NIKE, Inc. has worked to improve labor conditions in our footwear, apparel and equipment supply chains for more than 15 years. Key issues in which we have engaged include the health and safety of the workers who make our products, excessive overtime, the ability of workers to freely associate, and child labor and forced labor.
In our FY05/06 Corporate Responsibility Report, we identified an overall goal to bring about systemic change for workers in the footwear, apparel and equipment industries, and we set five targets for FY11.
During FY10, we “rewired” our approach to managing risks and opportunities within our supply chain. We launched new sourcing and manufacturing tools that are embedded within product creation (discussed in the Manufacturing section), and created an integrated, multi-disciplinary team to support sourcing selection and performance. We also created a new organizational structure within the company that brought together labor compliance, health, safety and environment, lean manufacturing, human resources management, climate and energy, waste and water management. More recently, we identified the creation of a “sustainable supply chain” – i.e., one that includes sustainability on equal footing with cost, on-time delivery and quality – as one of the pillars of our sustainable business strategy and developed a vision of what success looks like. The vision and steps we are taking to achieve this strategy going forward are described in the Manufacturing section of this report. In this section, we take a look back and report on key indicators and our progress toward the targets we set for the FY07 to FY11 period.
We have been working with contract factories to build their human resources management skills and help them reach even higher levels of economic, social and environmental performance. Our work has centered around three fronts:
- Working conditions in factories: environment, safety and health
- Labor rights, freedoms and protections
- Workers’ lives outside of the factory, and living conditions in their communities
Our approach employs three main tools: audits, human resources management (HRM) training and lean manufacturing (discussed in the Manufacturing section). In addition, we have established collaborative efforts with other brands and civil-society organizations to develop common approaches for raising and sustaining standards in footwear, apparel and equipment manufacturing.
A centerpiece of our work in the past few years is our HRM program, which combines multi-stakeholder workshops, training for factory managers and the surveying of workers. We have found that factory managers aiming for full and consistent compliance with labor requirements sometimes lack the systems and skills to achieve it. By building the capabilities of contract factory management, we strive to create a sustainable framework for improving working conditions overall. In addition, the training supports the transition to lean manufacturing powered by a skilled, empowered workforce. (See the Manufacturing section for more detail on the lean approach)
We piloted the first wave of this program in FY09 with contract factories in Vietnam. During FY10, HRM evolved into Sustainable Manufacturing Training, which takes an integrated approach to sustainability capability building. Sustainable Manufacturing Training has an expanded focus (beyond just HRM), including modules on health, safety and the environment (HSE), environmental sustainability and energy/greenhouse gas management. The training also covers how to protect workers’ freedom to associate.
Where appropriate and possible, government officials, trade union representatives, representatives from the International Labor Organization and other key local stakeholders participate in the training program. Following an initial workshop, there is a six-month follow-up process in which the factories implement an action plan under the supervision of Nike compliance staff and the factory’s lean production lead (or “sensei”). The factories are then expected to participate in “learning communities,” in which they continue to share best practices on a regular basis.
Lessons We Have Learned
Today, when a company suddenly receives intense public scrutiny for practices in its value chain, comparisons are often drawn to Nike. In the late 1990s we were one of the first companies to deal with the challenges of a global supply chain. Because we were among the first companies and industries to experience such scrutiny, we did not have the benefit of an established roadmap. Instead, we had to learn a great deal through taking action based on our best instincts, evaluating the results of those actions, and then modifying our course based on what we learned through those experiences.
Consequently, we have moved through several distinct phases in how we have engaged, both when it comes to the specific issue of responsible labor practices within our supply chain, as well as the broader overall issue of sustainability. Nike’s track record of learning and changing is an almost textbook example of how sustainability experts describe the transformative steps organizations must take to evolve from reputation management toward real change.
In the early years of our evolution, we took the approach of “risk mitigation,” viewing our situation as a reputational problem that we needed to manage through compliance and better communication. We quickly learned that the issues were indeed genuine and substantial, and that we needed to go further. We dedicated significant resources and created new programs focused on monitoring and environmental improvements.
Those efforts produced real benefits, but their impact was relatively limited because they did not really address the deeper, systemic causes of the issues. And despite the fact that we were a large company by most standards, we simply did not, on our own, possess the scale or influence required to exert meaningful impact on the market forces driving the dynamics of our supply chain. To go beyond merely addressing the symptoms of the problems, we realized that we had to actively collaborate with others, including governments, NGOs, activists and, yes, our long-time competitors.
