businesses:
Cost saving: By using less material and reducing energy consumption during production, by implementing more innovative designs and more efficient production, businesses can save costs.
Reputation and brand value: Sustainable sourcing can contribute to a positive brand image, customer loyalty, and a competitive advantage in the marketplace.
Risk management: Sustainable sourcing helps mitigate legal and ethical risks, as well as issues related to injuries, complications during production, operating licenses, and compliance with product regulations.
Innovation opportunities: Sustainability and innovation go hand in hand. By embracing sustainability as an opportunity, companies can be more future-oriented and prepare better for stricter regulations in the future.
Employee morale and loyalty: Sustainable practices can increase employee morale and loyalty, as employees are more likely to be more engaged when working for a socially and environmentally responsible company.
Investor appeal: Investors often favour companies with a sustainable vision, seeing them as more stable and attractive investment opportunities.
Get started with ethical sourcing in China
Developing a strategy is essential for any company serious about maintaining ethical and environmentally sound supply chains. However, implementing such an initiative can seem scary, especially for small businesses with limited resources. This guide aims to make the process more approachable and actionable by breaking it down into concrete steps tailored for companies sourcing products from China.
I’ll explain how to analyse the business needs and priorities to set clear goals for sustainability. Then I’ll guide on establishing metrics, selecting suppliers, negotiating contracts, and continually improving practices over the long run. Special consideration is also given to the realities of operating in China, such as cultural differences, regulatory constraints, and everyday challenges.
Following the tried-and-tested tactics outlined here, you can create a customised strategy aligned with your values and capabilities. More importantly, you’ll take the following steps to minimise negative impacts and maximise positive influence within your supply base. Let’s get started towards more significant ethical and environmentally responsible procurement.
Prioritising goals for ethical sourcing.
First, You must evaluate how your procurement aligns with your company’s ethical sourcing policy. Research the social and environmental impacts within your supply chain. Assess each product category’s risks from raw material extraction through logistics. This helps to prioritise categories with the most significant impacts and where you have a strong influence over suppliers. Focus on these items where change is feasible.
Set SMART, measurable goals for your priority categories within set timelines. For example, source 50% of a high-risk material sustainably within 18 months. Validate priorities and goals by engaging stakeholders across procurement and marketing and sales of your products. This helps to align impact with demand.
Selecting Metrics and KPIs
Defining key performance indicators (KPIs) helps measure your strategy’s success. Start by setting SMART goals aligned with priorities. Translate goals into specific, quantifiable targets. Prioritise issues like human rights and environmental stewardship based on the ability to drive change and the effort required. Develop a supplier scorecard to track metrics important to your code of conduct, like sustainable material use.
Clearly define measurement methods to provide feedback to suppliers and make progress. With the right KPIs, you can effectively guide your ethical sourcing program and refine initiatives over the long run.
Now, you’re ready for tactical implementation. Upcoming sections cover how your requirements can be implemented in supplier selection and continuous tracking to achieve your strategy. The proper focus areas set an adequate foundation.
Ethical sourcing tactics and your sustainable procurement strategy
When establishing ethical sourcing tactics, there are two main approaches: product-based and supplier-based. A clear understanding of both will help define requirements and priorities aligned with your goals. Choosing the correct approach or the best balance between the approaches will drive you to optimise your impact and results.
A Product-Based Approach
This approach focuses on individual goods and their specifications. What are the materials, and what is the overall impact of the production, consumption and disposal throughout the supply chain and product lifecycle? Identify strategic categories by analysing sourced products based on relative risks. Product requirements are then set for continuous sustainability.
A Supplier-Based Approach
Alternatively, the focus can be on the suppliers. You could weigh factors like the impact of manufacturing systems, standards adherence and the social/environmental impact of their operations. Audits assess conformance with your code and benchmarks like ISO certifications. Strategic partners and suppliers are identified based on these evaluations.
With insights from both perspectives, you can develop an integrated strategy. Upcoming sections will guide operationalising each approach. The right balance helps with the tactics to match priorities and capabilities.
Implementing your product-based strategy
A key aspect of any ethical sourcing program is establishing requirements and monitoring performance at the product level. A product-based approach allows for a targeted strategy tailored to your unique product portfolio and supply chain strengths. The tactics you can use depend on your market power and the impact of your sourcing. This decides in which of the below product categories the products you source belong and, therefore, what tactics work for that product.
