Nike's Supply Chain Auditing

This paper aims to discuss the reasons why Nike’s auditing of its global supply chain factories is not sufficient to ensure sustained improvements in the working conditions. Working conditions include “a range of areas including working hours, information and consultation of workers, occupational health, and safety at work as well as conditions for a part-time, full time and temporary agency workers.” (European Commission, 2014, p.3)

For relevance to the topic of Nike’s global supply chain factories, this paper focuses on the working hours and occupational health and safety at work because these are the main concern of the factory workers. This essay will first describe the compliance ratings, then move on to discuss the country factor, the limitation of management audits and strategic suppliers. The main argument of the paper is that the auditing proved insufficient because of financial and technological constraints and an imperfect auditing system.

Nike has faced criticism and public relations disasters since the 1980s for having their products produced in countries with poor working conditions by underpaid workers (Locke, R.M., 2002, p.9). In response, Nike has carried out audits by Nike’s own labor specialists and outside consultants (Locke, R.M., 2002, p.17). However, audits results have shown that the effort has not generated the level of improvements that many hoped for. Nike’s own factory compliance rating (CR) programme is a grading system from A through D gave to suppliers based on audits and inspections by Nike and the Fair Labor Association (FLA) staff (FLA, 2008, p.10). The grade reflects the results of three types of audits a Nike factory must undergo: an environmental, safety and health (SHAPE) audit, a management audit (M-audit) and inspections by the FLA (Locke R.M., Qin F., and Brause A., 2007, p.18).

The CR grades show that the working conditions have not improved. Nearly half (42%) of the CR grades have remained the same and 36% of them have even declined (Locke, R.M., Kochan T., Romis M. and Qin F., 2007, p.31). Nike has invested heavily in developing audit protocols and training its staff as well as working with third parties on improving working conditions (Locke R.M., Qin F., and Brause A., 2007, p.17). So why have the workers not seen sustained improvements in working conditions at Nike’s global supply chain factories despite the efforts of Nike and the FLA? According to Locke, Qin and Brause (2007), factories in the Americas and the Europe-Middle East-Africa (EMEA) region performed better in the management audits (M-audits), often scoring over 50%, as opposed to their North and South Asian counterparts, which saw significantly more dispersed results.

Many of Nike’s largest factories hiring the highest number of workers are located in developing countries, with China and Indonesia taking the first two places with over 170,000 and 100,000 workers employed respectively (Locke, R.M., 2002, p.6). The working conditions in the factories in these countries with weaker legal and regulatory systems are poorer on average (Locke, R.M., 2002, p.15). The inspectors are unable to enforce labor laws and standards in these countries (Locke, R.M., 2002, p.20). For instance, when Locke and Romis (2007) researched the working conditions of a Mexican factory producing products for Nike, it was found during interviews and M-audits that its workers are expected and even forced to work more than 60 hours per week, which is more than the legal limit of Mexico and not in compliance with Nike’s code of conduct.

However, working overtime is one of the ways for workers to increase their low wages, so it does make sense why the workers are accepting being overworked as a norm. It can be argued that the Mexican supplier simply has no incentive to change the excess overtime issue because its workers lack bargaining power, and neither the Mexican regulatory bodies nor Nike has taken action against the factory, despite it having a CR rating of D, which indicates “critical” violation of labour code (Distelhorst G., Hainmueller J., Locke R.M., 2014, p.714). Nike’s auditing has revealed compliance issues in many of its subcontractors in developing countries, but it is not always easy for them to strictly comply to the code of conduct, due to technological and financial constraints, they might not have the capacities to meet Nike’s demand without overworking its workers. To Nike, with U.S. factory workers making 76 times more per hour than their Indonesian counterparts (Ghogomu M., 2015), one can argue that Nike is being accountable to its shareholders by continuing to operate its supply chain factories in Indonesia rather than ceasing to work with those low-cost suppliers, despite the lower labour compliances.

