Ethical Sourcing Intelligence (ESI) is the quarterly publication of a (fictional) professional body that promotes ethical business, sustainable manufacturing and similar topics. In order to produce their magazine, they need a regular supply of articles from freelance authors. That’s where you come in!
Your task is to write an original article that informs the reader about an ethical and/or socially responsible procurement topic of your choice. You can profile an industry, an individual company or a relevant event.
The requested format for the ESI article can be summarised as follows:
- It should be readily understood by a reader who is not an industry specialist
- … but it must be informative and accurate.
- It must cite supporting evidence from published sources (since ESI don’t want to get taken to court).
- It should highlight a problem in the supply network, and show how some organisations are addressing the problem.
- The article should feature at least one original illustration in the “infographic” style, communicating information about the supply chain problem at a glance.
Note: this is not a report, and should not be structured as one. Conduct some basic research into organisations that are lobbying for ethical or socially responsible outcomes and observe the ways that they communicate – then produce something similar of your own. Your submission can be less ‘academic’ in tone than some of the coursework that you have done: think “magazine article”, not “research paper”… but do remember to back up your statements with evidence via Harvard referencing. Be sure to make use of the Skills Team if you are in any doubt about this key skill: see https://www.hull.ac.uk/choose-hull/study-at-hull/library/skills/index.aspx
Your submission should be 3,500 words in length, double-spaced and in Arial 12 point font or similar. Illustrations and tables should be placed within the main text, suitably labelled.
Additional guidance:
A good piece of work will be structured so as to lead the reader from an introduction to a supply chain problem, through a discussion that brings in present-day examples, finishing with a clear message in favour of an ethical and socially responsible supply chain. Please do not simply describe the organisations and the events that have occurred, but try to analyse them. Don’t simply present a profile of an organization which has problems, accompanied by theoretical solutions: review policies that have actually been tried, providing analysis as to how and why the approach worked (or didn’t work) in terms of ethical, socially responsible and sustainable procurement.
Use what you discover to illustrate the key principles of ethics and social responsibility and try to back up what you say with hard facts and figures. Note that what you discover should also provide you with some ideas for the infographic-style illustration(s) that you have also been asked to provide.
Addressing Module Learning Outcomes 1, 2, 3 & 4:
This assignment tests whether you have achieved the learning outcomes of the module:
LO1 | Demonstrate an understanding of ethical and socially responsible procurement and the current related challenges. |
LO2 | Compare, contrast and discuss effective ethical sourcing practices in response to current pressures on social responsibility. |
LO3 | Evaluate ethical and socially responsible procurement relying on the established theory in the discipline and on exemplary industrial case studies |
LO4 | Present and communicate ideas |
Date
Supply Chain Fraud in Hyundai Motors
Introduction
Ethical sourcing has already been established as the most crucial element in the supply chain. Ethical and social responsibility is the fundamental principles that should guide the procurement process. Therefore the functional teams should employ ethical standards that facilitate effective, ethical sourcing in the global environment. From this perspective, the functional groups can regulate the competitive pressures disrupting corporate social responsibility. Following this, the supply chain managers will establish reliable and transparent suppliers operating under ethical standards to ensure the Company receives respect, loyalty, and trust from subsidiary organizations or people concerned with the Company’s growth and development, such as customers, shareholders, and employees.Ethical and socially responsible procurement is a rigid framework that guides business operations. It comprises of purchasing, production, manufacturing of quality good that align with needs of its customers to ensure the company maintains good relations, embraces diversity. Therefore just like any other sector in the supply chain of a company the procurement department faces numerous challenges in regards to the integration and implementing of ethics of socially responsible procurement. Purchasing is an essential element in for the smooth running and operation of an organization and can play a huge role in issues relating to ethics of socially responsible procurement in regards labor, environment and. Customers. These particular sectors accumulate factors that emanate problems or the procurement to be ethically and socially responsible. In today’s contemporary world of business companies are obliged not only to make sales but endeavor to maintain an adequate image in the eyes of the public. Customers are more attracted to companies that meet demands and produce quality good which is a perfect reason for procurement to align the needs are targeted in order to be socially responsible towards consumers. Although value for many is relative based on the services or goods offers the company must warrant delivering quality product to the customer without ripping them off. For a company to achieve ethical and socially responsible procurement officers at the top of the food chain should establish ways to provide quality at a reasonable rate balance the equilibrium. Every Company experiences strategic problems in the procurement sector and Hyundai Motors is no exception.