That required us to become far more open. Nike realized that transparency and collaboration are competitive advantages. They are enablers of long-term growth. Opening up and collaborating has significantly accelerated our learning, and today we operate with a great deal more insight into what consumers expect of us and what will be required for us to thrive in a world of increasingly constrained resources.
This insight and awareness is something that has changed the way we think about sustainability. It has quietly but purposefully shifted from a peripheral concern to a deeply integrated component of our business strategy, designed into the way we think about what we produce and how we produce it. In fact, today we assume that our ability to consistently create sustainability breakthroughs through innovation will be a key factor in our long-term growth.
Innovation is at the very heart of our culture at Nike. One of the cornerstones of innovation is a willingness and desire to learn. And, while we have learned much from our past and others have learned much from our experience, we believe the next era in the evolution from an industrial economy toward a sustainable economy will teach greater lessons than learned before.
Global Contract Factory Worker Profile
The factories that supply the brands of NIKE, Inc. employ more than 1 million people. The workforce is 67 percent female, with an average age of 31 (as of the end of FY11).
Progress and Performance
We collect and analyze substantial amounts of data on our contract factory base. Below we provide some key performance data, with a focus on summarizing long-term trends.
As described in the Manufacturing section, Nike’s approach to ratings and scoring will change in FY12 and beyond with the introduction and implementation of new tools and indexes. In particular, a new Risk Index will help us identify, at the outset of a sourcing relationship – whether with a new factory or one already in our supply chain – the potential for low performance. The Risk Index, which is being rolled out in FY12 and will evolve over time, assesses such areas as political risk, social/ compliance risk, economic risk and infrastructure and climate risk. The ultimate goal is to significantly reduce the amount of time required on the front end to assess a potential factory for a new work order.
We audit factories in our supply chain and evaluate their compliance across a range of labor and HSE factors. During the period covered by this report, findings were rolled up into overall ratings on a scale of A through E, where A is the best and E represents “unrated.” Full details on the letter grades are available online.
Key trends have included the following:
- The number of audits showing serious, repeated violations has remained low, at 4 percent or fewer over the past three years
- The proportion of the most severe issues has decreased
- The number of factories with unknown conditions (i.e., E-rated on the chart above) has decreased from 48 percent in FY09 to 8 percent in FY11, as transparency has expanded
As we transition to the new Sourcing & Manufacturing Sustainability Index, all factories rated at the A and B level will typically convert to “Bronze” standing, setting a high bar for performance.
Beyond the breakdown of factory ratings, we also look at trends in the types and severity of violations found through our auditing processes. We made a significant shift with the incorporation of NIKE, Inc. Affiliate brands in our auditing and reporting. We moved from 68 percent non-rated factories in FY07 to 89 percent rated in FY11 (see previous table). By comparing the percentage of C (serious) and D (critical) rated incidents found during factory audits, over time we can see where changes are taking place.
Over the five years from FY07 through FY11, the most common issues were those related to hours worked and wages.
In FY11, 41 percent of overall noncompliance incidents were related to hours, down from 52 percent in FY07. Hours issues entail the serious (C-rated) incidents of contract factories with workers putting in between 60 and 72 hours per week or not providing one day off in seven. Other issues in the general category of hours include critical (D-rated) issues of no verifiable timekeeping systems, exceeding daily work hour limits, working more than 72 hours per week, or not providing one day off in 14.
Wages represented 17 percent of noncompliance incidents in FY07, when assessing NIKE Brand only, compared with 36 percent of incidents found in FY11 with inclusion of all brands across NIKE, Inc. Most wage-related incidents were miscalculations of wages or benefits, rather than an overall failure to pay workers the agreed wage for work performed. These kinds of incidents are systemic within factories across the industry, as understanding and correctly paying social security-type benefits can mean navigating confusing and complex laws and standards. We recognize the complexity of and interest around the broad issue of wages, and we address our efforts in this area both below and in the Manufacturing section of this report.
Other categories tracked have remained relatively steady over the five-year period and the inclusion of Affiliate brands. Age-related incidents remained steady at 1 percent. Freedom of Association remained relatively low, from 0 percent to 2 percent of incidents. Harassment decreased from 7 percent to 3 percent of noncompliance incidents, which we believe to be partly due to the HRM training.
