Too Much Profit?

This week in class we learned about supply chain management. The most important thing I learned about supply chain management is the strategic importance of it. The strategy companies employ is the integration of activities to procure resources and transforming them into goods. One company that clearly has a superior supply chain strategy is Apple. However, in an article from Bloomberg, “Apple’s Greatestness and Its Shame” raises important issues regarding Apple’s supply chain strategy.

Last Tuesday, Apple reported 4th quarter revenues of $46 Billion and profit of $13 Billion. A week prior to the earnings release, Apple released their report disclosing their audit of suppliers. The results from that report identify issues in their supply chain. One important question the Bloomberg article raised is whether management should increase shareholder value at all costs. Should Apple reduce profits to improve working conditions in their supplier’s factories? Remember, suppliers are separate companies.

I think that this is an ethical dilemma that some companies can only dream about having to make. I know this sounds odd, but think about it. Apple has doubled in value in about three years. Most companies can’t have that kind of growth in a decade. It is a dream for companies to have to question if they are paying their suppliers too little. A company is in business to provide goods and services to consumers. Management’s role is to increase shareholder value.

Just to play devil’s advocate, I ask, if a company makes any profit should it reduce profits and voluntarily pay suppliers more? If a business reduces profits by allowing suppliers to increase their costs, (i.e. higher wages, more workers, additional safety equipment, added employee benefits), would a company continue to do business with them?

When would an altruistic approach to selecting supplier contracts go too far? Should a company ensure that all employees of a supplier are paid minimum wage commensurate with the foreign nation? Should a company pay for the supplier’s employee vacation and retirement plans?

I think these questions should be considered when a company weighs the risk of their supply chain. These questions are likely to fall under political and currency risks. In my opinion, a company should consider the working conditions and employee wages when choosing a supplier. I think this should be applied universally regardless of the profitability of the company. Lastly, I think companies should select suppliers that operate efficiently. The more efficient a supplier is they will be able to reduce manufacturing costs and the more cash they will have to ensure the employees are taken care of.

5 thoughts on “Too Much Profit?

  1. I don’t think that a company should voluntarily pay its suppliers more. The only exception is if that supplier is key and they treat their workers very well. A company should also make sure their workers are paid minimum wage. On the other hand,realistically, a company would not continue to do business with someone if the costs were to rise. These are things that a company has to consider when conducting operations management.

  2. This is an interesting and very real conundrum. We are commerce students who are heading into the business sector, and mostly likely, our goal will to make shareholders money. At the same time, we are living in a time where society has been more empathetic towards the less fortunate than ever. Sometimes I feel the paradox that this creates in my head.

    It is safe to say that over the last decades, ethics has become a huge element of business strategies. We recall the scandal Nike faced in the 1990s because they were making obscene amounts of profit, but their merchandise was being made at the expense of sweat shop laborers in Asia. People were arguing then that they were making so much money that they should pay their suppliers more so workers could make decent wages. Nike’s response was the implementation of some factory improvement requirements and safety audits. However, it has often been thought that they still haven’t done enough and continue to contract with suppliers who are using questionable and unethical practices.

    I’m not going to say that companies shouldn’t make so much money, but I will argue that we have a responsibility as world business leaders to make sure we aren’t exploiting other humans. It turns out that companies with profits that are out of this world are the ones that are in the best position to ensure exploitation doesn’t happen.

  3. Your post is very interesting and controversial in the same time. Companies focus on making high profits and usually one of the biggest elements or factors to achieve that is the chain of suppliers they deal with. The less costly they are the more money companies can make.

    What would be controversial is that companies would argue that paying more to suppliers would mean that they will not make as much of profit and that would not be in the shareholder’s best interest by definition. On the other hand, suppliers know for a fact that they need to keep what they provide at the lowest possible to stay in business. Such criterion in nine times out of ten will come at the expense of labor in the form of low safety working environments, minimum wages and overloaded working hours.

    Nowadays, we see huge improvements in terms of regulations throughout the world but not so much on the level of implementation. Such rules would include blacklisting companies working with suppliers with questionable practices, forcing companies to allocate a percentage of their profits to the society and other stuff of this sort. Yet though, companies know these laws very well and they are creative in every imaginable way in going around the rules to make profits at the expense of all other things at the end of the day.

  4. Why would any company pay its suppliers more money while in fact they don’t have to do so? I think Apple strategy is noteworthy as it keeps the payments to its suppliers to the minimum and maximizing the profits. Of course, some people will not be in support of this strategy by Apple, but conversely it will keep the stakeholders happy. Besides, Apple got enough problems and concerns to deal with instead of paying attention and giving efforts to its supplier’s internal issues. At the end, the goal of any company is to maximize profit and reduce cost.

  5. A company like Apple can afford to pay their suppliers more but it isn’t necessary for them to do so because I feel like any company will be willing to manufacture their products. Apple products are really popular and the production number is very large. These suppliers are profiting from supplying the products to Apple. From the shareholders’ point of view, they would never agree to decrease profits because they only invested in the company to earn money. They won’t be willing to give up their profits even though Apple management is willing to. Of course, as mentioned by the previous commentator, companies operate to maximize profits while reducing their costs.

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