Hyundai Motors is a subsidiary branch of Hyundai, which is one of the largest chaebols in South Korea. Hyundai boasts a complex supply chain that plays a critical role in the Company’s health and success. The company has a diverse and robust chain of foreign suppliers who source materials and car parts from Korea’s domestic market. The Company’s supply chain consists of 400 top-tier suppliers, 2500 second-tier suppliers, an undisclosed number of third-generation suppliers upstream. Empirical studies show that the Company’s success is primarily attributed to reliable and transparent communication within the global supply chain (Blackhurste, 2005). However, there is a striking difference and a surprising window into the Hyundai supply chain path. Hyundai’s supply chain was founded on a well-integrated ethical and socially inclusive organizational culture that contributed to the Company’s growth and expansion. The design, nature, and fluidity of the supply chain boosted strategic opportunities, organizational structures, work culture, leadership, and management practices. Hyundai’s collaborative and inclusive corporate design worked for all its subsidiaries across the world. The supply chain embraced robust ethical rules that regulate the business operations in the Company. However, in 2001, Hyundai experienced unprecedented changes that haunt the Company up to date. In 2006, Hyundai’s top manager was sued for corruption in the parent company in South Korea. This marked the beginning of a long tail of problems characterized by many illegal and ethical challenges arising from the ongoing court case. In collaboration with his sons, the top managers were breaching the code of ethics by embezzling funds from the parent company to bribe Government officials to secure favorable deals in the neighboring countries. As a result, the prosecution and subsequent conviction of Hyundai Motors ‘Chairman, Chung Mong Koo elicited a lot of controversy in the media and public, thus tainting the Company’s image. Chung was sentenced to three years in prison but in September 2008, he was acquitted for his sentence due to his imprisoned had adverse effects on the Korean economy. Furthermore Chung had promised to donate$1billion if he was freed. Surprisingly in February 2008, Chung was re –appointed as the Chairman of Hyundai Motors. Drawing from the precepts of management Chung’sbehavior resonates an immoral manager. This does not only taint the image of Hyundai but put the company at risk. Chung was not concerned about the wellbeing of the company but was more interested in his own selfish interests and his family. According to the Korean business regulations, infringement of the code of the ethics of a company warrants arrest and public dismal from occupying any public office. But due to huge political and economic crisis he was offered a leeway and reinstated. This court cases never subsided, as a matter of fact the in 2014, the company underwent through a series of strikes from the employee due to the violation of codes of ethics on wage payment. Hyundai Motors breached the Supreme court ruling on provision of bonuses as part of regular pay as opposed to the previously existing system whereby employee were given bonuses only when the targets are met. For a long time Hyunda failed to honour the ruling which caused an outcry among the employees. Subsequently Hyundai was experiencing problems with their dispatched workers. Hyundai employe dispatching workers on a temporary basis to cut on costs of sales and production. However Hyundai was not acting in accordance with the court’s Act of Protection for Dispatched Workers. This act states that if a temporary employee works in the company for more than two years, the company should recruit the worker as a full time employee with regular pay. For the longest time Hyundai was not abiding to this act which is clearly a breach of ethical practices. On top of this the temporary workers had worked for more than two years without pay and there was no legal framework to reference from in terms of payment. There was no rigid approach to promote the moral codes of ethics, cohesion, togetherness and unity in the functional groups. Amidst all these the discussions and negotiations has intensified but did not amount to anything concrete. With all the turmoil ongoing within the organization employees were enraged with vast plans to construct resort style theme parks and plants in China and Mexico when employees had not received benefits of full payment status.
