3/2014, In English, Tutkimus ja innovaatiot

CSR management and communication upstream a supply chain; an intermediary SME approach

1. Introduction

Importance of small and medium sized enterprises (SME) as a driving force of economy is widely discussed, especially when seeking remedies for the aftermath of the financial crisis of 2008. Another topic gaining plenty of media coverage is corporate social responsibility (CSR); many well-known large companies have experienced reputation crises when their or their suppliers’ non-compliant actions in developing countries have been exposed to public attention. At the same time, outsourcing and networking are ever more common in any field of business, and more and more companies – including SME – are involved in international supply chains. Consequently, managing and communicating the CSR issues within the supply chain is crucial for risk reduction. The call for effective and reliable approach to both CSR and supply chain management (SCM) is therefore an acute topic not only in large organizations, but many SME, as well. Operating a global supply chain, especially sourcing products from developing countries makes CSR a complicated issue with limited resources of an SME.

The purpose of this paper is to discuss CSR management and communication within a global supply chain with an intermediary SME approach. There is plenty of research on both CSR and SCM, but mainly from larger company perspective. Research and literature on CSR from SME point of view is also available, but they often concentrate on SMEs acting as an individual organization and in the role of a supplier. Publications on CSM from SME point of view are quite scarce, as are articles discussing SME in an intermediary role within global supply chains.

In this paper, these tree topics are interlinked and discussed as an entity, which is based on a desktop research on published articles discussing CSR and SCM themes, emphasising ones with an SME and communicative approach. The articles were selected for the review by their relevance and accessibility. Firstly, the aim of this paper is to develop an overall perception on the current situation of CSR management and communication in SME, concentrating on the supply chain related issues. Secondly, the recommendations for good CSR and SCM practices suggested in the articles used are concluded as general guidelines for developing CSR and SCM processes in intermediary SME.

The document at hand is structured as follows: In the next two chapters, the methods and materials used are described and the key concepts and theoretical framework introduced. The analysis is divided to description of the current situation and recommendations for future development. In conclusion, the main findings of this paper are presented and needs for future research discussed in brief.

2. Key concepts and theoretical framework

Corporate social responsibility (CSR)

United Nations define CSR as “a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders.” (www.unido.org) CSR is often described as “Triple bottom line“, where company’s responsibilities include economic, environmental social imperative (Jussila 2010, 15, www.unido.org). As mentioned above, stakeholder approach is core issue in CSR, as all activitied and development should be based on the needs of the stakeholders and dialogue with different stakeholder groups – employees, customers, suppliers, shareholders, local communities etc. (Jussila 2010, 125)

CSR is a topical theme of discussion, as CSR issues are getting more media attention and the pressure from the stakeholders toward companied to be engaged in CSR is growing (Andersen & Skjoett-Larsen 2009,75. Welford & Frost 2006, 168). As consumers’ ethical needs are increasing, the importance of CSR management in retails rising which adds more pressure to the entire retail supply (Cosetta, Musso Risso 2009, 33). CSR approach is becoming more important not only for consumers but (partly due to the consumer pressure) it affects also business purchasing decisions (Hietbrink, Berens & Van Rekom 2010, 284). At the same time, relevance of CSR for company image has increased (Hietbrink et al. 2010, 284) and risk reduction is a major driver for engaging in CSR (Welford et al. 2006, 168), in particular with brand items. The clearer the company or trade mark brand is, the more vulnerable it is for damage from bad publicity due to breaches in CSR related issues (Welford et al. 2006, 168, 170). Many retail chain have introduced own house brand products, where the damage would be exceptionally severe as it reflects to the entire company image (Cosetta et al. 2009, 36). Safety recalls, quality and consumer issues are also often considered as a part of CSR (Carter & Jennings 2002, 37).

Supply chain management (SCM)

Supply chain managements means management of multiple relationships across a network of businesses called the supply chain. It gives the opportunity to gain synergy benefit from integrated processes and management within a company and between them (Lambert 65). The main components of SCM comprise the work flow/activity structure (i.e. division of work within the chain), organisational structure (i.e. integration of functional areas), structure of communication and information flow and methods for planning and control (Vaaland & Heide 2007, 21).

