Community Social

Why adopt a standard

The sustained global growth of Billabong International Limited prompted a move by the Company to progressively centralise its supply chain management. This is a significant initiative, bringing together each of the Company's global sourcing divisions under a common management structure. The move is providing operational efficiencies and is helping to create a single platform from which all third-party social responsibility initiatives can be directed.

The migration to the centralised supply chain was also viewed as an opportunity to identify appropriate international benchmarks that the Company should work towards in its dealings with third-party contractors. This was an exercise conducted within Billabong International Limited in 2005 and resulted in the review of reporting standards of international peers, as well as a host of environmental and ethical publications and standards. Through this review, it became apparent that the only suitable way to benchmark third-party contractor performance and demonstrate their continued adherence to appropriate labour standards was for Billabong International Limited to move towards the adoption of a globally-accepted standard.

The social compliance standard adopted by Billabong International Limited was Social Accountability International's SA8000.

What is SA8000?

Social Accountability 8000 (SA8000) is a certification standard designed to help companies manage workplace conditions throughout a global supply chain. It was designed in consultation with 'representatives of trade unions, human rights organisations, academia, retailers, manufacturers, contractors, as well as consulting, accounting, and certification firms'.

The standard is based on the primary international workplace rights contained within the International Labour Organisation conventions, the Universal Declaration of Human Rights and the UN Convention on the Rights of the Child. It involves the implementation of management systems within the workplace of suppliers and involvement of key stakeholders including workers and factory owners. Importantly, SA8000 is an auditable certification standard which provides the ability to benchmark workplace standards and measure improvement.

An overview of SA8000 can be viewed at http://www.sa-intl.org/, which provides the following summary of key elements of the standard:

The implementation of SA8000 throughout Billabong International Limited's global supply chain continues to evolve. It allows the Company to better understand and manage its supply chain. Over and above this, it is hoped the move towards such a standard may encourage generational change among contractors and suppliers and, ultimately, lead to positive social change and manufacturing excellence.

The International Codes On Which SA8000 Is Based On

ILO
(Extract from www.ilo.org)

As the world's only tripartite multilateral agency, the ILO is dedicated to bringing decent work and livelihoods, job-related security and better living standards to the people of both poor and rich countries. It helps to attain those goals by promoting rights at work, encouraging opportunities for decent employment, enhancing social protection and strengthening dialogue on work-related issues.

The ILO is the international meeting place for the world of work. We are the experts on work and employment and particularly on the critical role that these issues play in bringing about economic development and progress. At the heart of our mission is helping countries build the institutions that are the bulwarks of democracy and to help them become accountable to the people.

The ILO formulates international labour standards in the form of Conventions and Recommendations setting minimum standards of basic labour rights: freedom of association, the right to organize, collective bargaining, abolition of forced labour, equality of opportunity and treatment and other standards addressing conditions across the entire spectrum of work-related issues.

The ILO's diverse tasks are grouped under four strategic objectives:

Promote and realize standards and fundamental principles and rights at work

Create greater opportunities for women and men to secure decent employment and income

Enhance the coverage and effectiveness of social protection for all

Strengthen tripartism and social dialogue

Universal Declaration of Human Rights

The Universal Declaration of Human Rights is an international declaration adopted by the United Nations General Assembly. The declaration lists 30 ‘articles’, each outlining the UN’s position on the universal entitlement to acceptable human rights practices. The full 30 articles can be viewed on the UN website http://www.un.org/en/documents/udhr/

UN Convention on the Rights of the Child

(Taken from the UNICEF website http://www.unicef.org/crc/)

The Convention is a universally agreed set of non-negotiable standards and obligations. These basic standards – also called human rights – set minimum entitlements and freedoms that should be respected by governments. They are founded on respect for the dignity and worth of each individual, regardless of race, colour, gender, language, religion, opinions, origins, wealth, birth status or ability and therefore apply to every human being everywhere. With these rights comes the obligation on both governments and individuals not to infringe on the parallel rights of others. These standards are both interdependent and indivisible; we cannot ensure some rights without – or at the expense of – other rights.

How does SA8000 apply to our supply chain?

Billabong International Limited previously used its own supplier Code of Conduct, coupled with a series of standards outlined in the contractually binding Supplier Agreement, to influence supply chain workplace standards. While generally effective, the Code of Conduct and Supplier Agreement did not represent a global standard that could be independently audited and measured.

This led to the introduction of the SA8000 standard into the Billabong International Limited global supply chain in 2005. The first step in its introduction was the education of our own regional managers about the standard and this was undertaken through a series of meetings coordinated by the Company's Global Operations division.

