Sustainable Procurement – Is ‘Right-to-Work’ the Preferred Sustainable Sourcing Criterion?

By the very nature of the word "sustainable" we can hear that it refers to the longer term – to what can be continued over time. Many companies want to support this approach (or at least be seen as doing so), but what can tangibly be done? I'll go out on a limb here and suggest that whether a company or a supplier is in a right-to-work state or not (i.e. not unionized, or unionized) can make a big difference in local economic conditions over the longer haul.

Demonstrating or committing to a positive local business impact is often important in closing deals, and I see how "right-to-work" will help here as well over the longer term. There is also the question of income inequality, which is another issue popular at the moment – if not always – and I'll address that in a later article.

FREE Research: Quantifying and Tracking Hard Cost Savings

Regarding the detrimental long-term effects on overall employment because of unionization, let's assume that we can all agree that the worst possible income inequality as well as local impact outcome is to have no job, i.e. income. With the inherent monopoly power given to unions, it is clear they extract far more than the labor component otherwise is worth. This leads to unsustainable balance sheets – more so with irresponsibly generous pension plan and health benefit commitments rather than mere hourly wages, especially painfully obvious among public sector labor unions (witness the recent downgrade of Chicago, which now along with Detroit has the worst credit ratings in the nation among larger cities).

This, in turn, inevitably leads to either the outsourcing of the labor component to avoid the extortion (reference the practically "dead man walking" northern auto sector and the ongoing auto growth in southern right-to-work states) or the bankruptcy proceedings necessary to get much needed "haircuts" done (reference Detroit).

At the end of the exercise, the locals now have no jobs, and live in cities with crumbling infrastructure and dreadful balance sheets. Now, there's inequality to worry about. The only public policy "benefit" from unions appears to be the collective being able to (short-term) extract more from the shareholders' earnings than they would have in the aggregate if negotiating as individuals. This "benefit" clearly comes at an extremely high cost (as illustrated in examples above) and could be attained through the political process via capital gains or other taxation (although these taxes are already high enough to dissuade business activities in the US, which further reduce employment opportunities) instead.

Another example from the private sector is the recent massive supply chain disruption caused by the labor negotiations on the West Coast, which lead to de facto port shutdowns and 3 to 4 months of unpredictable, delayed or outright blocked deliveries. This issue will likely largely go away once the Panama Canal overhaul is completed and ships no longer will dock on the West Coast unless they absolutely have to, which shows, just like the auto industry, that companies invest away from union trouble spots. We predict huge workforce losses in the California port industry once Panama is finished. It will, however, be a boon to ports on the East Coast.

Back to the automotive sector, the relatively unique multi-tier nature of the supply chains of the automotive firms is partially caused by a need to specialize ­– reference the early need for vertical integration by Ford from rubber plantations to final assembly; something which Tesla is currently involved in because of the lack of specialized (and willing – it's a risky endeavor) suppliers for many of its components – but also because of a need to contain total costs, which led to outsourcing activities to the most cost-effective suppliers, which are non-union. Once the outsourcing started, the natural next step was to take a global view, and that's when the jobs went overseas. It is a vicious cycle and one that is accelerated by unionization levels. It's not that we can't make things in the US, it's just that we can't sustainably make them while saddled with onerous union rules and high cost levels. Witness where BMW, Honda, Hyundai, Mercedes-Benz, Nissan, Toyota, Volvo and VW have plants in the US – many are in the South.

This is clearly an issue that is fraught with politics, and I have tried to make the case that the longer-term, sustainable, business path is the one without union involvement.

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First Voice

  1. Dan:

    Interesting argument. What do you think of the German automotive industry that has managed to have both successful and profitable companies and a strong union presence?

    Also, hypothetically speaking, do you think the current era of (overly?) large executive compensation compared with salary levels in the rest of the organisation is because of weak unionisation?

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