Forced Labor and Human Slavery in Supply Chain Across the Global Economy

Recent studies have shown that organizational (corporate) misconduct becomes normal when institutional factors such as supply chain norms, market incentives, regulatory systems, or power structures create gray areas. The problem is embedded in many supply chains through overt or covert pressures on the bottom of the value chain, meaning the subcontractors,

Shockingly, fewer than 7% of companies conduct audits of their suppliers’ labor practices beyond tier one. Even more concerning, fewer than 11% of boards are willing to delve deeper into the risk of modern slavery and its associated brand risks. This calls for immediate and thorough action.

Many multinational corporations have failed in their well-intentioned efforts to root out unethical labor practices in their supply chains across the global economy, particularly in industries such as apparel (textile), food, and electronics. The familiar excuses still reign supreme.

Indeed, like product supply chains, labor supply chains need due diligence from direct to indirect suppliers—including the shadow factories. Moreover, the problem many firms face is the overreliance on dubious self-reporting schemes while assuming that what goes wrong will be reported,

It is crucial to remember that the Verite Report, published nearly 10 years ago, revealed a harsh truth. Firms that failed to address these issues risked not just their reputation but also their very existence. Across the electronics industry, illegal and unethical labor practices were not the exception but the norm.

In fact, recently, the ILO report found that 28% of workers across more than 500 firms were engaged in forced labor, while 32% of 87 foreign workers surveyed were found to be subject to forced labor in Malaysia’s electronics industry. As unethical and illegal as forced labor is, why are companies still closing their eyes to it? Because practices have been found to boost profit.

Consider this: The profit per victim of forced labor and child labor is estimated to be $3,900 across ASEAN countries, $5000 in Asia-Pacific, and $34,800 in developed countries. In other words, over $44 billion is generated in illegal profits across the private sector per year, according to ILO. However, almost 21 million people are working in conditions classified as modern slavery (including child and forced labor) in the private sector.

When poor working conditions across factories in the apparel (textile) industry in countries such as Bangladesh, where factory buildings can dangerously fall apart at any time, solving the value creation equation becomes worrisome.

Understanding the Chain of Japan Business

Every firm across the supply chain wants to maximize its profitability by solving interrelated challenges associated first with hectic demand, lead time, product quality and customer experience. However, in the relatively low-margin business model, no firm wants to increase its fixed cost and the trouble and reputational risks associated with forced and child labor.

Beginning with the larger and more powerful brands (mostly in developed countries) that have their purchasing function stationed across developing countries such as China and Vietnam, they arrange purchasing contractual agreements with their tier-one suppliers, which in turn make other agreements with other suppliers or subcontractors across the value chain from cities to far-flung villages.

In this kind of partnership, given the high volume and low margin nature of the retail industry, which accounts for nearly 30% of the global GDP and employs, directly and indirectly, more than 67% of the global workforce, for example, the further down a partner is positioned in the value chain (downstream), the higher the likelihood of engaging in forced and child labor or other unethical and illegal practices to compensate for profit margin erosion or the risk of losing money while abiding by the tough contractual demand, given the low bargaining power of lower-tier suppliers or subcontractors.

These sub-contractors will supplement or recruit through informal channels desperate people fighting for a living, and when these people show up, their passports are confiscated, their overtime work is unpaid, and most of the things they were promised don’t materialize. When the so-called auditors show up, the sub-contractors fool them by omitting workers’ names, employment data related to forced labor, illegal work conditions, and shadow factories that damage the environment in silence.

Rationalizing through excuses such as, “With tens of thousands of suppliers and sub-contractors spread within the global economy, how can we monitor all these unethical and illegal practices? Making self-congratulatory statements such as “We belong to the Sustainable Apparel Coalition, the Fair Labor Association, or the Global Reporting Initiative, is not good enough. Building an effective and efficient mechanism to monitor, punish, or dismiss partners engaged in child and forced labor is imperative for a purpose-driven organization standing for what is right by doing the right things.

Some of these sub-contractors or supply chain partners are woefully engaged in human trafficking by preventing people from quitting while transporting and harboring people for work through coercion or outright fraud. Indeed, in some cases, people become victims of debt bondage. Indeed, well-documented cases in the West African cocoa industry by the BBC, agriculture in Spain, and the Uzbek coffee industry are just the tip of the iceberg.

Dealing With the Issues

Multinational corporations in developed countries need to go beyond the traditional over-reliance on their membership of NGOs, such as the Sustainable Agriculture Initiatives (SAI) and social auditors, by building their own teams for tackling and monitoring the issue related to child and forced labor, including human trafficking. For one thing, many large and resourceful companies seem to believe that because there are laws and regulations in their key suppliers’ countries, most of the potential crimes have deterrence across supply chains. Thus, it will not occur as people in those countries would like.

However, our experience and analysis suggest they are wrong, given that these economic crimes are correlated with five socio-economic drivers—unemployment, poverty, geographic context, and culturally accepted norms regarding religious beliefs and what is accepted, tolerated, and punished across their suppliers’ cultures—that organizations need to monitor for the likelihood of child and forced labor (modern slavery). Given the reputational risks associated with these economic crimes through slavery or child and forced labor, bold actions and real leadership are necessary before another scandal erupts.