How the biggest brand in the world grapples with ethical sourcing

September 4, 2019
Harris Allgeier

Traditionally, most businesses’ supply chain concerns revolve around concrete practicalities: availability, costs, vendor stability, and other elements that directly impact the bottom line. However, in recent years growing consumer awareness and concern over the sourcing of products and services have increased business concern over a less traditional concern: ethics.

Now more than ever, people care about where their products come from and companies have been forced to address these concerns or face reputational damage and possibly regulatory punishment. According to the Ethical Investment Research Service (EIRS), a news article detailing a company’s exposure to an ethical concern can cause that company’s share price to fluctuate by between 0.5 and 3 percent. Public outcry, regulatory actions, and investor concern can all domino into costly production delays as suppliers scramble to secure more ethically sourced replacements. According to Abe Eshkenazi, CEO of the Association for Supply Chain Management (APICS), “supply chains that rely on items produced because of slave or child labor, for example, aren’t sustainable. The minute a company uncovers that its supply chain is compromised in this manner, it faces the possibility of a complete overhaul. That’s expensive and could create production delays.”

No business, no matter how successful, is immune to the scorching heat of consumer and regulatory ire over unethical sourcing, not even the Forbes-ranked most valuable brand in the world: Apple Inc. The smartphone titan has been forced to radically restructure its supply chain, in large part due to ethical concerns that prompted regulatory and consumer action. While the challenges Apple faces as a corporation are unique in scale, almost every business on the planet must reckon with the challenge of finding ethically and sustainably sourced components.

Foxconn & Labor Issues

For example, Foxconn, one of Apple’s chief manufacturers, has been the subject of a voluminous amount of negative press coverage due to lapses in ethical conduct. These include hiring underage interns (in direct violation of Chinese and international labor laws), financially penalizing employees for minor mistakes, and allowing inhumane factory conditions. Foxconn’s grueling labor practices have stimulated strikes and factory brawls which have led to temporary plant closures and disruptions in Apple’s supply chain.

The negative press attention from Foxconn’s slipshod adherence to labor regulations also prompted Apple to dedicate additional resources to its “Supplier Responsibility Program,” which in 2018 conducted 1,049 supplier assessments in 45 countries. These supplier assessments have led to Apple severing business ties with over 20 major suppliers who have been found to be in violation of its Supplier Code of Conduct. One of the major infractions Apple has had to police in its supply chain is the use of debt-bonded labor (a dry and marginally more savory way of referring to indentured servitude) and supplier recruitment fees (exorbitant sums charged by recruiters to new hires). Apple took action in concert with local governments to force companies in its supply chain involved in these ethical violations to return $30 million in supplier recruitment fees to affected employees. Ultimately, the company was left with holes in its supply chain and its own considerable legal expenses.

Cobalt Rush

Megalithic corporations like Apple must also be wary of ethical concerns among their lower tier supplier. The tech company relies on cobalt for its operations—the 27th element is a necessary component of the lithium-ion batteries found in smartphones (and just about everything else) and presents numerous ethical concerns.

Over 60% of the world’s cobalt is produced in the Democratic Republic of Congo (DRC), much of it from artisanal and small-scale mining (ASM) operations that have come under fire from Human Rights organizations like Amnesty International for inhumane labor practices. This public outcry prompted Apple to terminate its relationship with ASM mining outfits in 2017. This was a costly move at the time given the skyrocketing demand for cobalt. The element has since fallen dramatically in price thanks to a surge in supply.

It’s worth noting that these challenges aren’t unique to Apple: every one of the major smartphone manufacturers contends with the same problems. The complexities of ethical supply chain policing are almost inconceivably vast for this industry, whose products involve numerous rare earth minerals that must be refined and separately manufactured across a web of hundreds of suppliers. But the core issue is one shared by almost any business: people, businesses, and governments care more than ever before about the optics of what they sell, and nobody wants even the appearance of unethical behavior clouding their image.

Apple’s CEO Tim Cook recently signed a statement alongside the CEOs of 191 of America’s largest companies as part of the Business Roundtable which further committed Apple and the other signatories to prioritizing “dealing fairly and ethically with [their] suppliers” over promoting shareholder value, a further indication that the pressure to ethically and responsibly source is not easing. That’s why maintaining awareness of your suppliers, and your suppliers’ suppliers, and your suppliers’ suppliers’ suppliers, is vital to operating as a business today. If it matters to the biggest brand on the planet, it matters to your business too.

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