Tesco: Dealing With Suppliers

Business ethics refers to the study of morality on what is right and wrong that has been focus on moral standards as they are applied to the business, organization and behavior (Velasquez M.G., 2006). However, ethics can be defined as the application of morals to human activity (L. Manning, R.N.Baines & S.A. Chadd, 2006). Therefore, ethical theories refer as the rules and principles. Ethical practices are important as it gives power and influence of business in society and offer major contributions to society.

The reason for selecting Tesco is because this company is the third largest retailer in the world, which is encountering ethical and unethical practices that concerns much of the people’s daily life.

Company Background

Tesco was founded in 1919 by Jack Cohen from a market stall in London’s East End. Over the years the business has grown and Tesco has 6,351 stores operating in 14 countries across Europe, Asia and North America (Tesco PLC, 2012). They have over 520,000 employees and serving millions of customers every week (Tesco PLC, 2012). Tesco is known to be the world third largest retailer selling groceries, household items, general merchandise and etc. However, Tesco is the second largest retailer in term of profits. Throughout the years, Tesco never stop expanding their business while also taking over other supermarkets which leads them continue growing. In Malaysia, year 2001 Tesco partners with Sime Darby and started their first store in Puchong in year 2002. In year 2009, Tesco was recognized as the number one hypermarket in Malaysia.

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Ethics is important for Tesco to maintain their valuable reputation and to build Tesco’s success. Hence, Tesco have to conduct their business in a manner of legal and ethical. Currently Tesco keep improving their merchandise, systems and stores to show that they are green, recycling-friendly, fair trading and ethical. Tesco aim to gain reputation of being ethical in their business following the footsteps of some ethical companies like The Body Shop which are retailer and manufacturer of naturally inspired and ethically produced cosmetic products. Body Shop is a company who appreciates the environment and social impact in its supply chain. Thus, the company ethical practices can be reflected in its Community Trade Programs and Ethical Trade (Business In The Community, 2012).

2.0 Ethical Dilemmas

2.1 Stakeholder Theory

The method use for the analysis is stakeholder analysis. According to Edward Freeman (1984), a stakeholder in an organization is defined as group of individual who can affect, or is affected by the achievement of the organization’s objectives (Freeman 1984:46).

Evan and Freeman (1993) suggest two principles in order for a more precise definition of ‘affects’ and ‘affected by’. First, principle of corporate rights which is the corporation has the obligation not to violate the rights of others. Principle of corporate effect refers to companies are responsible for the effects of their actions on others.

Stakeholder theory comprises of competitors, customers, employees, community, suppliers, shareholders and government (Appendix 1). According to Freeman, others have a legitimate claim on the corporation. However, Freeman (1984) argues two perspectives which is the legal and economic perspective. Legal perspective is a legally binding contract which is protected legally in some ways while economic perspective is outside contractual relationships.

Role of management by Freeman, states the broader view of responsibility towards multiple stakeholders assigns a new role to management. Rather than just agents of shareholders, the management has to take into account the rights and interest of the stakeholders. There are two models suggested which is stakeholder democracy and corporate governance. Stakeholder democracy gives the stakeholders the opportunity to influence and having control over corporate decisions. Whereby corporate governance regulates and codifies various rights of the stakeholder groups.

2.2 Ethical Dilemmas of Tesco

2.3 Supplier

Ethical dilemmas encountered by Tesco are suppliers. Tesco being one of the market leaders is using its strength in the market place “to deliver unbeatable value” which in turn forcing the suppliers to push down prices of vegetables, meat, garments and etc. Therefore, this action shows that Tesco is paying its suppliers 4% below the industry average and has cause some UK farmers on the brink of bankruptcy (Friends of Earth, 2005).

In addition, Tesco often make unnecessary demands on farmers to guarantee uniform products. Therefore, it became national standards inevitably (Friends of Earth, 2005). There have been also incidents whereby Tesco cancelled order at the last minute and this has cause financial losses to the suppliers especially to the farmers.

Next, Tesco is loading various risks and costs of its fresh-produce business onto farmers whereby also passing it to the workers particularly woman (Oxfam, 2004). Tesco push the price below cost of production example: a basket of food which contains eggs, milk, bread, tomatoes, beef and apples which would total up for £ 37 whereas the farmers only get £11 (Friends of Earth, 2003).

At the same time, Tesco also force suppliers to depend on cheap seasonal labour and exposing workers particularly woman to intolerable living and working conditions. However, the woman workers are employed in the form of temporary and irregular employment without basic rights. According to Oxfam (2004), Tesco put pressures on South African fruit and wine suppliers by making them to pay for promotions and paying them below cost of production.

2.4 Community

Although Tesco has huge share of the market, this unethical practice towards suppliers will affect the communities.

The unethical practices of Tesco will affect the communities by having low job security for workers such as farm workers. Permanent jobs will be lesser as more contract and temporary labour will be required. Therefore, workers is seen to have no job security as they are required to become seasonal workers working only 8-11 months a year and lose their benefits of a permanent employee (Friends of Earth, 2005). However, casual woman labourer lose out on benefits, as men get everything like boots and uniform while woman gets nothing when they work all year in a pear farm (Action Aid, 2005).