In the modern network economy, supply chains compete with one another as much as individual companies (Vaaland et al. 2007, 20, Lambert 65, Carte et al. 2009, 75). The importance of SCM increases along with the transitions from manufacturing business towards providing services, as well as from own manufacturing towards outsourcing and networking are (Howarth 674). Within a supply chain, companies can reduce costs and ensure profitability (Vaaland et al. 2007, 20), but at the same time, they become partly responsible of whatever happens upstream the supply chain.

Small and medium sized enterprise (SME)

European commission has a clear definition for SMEs:

“The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro.) (Article 2 of the Annex of Recommendation 2003/361/EC as sited in SM User Guide 2014, 5)

Despite their limited size, SMEs have a significant role in the economy; eg. in the European Union alone there are approximately 23 million SMEs that employ 75 million people. Moreover, 99 % of all European enterprises fall to the category of micro, small or medium-sized enterprise. (SME User Guide 2014, 5)

3. Findings

The reality of CSR in supply chains

CSR management within supply chain
SCM has got even more attention with the CSR scandals arising from western companies manufacturing goods in the developing countries with lacking respect to environment, human rights an social issues (Andersen et al. 2009, 76). Often, these breached do not happen with the company itself but up the supply chain. In order to have credible and effective CSR policy, a company needs to ensure the behaviour of the entire supply chain it sources from (Cosetta et al. 2009, 36, Vaaland et al. 2007, 20, Ciliberti, Pontrandolfo & Scozzi 2008, 1579). It takes already plenty of effort to have CSR issues communicated and controlled with the direct suppliers, but involving second and third tier suppliers and auditing the reliably is challenge that can hardly be met, especially with SME resources (Welford et al. 2006, 170, Ciliberti et al. 2008, 1581). On the other hand, a single company engaging in CSR affect an entire business network and supply routes and thus have much wider and deeper impact than expected (Cosetta et al. 2009, 54). Whether a company sees CSR from doing good – perspective or aims at gaining competitive advantage of it, the entire supply chain must be involved in order to have long lasting results of one’s own actions.

Pressure up the retail supply chain
As the consumer pressure increases in retail and the brands need to be protected from damaging publicity, the pressure to engage in CSR does not stop the retailers but affects the entire supply chain. (Welford et al. 2006, 168, 170, Hietbrink et al. 2010, 284). According to most research, CSR may and should add willingness to buy from the company (e.g. Hietbrink et al. 2010, 284). Especially when CSR is particularly important for the company’s image, company buyers consider the consumer pressure on CSR when choosing the suppliers Hietbrink et al. 2010, 296). In case if quality and price are equal, well-managed CSR may be the deciding factor in benefit for a certain supplier. The importance of CSR in procurement process increases, if the purchased product plays a major physical part in customer’s own end product (Hietbrink et al. 2010, 295). For a company in intermediary supply chain position that provides services by supplying products from other manufacturers this is crucial, as the physical product delivered is eventually sold to consumer as such.

Contradictory demands
Though most customer companies in supply chains do appreciate CSR effort, they are seldom willing to reward the practitioners of CSR enough to cover the costs induced (Hietbrink et al. 2010, 296). Tight price competition makes CSR development in supply chain harder, as customers are not willing to pay for the CSR engagement that they nevertheless require to be implemented up the supply chain (Welford et al. 2006, 171). In addition to lower price, retailer customers require shorter lead times, constant update of the products to meet the latest requirements or trends and seasonal products to be delivered within a tight time frame, which is in contradiction with the CSR aim to comply with legal working time limits in manufacturing (Welford et al. 2006, 171).

