INFINITE SUM ETHICAL SOURCING 2017

The demand for Ethical Sourcing is gaining momentum, and changing the landscape of global sourcing, production, and processing around the world.

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TABLE OF CONTENTS

Infinite Sum Ethical Sourcing | TOC

An Increasingly Challenging . . . . . . . . . . . . 2 Sourcing Landscape

So What Is Ethical Sourcing? . . . . . . . . . . . 4

The Infinite Sum View . . . . . . . . . . . . . . . 4

Five Key Steps To Ethical Sourcing . . . . . . . . 5

1. Baseline . . . . . . . . . . . . . . . . . . . . . . . 6

2. Design And Build . . . . . . . . . . . . . . . . . .7

3. Implement . . . . . . . . . . . . . . . . . . . . . 9

4. Improve. . . . . . . . . . . . . . . . . . . . . . . 10

The Business Case for Ethical Sourcing . . . . . 11

Alliance Foods: Winning Business . . . . . . . . 12 by Raising Ethical Standards

Starting on Your Ethical . . . . . . . . . . . . . . 13 Sourcing Journey

Infinite Sum’s Roadmap to Ethical Sourcing . . . .13

How We Can Help You Succeed on . . . . . . . . 16 Your Ethical Sourcing Journey

CHILDREN ARE USED IN PAKISTAN TO PRODUCE SURGICAL EQUIPMENT FOR THE EXPORT MARKET

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AN INCREASINGLY CHALLENGING SOURCING LANDSCAPEManaging today’s complex, global supply chains is increasingly challenging, with the risk of dis-ruption a common fear for many companies, par-ticularly those sourcing from emerging markets. Climate change, extreme weather and resource scarcity can send raw material costs soaring and threaten the security and cost of supply.

Meanwhile, lack of visibility of suppliers’ ethi-cal and environmental practices creates further risks. The results can be catastrophic, with high profile scandals causing serious reputational damage.

Mattel suffered a dramatic loss in consumer con-fidence in 2007, when it was revealed that nearly

one million of its toys[1] had—without its knowl-edge—been painted with lead. The 2013 Rana Plaza building collapse in Bangladesh caused significant brand damage for global fashion brands and retailers, while the UK’s ‘horse meat’ scandal resulted in intense scrutiny of food com-panies, calling into question transparency and quality standards across the food supply chain.

Following the sweatshop revelations of the early 1990s, Nike has gone on to transform its busi-ness, becoming a sustainable business leader.

Today, stakeholders continue to push for radical transparency, creating ever more pressure to build resilience and invest in ethical sourcing.

[1] New York Times Article, August 2, 2007: Lead Paint Prompts Mattel to Recall 967,000 Toys

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In the days following the collapse of Rana Plaza, cranes plow through the wreckage in search of bodies, while thousands of people like this young boy (inset), hold up photographs of loved ones who are missing.

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SO WHAT IS ETHICAL SOURCING?Perceptions of ethical sourcing differ wide-ly across industries, and even within compa-nies, with definitions ranging from protecting workers’ rights to environmental compliance to sourcing from politically stable countries. Within the same company, views often differ according to job role and seniority.

Purchasers—those at the coal face—often fo-cus primarily on negotiating low order prices, in order to achieve their personal performance goals. However, by accepting low prices, sup-pliers are unlikely to be able to pay workers fair wages or invest in improving product quality, health and safety and labor conditions.

In competitive markets where suppliers typi-cally engage in a ‘race to the bottom’ to win

business, they may struggle to meet previously agreed ethical and quality standards, including those set out in companies’ Codes of Conduct. Similarly, inaccurate forecasting, last minute or-dering and order changes can result in illegal sub-contracting, excessive overtime hours and harsh treatment of workers.

Ethical issues in the supply chain can also be generated by the actions of some (not all) mid-dlemen (such as agents and brokers), who may push the supplier for lower prices without the knowledge of brands and retailers. The more people involved in a transaction between a retailer and a supplier, the less transparent it becomes, and the higher the possibility that corruption may occur, leading to a domino ef-fect with suppliers being forced to cut corners.