The category of “other” – which includes issues of dishonesty, such as coaching workers to lie about conditions, denial of auditor access, falsifying statements and unwillingness to comply with standards – has decreased from 20 percent to 13 percent of incidents over five years. We believe this indicates increased transparency in the supply chain.
We have continued to analyze the root causes of noncompliance. The three main causes we saw in FY10 and FY11 are broadly consistent with previous years: lack of systems, lack of commitment and lack of knowledge.
We have undertaken research and continue our engagement with stakeholders including non-governmental organizations, academics and factories – to better understand the impact of wages on overall quality of life for workers and our role in wages.
While we neither own contract factories nor employ their workers, we can influence their business practices – including wages – through our own sourcing and assessment processes.
Wages are complex, affected by a market economy of global supply and demand, including trade and social stability. But complex issues sometimes call for complex responses. We continue to take positive steps and we recognize there’s more to be done.
Over the past 10 years, wages paid to workers in factories contracted by Nike have been increasing at a rate higher than inflation. These changes mostly align to growth in minimum-wage standards, changes in pay structures and increased demand for labor. And as a component of our total cost of finished footwear goods in China, Vietnam and Indonesia, wages have increased.
We are also working with other brands and on multi-stakeholder initiatives to improve the industry as a whole and we are innovating our own supply chain (see Manufacturing section) in a number of ways related to wages and other issues important to factory workers.
One such area is with the Fair Labor Association, to develop a new “fair-wage” standard that identified 12 dimensions to fair wages. (More information is available online at www.fairlabor.org).
The dimensions span areas covering systems, comparability (e.g. to other industries, to inflation, to minimum standards, to cost of living), overtime, tying wages to skills, protecting the factory’s financial health and communication. The FLA sets out the dimensions and provides a gradual way of addressing each one, some based on information not readily available. We have begun addressing these dimensions through our Code and work with factories but other areas will take considerably more time and study.
As a leader in our industry, in FY11 we incorporated updates into our Code of Conduct and Code Leadership Standards to tackle some of the more pervasive wage problems, such as full funding and payment of statutory severance by factories and confirming that overtime is consensual and paid at a premium rate of at least 125 percent.
These changes are backed by updated Code Leadership Standards on factory closures and retrenchment (downsizing), which provide full detail of our expectations regarding pay, benefits and factory responsibilities. The Standards call for detailed actions in the case of factory closure or retrenchment in addition to what is required by country law or collective bargaining agreement, and factory management is encouraged to work directly or in coordination with governmental, nongovernmental or other third parties.
In addition, we have begun to define the actions we expect for contract factories to make progress toward better wage systems – that is, wages that meet the FLA definition of “fair wage.” Examples of these actions include: consistent payment of wages and benefits; standardized pay systems, policies and procedures; communication and dialogue around wages, training and development; monitoring and remediation; and wage self-assessments. The systems call for methods to track legally required minimum wages as well as different levels of worker education, skill, training and experience; monitoring against inflation and consumer prices; and equal-pay policies. These changes are being introduced in 2012.
We are addressing wages on several fronts. We know that standards are important: they communicate intent, they reinforce our position, they serve to heighten attention at factories for management and workers, and they form a rigorous and necessary baseline for performance. But standards themselves do not drive change; they set only a minimum bar that can help to identify and remove the worst performers.
We are also beginning to test with factories how they can increase workers’ wages while maintaining a financially competitive business. Our theory is that when factories invest in their workforce, they will see higher productivity and returns that can be shared across Nike, contract factories and their workers. We do not know the answers but are working with nongovernmental organizations, academics, factories and other businesses to find out how this can work and are committed to sharing the results to drive broader industry change. We discuss this theory and our approach in the Manufacturing section of this report where we define what “equitable” means for a sustainable supply chain.
Going forward, we are further studying wages and working with contract factories to explain our expectations and source from factories that make progress toward the FLA definition of “fair-wages” using our assessments in our Sourcing & Manufacturing Sustainability Index and Manufacturing Index to factor this issue more directly into our sourcing decisions.