Challenges in implementation and communication 
In practice, even the big players in retail are struggling to communicate and implement their CSR principles and use codes of conduct to instruct and control their supplier in the global supply chain. There seems to be a contradiction in the companies’ policies and how well they manage to root the principals to their suppliers (Andersen et al. 2009, 75-78). At the same time, the ones producing CSR communication seem to find it more successful than the targeted audience (Dawkins 2004, 113). Also for the CSR implementation in the supply chain, the most common approach is quite straightforward: companies have a code of conduct for suppliers and regular monitoring for compliance. In case of non-compliance, the measures vary from warning to immediate cutting of the contract. Many CSR managers would prefer mutual engagement to CSR from earlier stage and developing the operations in cooperation with the suppliers, but with limited resources this seldom is possible. (Welford et al. 2006, 169)

Power distribution in the supply chain
Key actors of the supply chain are usually the large retailers from the developed countries. They can affect consumer choices, experience the pressure from the consumer and take most responsibility towards them. At the same time they define the target level of CSR, stipulate it up the supply chain and, due to their size, also have the most power to influence with their bargaining power. (Andersen et al. 2009, 77, Cosetta et al. 2009, 35) The larger the firm is and more resources it has, the easier it is to attract suppliers and get them committed to the customer’s CSR policies (Andersen et al. 2009, 82, Ciliberti et al. 2008, 1580). The possibility to affect a supplier is highly dependent on the relevant power structure: the bigger share of the business of the supplier comes from a customer, the more its needs and concerns are listened and met (Vaaland et al. 2007, 201). Correspondingly, intermediary SME’s are in a weaker position within their supply chains, often to both directions. Large retailers have specific demands on CSR that SME’s must follow (Cosetta et al. 2009, 38), but at the same time, SME may have difficulties in implementing CSR with their own suppliers. SME’s can introduce codes of conduct, but it is questionable whether they are regarded as important as the ones of larger customer. Even the sanctions used for CSR breaches are less effective, when coming from a minor customer. (Ciliberti et al. 2008, 1581)

CSR in SME’s
For SME’s, the motives for CSR activity differ from the ones of larger corporations; potential business benefits and personal values of the owners / managers play a larger role, whereas pressure from NGO’s etc. is lesser. In SME’s, CSR can be more easily than in large organizations embedded to company culture an identity, as owners’/managers’ values in general are more visible in the company. (Nielsen & Thomsen. 2009, 185) Engagement in CSR and customer requirements can be seen either as a threat, a necessary evil or a business opportunity; the approach is much dependent on the owners/managers views. (Howarth 679) At the same time, external factors, especially customer demands are a priority for SME’s in CSR decision making (Howarth 675). Partly outside the triple-bottom-line approach, the quality of the products and services is also often considered as major a part of social responsibility in SME’s (Suprawan, de Bussy & Dickinson 2009, 3-5.).

Scarcity of resources allocated for CSR is a constraining factor in most organisations (Welford et al. 2006, 168), but especially in SMEs where having competence and know-how on CSR is also not as widespread as in large corporations. Other SME specific CSR challenges are also recognized: Large customer tend to be very demanding in their codes of conduct, without understanding the limitations of SME’s and external support for SME’s in developing their CSR policy and operations is inadequately, while they at the same time gain less direct advantage from implementing CSR than the large companies. (Cosetta et al. 2009, 38) For SMES’s, having a sufficient, credible CSR system and communication with suppliers is crucial for being competitive towards large customers, but making it profitable is a major challenge, as putting a price tag on good CSR and SC management is often not possible. Many CSR efforts in SME’s are tackled by the high cost, both internally and in the form of higher purchase prices (Ciliberti et al. 2008, 1580).

SCM in SME’s
When it comes to supply chain management, SME’s seldom have effective systems, techniques and tools at use. Also, they are less satisfied with the current supply chain situation than larger organizations. Implementing SCM in full extent is challenging for SMES’, as their own operations are often practically stipulated by large customers’ requirements. (Vaaland et al. 2007, 21) However, if SME’s are not strengthening their SCM, there is a risk that they’ll lose even more bargaining power with the larger links of the chain: not only the customers, but also suppliers which eventually will result in lesser competitive power. (Vaaland et al. 2007, 28.) Auditing is another crucial phase in credible CSR process within a global supply chain, but it is especially challenging for SME’s with supplier around the globe: having internal auditors is not possible, but finding a reliable, cost effective third-party inspector to do it is not easy, either (Welford et al. 2006, 169,171. Ciliberti et al. 2008, 1580.)