THE INFINITE SUM VIEW“Ethical sourcing is about taking a responsible, holistic approach to sourcing—considering a whole range of political, economic, social and environmental issues—and giving weight to both ethical and commercial criteria in sourcing decisions. Quite simply, ethical sourcing is still perceived by many organizations and execu-tives as a ‘nice to have’ today, whereas it will

become the norm over the next few decades, propelled by increasingly robust legislation and pressure from customers and investors.”

Peter Agnew President and Chief Operating Officer Infinite Sum

5 KEY STEPS TO ETHICAL SOURCING

LEADOngoingTo insure client continues to engage inbest practices and becomes a leaderin the implementation and advocacyof ethical sourcing

IMPROVE6 MonthsTo measure the success of currentinitiatives, make recommendationsfor improvements, and report onprogress

IMPLEMENT8 – 12 MonthsTo ensure policies and proceduresmanifest in practice across businessoperations and supply chains

DESIGN AND BUILD3 – 4 MonthsTo create a foundation of goodpolicies and procedures from whichto build ethical sourcing practices

BASELINE2 – 3 MonthsTo examine our client policies andprocedures as they relate to ethicalsourcing in business operations andsupply chain

ETHICAL SOURCING ROADMAP

5KEY STEPS

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

1. Baseline: The first step in the roadmap is to commence with an ethical sourcing policy and management systems gap analysis. The findings of this review will form the baseline for improvement from which progress will be measured throughout the course of the program and ongoing.

GOALTo examine our clients policy and procedures as they relate to ethical sourcing in its business opera-tions and supply chain.

Timeframe: 2 – 3 Months

Workstream Baseline for Improvement

Policy `` Update Procurement Policy to address elements of ethical sourcing

`` Adapt our clients Supplier Code of Conduct as required

`` Develop a Human Rights Position Statement

Business Operations `` Join relevant industry peer or multi- stakeholder initiatives and participate in rele-vant policy discussions.

`` Update supplier evaluation processes with minimum ethical sourcing requirements

`` Update risk register with ethical sourcing and human rights considerations

`` Develop staff education on ethical sourcing including human rights

`` Develop performance targets or incentives for procurement staff on ethical sourcing

`` Participate in a third party assessment of ethical sourcing practices

Supply Chain `` Update preferred supplier list

`` Update supplier engagement processes to include ethical sourcing considerations

`` Update supplier contract templates with clauses that promote ethical sourcing, including the verification and resolution of ethical sourcing claims

`` Develop key performance indicators for suppliers which correlate with ethical sourcing

Expected Outputs `` Ethical Sourcing Policy and Management Systems Gap Analysis. The results of this analysis have formed the baseline findings above.

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2. Design and Build

GOALTo create a foundation of good policies and procedures from which to build ethical sourcing practices.

Timeframe: 3 Months

Workstream Baseline for Improvement

Policy `` Update Procurement Policy

`` Adapt our client Supplier Code of Conduct as required

`` Develop a Human Rights Position Statement Business Operations

Business Operations `` Join relevant industry peer or multi- stakeholder initiatives and participate in rel-evant policy discussions.

`` Define risk ratings and categories for ethical sourcing

`` Develop a stakeholder engagement matrix, including an internal cross-functional group to consider ethical sourcing

`` Define staff reporting requirements and responsibilities for progress against targets

`` Complete an Infinite Sum audit of client organization

Supply Chain `` Define supplier groups

`` Apply an initial supplier risk rating based on supplier status as well as spend, country and category risk

`` Disseminate supplier self- assessment questionnaire

Expected Outputs `` Ethical sourcing roadmap

`` Human Rights Position Statement

`` Updated Procurement Policy

`` Stakeholder Engagement Matrix

`` Results and corrective action plan from Infinite Sum audit

`` Supplier Self- Assessment Questionnaire Template

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“WE OWE IT TO THE EMPLOYEES OF OUR SUPPLIERS THAT THEY ARE TREATED FAIRLY AND WITH RESPECT”

—THE CEO OF A FORTUNE 500 INFINITE SUM CLIENT

3. Implement

GOALEnsure policies and procedures manifest in practice across our clients’ business operations and supply chains.