Hyundai aims to build a reliable and transparent supply chain that reflects the Company’s commitment and focus. Transparency and reliability aids in business administration and ensures that the Company adheres to ethical practices to create a socially responsible environment. For example, Hyundai operates in a global environment with optimized business operations that abide by moral rules. Furthermore, the Company set up a fair trade to regulate the legal and ethical regulations throughout the supply chain. Figure 1 is a perfect representation of the factors that affect demand, supply in the supply chain.
Figure 1: The supply chain (Hahn et al., 2000).
Wadeson (2019, 12) posits that Hyundai motors uses its supply chain as a marketing strategy and attracts robust competitiveness, collaboration, organizational change, and innovativeness. Consequently, Hyundai Motors’ supply chain attracts numerous supply chain issues such as failure to integrate all the supply chain organizations’ activities to facilitate ethical and socially responsible procurement. After an in-depth review of peer organizations such as Ford and Toyota, it is evident that reconfiguring a supply chain is an arduous task. However, the centralization coordination theory explains a comprehensive rigid plan to makeover the supply chain by ethical sourcing, ethical management, etc. Although it is not perfect, Philosophers argue that the centralized coordination approach is an integrated framework engineered to oversee the running and operation of the procurement and supply chain success and advancement in the logistics department (Dessein. 2019,15).
Redesigning the Supply chain using the Centralization coordination approach
After the case was resolved, Hyundai Motors reinvented its supply chain to ensure ethical standards were incorporated in its activities. Initially, the Company developed mechanisms to link production planning, sourcing, and scheduling activities among supply-chain members. Hyundai Motors established channels of ethical management techniques that allow effective sourcing, production, and sales across the extended supply chain with this mechanism. The Company leveraged cross-functional meetings and scheduling policies to integrate supply chain activities (Hahn et al., 2000. When implementing this process, the Procurement and Supply Chain department redesigned the structural, environmental, and behavioural environments to optimize supply chain operations through ethical management to improve communication between the suppliers and the companies within the supply chain. The centralization approach successfully established ethical management techniques that reengineered trust and respect from all the concerned parties through increased customer satisfaction by coordinating all the functional teams. Furthermore, the centralization coordination approach presents sustainability as a fundamental principle for maintaining a vibrant and complex supply chain across all Hyundai Motors subsidiary organizations.
Figure 2: The Centralization Approach Theory (Hahn, Duplaga, and Hartley, 2000).
Following the precepts of philosophy and ethical sourcing, the Company is reinventing the total quality management upstream and downstream. It has also set a good pace in reengineering the production line to ensure quality and efficient products at a reduced cost. The collective power increased the Company’s internal operations to achieve its organizational goal. From this perspective, it is pertinent for managers to increase demand and work in highly competitive environments to improve product quality, responsiveness to the market, and product efficiency. Research shows that companies seek to explore their competitiveness through the concept of supply chain management (Spekman., 1998, 1). In this regard, top executives managers have coordinated many activities to draw viable solutions to ensure the supply chain’s comprehensive analysis amongst an organization’s expansive network. Although complete synchronization of these tasks is a formidable task, Hyundai motors have laid out a firm foundation to ensure the overall synchronization of activities from the senior level to the junior level. Traditionally the supply chain boasts a wide range of activities starting from the raw materials, suppliers, tier suppliers, sub-assemblies, final assembler, the distribution channel, and the consumer. However, Supply chain management focuses on managing the flow of information and materials to ensure organizations produce high-quality goods at a lower price. Ideally, the supply chain activities should be integrated to achieve optimal production. Hyundai Motor’s first approach in achieving synchronization involved a centralized coordinating group. This group consists of functional teams familiar with the operations techniques and production standards, and measures to ensure successful production amongst all companies in the supply chain. These people have the knowledge and capacity to facilitate the success of the functional groups. Through this process, Hyundai Motors achieved its first breakthrough in synchronizing organizational activities across organizational boundaries. Fraser (1997, p. 76) posits that synchronization is almost a non-existent phenomenon in most global companies’ supply chains. The process requires a lot of effort and capital to achieve and sometimes has minimal returns on investment.