External communication 
SMEs recognize the importance of clear and truthful communication, as well as the necessity to differ the approach to different stakeholder groups (Suprawan et al. 2009, 5). However, SMEs’ approach to CSR communication is unsystematic and they try adapt some of the communication practices of the bigger companies) but are unable to execute them as such (Nielsen et al. 2009, 177). CSR communication is often focused on internal communication instead of external (Ciliberti et al. 2008, 1580). Many SME’s concentrate on building informative one-way communication to their customers, but tend to forget other external stakeholders, such as suppliers (Nielsen et al. 2009, 185). SME’s often lack a written code of contact, but relay on interpersonal communications (Suprawan et al. 2009, 6-7). Even though SME’s are able to build dialogue and long term relationships with key suppliers often more effectively than larger organisations (Nielsen et al. 2009, 185), this ad-hoc approach instead of written policies and codes of conduct is eating too may resources when there many customers and suppliers to communicate with.

Combined a challenge
Therefore, developing CSR implementation in the entire supply chain is a particular challenge for many SME’s but also necessity for future success of the business. Combination of developed CSR and SCM is especially important, as both these issues gain public interest and media coverage so far the big retail companies are the most affected, bot for SME, a similar reputation scandal could be even more lethal. (Nielsen et al. 2009, 185). This, however, is a true challenge; If even the big players in retail are struggling to implement their CSR principles in their supply chain (Andersen et al. 2009, 75), what are the realistic possibilities for SME’s to do the same?

Guidelines for future development

Profitable CSR with customer in mind
SME’s should develop their CSR process with the customer oriented perspective at the forefront. CSR activities should meet the customers’ preferences and requirements in order to attract business (Hietbrink et al. 2010, 296). This would also increase the possibilities to gain competitive advantage and to make CSR profitable, as CSR actions and communication can more effectively be presented to a customer as added value to the service or product if they match the customers’ needs and concerns (Dawkins 2004, 109). Listening to the customers, market and public discussion constantly is crucial, as situation changes all the time and a company must react and update its CSR policy and communication likewise (Morsing & Schultz. 2006, 323).

Integrated CSR
In order to enhance CSR in its supply chain, SME’s need to have CSR integrated in their entire organisation (Andersen et al. 2009, 81). CSR and communicating the responsibility issues should be embedded in all key processes and personnel from all functions as specialists in their own field made involved in developing the company practices further (Dawkins 2004, 118). Internal communication on CSR should be open, as the dialogue between leaders and employees increases not only understanding of CSR within the organization but also enhances the external communication (Suprawan et al. 2009, 5). Internal sense-making, trainging and personnel involvement in CSR is crucial for effective supplier communication on a day-today basis (Howarth 681. Suprawan et al. 2009, 4). Purchasing and logistics functions are a key player in CSR development in the supply chain, as it has the closest interactions with the suppliers (Carter et al. 2002, 38)

Tools and systematic approach
Introducing tools and systematic approach to both CSR and SCM would make the internal processes more effective and reliable, but also get the suppliers better involved in CSR (Ciliberti et al. 2008, 1587). The most important management tools for CSR in SCM are written policies and requirements to suppliers (eg. code of conduct), performance monitoring (internal and supplier auditing system) and awareness building (educating suppliers systematically). (Ciliberti et al. 2008, 1580) SME’s should also get acquainted with the most common practices and guidelines in CSR and SCM, and follow them whenever possible in order to avoid conflicts with requirements from larger companies that suppliers meet.