Timeframe: 6 – 8 Months

Workstream Baseline for Improvement

Policy `` Publish Procurement Guidelines

`` Disseminate Supplier Code of Conduct

`` Apply relevant statements into business operations

`` Train purchasers across all departments on procurement policies and guidelines

`` Develop staff education on ethical sourcing including human rights

Business Operations `` Update procurement policies and procedures to address new practices

`` Update tender process to include ethical sourcing requirements

`` Integrate ethical sourcing roadmap into broader company strategy and roadmap

`` Develop due diligence criteria for low, medium and high risk suppliers

`` Implement corrective actions from Infinite Sum audit

Supply Chain `` Analyze and publish results from Supplier Self Assessment questionnaire

`` Host Key Supplier Roundtable

`` Develop supplier information packs based upon any identified needs

`` Disseminate supplier Code of Conduct and acknowledgment of compliance form

`` Review supplier contracts and develop verification clauses on ethical sourcing

`` Engage two key/strategic suppliers in supply chain mapping at multiple tiers

Expected Outputs `` Procurement Guidelines

`` Staff education modules on ethical sourcing

`` Purchasing policies and procedures embedded with relevant clauses

`` Tender process updated with ethical sourcing requirements

`` Report on results from Supplier Self- Assessment questionnaire

`` Supplier contracts updated with a “right to verify” clause

`` 10+ suppliers to attend first supplier sustainability roundtable

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4. Improve

GOALTo measure the success of current initiatives, make recommendations for improvement and report on progress.

Timeframe: 6 – 8 Months

Workstream Baseline for Improvement

Policy `` Review implementation of Human Rights Position Statement

`` Review implementation of Procurement Policy

`` Review Implementation of Supplier code of conduct

`` Review employee knowledge on ethical sourcing policies and targets

Business Operations `` Review the implementation of Ethical Sourcing Roadmap, seang goals and activ-ities for continued improvement

`` Develop remediation guidelines based on findings / experiences from previous phases

`` Explore if procurement practices (price and lead- time) impact supplier performance

`` Review and close out corrective actions from Infinite Sum audit

Supply Chain `` Conduct a supplier satisfaction survey on supplier engagement and ethical sourcing

`` Strategic suppliers have updated policies and procedures as they relate to ethical sourcing

`` First tier /Strategic suppliers are allocated an ethical sourcing risk rating

`` Host a second Supplier Sustainability Roundtable

Expected Outputs `` 100% suppliers signed against Supplier Code of Conduct (CoC)

`` 100% visibility of first tier suppliers

`` All third party suppliers completed basic self assessment questionnaire

`` Remediation guidelines

`` Published supplier engagement case- study

`` Published customer success story

`` Ethical Sourcing Roadmap—version 2

`` Report on progress against roadmap to all in- house staff and where appropriate on the company website.

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THE BUSINESS CASE FOR ETHICAL SOURCINGInvesting in an ethical sourcing program sets companies on course for sustainable growth and effective competition in the marketplace. It’s a long-term commitment, requiring determi-nation, investment and a shift in mindsets and practices across your organization. But the re-wards far outweigh the risks.

By not investing in ethical sourcing, you stand to:

� Lose market share to competitors—As cus-tomers increasingly demand ethically sourced goods, companies investing in ethical sourcing are likely to steal a march on their competitors.

� Increase supply chain vulnerability—Neglecting to address social and environmental issues leaves your supply chain exposed to multiple risks, from worker unrest and human rights scandals to illegal sub-contracting to environ-mental pollution.

� Damage brand reputation—High profile sup-ply chain controversies threaten to undermine consumer confidence and deter investors.

� Respond reactively to legislative changes—Without the foundations for ethical sourcing,

companies will be harder pressed to respond effectively to evolving legislation, such as the UK’s Modern Slavery Act.