The advent of globalization and knowledge-based economies organizations has caused a paradigm shift in supply chain management. Over the last decade, practising managers at Hyundai Motors’ helm presented enormous empirical evidence on how organizations align their supply chain with the design phases to eliminate illegal practices. It is pertinent for the automotive industry to develop rigid and complex ethical sourcing techniques to allow sustainable production to manufacture high-quality products on time. However, increasing product diversity while reducing production cost is arduously tricky. Hyundai Motors reorganized the production and sales to mediate between manufacturing, the domestic and export sales department, and the foreign purchasing department to redress these problems. In its initial approach, Hyundai employed the centralized coordination approach to allow coordination in the manufacturing facilities and related functions located in UI-san, Korea. Redesigning the supply chain made the process easy for the department to employ ethical sourcing practices to ensure the plant can manage and control the environment in which it operates. However, reconfiguring the process of sourcing, manufacturing, and distribution attracts enormous problems. The centralization coordination approach faced five key issues; lack of ethical souring practices, integrating sales and plant production capacity, maintaining an equilibrium between imports and export in the sales departments, failure to establish a balance between the import and export aggregate demand, limited supply, and surge in inventory due to surplus production, poor coordination of newly launched products and failure to incorporate order launching and delivery schedules in the supply chain. With this knowledge, Hyundai Motors decided to redesign the supply chain to restore all the ethical practices.
Figure 3: Redesigning the supply chain (Forbes, 2020)).
Synchronization of the various activities in the supply chain allows ethical sourcing and flexible production as the Company can define its priorities and formulate ways to achieve them strategically. Consequently, the functional teams can establish the nature and importance of issues causing the production capacity to fluctuate (Hahn et al., 2000, 33). Hyundai models of production take up different abilities and capabilities and can be easily altered by fixating fluctuating demands and challenges that face an organization. The sales department is designed to align the production model to meet the customer’s needs, which simultaneously causes sales to fluctuate. Through this, the sales function can employ unethical strategies that harm the model of production. Therefore, it is paramount for the production function to devise a rigid, steady, and smooth production schedule to avoid alteration by current pressures such as rising demand.
Another major issue ailing the Hyundai Motors supply chain is the drastic shift in export and domestic sales. Continuous fluctuation disrupts the internal and external environment in which the Company operates. In such a scenario, managers can make corrupt deals such as the bid-rigging conspiracies to source materials to meet the soaring demand. In this regard, Hyundai established ethical sourcing practices in response to current pressures on social responsibility. Through this, the Company launched production limits due to the differing domestic and export sales aggregate demand. These differences vary based on models, design, and internal and external factors such as pandemics and political climate. However, the local demand attracts many customers and is quite reliable compared to international markets. With the export demand, the production tends to be high and requires innumerable logistics due to the shipping process. A drastic rise in global demand disrupts ethical sourcing as manufacturers have tight production schedules to meet the shipping timelines. In this regard, the production and sales department (P/S C) derived an ethical and socially responsible procurement and supply chain to balance domestic and export demand during the planning process. Hyundai cultivated flexible production plans that do not overload the suppliers and the manufacturing facilities, which have since been adopted and replicated across many organizations such as Ford and Toyota. The centralization approach was a massive success in Hyundai Motors (Kim et al., 2004, 30).
The success of redesigning Hyundai motors shows the benefits associated with a centrally located supply chain. Hyundai Motors’ supply chain serves as a benchmark for peer organizations to steer the supply chain department in the right direction. Through a collaborative and inclusive framework, Hyundai Motors has reconfigured the supply chain upstream amongst all organizations. During this period, Hyundai Motors achieved better earnings before interest, taxes, depreciation and amortization (EBITDA) value than most of its peers in the region. The performance reflected the Company’s willingness and potential to establish an ethical and socially responsible, and sustainable supply chain (Hahn, Duplaga, and Hartley, 2000, p.42). Today in Hyundai Motors, the value-added network EDI systems have become mainstream, and many companies can access and adapt to ensure successful redesign of the supply chain. For instance, Ford, a regional and international automotive champion, has leveraged the centralization coordination approach to coordinate all its activities across boundaries.