Strategic products
These goods have a substantial impact on your sustainable impact. The supplier depends on you for your buying power, but you also rely on them for their unique capabilities and expertise. The best strategies are to be found in close cooperation with suppliers and working towards improvements and innovations together. Find alternative suppliers, or BATNA (Best Alternative to a Negotiated Agreement) for stronger negotiation power to avoid becoming too dependent on a supplier. Find ways to avoid paying additional for higher costs for sustainable solutions by finding win-win gains.
Bottleneck products
When the goods have a significant impact on your business, and there are only a limited number of suppliers who can meet your criteria, especially if you are a small or new brand, you need to employ different tactics. This is because as a small buyer, your buying power is limited.
Choose your priorities based on what you can afford and make impact. Factory management and quality inspections can be used to stay in control to ensure that these criteria are met. In this scenario, it is often necessary to pay additional costs to the supplier to get them meet your requirements. The factory will otherwise lack the incentive to produce according to your requirements. In the longer term, find a BATNA and increase buying power to improve the negotiation position and get more control and lower prices.
Leverage products
Your buying power is strong, and many suppliers can produce your product. Then you can be critical and selective:
- Establish more mandatory sustainability criteria.
- Have a strict selection procedure.
- Check and assess the supplier performance regularly and consider changing suppliers if this will increase performance.
Routine goods
These are goods with limited volume or impact: Prioritising these products won’t have much impact.
Sustainability in specifications
You can define the specifications of your products to minimise the negative impact of the product within the entire production and lifecycle of the products, including the production, supply chain, use and disposal of the goods. Conduct market research to define the mandatory specifications to ensure enough suppliers can meet your requirements. All specifications that risk being short of suppliers can be formulated as desirable specifications in which your company has flexibility.
We seperate the sustainability requirements into 3 categories:
- Visible product characteristics: What visible technical characteristics must the product have, often the materials? (Examples: sustainable woods, recycled plastic, etc.)
- Performance-based requirements: How long should a product last, and how easy should it be to be repaired?
- Non-visible social/environmental factors: Non-visible requirements, for example, the social and environmental impact of the production of your goods. Eco-labels can help to verify and communicate these specifications.
Ensure you clearly define the objectives and verifiable specifications without risks, bias, or cultural misunderstandings. Use ethical procurement processes and translate them into product specifications.
Innovative design and material selections and requirements are some ways to ensure minimal impact. New technologies and designs by the buyer or the manufacturer can improve sustainable performance.
Engaging suppliers in formulating specifications
Clear communication and avoidance of misunderstandings are crucial when making sure that the supplier knows what requirements you have. Make a distinction between absolute requirements and desirable specifications. Incentivise suppliers to go beyond the absolute required specifications. Let your supplier come up with solutions for issues and initiate improvements. When it comes to minimising material use or gaining a higher price for more sustainable products, there is often a strong supplier incentive.
Finally, consider the practical and technical aspects of the specifications and work with experts in this field, either from the supplier’s side or your own experts. This requires understanding of the production processes. Ensure that changes in the specifications to meet sustainability goals don’t lead to quality or production problems when they need to be realised in practice.
Implementing your supplier-based strategies
Achieving sustainability may require a supplier-based approach. Find the right suppliers that can help to make your supply chain sustainable and together with your Chinese partners in the factories, collaboratively solve problems and strengthen management systems over time.
Critical supplier selection
Before searching for new suppliers, determine if this is necessary by considering working with existing ones. Focusing on improving current relationships or finding new incentives for cooperation can better meet sustainability goals than changing partners. Only pursue new suppliers if necessary improvements aren’t feasible.
To start your sustainable sourcing effectively, define the specifications or requirements of the product you want to source. Distinguish between absolute requirements, nice-to-have requirements and distinctive specifications or requirements. If there are enough suppliers, comparing and selection can start. Explain your goals to the supplier and check what solutions they can come up with. Select the suppliers with the ambitions and innovation capacity, resources and mindset you need to achieve your goals.
You can often use the supplier’s existing knowledge, expertise and experience of solutions they have already used. These so-called Best value practices (BVP) provide you with solutions that you cannot find yourself. Let them come up with solutions to meet your quality and ethical criteria. Challenge suppliers and let them take the lead to understand their problem-solving skills. You can use this competition between suppliers to select suppliers with distinctive solutions. It pushes the supplier to demonstrate expertise.
Assessing the attitudes towards innovation and sustainability will help you select a partner to help you in the future. Communicate your expected steps in cooperation, such as an audit and a contract in place, to understand their willingness to be open, transparent and cooperative.
Two supplier selection rounds
During supplier selection, we usually have two selection rounds. The first round is after receiving the suppliers’ quotations. Suppliers that cannot meet the mandatory requirements will not be selected.
