Building ethical supply chains and driving positive change in retail

This is part two of our ethical retail series. Be sure to check out part one if you missed it:

-    Ethical Retail in 2024: Key drivers, supply chain challenges, and regulations for businesses

Despite the demand and moral obligations to conduct retail business in an ethical manner, it is not quite as simple as flipping a switch. The road to sustainability is fraught with challenges, from the complexity of supply chains to cost considerations, transparency issues, and ensuring compliance with ethical standards.

RSM’s retail specialists explore these challenges and outline actionable strategies to overcome them so that retailers can foster a more sustainable and responsible retail industry.

Challenges in establishing ethical supply chains

Perhaps one of the most important aspects of ethical retail is building and maintaining an ethical supply chain. By maintaining ethical standards throughout the supply chain, retailers can better ensure that workers are treated fairly, environmental impacts are minimised, and resources are sourced sustainably.

This commitment enhances a retailer's reputation, builds consumer trust, and contributes to a more equitable global economy. Ethical supply chains aim to prevent exploitation and environmental degradation, promoting a more humane and sustainable approach to commerce that benefits all stakeholders, including workers, consumers, and the broader community.

However, when it comes to establishing an ethical supply chain, there are some important challenges that retailers need to consider. Jacqui Baker, Head of Retail at RSM UK, says, “These challenges include the complexity of supply chains, cost considerations, and ensuring supplier compliance with ethical standards. Transparency and traceability issues, coupled with varying levels of consumer demand and regulatory compliance, further complicate matters.”

With these hurdles summarised, let us explore some of these issues a little more thoroughly and consider what businesses can do to overcome them.

Complexity, fragmentation, and cost considerations

“While the current geopolitical landscape is causing some to question the future of the global economy, the fact remains that in recent decades, supply chains have become increasingly complex,” says Christopher Shaker, National Retail Sector Leader at RSM US LLP. “Most retailers have multiple suppliers and distributors that are geographically disbursed, making it very challenging to monitor the practices of everyone that touches a consumer product from the beginning of the manufacturing process, to the last mile.”

Additionally, ethical practices often come with a higher price tag due to the need for better raw materials, fair wages, and improved working conditions. For many retailers, these additional expenses can be prohibitive. Shaker adds, “While new technologies such as blockchain can help, monitoring the entire process throughout the supply chain is still expensive and time consuming, especially for middle-market retailers that lack the buying power and influence that big box retailers enjoy.”

Transparency, traceability, and compliance:

Ensuring transparency throughout the supply chain can prove to be a significant challenge. The lack of clear, traceable data can obscure unethical practices, making it difficult for retailers to guarantee that their products are ethically sourced.

“The lack of transparency obstructs the identification of ethical problems, making it difficult for retailers to address and rectify issues within their supply chains,” says Nahuel Beccaria, Partner at RSM Argentina. “Additionally, the cultural and legal diversity across different regions further complicates compliance with ethical standards.”

These challenges not only jeopardise the retailers' reputations but also risk eroding client loyalty, as consumers are increasingly aware and concerned about the ethical practices of the companies they support. Without clear visibility and consistent ethical adherence, retailers face substantial threats to their brand integrity and customer trust.

Overcoming the challenges

While there is no clear-cut, fix-all solution when addressing these challenges, there are certainly strategies that can help.

“To overcome these challenges, retailers can engage with suppliers to set clear ethical standards and foster collaboration,” says Baker. “Implementing systems for tracking and monitoring supply chain activities enhances transparency and traceability, while investing in supplier training and capacity building improves ethical practices. Utilising certifications such as chain of custody certificates and conducting third-party audits verifies compliance and builds consumer trust through transparency.”

“Furthermore,” Robyn Duffy, Senior Analyst – Consumer Markets at RSM UK, adds, “Retailers can educate consumers about the importance of ethical sourcing and provide transparent information about their products' ethical practices. Collaborating with stakeholders such as non-profits and government agencies enables collective action to address ethical supply chain challenges. By taking these steps, retailers can navigate the complexities of ethical sourcing and contribute to a more sustainable and responsible retail industry.”

The steps to driving positive change in retail

Having addressed the key issues of ethical retail’s fundamental instrument, the supply chain, what are the steps that retailers can take to adopt ethical practices? “Household names play a significant role in all markets when it comes to the evolution of ethical business practices. Thus, middle-market retail businesses have the power to influence positive change within their own industry, and more widely,” says Duffy.

As discussed, there are certainly some challenges on the road ahead for budding ethical retailers, but there are steps that they can take to adopt ethical practices within their businesses.

1.    Create a strategic framework for ethics

As Shaker puts it, “The first step toward adopting ethical practices that every retailer should take is including a focus on ESG within the broader corporate strategy. Setting the proper tone at the top will drive change from the top of the organisation, all the way down to the employees on the floor.”

Baker adds, “It is essential to establish clear ethical standards that encompass sourcing, labour practices, and environmental sustainability - and be sure to engage key stakeholders. Measuring and reporting progress on these key ethical pillars will demonstrate accountability and enhance credibility.”

“Additionally,” Edgardo Rondó, Partner at RSM Argentina, continues, “Retailers should ensure that their internal policies promote transparency and accountability at all stages of the supply chain. By transparently communicating their efforts and achievements in ethics and sustainability, these companies can inspire other mid-market players to follow their example, generating a positive impact throughout the industry.”

2.    Prioritise ethical suppliers

When it comes to sourcing materials and labour for products, using ethical suppliers is crucial. “Prioritising suppliers committed to ethical practices and promoting transparency in operations and supply chain management are foundational steps,” says Duffy. “Knowing your supply chain is essential, with regular audits of suppliers further ensuring adherence to these standards.”

3.    Employee engagement and training

Beyond ethical suppliers, it is also crucial to ensure employees are engaged with the ethical strategy. “Training employees on business ethics and providing whistleblowing channels is essential,” says Beccaria. “Additionally, they can collaborate with civil social organisations and participate in corporate social responsibility initiatives that address specific problems in their local communities or globally.”

Leading by example is also key. As Duffy says, "Investing in employee training can allow business leaders to foster a culture of responsibility and demonstrate fair working practices. This, in turn, can have a domino effect through the value chain."

4.    Consumer engagement:

“Finally,” says Baker, “Educating consumers by providing them with information on the transparency and traceability of supply chain partners can have a profound impact on shopping habits, and further support businesses with ethical practices. Through these concerted efforts, middle-market retailers can actively drive positive change, fostering a more sustainable and responsible retail industry for the benefit of all.”

Not only does this drive positive change from a sustainability perspective, but there are also added business benefits. As Shaker says, “What most retailers don’t immediately realise is that these practices can also lead to more sustainable growth and profitability by creating more brand loyalty with customers and attracting the right types of investors and business partners.”

By implementing these strategies, retailers can not only overcome the inherent challenges in establishing ethical supply chains but also contribute to a more sustainable and responsible retail industry. These steps help ensure compliance with ethical standards and build strong, trust-based relationships with consumers, suppliers, and other stakeholders. Through concerted efforts, retailers can lead the charge towards a more ethical and sustainable future.