However, the centralized group approach harbors significant challenges. The supply chain department experienced adverse structural, environmental, and behavioural problems. Initially, the coordinating production plan, authority and responsibility were not well defined as it was a new technique. The newly established coordinated supply chain did not have firm and rigid frameworks, philosophical precedents, and mechanisms to guide and steer the organizational activities in the right direction. Furthermore, the employees were expected to cooperate and encourage the transition phase with little knowledge and training in these areas. With time these challenges subsided as the organization became accustomed to the experiences and problems. Today Hyundai Motors boasts robust and rigid ethical policies and procedures.
In the initial phase of redesigning the supply chain management, Hyundai management did not have an effective communication model to oversee its running and operation. As part of its strategy, the centralization group approach provided the building blocks to interlink the various database to inform and communicate with the different functional groups. Using a practical, ethical sourcing plan, the Company reconciled data from the various functional groups to allow smooth and efficient communication. The system transmits it to all the team members in the supply chain at their different capacities to facilitate production plans. It also helps initiate preparing and developing a master production schedule that eradicates any recurring or emerging issues. These master development plans are meshed to produce production plans that match the sale and manufacturing functions.
This approach’s continuous use led to eradicating corrupt practices, improper use of production assets, and Quality assurance fraud existing in the supply chain. Consequently, the Company’s experienced a drastic rise in profits brought out unexpected drawbacks in production to meet the aggregate demand, a significant concern to the marketing and sales department as the production schedules had been altered to meet the aggregate demand. Similarly, in the wake of the 1990s, the demand for a Sonata skyrocketed reached unwavering high rates. During the initial phase, the domestic market was overwhelmed o to the point that the purchasing and delivery department scrubbed off the ethical sourcing practices, production schedules and extended the delivery timeline to 2months. Since then, this has become a recurrent debate in the sales department (Huang, 2011). This triggered the need to collaborate and integrate the different functional teams to establish ethical sourcing practices in response to current pressures on social responsibility in the parent manufacturing plant. The sales function had to define a strategy to restore balance in the customer orders and the organization’s potential and capacity to produce high-quality products to offset the heavy burden of the newly established defined production schedules on the manufacturing facilities.
The centralization group approach also experienced severe behavioural problems that affected the planning process. As in many organizations, the practicing managers are in charge of the supply chain upstream. Therefore they have the authority to take control and direct the functional teams as they deem fit. In this case, senior managers at Hyundai Motors disregarded the code of ethics governing the production plan agreed upon in the initial meeting by all the relevant parties. These changes caused frustration, confusion and caused a significant uproar from various lobbyists in the different functional teams. From a philosophical perspective, this violated the ethical code of conduct, biding the organization as an entity.
Furthermore, this demoralized the potential of different functional teams’ contributions. It showed a low level of consideration about the impact of many participants during the process. Although most of the cases were due to drastic changes in internal and external environmental conditions, supply chain makeover is a collaborative and inclusive process that requires all functional teams’ input and participation upstream and downstream. Therefore it is of paramount importance for the senior managers to communicate the factors causing drastic changes to the initial production plans on time. Similarly, managers at the departmental level made drastic changes without consulting the functional teams. However, their reasons for changing production plans made in the preliminary meeting differ from the senior managers. Most decisions were based on aligning the production plans to the perceived ethical standards (Hahn, 2000). Although they altered the changes, departmental managers emphasized setting up operation units and production plans to achieve the ethical souring practices agreed upon in the reconfiguration process’s initial stages. Most of the time, the differences in emphasis deviated from the preconceived ethical standards and affected operating-unit behavior. This was a classic example of the sub-optimization issue that showcased the need for the senior leaders to address the existing changes and problems experienced downstream. Traditionally, the procurement and supply chain department cannot change the operating plans’ or performance criteria.
To curb supply fraud in Hyundai Motors, there should be a complex and robust chain of anti-bribery provisions, import and export laws, health and safety regulations backed up by factual information and data such as periodical reports, sales forecast, resource allocation, availability capacity, material plans, etc. The department heads’ role was to collect data sets and derive laws and policies that oversee the supply chain’s smooth operation. However, Hyundai Motors department heads developed the manufacturing and production procedures to match their interests and role in the supply chain. On the other hand, some functional teams proposed the top management create the best suitable data sets. This caused a rift between participants, as the proposed data sets were revised to realign the senior managers’ goals and objectives. As a result, this led to the desired need for leads to abiding by their departmental positions. This meant that personality is the defining force instead of logic. Although it may seem like a minuscule decision, it radically affected the coordination and integration needed to link data sets to develop accurate manufacturing, production and sales policies.
