The gear and apparel we sell comes from sources around the world. At REI we expect workers in the global supply chain to experience safe, fair, and non-discriminatory working conditions. Because relying solely on local laws and enforcement may not be enough to achieve this goal, REI introduced a factory Code of Conduct in 1993. The code establishes standards of workplace conduct for the factories that produce products we sell, both our own REI-brand products (REI and Novara) and the products of other brands.
In 2006, we began a partnership with the Outdoor Industry Association (OIA) to develop, publish and maintain the Fair Labor Toolkit. In 2009, we joined the Fair Factories Clearinghouse (FFC) to promote and participate in deeper collaboration across several industries.
REI-Brand Gear & Apparel
In 2009, REI's board of directors commissioned an external audit of the co-op's Fair Labor Compliance Program (FLCP). While not identifying any material deficiencies in the program, the audit firm recommended improvements in the reporting and governance of the compliance function. Specifically, the firm cited industry best practice and recommended more direct oversight and reporting to senior leadership and the board of directors. Additional audit recommendations were to allocate more resources (staff and budget) to factory oversight, increase industry collaboration, and improve supply chain visibility.
These independent recommendations informed our work in 2010 of reorganizing the FLCP. REI's senior leadership established a small group to review the audit recommendations and propose responsive action. The outcomes were several: first, the co-op created a management oversight committee called the Fair Labor Oversight Committee (FLOC). This group is chaired by an executive vice president and includes REI's general counsel and two vice presidents. The FLOC is accountable directly to the Audit & Finance Committee of the board and is responsible for objective oversight and assessment of the fair labor compliance program.
Second, the co-op recruited and hired an experienced manager to lead the FLCP. Moreover, to provide independence from the business unit, the manager's reporting relationship moved from the business (REI Gear & Apparel division) to REI's Legal department. The manager and her staff now have a direct reporting line to the board of directors both through the FLOC and the general counsel's office.
Third, the FLOC created and implemented a new policy and procedure for prompt escalation to the FLOC of egregious fair labor violations by factories. Although in REI's long history with contracted factories an egregious fair labor violation has never been reported, this new procedure and the FLOC's oversight assure swift, decisive action if one were to occur. The escalation policy requires factories to take corrective action, and, if acceptable action is not taken within a reasonable time frame, REI will immediately cease doing business with the factory. Throughout the process, the FLCP team collaborates with staff in the REI Gear & Apparel sourcing team and with the FLOC to ensure that a thoughtful decision is reached.
In 2010, REI scheduled five audits by third-party auditors of factories within China, Taiwan, and El Salvador that produce REI-brand products. While REI completed fewer direct audits than in previous years, the complete audit plan was augmented by shared audits conducted by other brands, as discussed below. This approach in 2010 of combining direct audits with shared audits was a strategic decision by the newly-formed FLOC to allow time and resources to focus on the hiring and on-boarding of new staff and implementation of the changes to the compliance program.
The results of our factory audits are largely in line with those reported in previous years. Similar levels and types of violations were detected and corrective action processes have been followed. As we have noted in our report in previous years, this traditional audit effort keeps us informed of factory activity and performance but does not promote transformational change in the supply chain.
In 2009, we reported that we intended to move toward deeper engagement with factories while simultaneously working with other brands to address systemic change in the supply chain. A major step along this road was REI joining the Fair Factories Clearinghouse (FFC). In 2010, our participation in FFC resulted in eight shared audits where REI accepted the results of factory visits by other brands. By sharing factory audit results we increased visibility into the factories while reducing the "audit fatigue" experienced by the factories.
Significant economic shifts in worldwide markets for commodities and materials and major changes in the Chinese labor market (now, widely publicized) have added a new set of challenges to factory labor compliance. Labor shortages in China have had both positive and negative influences on the situation. For example, increased competition for labor has caused factories to emphasize employee retention, which gives workers more power in negotiations over pay, benefits, and working conditions. On the other hand, factories are moving further into the interior of China, or in some cases to other countries, where labor oversight by both government officials and brands can be difficult. The full ramifications are not yet evident, but we are increasing our presence in factories as our first line of engagement.
A more visible presence leads to better collaboration, faster time to market, better quality control, and better insight into actual health, safety and labor relations issues. To further our direct engagement with factories, we are in the process of establishing REI's first full-time physical representation in China, through an office staffed by quality assurance specialists. This office, which should be fully operational by mid-year 2011, will play a vital role in our increased engagement with our contracted factories.
As we evolve and expand our FLCP, we will continue an emphasis on developing and maintaining effective working relationships with factories and other brands. We believe one outcome of this focus will be change in the supply chain that benefits factory workers, change that takes the shape of factories committing to and delivering continuous improvement in worker pay, work conditions, and life balance. We look forward to reporting our progress in 2011.
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