Subsequently, Tesco affects the communities in terms of unemployment. When farmers fail to cover their cost of production, it will become a norm of being in debt. Thus, this affects them to be out of business and creating the way for the end of the small and family farms (Corporate Watch, 2004).

Next, the unethical practices of Tesco affect the communities on their cost of living. As Tesco’s aggressive buying practices force suppliers to push their prices down. As a result leads them to receive poverty wages and unable to fulfill their daily basic needs. Wages are so low that they are unable to maintain standards of living whereby families are often malnourished (Clean Clothes Campaign, 2009). For example: Tawana Fraser who work in the pear farm that supplies to Tesco says that although wages of £32.50 were paid every two weeks, she can’t even afford to go to school functions, buy school uniforms and even can’t pay for her daughter’s school fees (Action Aid, 2005).

Besides that, Tesco affects communities on their poor living conditions. Workers live in dismal housing where they only sleep on the floor with a plastic sheet with no electricity and water. Furthermore, walls of the shack are made of cardboard.

Subsequently, the unethical practices of Tesco affect the communities by having unsafe working conditions. Workers have no protective clothing and gloves when working while they have to climb wet leaders that are still wet from pesticides to pick up pears from the trees (Action Aid, 2005).

3.0 Dealing with the dilemmas

3.1 Supplier

To deal with the dilemmas, Tesco joint venture with Impactt Limited (company that provides training, advice and develop ethical trading strategies) to deliver ethical buyer training for Tesco buyers around the world. This training is to raise buyers awareness on ethical issues and the effects that purchasing practices can have on labour standards of the suppliers (Impactt Limited, 2012). This training also aims to teach them to understand and reflect ethical considerations in their purchasing practices and also highlight that buyers are responsible for ensuring that their behaviors do not force suppliers to cut corners (Tesco International Sourcing, 2008).

Besides that, Tesco has committed to fair trade by signing up the Government’s Supplier Code of Practices (Friends of the Earth, 2005). It was revised and strengthened in 2008 to protect the suppliers from exploitation.

Next, Tesco also deals with supplier dilemmas by introducing supplier viewpoint independent annual survey. The suppliers are required to answer this anonymous survey, which allows suppliers to voice out how they feel about working with Tesco (Tesco PLC, 2012). Hence, this allows Tesco to understand the problem the supplier is facing whereby enables Tesco to understand and rectify the problems with their supplier.

3.2 Community

Tesco deals with their dilemmas by emphasizing on two over – riding priorities on ethical trade. Thus, with the two over-riding priorities on ethical trade, Tesco is committed to ensure the well-being of workers in the supply chain, to ensure no human rights abuses and at the same time ensuring sustainable environment impact (Tesco International Sourcing, 2008). On top of that, Tesco being one of the founders and the members of Ethical Trading Initiative (ETI) uses ETI base code as a standard for all workers in the supply chain (Appendix 2). Whereby, Tesco made efforts on monitoring to help the workers to improve conditions and address entrenched problems.

To deal with community dilemmas, Tesco also implement Supply Chain Impact Assessments whereby frequent visits by Tesco personnel to better understand what the challenges the workers are facing. Whereby using participatory interviews, third party audits to collect information from workers about their workplace concern. Furthermore, Tesco have been working with UN representative, South African partners on human rights to pilot principles that can strengthen effective grievance mechanism. For example: Tesco have piloted a farm level grievance mechanism which involves more than 3000 workers to voice their problems they were facing.

3.3 Apply one ethical theory into dilemma

Ethical theory refers to rules and principle which decide the right and wrong in a given situation. Ethical theory consists of two ethical theories which are normative ethical theories and descriptive ethical theories. Normative ethical theories suggest the morally correct way of acting while descriptive ethical theories describe how ethical decisions are made.

The role of ethical theory by Richard De George (1999) suggests two extreme positions which are ethical absolutism and ethical relativism. Ethical absolutism is universally applicable moral principles which the right and wrong are objective qualities. However, ethical relativism claims morality is context dependent and subjective, whereas there are no universal rights and wrong that can be determined. It depends on the person, culture and location (Crane, A. and Matten, D., 2007).

Under normative theory, it consists of traditional and contemporary ethical theories. Traditional ethical theories are separated into consequentialist and non-consequentialist theories (Appendix 2). Under consequentialist theories, egoism refer to an action which is morally right when decision maker is free to decide to pursue their individual short term desires or long term interest. According to Adam Smith (1793), it is morally acceptable when individual interest pursuit through invisible hand of market which creates benefit for all. Next, utilitarianism refers to an action which is morally right if the outcome is greatest amount of good for the greatest amount of people affected by the action.