We continue to evaluate why excessive overtime is a persistent issue in contract factories. During FY11, more than two-thirds (68 percent) of the excessive overtime incidents identified and analyzed through audits of 128 factories were attributable to factors within Nike’s control, primarily forecasting or capacity planning issues, shortened production timelines and seasonal spikes. However, it is unclear how often these factors are directly linked to one of our brands, as some factories also produce products for many other brands. In factories for which multiple brands place orders, it is very difficult to isolate the root cause of production-capacity planning bottlenecks. As a result, we will begin to explore ways to create internal systems that allow us to isolate Nike-caused capacity spikes and imbalances that can contribute to a factory’s inability to effectively manage production planning. In addition, we will begin the process of creating new tools and reporting mechanisms for apparel factories to proactively communicate with Nike when their production team is approaching overtime limits that would be in violation of our standards. We have instituted these reporting requirements in NIKE Brand footwear factories already, and have seen marked improvement in the management of excessive overtime as a result.
We recognize that excessive overtime is a serious issue – in terms of both hours worked and days on the job without a break. We are focusing on these areas through continued analysis of root causes, which has led us to identify and address key business processes upstream from the factory. Variability is one of those root causes. Some of the key variables we have assessed include: seasonality in styles, the lack of predictability in consumer or product demand, and the impact of global economic challenges. We are working to develop our abilities to successfully respond to these real variables without negatively impacting factories or workers.
We are addressing these issues throughout our product-creation process, including via improved forecasting alignment, which involves coordination across geographies, categories and product engines to get the right information and decisions made at the right time. We’re also optimizing our sourcing base in footwear and apparel to handle fluctuations in capacity and to adopt and implement the technologies needed to respond to the demand for emerging styles and products.
Outside of those items influenced by Nike, in some places overtime is expected by both workers and factories, tied to broken models of compensation in which the only way workers can earn more is by working more hours. We recognize that excessive overtime is not sustainable from a worker or business point of view, as the costs are high for both. We are working with factories to build an understanding of these costs in terms of workers’ health and safety, productivity and quality of life, and as a contributing factor to labor turnover. We will continue to track our impact on excessive overtime at factories and believe that the inclusion of excessive overtime in our Sourcing & Manufacturing Sustainability Index will elevate the issue and help us to recognize where and when these issues arise and to factor this aspect of factory performance into our sourcing decisions.
Freedom of Association
While factory noncompliance on issues of freedom of association (FOA) and collective bargaining have remained steady at a low rate of about 1 percent of all noncompliance issues, these issues are serious and important. Our Code states that both FOA and collective bargaining are to be respected and, to the extent permitted by the laws of the manufacturing country, that a contracted factory respects the rights of its workers, including the right to form and join trade unions and other worker organizations of their own choosing without harassment, interference or retaliation.
In countries where law restricts free association, we call upon factories to facilitate alternative means to individually and collectively engage with workers and to enable workers to express their grievances and protect their rights regarding working conditions and terms of employment.
We have included further information on expectations for factories in our Code Leadership Standards, and we address FOA training in our HRM training (see the following page) at factories.
A powerful example of how we have encouraged freedom of association can be seen in the work Nike and other brands have done over the past two years with the Play Fair Alliance (local union representatives and factory owners) to create the Indonesia Freedom of Association Protocol. This historic agreement, endorsed by the Indonesian government, has created a platform for the advancement of free association rights in Indonesia.
We also are including FOA in the assessment of risk in our sourcing selection process. We include country-based assessments, including the likelihood of violations based on FOA and other core International Labour Association standards.
Human Resources Management Program Implementation
As an extension and elevation of lean manufacturing, the development and delivery of our HRM program had, through the end of FY11, been delivered in 76 factories in Vietnam, China, Indonesia, Sri Lanka, India and Thailand, representing more than 422,000 workers, 94 percent of total footwear volume and 43 percent of total apparel volume. Some results of the training have included the following:
- Factory groups developed short- and long-term HR strategies
- Factory groups recruited and hired better-qualified HR directors and managers
- Factory groups allocated budget resources to HR and worker development
- 408 factory leaders completed advanced-level training on lean, HRM, HSE, environmental sustainability and energy issues
Our HRM training builds from, and on, our investments in lean manufacturing training at the factory level. Lean is a journey that begins with technical skills, reorganization and training, and then advances to changing workplace behaviors and mindsets. The empowerment of workers is a critical part of the implementation of lean manufacturing principles in a factory. In our HRM program, a key feature is a survey of factory workers that further helps to establish a focus on building dialogue and skills. The survey helps establish a feedback loop between workers and management and provides factory leaders with valuable data to improve retention and productivity.
