In 2005 we took the bold step of disclosing our supply chain. We anticipated this disclosure would spark collaboration between brands in the oversight of supply chains. We established a goal of increasing collaboration with other brands to cover 30 percent of Nike-contracted factories by FY11.
While 30 percent may appear to be a small number, it is a realistic target given that some contract factories produce solely for Nike and many factories serve other buyers that currently lack a robust compliance program, making a mutual exchange of information or partnership in capacity building unfeasible.
Nike's strategy for auditing focuses internal resources and our deepest expertise on contract factories that represent a significant portion of Nike business by volume, dollar value and worker populations. We still seek, however, to have reliable, accurate data about all factories manufacturing branded, finished goods, so that these factories are held equally accountable for their compliance performance. In order to meet this need for information, licensees and agents are required to oversee their suppliers (either through dedicated internal compliance teams or third-party monitors) and Nike engages third-party monitors directly to provide audit information about non-focus factories that provide product directly to Nike.
In the apparel industry, where working with multiple buyers is the norm for most factories, the collective costs of monitoring activities for both brands and suppliers have become exorbitant.
In an informal poll of suppliers manufacturing for Nike in Thailand and China, manufacturers said they responded to approximately 12 audit requests each year. One supplier in Thailand, however, reported accommodating 48 audits in a single year and we do not think this is unique. Extrapolate the impacts of this inefficiency to hundreds of suppliers for Nike.
Cost is not the only inefficiency. Not only are brands duplicating efforts through multiple audits, but we also are undermining each others' efforts to promote compliance by providing conflicting standards and proposed remediation approaches to factories. Finally, supplier support of industry collaboration is also undermined by differing business philosophies across the industry.
Though the industry has taken steps toward transparency and cooperation, the pace has been slow and cautious. Not all buyers share the same level of commitment to advancing workers' rights in the global supply chain. Brands that have invested in a decade's worth of work in monitoring, like Nike, have developed strong views about what works and what does not in the field.
Nike works to share resources with brands that share our aims of assessing management systems, have high compliance expectations for suppliers and are committed to partnership and rewarding continuous improvement. While it is fairly easy for us to provide audit information to interested brands, we are more challenged to fully leverage the scope of audits currently taking place in our supply chain. Given the importance placed on factory compliance ratings in our overall sourcing strategy, we use audits from other brands only after robust dialogue ensures us that they comprise a similar standard to our own. Furthermore, to ensure consistency, we also apply our own standards to any data collected and shared with us by other brands.
We identify opportunities for sharing by approaching brands as potential candidates based on two criteria: overlaps in the supply chain and their demonstrated commitment to conduct thorough assessments of factory performance. Generally, Nike jointly reviews code standards, audit tools and protocols with other brands interested in collaboration. This desk work is then followed by a joint audit in the field, where a Nike auditor and an auditor from the other brand go to a shared facility, simultaneously conduct separate investigations and then compare findings. Through this process we believe we have been able to share some of our best practices, while also incorporating learning from the work of other brands.
Once we have reached mutual agreement to accept audit information, audits that come in from other brands are reviewed by Nike field teams in each country. These external audits must be uploaded to our compliance database and factory ratings are assigned based on Nike performance criteria.
Until summer of 2008, we did most of this work manually. As Fair Factories Clearinghouse (FFC) (see www.fairfactories.org) attracts more members into its sharing platform, we are hopeful that assessing opportunities for sharing will be accomplished more quickly.
We upload all of our audits quarterly from our internal database to the FFC. Current FFC members represent approximately 30 percent of our supply chain. In terms of what we have shared, Nike is on track for meeting its collaboration target. It is important to remember, however, that not all contract factories are scheduled to receive an audit each year. The audits we provide are based on Nike's schedule of work for monitoring the supply chain through our focus factory filter and revised risk evaluations.
Ultimately, our goal is to have joint scheduling protocols with other brands, to embed the opportunity for collaboration into our schedule of work, creating maximum efficiency for the buyers and the suppliers.
Audits are only one area of potential collaboration. We also focus on what happens as a result. When an audit reveals significant areas for improvement, there is potential for collaboration in remediation. Unfortunately, not all brands or suppliers are comfortable with joint remediation. We believe the best way to resolve this is through developing consensus in the industry in remediation philosophies and standardized code alignment.
We are focused more on promoting broader alignment between brands in remediation philosophies, rather than on a case-by-case basis. In many key manufacturing countries, auditors come together to discuss labor and ESH challenges, and possible approaches for addressing those concerns. See ESH case study.
Nike's local teams participate in these meetings, and we believe there is a great deal of benefit for suppliers if we can promote increasing convergence around issues: whether it is the height of the fire extinguisher, the correct way to calculate overtime pay, or the safest way to manage hazardous waste. We hope to measure change in this behavior through ongoing dialogue with manufacturers about where they receive the greatest amount of conflicting information in remediation recommendations and focusing brand discussions in these areas.
Our long-term monitoring goal is to shift our efforts from repetitive auditing to capacity building of helping contract manufacturers develop knowledge and skills to address specific labor and ESH compliance issues and/or systems. (For more on capacity building, see collaboration with Levi's). We believe that collaborating with other brands holds great potential to improve our auditing and capacity building capabilities. As such, we are working informally with a group of brands and in partnership with the Fair Labor Association (FLA) to identify the types of supplier training that can jointly address factory needs.
As part of our ongoing monitoring, Nike regularly accepts audits from other brands and shared remediation efforts within FLA-participating companies as well as non-FLA brands. (Find out more). In general, however, we believe the opportunity to leverage brand collaboration is underdeveloped, and we will be focusing this year more intensively on this area directly with specific brands and/or via multi-stakeholder initiatives.