Secondly, the Company had to establish a trained audit team to provide the base SA8000 assessment of the workplace standards within the global supply chain. This allowed the Company to better analyse the supply chain and document the base data from which future improvements would be assessed.

The supplier Code of Conduct, Supplier Agreement and SA8000 are now jointly applied across the Company's global supply chain, giving three levels of social compliance management criteria by which the performance of the supply chain can be assessed.

What is the supplier Code of Conduct?

The supplier Code of Conduct outlines the ethical standards that Billabong International Limited expects within its third-party supply chain. The document is given to all suppliers and is displayed in poster format in a prominent position within their factories. If a factory is failing to comply with the code, this is identified during inspections and audits. There is also a toll free telephone number and an email address through which workers can lodge anonymous complaints. The Code is supplied in both English and the local language relevant to each factory location.

What is the Supplier Agreement?

The Supplier Agreement is a contractually binding agreement that outlines all trading and manufacturing terms between the supplier and companies within Billabong International Limited. It covers all of the processes for matters including ordering, payment, prices, design approvals, sampling, delivery, quality, use of intellectual property, subcontracting, insurance, legal compliance and dispute resolution. In addition, it works in conjunction with the Code of Conduct to outline appropriate workplace standards, sets the expectation for compliance with Billabong International Limited policies and provides a set of guidelines for the adoption of responsible and commercially beneficial practices.

What is the supply chain?

The Billabong International Limited supply chain comprises a group of third party contractors that manufacture product for brands within the Billabong International Limited group. The contractors operate factories in approximately 25 global destinations including Asia, India, the USA, South America and Europe.

As of 30 June 2009 the supply chain comprised in excess of 400 individual factories. These factories produce more than 60 million individual product units for the Billabong group in any 12 month period.

While the volume of goods that are produced throughout the supply chain sounds impressive, Billabong International Limited is a small customer within the majority of supplier factories. That is, Billabong group product generally makes up a very small percentage of the overall business of the vast majority of the individual suppliers.

While limiting the reliance on any single factory or supplier makes good commercial sense for the Billabong group, it also presents challenges in terms of the Company's ability to influence the work practices of suppliers. It is only through a shared commitment from each of the factory's customers that the desired generational change will be effected within the supply chain.

Appointing a new supplier

Billabong International Limited has established a process to encourage prospective suppliers to build globally-accepted work practices into their corporate culture. This works to align the suppliers with the Billabong group culture.

While existing contractors in the supply chain are subject to ongoing audits using the SA8000 standard, the same process has been extended to prospective new suppliers.

This sends a clear message to the supplier in relation to the social and ethical expectations of the Billabong group. If prospective new suppliers demonstrate no motivation or ability to move towards SA8000 standards, they are denied entry to the Group's supply chain. If they submit to an audit but demonstrate workplace standards below those imposed by SA8000, then they are issued with a corrective action plan. The prospective supplier then has to demonstrate an improvement or a commitment to improve workplace standards to ensure entry into the supply chain.

This process is outlined as follows:

Auditing of the supply chain

Billabong International Limited has its own internal department comprising a team of trained auditors and quality control specialists to monitor its global supply chain. The department is based in Hong Kong, with a second office in mainland China to position it close to the majority of the Billabong group's supply chain. The division is overseen by a regional management team, which works in association with the Group's international sourcing managers. These same teams also oversee the implementation of the same standards in other major regions, into which trained auditors and/or managers are being deployed.

The team of auditors is trained and certified through groups such as SGS and Bureau Veritas. Both SGS and Bureau Veritas are among the handful of organisations that are accredited to undertake SA8000 certification.

The trained Billabong group auditors undertake initial SA8000 compliance audits of factories within the supply chain. After the first audit, corrective action plans are implemented to help correct any deficiencies. Further audits are then undertaken to ensure compliance with the corrective action plans.

These audits, in effect, help prepare the supplier factory for formal SA8000 certification. To formalise the certification process, the factory must submit to a further audit by a certified independent body such as SGS, Bureau Veritas or RINA.

During calendar year 2006, Billabong International Limited completed SA8000 audits in approximately 150 factories. These factories had a combined workforce of approximately 90,000 employees, some of whom would work on the Billabong Group's product. Additionally, follow up audits were undertaken within scores of these factories to ensure corrective action plans were being implemented. The audit teams were also regularly rotated between different factories to maintain the integrity of the audit process.

By 30 June 2007, the number of completed SA8000 audits had lifted to 299 factories covering in excess of 175,000 workers. A further 151 follow up audits had been undertaken within these factories. During the combined 450 audits, a total of 12,690 workers were interviewed and a further 13,360 workers were provided with questionnaires relating to working conditions.