Utilitarianism has been chosen to apply in supplier dilemma. Through a utilitarian perspective, we can see Tesco acts in a way to produce the greatest possible balance of good over dissatisfaction of their suppliers. Tesco implementing low price policy which instead pushes the price lower of the products from their suppliers which cause supplier to suffer from huge lost. Although forcing the suppliers to lower the price is unethical, yet with Tesco low pricing policy it creates the greatest amount of happiness for the community while the company can enjoy higher profits. As a result, if low pricing gives happiness and more benefit to the community, Tesco do not need to think about how unethical their practice is towards the suppliers.

However, under non-consequentialist theories it is divided into ethics of duties and ethics of right and justice. Ethics of duties by Immanuel Kant (1724-1804) argues that morality and decisions of right and wrong could not depend on a state whereby it is let alone on the consequences of one’s action (Appendix 3).

For ethics of right and justice, natural rights are important, certain basic, unalienable entitlements that should be protected and respected in every action. Hence, justice refers that together all individuals must receive fair treatment in a situation whereby the outcome is everybody get what they deserve. According to Locke (1632-1714) the most important rights are rights to life, freedom and property (Appendix 4).

Next, under normative theories which consist of contemporary ethical theories are divided into virtue ethics, postmodern perspective, feminist ethics and discourse ethics (Appendix 4). However, descriptive ethical theory involves two factors that influence the decision making which are individual and situational factors (Appendix 5).

4.0 Organization Best values and practices

4.1 Best Practices

P&G current practices are supplier engagement. P&G work closely with their suppliers across the entire supply chain. In order for them to bring the best thinking that benefits the brand and business, P&G implement supplier scorecard which is to improve supply chain environmental issues while also encouraging sharing of capabilities and ideas in the supply chain which leads to deliver better products and services to consumers (Procter & Gamble, 2012) (Appendix 6).

Based on the best practices of this company, Tesco should emulate the footsteps of the above mentioned company to achieve the best practices.

The best practices Tesco should adopt are supplier engagement. Tesco could launch a supplier scorecard to measure and track the supplier environmental footprint while also a way to communicate with suppliers. Subsequently, scorecard creates a platform to receive feedback, sharing of capabilities and get ideas from suppliers. Thus, with the ideas and feedback Tesco could fine-tune its own procedures to communicate better with their suppliers for further improvement such as work practices and environmental issues. However, having better communication and good relationship with suppliers also gives suppliers better opportunity for business which in turn suppliers would not act unethically.

4.2 Best values

Next, the values of NTUC Fair Price Hypermarket in Singapore are responsible retailing. Product safety and food handling is an important element in Fair Price’s business to raise the standards of food safety in Singapore for their customers. As a result, the company is certified with Hazard Analysis Critical Control Point (HACCP) which is the management system for the assurance of food safety and ISO 9001 quality management system (Appendix 7).

Based on the values of this company, Tesco should emulate the following values of the above mentioned company.

The best value that Tesco should also adopt is food quality and safety management. In the food retailing industry, food quality is the most important values that could deliver excellent standards for food and products consistently. By offering quality products to the customers, customers will have the trust and confidence to shop in Tesco. However, Tesco can establish Hazard Analysis Critical Control Point (HACCP) Program which is a management system for the assurance of food safety. Thus, by adopting food quality and standards Tesco is able to increase the confidence level of customers that they are receiving high quality, safe products.

In addition, Tesco can implement ISO 9001 (quality management system) to ensure that they conform to standards by ensuring the highest food quality and food safety for customers. Thus, by Tesco implementing these values, it is able to show that Tesco prioritize responsible retailing.

4.3 Apply one ethical theory

Normative theory consists of traditional and contemporary ethical theories. Under contemporary ethical theories there is postmodern ethics which refers to questioning everyday practices, rules and to listen everyone and follow their emotions and gut feelings about what they think is right and wrong in a decision making (Crane, A. & Matten, D., 2010)

The best practices of supplier engagement can be applied with postmodern ethics as Tesco needs to have good communication and work closely with their suppliers in order to be a successful ethical company. Therefore, by applying postmodern ethics Tesco needs to question their suppliers on environmental practices and make sure they follow consistently supplier trading policy. On top of that, to make sure suppliers maintain high ethical standards on environmental issues and work practices. At the same time, also listen to suppliers sharing of ideas or listen to problems encountered by supplier which relates to work practices and environmental practices. By Tesco making sure their suppliers follow procedures consistently it will reduce the chances of both parties acting unethically.

5.0 Conclusion

Practicing good ethics is important part for every company as it helps to maintain the company’s reputation and brand image. Hence, when Tesco have bad reputation in ethics will lead to loose customer or community trust and loyalty. Whereby, in year 2012 shows Tesco’s market share first time in seven years have drop below 30 % which is 29.9% (BBC News, 2012). Therefore, for Tesco to gain back their market share, Tesco have to act ethically to gain back the community’s trust and confidence level in their practices and products. Hence, by Tesco acting ethically it enables Tesco to continue maintaining their position as the third largest in the world.

Furthermore, Tesco have to act ethically in every aspect they deal with to benefit the communities. At the same time, also acting ethically in their business in order for them to penetrate into more countries to maximize the shareholder’s value, increase company’s profit and deliver sustainable growth year to year.