Involving CSR
Knowledge enhancing is important both internally and externally: training own personnel and engaging them to CSR is a prerequisite for dispensing the ideas to partners and suppliers, as well. Constant dialogue on CSR issue with the supplier eventually creates a shared frame of reference and creates true commitment to CSR practices (Andersen et al. 2009, 81-82). Building a network,  investing in trusting long term supplier relations and developing CSR issues in cooperation makes CSR implementation the supply chain more effective (Andersen et al. 2009, 82. Welford et al. 2006, 170. ). From a supplier point of view, this learning approach eventually improves the position in competition, which is an effective motivation for cooperation and CSR implementation (Carter et al. 2002, 48). Better cooperation and introducing CSR thinking within the supply chain also improves suppliers performance in quality, lead time and efficiency (Carter et al. 2002, 46).

CSR communication strategy
When choosing the strategy for CSR communication with their supplier, SME’s can choose from various approaches. The traditional, mostly informative and one-way, CSR communication strategy is based on risks, standards and compliance (Howarth 676. Ciliberti et al. 2008, 1580.). Internally, the control-power approach means that managers communicate CSR and delegate responsibility downwards, and similar thinking is applied towards suppliers: in order to avoid risks, an individual or a supplier has to fulfil the defined standard is or a punishment will follow (Howarth 680).

Another strategy, believed to be more beneficial but perhaps more arduous to implanted, emphasizes capacity building, creation and empowerment: CSR policies are developed in internal dialogue as well as in dialogue with suppliers, which creates true commitment and concentrates more on new possibilities and shared responsibility (Howarth 680. Ciliberti et al. 2008, 1580). Common involvement in social responsibility seems to enhance trust, commitment and cooperation within the supply chain and prevents opportunism (Carter et al. 2002, 46. Morsing et al. 2006, 324), which is important for an intermediatory SME whose success relies on trustworthy long term relationships both up and down the supply chain. This mentoring approach also means transition from reactive to proactive thinking (Howarth 676, 681.), which enhances seeing CSR as an opportunity instead of a burden at all levels of the supply chain.

Supplier perspective
Especially for suppliers in developing countries, external pressure, i.e. customer demands, is at currently the most significant motive of engaging in CSR activities and communication (Welford et al. 2006, 168). However, suppliers are also waking up, as the consequences of exploiting employees and environment are becoming visible (e.g. shortage on work force, water, waste and pollution issues) (Welford et al. 2006, 173.) Also, learning more about CSR and embedding it to the processes is becoming a competitive factor for the suppliers, as well (Welford et al. 2006, 171): with developed CSR, they can maintain a higher sales price, save costs, attract more customers, but also be more attractive as an employer. Therefore it seems, that now is a good time to kick-start CSR discussion with the supplier, as they have an internal driver for it, too.

4. Conclusion

The concepts of corporate social responsibility and supply chain management are tightly interlinked in the modern business model based on networks and subcontracting. Implementing and communicating their CSR policies successfully in a supply chain is challenging, and at the same the pressure and contradictory demands are increasing. Bargaining power within the supply chain defines the possibilities of a company to introduce CSR requirement, and SME’s are in weaker position doe to their limited size and influence.

SME’s engage in CSR for somewhat different motives than larger companies but are well aware of the importance of the issues. However, SME’s struggle more with the scarce resources for CSR implementation, as well as find it difficult to make their CSR efforts pay off. Non-systematic approach to supply chain management and communication make the combined challenge even more arduous to overcome.

When developing their CSR communication within the supply chain, the SME’s should concentrate on issues most relevant for their own customers. Integrating and involving approaches to CSR are the most effective both internally and externally, and introducing management tools and systematic approach builds up the process. Capacity-building oriented communications strategy enhances constant development and knowledge sharing, but also increases supplier commitment.

In conclusion, this paper shed some light on the reality of SME’s operating in a global supply chain with tightening CSR requirement, but combining the aspects of CSR, SCM and SME would be topic worth further research. Surveying the perceptions of SME’s dealing with these issues would also assist in creating better tools for supporting SME’s in various supply chains and networks and enhance best practices of implementing CSR in SME’s.

Author

Milka Pääkkönen, MBA student of Business Management and Entrepreneurship, HAMK University of Applied Sciences, milka.paakkonen@student.hamk.fi

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