In the 12 months to 30 June 2008, Billabong International Limited performed a further 295 factory audits and a further 443 corrective action plan audits, while in the 12 months to 30 June 2009 a further 347 factory audits were undertaken by the Group.

How have we performed?

As SA8000 advocates continual improvement, performance against the standard is best measured over several years.

Through calendar year 2006 Billabong International Limited audited approximately 150 factories, which employed a combined total of approximately 90,000 workers. Additionally, the Company undertook multiple audits within 72 factories, which were selected by virtue of the fact they were the first audited. They comprised a mix of the Company's largest suppliers, in addition to a collection of smaller suppliers.

These follow-up audits generally showed ethical improvement across the supply chain and a willingness on the part of the majority of suppliers to improve conditions within the workplace. Suppliers that did not make any measurable improvement and failed to commit to future improvements in work practices were terminated from the supply chain.

Billabong International Limited ranked the 72 suppliers that underwent multiple audits and assessed them according to risk of SA8000 breaches. The reference to 'risk' should not be viewed as an outright breach of local laws. According to SA8000, an issue will be assessed as a 'risk' if the supplier cannot provide documentary evidence that systems are in place to avoid or, if found, immediately remedy an issue. It is for these reasons that corrective action plans are implemented. Two of these 72 factories were SA8000 certified.

The performance of the balance of those subjected to multiple audits was encouraging. It showed that 45% of the remaining 70-factory sample group demonstrated significant improvement, while 19% were terminated. A further 35% committed to corrective action plans but, at the time of audit, had not demonstrated sufficient improvement to lift them out of their initial risk category. Billabong continued to closely monitor and work with these suppliers to help them improve standards to give them the opportunity to remain in the Group's supply chain.

By 30 June 2007, Billabong had expanded its original 72-factory sample group to 92 factories. Of the total sample group, 21 of the factories had been terminated from the supply chain for general operational reasons or failure to comply with appropriate corrective action plans. The balance was satisfactorily working to agreed corrective action plans.

Additionally, the number of completed SA8000 audits had lifted to 299 factories with a combined workforce of in excess of 175,000. A further 151 follow up audits had been undertaken within these factories. During the combined audits, a total of 12,690 workers were interviewed and a further 13,360 workers were provided with questionnaires relating to working conditions. Outside of the 92-factory sample group, a further 24 factories had been terminated from the supply chain. This took the total terminated through the SA8000 process to 45.

By 30 June 2008, analysis of the original sample group had become less relevant given approximately half were no longer in the Group's supply chain. A more relevant analysis of performance was a study of factories that had undergone more than one audit. A total of 182 factories had been subjected to two audits, 77 had undergone three audits, 36 had four audits and eight factories were on their fifth audit.

Approximately 85% of factories to have undergone three audits were initially assessed as high risk. By the third audit, this number had dropped to approximately 10% as factories improved their performance. Similarly, the number of factories to have achieved an intermediate rating had lifted from 13% to 56%. While the sample group of factories to have undergone more than three audits is much smaller, the same general trends were evident.

In the 12 months to 30 June 2009 the Group undertook 347 SA8000 audits, in addition to a further 227 corrective action plan audits. More than 15,000 workers were interviewed through the audit process.

A number of factories submitted to further education about SA8000, with 30 factory representatives trained by independent auditors in the process of internal SA8000 auditing. This helps the factories better prepare for external auditing and is designed to speed their awareness and understanding of globally-accepted workplace standards. Billabong Group auditors were also provided with training under OHSAS18001, an occupational health and safety standard that helps identify and monitor safer working conditions.

The Group achieved a significant milestone through the 2008-09 year, with confirmation that mens' boardshorts – the Billabong brand's "hero" category – were now being manufactured in 'SA8000 certified' factories.

But the year was not without its challenges. The global economic downturn impacted some factories, leading to an increase in the incidence of workers not receiving appropriate remuneration. This prompted increased vigilance among the audit team and an increased dialogue with factory managers to reinforce the benefits of maintaining high workplace standards.

Corrective action plans

Corrective action plans (CAPs) are an essential component of the SA8000 audit process as they encourage suppliers to move towards improving workplace standards. This, in turn, leads towards positive social and economic outcomes for factory workers.

Yet it is important to understand that SA8000 compliance and certification can be a long process. Imposing the workplace rights and liberties enjoyed by many developed countries on employers in developing countries is indeed a challenge. There is the vexing question of whether to work with a non-conforming factory to encourage change, or simply terminate them from the supply chain. While often it may be easier to walk away, the better social outcome may well be to work with the factory to impose generational change.

