Consider this scenario: Your company discovers that a critical third-party supplier within your value chain has been implicated in human rights violations. How should your organisation respond? Should you sever ties with the business partner immediately to mitigate potential reputational damage, or engage further with the supplier to address and rectify the issues?

This ethical and strategic dilemma is increasingly common in our increasingly decentralised supply chains. The decision to maintain or end a business relationship with a third-party supplier is complex, with significant moral and economic implications. In this article, we will explore the intricate challenges of disengagement in supply chain management, examining when it is appropriate to disengage the supplier —and when a more measured, corrective approach is warranted to uphold ethical supply chain commitments and protect long-term business continuity.

The Cut-and-Run Conundrum: A Double-Edged Sword

Companies have often historically responded to severe labour incidents by quickly cutting ties with problematic suppliers.  This “cut-and-run” approach involves terminating a business relationship when a zero-tolerance human rights risk appears, especially if the violation has gained public scrutiny. .

On the surface, the “cut-and-run” approach appears to be a straightforward way to mitigate risk and protect a company’s reputation, especially in an attempt to restore trust with consumers, investors and regulators. By immediately distancing the company from problematic suppliers, executives make the assumption that they will be able to avoid the legal liabilities and potential public backlash from the findings. While a company may see benefits to a “cut and run” approach, the economic instability that accompanies a sudden loss of business for the supplier may potentially worsen the found violations, an outcome that directly contradicts the ethical sourcing goals that prompted the initial supplier disengagement.

While abruptly severing ties with a supplier may serve as a punitive measure for human rights violations, a sudden loss of revenue for the supplier can exacerbate  poor working conditions for those employed at the supplier facility, who may seek to stabilise their finances by reducing labour costs unethically. Alternatively, the ‘buyer vacuum’ created is often filled by replacement buyers who may be willing to turn a blind eye to the fiscal and labour abuses at the facility, in favour of purchasing lower cost items.

A More Ethical Alternative: Responsible Disengagement

Recognizing the limitations of the cut-and-run approach, there has been a growing movement toward what is known as “responsible disengagement.” This concept is emphasised in the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), which advocates for a more thoughtful and collaborative approach to managing supply chain risks.

In employing a responsible disengagement strategy, companies are encouraged to prioritise working with their suppliers to address and rectify severe labour issues before considering the termination of a relationship. This approach aligns with the OECD Guidelines, which stress the importance of engaging with business partners to improve conditions.

The core tenet of this model is that disengagement should be considered a last resort, not an immediate reaction. When negative audit findings, such as human rights violations, are discovered, companies should first attempt to ameliorate the violations through dialogue, support and enforceable expectations for corrective measures, with an ongoing collaborative approach between all parties. Only when it becomes clear that there is no reasonable prospect for good faith engagement should disengagement be considered.

In doing so, buyers are also encouraged to examine the ways in which their own operations impact their suppliers. For instance, in the apparel industry, brands are increasingly reconsidering their approach to their purchasing practices. The push for low prices from buyers can pressure suppliers into precarious financial standing that can lead to labour rights abuses in the facility. Instead of cutting ties abruptly, responsible disengagement requires companies to engage in meaningful dialogue with their suppliers, offer support for improvement, and carefully assess the potential consequences of ending the relationship.

Engaging Stakeholders: A Critical Component of Responsible Disengagement

A cornerstone of responsible disengagement is that companies must consider the perspectives and needs of all affected parties—especially workers and their dependent communities—before making any decision to disengage.

A sudden withdrawal from a business relationship, without consulting those who will be affected, can lead to new human rights violations. This was particularly evident during the COVID-19 pandemic when many buyers  abruptly cut ties with suppliers due to financial deficits, leading to widespread job losses and economic vulnerability in communities from which their suppliers source their labour force.
To mitigate these unintended consequences, responsible disengagement requires companies to engage in meaningful dialogue with their suppliers, worker representatives, and local community stakeholders. This collaborative approach allows for a thorough assessment of the potential impacts of disengagement and the identification of measures to support affected parties during the transition.

Walking Away: When and How to Disengage Responsibly

The decision to walk away from a business relationship requires a careful assessment of the potential impacts on all stakeholders and a commitment to mitigating any negative consequences wherever possible. While the cut-and-run approach may offer a quick solution to risk, it often fails to address the root causes of human rights violations and can lead to worsening circumstances.

In contrast, responsible disengagement offers a more balanced and ethical approach. It recognizes that companies not only have a duty to remediate existing labour abuses, but also to proactively work towards improving conditions in their supply chains. By engaging with suppliers, supporting corrective actions, and ensuring that disengagement is a last resort, companies can better fulfil their human rights due diligence obligations and contribute to a more resilient supply chains.

When disengagement is unavoidable, companies should prioritise a gradual, phased approach over an abrupt exit. This can help mitigate the negative impact on workers and communities, allowing for a more orderly transition and the implementation of support measures.
In choosing to disengage from a supplier, companies should also carefully evaluate alternative sourcing options and their own practices, to ensure that they are not simply shifting the problem to a different location or supplier.

Ultimately, the question of when to walk away is not just about risk management—it is about upholding the rights and dignity of everyone involved in the supply chain. By embracing responsible disengagement as a core principle of their supply chain management strategies, companies can demonstrate a steadfast commitment to ethical practices. This, in turn, can inspire broader industry-wide transformation, catalysing a shift towards more equitable and sustainable business models that prioritise the wellbeing of all stakeholders.

Author: Sophie Rahmel