As Hyundai Motors grew and ventured into new markets, it attracted numerous issues that ail the supply chain across many organizations, such as the Chaebols family’s ethical issue (Stanwick, and Stanwick). New models made it difficult to merge and integrate the activities as they do not have well-established foundations. As a result, coordinating different interests and preferences from the other inventories across the supply chain became a formidable and time-consuming task. The theory of centralization coordination is anchored on the principle that an organization’s supply must be integrated and should work together to balance the manufacturing, sales, and distribution function.
Ethical and socially responsible procurement based on the centralization coordination approach
Ethical and social responsibility is founded on the ability to drive and make a change in society. Anchored on three significant variables supporting organizational interests, embracing ethical procedures, and improving an organization’s welfare ensures collaborative and inclusive action in the supply chain. Modelled on the centralization coordination approach, Hyundai Motors’ supply chain comprises ethical and socially responsible features. Therefore, it is pertinent for organizations to employ honest and socially responsible practices that reflect the value-added techniques presented in the Ethical sourcing Intelligence. Drawing from the centralization group theory, it is paramount to align the sales, manufacturing, and distribution departments to avoid overlapping. Traditionally, this means coordinating and monitoring company inventories, custom order promises, production schedule, and expected supplier scheduled deliveries according to the aggregate domestic and foreign demand. The sales department focuses on providing a flexible production plan to meet the customers’ needs as soon as they arise. It is increasingly important to work on limited products to offer quality products that align with ethical standards. Hyundai Motors’ success is attributed to this goal. Hyundai Motors’ primary goal is to boost a complex and vibrant sales and distribution network that produces minimal inventory while maintaining competitive and aggressive delivery leads. Hyundai does not have any readymade cars in its sales office to achieve this goal but produces vehicles based on the order.
The centralization coordination ability to transverse downstream and upstream has facilitated a good relationship with foreign suppliers. Through this approach, Hyundai has ventured into numerous countries in Europe and Asia. This centralization approach has the potential and capacity to go beyond the organizational boundaries to maintain total quality management practices. Hyundai Motors has also leveraged on global sourcing of raw materials by integrating the supply chain activities. It has collaboratively built a vast network of international partnerships to maintain the supply chain during turbulent times.
Furthermore, the centralization coordination approach has established a balance between the sale and the aggregate demand in domestic and export sales; by coordinating activities during production planning across manufacturing facilities and the functional areas, Hyundai curb misconduct in the supply chain. To address this, the procurement and supply chain department has taken control of the manufacturing, sales, and distribution function to ensure the production of domestic sales within the production schedules allotted for one month, six months, or weekly production schedules. The Hyundai team established policies to curb the growing demand. Today the Company requires the purchasing procedure and the in-depth review of consolidated export requests supported by credit reports to initiate production. This mechanism has allowed the supply chain model to cater to domestic sales and international sales in equal measure while providing quality products. From this perspective, it is evident that the centralization group approach is a valuable technique that can redefine, reconfigure the supply chain, and procurement according to the Ethical intelligence Sourcing. Operating in an ethical and socially responsible procurement supply chain improves cost control, product quality, customer service, supplier/partner relationship management planning, and risk management by abiding by philosophy’s principles and precepts.
Conclusion
Although Hyundai’s choice to redesign its supply chain is built on the notion that its parent manufacturing plant/ facility is located at UI-san, Korea, the centralization theory can also work in a geographically diverse supply chain. It does not work best due to proximity to the geographical location of the supply chain members. The centralization approach is measured based on its ability to transform, reconfigure, and produce an ethical and socially responsible supply chain. The continuous coordination and collaborative relationship between sales, manufacturing, and purchasing functions create a supply chain that leverages total quality management, just-in-time production, and process reengineering.
Reference List
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