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Advice For Wal-Mart As It Asks Chinese
Suppliers To Be More Socially Responsible

Lee Scott, CEO of Wal-Mart, flew to China and the company issued an announcement:


Company sets new goals and greater expectations for environmental and social compliance, transparency and accountability.

Beijing, China — Oct. 22, 2008 — Today, Wal-Mart Stores, Inc. (NYSE: WMT) took the next step in its sustainability journey by hosting an unprecedented gathering of more than 1,000 leading suppliers, Chinese officials and NGOs in Beijing, China. The company outlined a series of aggressive goals and expectations to build a more environmentally and socially responsible global supply chain.

“Sustainability is about building a better business. We think it is essential to our future success as a retailer — and to meeting the expectations of customers,” said Lee Scott, president and CEO of Wal-Mart Stores, Inc. “Maintaining the trust of our customers — today and in the future — is tied hand-in-hand with improving the quality of our supplier factories and their products.”

The company will focus on areas aimed at meeting or exceeding social and environmental standards, driving innovation and efficiency and building stronger partnerships with suppliers, government and NGOs.

Scott continued, “I firmly believe that a company that cheats on overtime and on the age of its labor, that dumps its scraps and chemicals in our rivers, that does not pay its taxes or honor its contracts — will ultimately cheat on the quality of its products. And cheating on the quality of products is the same as cheating on customers. We will not tolerate that at Wal-Mart.”

Addressing suppliers in attendance, Mike Duke, vice chairman for Wal-Mart’s international division outlined a number of requirements and expectations for suppliers who want to do business with Wal-Mart. “Achieving the goals that we lay out today is going to require a common commitment. It’s going to take even stronger and deeper relationships. And it is going to take all of us working together.” said Duke. “We are expecting more of ourselves at Wal-Mart, and we will also expect more of our suppliers.”

Responsible Sourcing

At the Summit, Wal-Mart laid out a series of requirements for companies who want to do business with Wal-Mart. These requirements include:

Required demonstration of compliance with environmental laws and regulations — China’s desire for a cleaner environment is clear, and the laws on the books reflect that. Wal-Mart is taking a number of steps to further strengthen and enforce supplier compliance with environmental and social standards, including the creation of a new supplier agreement that will require factories to certify compliance with laws and regulations where they operate as well as rigorous social and environmental standards. The agreement will be phased in beginning with suppliers in China in January 2009 and expanding to suppliers around the world by 2011.

Partner with suppliers to improve energy efficiency and use fewer natural resources — Wal-Mart will partner with suppliers to improve energy efficiency in the top 200 factories it sources from directly in China by 20 percent by 2012. The company will share information and best practices with all of the factories it sources from as well as its competitors.

Higher standards of product safety and quality — Wal-Mart aims to drive returns on defective merchandise virtually out of existence by 2012.

Greater transparency and ownership — By 2009, Wal-Mart will require all direct import suppliers plus all suppliers of private label and non-branded products to provide the name and location of every factory they use to make the products it sells. The company will also have all suppliers it buys from directly to source 95 percent of their production from factories that receive the highest ratings on environmental and social practices by 2012.

Wal-Mart also announced a major effort to make Wal-Mart China a leader in sustainability in China by committing to make its stores more sustainable. The company will design and open a new store prototype that uses 40 percent less energy and will reduce energy use at existing stores by 30 percent by 2010. In addition, during the next two years, Wal-Mart China will aim to cut water use in all of its stores in half by investing in new hardware and systems and developing best practices that will help its associates and stores use water more efficiently.

The company also pledged to bring more environmentally sustainable products to its store shelves.

Outlining the steps Wal-Mart will take to become the most environmentally responsible retailer in China, Wal-Mart China President and CEO Ed Chan addressed the need for collaboration between Wal-Mart, the company’s suppliers and the Chinese government. “Few challenges in our world today are more pressing than protecting the environment and, in China, Wal-Mart has a unique opportunity to lead,” said Chan. “With the world’s largest population, and a robust manufacturing industry, no market presents a greater opportunity for environmental sustainability to take hold than China.”

On the environment, the Chinese government has set strong goals for sustainability and Wal-Mart is aligned with those goals. Wal-Mart and the Administrative Center for China’s Agenda 21 of the Ministry of Science and Technology signed a Memorandum of Understanding that will serve as an example of a partnership that benefits both industry and government. Wal-Mart China will also reach beyond its own operations to engage customers and suppliers and form partnerships with government and NGOs.

The Summit builds on Lee Scott’s “Company of the Future” speech to Wal-Mart store managers in January, 2008. In the speech, Wal-Mart pledged to make the company’s operations in China more sustainable and our build a more environmentally and socially responsible global supply.

You can watch a video of the speech by Lee Scott, as well as speeches by other Wal-Mart executives, at the China summit right here.

Considering how dependent Wal-Mart is on China as a supply source and how important China is in Wal-Mart’s future retail plans, Wal-Mart has every incentive to ensure the acceptability of China as a vendor to governments and consumers around the world.

This won’t be easy. In addition to the intrinsic problem of the various scandals related to food and product safety, during economically difficult times there is a temptation for governments to become more jingoistic and protectionist.

Yet, though Wal-Mart’s initiative is strategic and will surely have some good effect, there are really only three things Wal-Mart or any other buyer need to say and do if they want to boost the standards of their Chinese supply base:

1. Wal-Mart has to announce that it is willing to pay more to buy product that meets its standards. In other words, as long as its standards are higher than legal minimums or as long as legal standards are not enforced, there will probably be cheaper product in the market. Wal-Mart is electing not to buy that product.

2. Wal-Mart has to announce that low prices are suspicious. This is a cultural change but sustainability includes ensuring the supplier base is viable. So when a vendor comes in with pricing significantly below what other vendors propose, rather than grabbing the opportunity, Wal-Mart executives have to sit down with the vendor and confirm that the vendor can make a living at this price. Otherwise the temptation is too great to bid what is necessary to get the order and, then, to do what is necessary to survive. Wal-Mart has to avoid putting vendors in this position.

3. Verification has to deal with reality. When we did a piece on organic certification in China, which you can read here, it quickly became obvious that verification standards of all sorts in China are very problematic. If you have a community that is deeply dependent on one crop or one employer and the verification company, even a US company, has a local office, think how difficult it will be for that one local representative to go against the interests of his mishpokhe.

We have an American friend who is currently a translator for the US military in Iraq. Interestingly enough, he tells us that when translators are needed regarding a situation where different elements of the local population are all urging different actions on the US, all the factions prefer to have an American translator. Why? The local translators are part of the local conflicts, they belong to ethnic and religious groups, their families need jobs and may need the help of local officials; only the Americans, as a true third-party, can be trusted.

Equally verifications in China need to be done by foreigners. This is very expensive but the only alternative. Bring in a Swiss team or a Swedish team to do the inspections and verifications. If Wal-Mart doesn’t set up this type of system, enforcement will be lax and the suspicion will be that Wal-Mart is willing to avert its eyes from violations.

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