Underestimating the level of commitment in-volved in ethical sourcing can also create risks. Without engaging effectively with ethical sourc-ing from the outset, companies risk coming unstuck or not being able to maintain the nec-essary level of rigor.

Investing in ethical sourcing allows you to:

� Grow market share and compete effectively in the marketplace. For example:

V Unilever’s Sustainable Living Brands are growing 30% faster, year on year, than the rest of its business.[2]

V Three out of four millennials are willing to pay more for sustainable products, accord-ing to market research giant Nielsen.[3]

� Strengthen customer relationships—Negotiate opportunities for long-term contracts or in-creased business by demonstrating robust ethical sourcing credentials.

[2] Unilever Website Article (unilever.com): Sustainable Living Brands Leading Unilever Growth

[3] Nielsen Website Article (nielsen.com): Green Generation: Millennials Say Sustainability Is a Shopping Priority

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A LLIANCE FOODS: WINNING BUSINESS BY RAISING ETHICAL STANDARDS

Alliance Foods Inc is a major food broker and merchandiser servicing many leading retail organizations in North America. As its retail customers became increasingly focused on ethical sourcing, the compa-ny quickly realized that a rigorous ethi-cal sourcing program would be vital to retaining and growing business with key customers.

Following the Infinite Sum Ethical Sourcing Roadmap, we helped Alliance Foods to de-velop and implement an ethical sourcing program supported by robust policies and procedures. We began by evaluating its key suppliers, many of whom were based in emerging markets, particularly Central and South America. We conducted on-site audits to evaluate supplier performance against required standards, and worked with Alliance Foods and its suppliers to de-velop corrective action plans.

Overall, the company achieved a stronger supplier selection process, consolidated

its supply network, and generated mea-surable improvements in suppliers’ ethical and technical performance.

In particular, its Tier 1 strategic suppliers raised their ethical standards, achieving, on average, a 7% higher ethical audit score. Importantly, this led directly to business benefits including increased productivity, improved quality and shorter lead times.

By meeting its retail customers’ ethical standards, Alliance Foods was able to strengthen its relationship with its num-ber one customer, winning additional busi-ness. It is also using its ethical sourcing credentials as a competitive advantage to win business from prospective customers.

Building on this success, we are helping Alliance improve the ethical performance of tier 2 suppliers, as we help the company to continue its ethical sourcing journey.

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STARTING ON YOUR ETHICAL SOURCING JOURNEYBefore developing your ethical sourcing pro-gram, it is important to determine how you will overcome practical barriers such as investment, resources and specialist expertise. Having the

people, processes and systems in place—and qualified specialists on the ground in your key suppliers’ production countries—is vital to cre-ating an effective program.

Infinite Sum’s Roadmap to Ethical SourcingWe recommend implementing ethical sourcing over an 18 – 24 month time-frame. The Infinite Sum Ethical Sourcing Roadmap is designed to be realistic and achievable, giving our clients the tools to embed ethical sourcing consider-ations into core business operations and supply chain practices.

1. Review and Analyze

Understand who across the organization holds decision-making responsibilities that impact on ethical sourcing, and how these functions inter-act. Review company policies—across sourcing, procurement, human rights and environment—evaluate your Supplier Code of Conduct and management systems, and commission an in-dependent review of existing ethical sourcing practices.

Identify gaps and opportunities for improve-ment, and begin creating minimum ethical re-quirements and KPIs for suppliers. This initial assessment will form the baseline from which you’ll measure progress. Where possible, we recommend integrating this process of review

and analysis into a broader, strategic program of supplier evaluation, cost-cutting and consolidation.

2. Design and Build

Create your roadmap, drawing on your baseline analysis. Develop and strengthen policies and procedures (including your procurement policy) to lay a strong foundation for ethical sourcing practices.

Ask Tier 1 suppliers to complete a self-assess-ment, and become a member of the Supplier Ethical Data Exchange (Sedex) in order to share information on their ethical, health and safety, labor and environmental practices. Determine how to rank suppliers according to ethical risks, and consider how to give greater weight to social and environmental issues in sourcing decisions.