The second round is after we send out the Request of Information and when receiving all additional information about capabilities and questions that test suitability.
When ranking and selecting suppliers during this phase, consider more than just characteristics, reputation and communication abilities. Any ethical or sustainability requirements must also be included as measurable, comparable criteria. Such criteria include life cycle costs, guarantees of durable functionality, measurable energy usage, and potential waste impacts. Quantifying these factors allows for a stronger evaluation of how each supplier’s capabilities align with your defined objectives. This balanced approach identifies the partners best equipped to advance your mission through responsible and innovative production practices.
Also, consider each supplier’s ability to improve over time. Look at how willing they are to try new ideas and customise their solutions for your needs. Rank all the factors together as well as their current practices and potential to change. This helps you understand which suppliers are the best fit. They should share your goals for business and being environmentally friendly. Studying everything gives a clear picture of which partners want to work with you in a good way.
Enable long-term sustainability achievements when working with Chinese suppliers
While establishing requirements and selecting responsible suppliers are important first steps, ongoing monitoring is crucial for driving continuous improvements across the supply chain over the long run.
There are different techniques for conducting onsite audits of supplier facilities. Or leverage negotiations and formal agreements with suppliers for better sustainability outcomes.
The following segments cover approaches for facilitating ongoing progress, such as remediation efforts to remedy issues and capacity-building initiatives. We’ll also look at change management tactics for overcoming supplier resistance to new requirements.
Onsite audits and monitoring techniques
Onsite monitoring, due diligence, and audits are important tools to gain more control over the supply chain and ensure the ethical and sustainable aspects. Conducting audits allows you to evaluate how well suppliers meet your company’s expectations and rules.
Build an evaluation system to assess how suppliers uphold critical management systems. Also, check the working conditions and how well-protected workers are within the facility. Audits help find potential issues or problems impacting compliance to your sustainable goals or blocking future improvements.
Some key things to examine during a include:
- Does the supplier fulfil your company’s basic requirements?
- Get transparency about labour circumstances, as well as social, ethical, and environmental circumstances.
- Create a starting point for conversations with suppliers about standards and next steps.
- Promote ongoing improvements at the suppliers you’ve been working with.
Track development over time with routine audits. You can do this when you visit your suppliers for regular product inspections. Use supply chain risk analysis to identify problem areas in production. Then, schedule audits and inspections when issues arise. Quality checks can serve dual purposes of inspecting goods and facilities.
If audits reveal weaknesses, work with suppliers constructively. Develop corrective plans together and support them in making positive changes. The goal is long-term compliance through cooperation and feedback from onsite reviews.
Negotiation and contracting
Negotiate to get a deal that can evolve to secure more sustainably produced items over time. Increase the percentage of sustainably produced goods over time or a higher percentage of those produced sustainably.
Write all deals down on paper, and we always advise you to write them in a legally valid contract. Develop this production contract as soon as possible after planning and scoping. Make sure that the supplier understands and is aware of all terms. Make clauses in the contract to guarantee a certain level of sustainable performance. Set all the major rules and terms of the cooperation in a production contract.
The contract is the cornerstone for establishing expectations and a framework for supplier engagement. Guarantee this delivery and define KPIs in the contract to measure and evaluate sustainable performance over time. Set precise conditions and targets.
Incorporate what-if scenarios in the contract if there is an inability by the supplier to handle requirements or increased demands for the requirements. Incorporate the risks and potential problems that may lead to reputational, financial or legal consequences for your company, in case of non-compliance by the supplier. Communicate in the contract how to assess performance and consequences if the supplier doesn’t meet the KPIs.
Continuous improvement methodology linking short and long-term goals
Strong cooperation and transparency lead to the optimisation of processes and will influence value for customers and company competition. Suppliers can also create new goods that better serve your sustainable goals. Leverage relationships to explore more possibilities. Encourage suppliers to suggest their improvement ideas and make action plans. Then, track progress together.
Remediation and capacity building help achieve long-term sustainability through supplier partnerships. Remediation identifies current issues preventing optimal performance via assessments. Corrective action plans are made with suppliers to resolve each problem by set deadlines. This promotes transparency and joint progress.
Capacity building strengthens suppliers’ skills and abilities to meet all present and future demands. It helps them in areas like training, equipment, and management systems over time. This ensures requirements can continuously rise as expertise accumulates.
The buyer implements a strategy for working with suppliers that addresses non-compliance and strong performance. This provides a framework for constant improvement. Together, remediation and capacity building empower continual improvements through constructive handling of issues and structured scaling of supplier competencies.