Auditing alone brings very limited meaningful impact on working conditions when neither the suppliers nor Nike acts in response to the results. One of the main audit processes used by Nike is M-audit. It provides a detailed assessment of the labour-management practices and working conditions at the factories, covering over 80 items including worker treatment and compensation (Locke R.M. and Romis M., 2007, p.57) However, this means two factories can receive similar scores even when they have very different labour conditions and different types of compliance issues, generating misleading results. In Locke and Romis’ (2007) research, two Mexican factories (Plant A and Plant B) with comparable M-audit scored but very difference CR ratings (in flavour of Plant A) were compared, and it was discovered that workers in Plant A are paid better and work less overtime and that the leadership style of Plant A is also more participative whereas that of Plant B is more autocratic, resulting in significantly higher labour satisfaction in Plant A. M-audit also focuses on documentary evidence and company records. As factories are notified in advance before an M-audit is carried out, suppliers can also perform better by preparing documents and even coaching their workers (Locke, R.M., 2007, p.20), rendering the M-audit results considerably less reliable.

Documentation evidence is exactly where Plant B scored perfectly and where Plant A fell short on. Since the CR grading system is more of a subjective appraisal, the compliance staff cannot be easily fooled when they visit the factories and witness the working conditions. Therefore, the apparent improvement in M-audits (Locke, R.M., Qin F. and Brause A., 2007, p.17) does not necessarily translate to actual improvement in working conditions. Suppliers can learn to perform well in M-audits and thus raise the score when they are audited for a second or third time, but when compliance staff visit the factories, it would be revealed that while those audit scores give a general view of how good the working condition is and provide a benchmark, they do not always tell the whole story of what actually happens inside the factory walls. The potentially large variance in actual workplace conditions in factories with both similar and different M-audit scores means it would be difficult for Nike to efficiently pick out suppliers that have poor labor standards and effectively implement policies to fix the issues.

Owners of the factories could also be inclined to neglect potential problems in the labor conditions just because the overall M-audit scores are on par and look good on their names, even though it might not actually be the case. Nike-Supplier Relationship Locke, Qin, and Brause (2007) suggest that strategic partners, “suppliers that Nike has designated as tier-one suppliers”, also tend to perform better in M-audits. Suppliers that Nike wishes to develop a long-lasting partnership with are the ones it concentrates its resources on. However, these suppliers having better compliance is not mainly because of Nike’s monitoring effort, as the same positive results can still be obtained even when the compliance staff is removed from the analyses (Locke R.M., Qin F., and Brause A., 2007, p.16).

Instead of the compliance staff, the visits of production staff can be an explanation for the results. Since Nike and the strategic suppliers work more closely, they would enjoy closer relationships and there could be a better flow of knowledge through collaborations (Locke R.M., Qin F., and Brause A., 2007, p.21), enabling these suppliers to improve their capacities. Thanks to funding and training from Nike, they could have access to superior technology and manufacturing processes, such as more advanced machinery to enhance division of labor and lean manufacturing practices, which can reduce non-compliant labor grades by 15% (Distelhorst G., Hainmueller J., Locke R.M., 2014, p.708).

Effectively speeding up the manufacturing process, excess work time could be reduced. In comparison to merely carrying out audits, visiting production staff not only inspect and grade the working conditions of a factory, they also involve directly in the structuring of the manufacturing process. Hence, the workers could actually benefit more, even though the main intention of that production personnel might not be to improve the working conditions. We can thus see that if monitoring and auditing are not paired with corresponding actions, they will prove insufficient in producing significant, sustained results. Although Nike’s auditing effort has created a benchmark with which individual suppliers compare, the actual usefulness of the auditing was not sufficient to bring about meaningful improvements in the workers’ working conditions.

The audit's results raised many issues, such as excessive working hours and low basic salaries, but there is no evidence that the problems have been solved or reduced, mainly because many of the suppliers in developing countries lack modern, efficient manufacturing processes and thus overwork their workers to meet demand. The workers also lack bargaining power and are afraid to lose the job and so are stuck in the vicious cycle. The audit process itself, namely the M-audit, is also not as easy to make use the results of to improve the working conditions, it could even be misleading for Nike and other regulatory bodies because it might not accurately reflect the different levels of working conditions in different factories. On the other hand, visits of Nike’s non-compliance staff actually had a positive effect on compliance staff on the labor compliance through communications with the factories and helping them improve production efficiency by working together. This also adds to how Nike’s auditing has fallen short and is insufficient to ensure sustained improvements in the working conditions of its global supply chain factories.