Where appropriate, Billabong International Limited prefers to work with the supplier to enact a CAP. The process following a first audit is designed to ensure:

Any form of under-age working violation is remedied with 24 hours of identification;

A CAP is in place within 30 days of the audit;

Remuneration violations are remedied within 60 days of the audit;

An enterprise bargaining agreement (primarily to control working hours) is in place within 90 days of the first audit;

Within 60 days the factory consents to a new Billabong International Limited Supplier Agreement, which includes a supplier Code of Conduct;

All other goals identified within the CAP to be completed within six months (excludes violations involving safety, as these are addressed immediately).

Where suppliers demonstrate a willingness to achieve the outcomes identified in the CAP, Billabong International Limited will generally maintain an ongoing relationship. Suppliers that fail to show compliance to the CAP or repeatedly breach key aspects of the CAP are terminated.

What do we do between audits?

The supply chain comprises a group of individually owned suppliers with whom Billabong International Limited has contractual work agreements. These agreements give Billabong International Limited a degree of influence and the authority to audit supplier factories, but they do not afford the Company any form of control.

Generally, orders placed by Billabong International Limited only comprise a small part of the overall business of the individual suppliers. This makes it a challenge to force wholesale change on the supply chain. Regardless, Billabong International Limited is committed to encouraging improvement and will maintain long-term working relationships only with those suppliers that can demonstrate a similar commitment.

Working towards the SA8000 standard gives the Company the ability to measure the performance of suppliers but, on its own, does not guarantee that suppliers will consistently follow accepted work practices. Between audits, Billabong International Limited may become aware of a breach of accepted work practices. In these instances, a remedial process is implemented.

Members of the operations team are notified of the alleged breach and all compliance records from prior audits are retrieved. An audit team is then assembled within 24 hours in the Asian region, or as soon as practicable in other regions, and then dispatched to the suppliers factory. The team prepares a report for immediate consideration by the operations team management. There are a range of remedial actions available for consideration which, in the case of under age workers, include:

Cancellation of the purchase order;

Implement a plan to provide education or training courses until the child reaches the minimum working age;

Commit to providing the child with living expenses and, once at the minimum working age, a job opportunity in accordance with the SA8000 guidelines. The costs of such remedial actions are to be at the suppliers expense.

Audit outcomes

One of the positives of SA8000 is the fact its sets the bar so high - generally higher than local laws, in fact - that very few suppliers within the global apparel industry can demonstrate absolute compliance with SA8000 standards. Indeed, much work needs to be undertaken in the vast majority of supplier factories before they can confidently claim to be a model employer.

With this in mind, one of the best outcomes from Billabong International Limited's move to undertake auditing against the SA8000 standard is the identification of unacceptable workplace conditions. The audits have allowed the Company to dig deeper into the work practices of suppliers and allowed the production of a set of base data from which supply chain improvements can be measured and corrective action plans implemented.

Such measurement is beneficial to the Company in many ways. Stronger relationships are fostered with those suppliers who are working to the highest standards, while those who fail in their commitment to corrective action plans are withdrawn from the supply chain. In effect, the audit process empowers Billabong International Limited to refine its supply chain.

While a large number of factories have been removed from the supply chain since the Group implemented the SA8000 standard in 2005, many factories demonstrated a commitment to work towards improving workplace conditions. This shows that while it is sometimes difficult to have influence over a supplier - considering that our business is often a small part of their business - SA8000 can lead to positive social change.

A further benefit is the impact the greater understanding of the supply chain has had on the purchasing practices of the Billabong group. Pre-engagement audits are ensuring greater care is now taken prior to the implementation of any new suppliers. Additionally, the audit process has identified preferred existing suppliers that can take on more business as non-conforming suppliers drop out of the supply chain.

Our influence within the global supply chain

Billabong International Limited works with a large global supply chain comprising hundreds of suppliers. In the majority of cases, the Company's contract with these operations generally comprises a small proportion of their overall business and, as such, the Company has limited control.

However, each factory throughout the Company's supply chain is held to certain social and environmental standards as detailed in the Group's Supplier Agreement. Among these standards is a commitment to meet all applicable laws in their country of operation. Where factories breach these obligations, the Company seeks to engage the supplier to undertake remediation works to lift standards. If the supplier fails to comply with such works within a satisfactory period, the Company may seek to terminate the working relationship. Conversely, factories that commit to responsible work practices are favoured by Billabong International Limited.