Long-term relationships with suppliers makes it possible to move away from a compliance-based pass-or-fail approach to cooperatively create new management systems. Ongoing improvements and innovations due to open communication and deeper engagement in each other’s companies. Understand each other’s problems and obstacles and integrate sustainability improvements for continual improvement. Also, provide training and support to the supplier and be willing to split costs for sustainability improvements.
Change management to manage changes for your suppliers
Managing change with suppliers is an important part of reaching sustainability improvements. Suppliers may be reluctant to alter their current practices, so it’s vital to employ strategic approaches to facilitate the adoption of new standards or goals. Change management strategies can help suppliers transition while maintaining a collaborative relationship.
Kotter’s model of change
My first strategy is based Kotter’s model of change[2]. It includes establishing a sense of urgency for the supplier for change by finding the right incentives that drive change on the supplier’s side. When starting to work with a supplier, this will often be a solid external incentive, usually a financial one. Only expect willingness to break old customs and comfort when you provide strong incentives. Chinese suppliers are generally more driven by external motivation than internal motivation. They naturally dislike change.
Communicate the changes and vision simply and clearly, that the supplier can understand. Patience is needed; use lots of repetition to ensure your message comes across. Find opportunities to work as a team with the supplier to find opportunities for improvement together.
In order to reach long-term motivation:
- Focus on short-term results first.
- Get some quick wins for both side morale and then build on trust for better cooperating for results in the long term.
- Keep finding areas of improvement that will lead to win-win for both you and your supplier.
Then, keep moving and invest in building trust in the supplier relationship. Patience and continuous cooperation, empathy and give-and-take is needed for this.
Using long-term trust as an enabler
The second strategy is using long-term trust as an enabler. Relying on this strategy takes lots of patience and is only possible after investing in a strong relationship with your supplier. Building this takes a lot of time and effort in China, but achieving trust and long-term results here can lead to exceptional results. China is a relationship-based culture, so investing in this relationship can give you results that you otherwise can only dream of.
You can build the necessary trust in China in the following ways ways:
- Be credible and reliable and just a great partner to work with over time.
- Build connections, listen to their perspectives, and be always willing to find solutions that work for both parties.
- Show your care of them by visiting the supplier face-to-face and respecting the other party’s customs and culture. Pay an effort to get a closer connection with them.
When brainstorming and negotiating, listening carefully to their needs is essential. Always have the result in mind. Make the supplier’s involvement a necessary part of the way towards the result. The end result must become a two-sided responsibility to ultimately make the brand stronger together and share the gains for this.
Logistics
Lastly, the mode of transportation you choose to get your goods shipped to your market also impacts the environment. Sea freight is much more efficient in fuel usage, and the greenhouse gas emissions are much lower than air freight. In addition, there are shipping agents that can help you compensate for your greenhouse gas emissions.
Managing internal stakeholders involved in sustainable sourcing
Engaging internal stakeholders in sustainable sourcing strategies is also essential. Consider how ethical sourcing affects the operation of the organisation and the involved stakeholders that it may impact. Your stakeholders may either be the enablers or roadblocks to your success.
These stakeholders include:
The suppliers: Suppliers may vary in their enthusiasm for sustainable procurement initiatives, but they may make or break your success. As described in this article, involving them in the process is crucial to realising your goals.
Employees and management: The management and employees are the ones who execute the ethical sourcing strategy. Their focus and morale are the enablers of successful strategy. They need to be involved and encouraged to develop ideas and initiatives.
Legislators: Compliance with national or EU legislation is essential for the sourcing strategy and the products you source.
Consumers: Increasingly, consumers are aware of the impact of their consumption behaviour on the planet and society. They expect companies to take initiative, be transparent, and address sustainability issues.
The society as a whole: Progress and innovation toward sustainability are shared expectations, and many companies want to take responsibility accordingly.
Conclusion
Understanding the fundamentals of ethical sourcing and sustainable procurement is crucial for your brands. While establishing ethical sourcing practices requires effort, the rewards can be significant for both business and society. Small importers can build sustainable supply chains aligned with their values by following a strategic approach that considers all stakeholders, prioritises impacts, engages suppliers as partners, and institutes ongoing monitoring and improvement. Most importantly, a diligent, long-term focus on people and the planet lays the foundation for enduring relationships that strengthen communities for generations. With care, communication and commitment to shared success, ethical sourcing through procurement presents opportunities to influence lives while growing responsible enterprises positively.
This guide gives an overview of the fundamentals to help you reach your sustainable ambitions.
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