In advance of the HRM training, factories conduct a survey among workers that asks 70 questions about workers’ perception of pay and benefits, health and safety, management culture, hours worked, their empowerment as workers and general job satisfaction. Nike developed the survey in FY08, built on topics that were considered core to workers and were validated by factories. A third-party provider administers the survey through an anonymous on-site questionnaire, worker interviews and a factory tour. Results are reported confidentially to factory management and in aggregate to Nike.
Through FY11, 25,468 factory workers participated in worker satisfaction surveys; the workers selected represented a statistically relevant sampling. The results of these surveys are used in HRM capacity-building workshops, where factory HR, corporate responsibility and lean leaders work together to prioritize and identify issues to address. Each factory defines gaps in its current HRM systems and creates action plans to address them. In FY10 and FY11, all participating factories had completed the survey and implemented HRM system improvements.
In FY11, factories participating in the HRM initiative began conducting follow-up worker satisfaction surveys using the same questions and methodology as the original survey. A comparison of pre- and post-HRM workshop responses from 16 factories in Vietnam showed increases of 9 to 15 percent in each of six key areas of satisfaction, including perceptions of management and morale (e.g., “I am very satisfied with my job,” and “I am treated with respect.”) An area with less improvement was worker perceptions of performance appraisals. This area improved only 3 to 4 percent (e.g., “I think performance appraisals are fair,” and “I think performance appraisals motivate employees.”)
Health, Safety and Environment
Our audits and reviews of health, safety and environmental performance assess 35 different factors. The audit tool used for this area differs from the labor tool, and global totals are assessed as an overall score rather than number of incidents of noncompliance. Results from HSE assessments help to inform training areas and the approach to working with contract factories and addressing issues. In FY11, contract factories scored 68 percent on average, globally, across all areas of HSE performance.
The top issues of concern to Nike are those areas of noncompliance associated with the highest risk to workers. Hazardous materials and electrical safety are high risk, especially within footwear manufacturing, due to the number of manufacturing machines and chemicals involved in the processes. We make it a high priority to assess these risks, and auditors have additional training in these areas, making them more likely to identify these issues in an audit.
More information on each area and the detailed Code Leadership Standards that outline our expectations for each is available online, along with the audit tool that provides information on how assessments are conducted. On average across all HSE factors, each region has similar average performance, ranging from 67 percent in our Europe, Middle East and Africa region and 69 percent in our South Asia region. In FY11 there were no areas that scored below 60 percent on any single element.
Across Nike globally, our HSE team includes 31 employees who conduct audits and provide training. This staff provides technical assistance through workshops and helps to teach factories how to chart their own safety-risk activities and use case studies to focus on the highest-risk noncompliance issues.
Going forward, health and safety assessments will be a component of the Sourcing & Manufacturing Sustainability Index.
Expanding Our Impact
We believe that collaboration with other companies and other sectors of society is the only way to achieve systemic change in global supply chains. It is an essential element of our approach and complements our direct engagement with factories in our own supply chain.
We are collaborating with a variety of organizations on new initiatives, some of which aim to develop common approaches to assessing and sharing data on factory performance. We have made considerable progress in this area, as described in the Manufacturing section.
In FY07 we set a target to promote collaboration by using other companies’ audit results. We discovered, however, that this is labor-intensive in practice, because our information systems are not set up to handle them. Our work, and that of other leading companies, has helped to spur the development of platforms that we believe are more effective for industry collaboration, such as the Fair Factories Clearinghouse (FFC). Accordingly, we chose to support that initiative by using it to share audits in FY11. A current FFC focus is developing technology that will make it easier for companies to use one another’s audit results and work together on a co-created corrective action plan.
We are continuing to expand our Sustainable Manufacturing Training. In FY12, we will present the first workshops in Brazil and Mexico. We are also evolving the training model in Asia, where factories are now choosing to enroll and fund their own participation. We will continue to conduct workshops in Indonesia, China, Sri Lanka and Vietnam. We are also rolling out our new systems and tools for evaluating factory performance and influencing sourcing decisions, as discussed in the Manufacturing section.