Establish a cross-functional team to build mo-mentum and engage employees in factoring eth-ical concerns into their daily activities. Identify opportunities to collaborate with stakeholders to address shared or systemic challenges, and participate in relevant policy discussions.

WHEN UNFAIR NEGOTIATION TACTICS ARE USED, IT’S NOT UNCOMMON FOR OFFSHORE SUPPLIERS TO FURTHER CUT COSTS BY OUTSOURCING TO LOW-COST, UNAPPROVED SUB-CONTRACTORS

3. Implement

Move from words to action by putting your updat-ed policies and procedures into practice across your business and supply chain. Train employ-ees on ethical sourcing, and engage purchasers with your new procurement guidelines, linking their incentives to improving suppliers’ ethical performance.

Update your tender process with ethical re-quirements, and communicate any changes in Supplier Code of Conduct, contractual require-ments or audits and assessments to suppliers, starting with your most strategic suppliers. Begin implementing the corrective actions recommend-ed through the independent review of ethical sourcing practices, and evaluate the results of your suppliers’ self-assessment. Importantly, ex-plore how to integrate ethical sourcing into core business strategy.

4. Improve

Measure the success of your ethical sourcing policies and practices, and partner with sup-pliers for continuous improvement, including by co-creating corrective action plans. Invite their feedback on your new ethical sourcing requirements.

Ensure that all suppliers have signed your up-dated Code of Conduct, evaluate strategic sup-pliers thoroughly, and ensure they have a risk rating. Consider whether you now have com-plete visibility of your first tier. Begin mapping your tier 2 (and 3) suppliers to build a better understanding of the risks they pose. Consider how to engage purchasing teams in adopting practices that allow suppliers to invest in im-proving ethical standards.

Encourage healthy competition between sup-pliers on ethical innovation and performance. Report publicly and transparently on prog-ress, and encourage further action within your organization.

5. Lead

Become a leader on ethical sourcing in your industry by continuously building on your prog-ress, and acting as a voice for change, encour-aging others to begin their own ethical sourcing journey.

Remain agile and able to adapt your ethical sourcing practices as the nature of your social and environmental challenges evolves. Above all, seek to ensure that ethical sourcing practic-es become and remain truly ingrained in core business practices.

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HOW WE CAN HELP YOU SUCCEED ON YOUR ETHICAL SOURCING JOURNEYOur experienced supply chain and sourcing ex-perts can support you throughout your ethical sourcing journey—from conducting your initial baseline analysis to integrated ethical sourcing into core business strategy.

Building the business case—We help you define what ethical sourcing means to your business, and how it could create value for your organi-zation. Importantly, we help you build a robust business case for change to present to senior decision-makers.

Analyzing and evaluating—We help you evalu-ate and strengthen your ethical sourcing policies in line with industry and global best practice, identifying opportunities for improvement. Our experienced auditors help you gain visibility of social and environmental risks posed by strate-gic suppliers, and set a baseline from which to measure suppliers’ ethical performance.

Creating a realistic roadmap and achievable goals—We help you create an ambitious ethical sourcing vision, and a robust, realistic roadmap, supported by achievable goals and a phased approach to creating change.

Increasing supply chain transparency—We help you forge more direct relationships with sup-pliers, increasing transparency by identifying middlemen who add minimal value. Where mid-dlemen (such as distributors) are required, we work closely with them to ensure visibility over commercial dealings with suppliers.

Laying the groundwork for success—We help you build effective policies, procedures and practices to embed ethical sourcing consider-ations within your core business strategy and across your supply chain, and develop effec-tive platforms to communicate your progress to stakeholders.

Delivering change on the ground—We help you raise supplier performance in your sourcing countries, working closely with you and your suppliers to deliver measurable, lasting improve-ments. Our supplier management and sourcing specialists support clients on the ground in more than 30 countries.

Please visit www .infinitesum .com for more in-formation. To understand how we can help you on your ethical sourcing journey, please tele-phone us, or email info@infinitesum .com.

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Date: 03/2017

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