Understanding Impact Business Models: Supply Chain Poverty Alleviation

Modified on Mon, 3 Mar at 9:22 AM

What is the intent of the Impact Business Model?

Ethical supply chains ensure that products are produced in fair and safe conditions and that workers are treated with dignity and respect. In contrast, unethical supply chains can often involve exploitative supplier relationships, poor working conditions, child labor, forced labor, and environmental damage. These harmful practices not only hurt workers and the environment but also perpetuate social inequalities. Ethical supply practices are critical for creating sustainable and responsible value chains and can serve as a powerful tool to enhance social mobility and reduce poverty.

The Supply Chain Poverty Alleviation Impact Business Model (IBM) aims to recognize companies that intentionally design their business models to reduce poverty by working with small, low-income suppliers through ethical purchasing practices. Companies may source directly from these suppliers or through third-party brokers. Specifically, the model spotlights companies impacting suppliers by providing beneficial trade terms, fair wages, and/or capacity-building services.

This IBM is found in the Community Impact Area of the B Impact Assessment (BIA).

What are some examples of companies that have this impact?

Examples of companies whose impact is captured in Supply Chain Poverty Alleviation:

A company that sells Fair Trade-certified products
A company that sources Fair Trade-certified input materials
A chocolate manufacturer with a 100% traceable bean-to-bar supply chain who pays a living wage to cocoa farmers for them to earn a sustainable living. The manufacturer also invests in capacity building to improve the social or environmental practices of the cocoa farmers.
A coffee retailer that purchases directly from low-income and small-scale suppliers in Belize and Guatemala provides beneficial trade terms, including premiums, and a few of these suppliers are also Fair Trade certified.

This is an illustrative, non-exhaustive list of types of impact that can be captured in this IBM.

How do I assess my company’s eligibility for this Impact Business Model?

For a company’s supply chain practices to be reflected in this IBM, the company must be working with suppliers that have the three characteristics below:

Low-income
Small-scale (less than 50 workers), and
Purchasing directly from these suppliers or indirectly through a third-party broker.

Please note that Fair Trade-certified suppliers, products, and/ or input materials would qualify for the Supply Chain Poverty Alleviation IBM without meeting requirements 1 and 2 listed above.

After confirming compliance with the requirements listed above, the next key element for eligibility is for the company to provide specific benefits to these suppliers, such as paying a living wage, providing capacity building and support to improve the social or environmental practices of the supplier.

If a company purchases both from qualifying suppliers directly and from brokers/third parties, then the company should select the answer option of the question “Purchasing from Low-Income and Small-Scale Suppliers” which applies to a majority of their spending with low-income and small-scale suppliers.

My company may be eligible for this IBM. How do I open this IBM in the B Impact Assessment?

If you are considering opting into this IBM, you will have to answer specific questions about the impact of your product/service that will determine which Impact Business Models you see in your BIA. These questions, called gating questions, ensure that you see the content that is most relevant to your company in your assessment.

To find the gating questions for the Supply Chain Poverty Alleviation IBM, navigate to the Community Impact Area and search for the questions titled, “Community Oriented Business Models” which must have the following answer option selected.

If answer option 2 applies, you must select "Yes" for the following "Supporting Low-Income and Small-Scale Suppliers" question (not pictured).

Any deviation from this will prevent the Supply Chain Poverty Alleviation IBM from becoming visible in your BIA.

My company may be eligible for this IBM. What supporting information do we need to provide?

These are some examples of evidence that your company can provide during the Verification stage to confirm the applicability of the Supply Chain Poverty Alleviation IBM. These examples are not exhaustive – depending on your company’s specific business model or context, your Verification analyst may require additional or different documentation.

Primary data confirming the low-income status of suppliers at the start of the relationship with the company.
Evidence demonstrating that the suppliers are small-scale (fewer than 50 workers).
Fair Trade certifications of products, input materials, or suppliers
Breakdown of expenses associated with Fair Trade-certified products, input material, or suppliers
- Breakdown of Cost of Materials (If Supply Chain Poverty Alleviation occurs in the procurement of physical raw materials, components, and/or finished products and packaging. It excludes manufacturing and transportation costs)
- Breakdown of Cost of Goods Sold (if Supply Chain Poverty Alleviation occurs in manufacturing and/ or transportation stages)

Concepts in the B Impact Assessment

Costs of materials - The total cost of materials includes spending on all physical raw materials, components and/or finished products and packaging, for products that the company sells. The transformation (e.g. manufacturing) and transportation costs are excluded. The total costs of materials must include supplier expenses for all products that the company sells.

COGS - The financial concept that captures the inclusion of transformation (e.g. manufacturing) and transportation costs is Cost of Goods Sold (COGS). COGS typically appear on the financial statements of your company. The below definition provides a suggestion of which costs may be included in the calculation:

COGS represents the direct costs attributable to the production of goods sold by a company. It includes various costs directly associated with the production or acquisition of the goods that a company sells during a specific period. These costs typically include:

Direct materials
Direct costs of production
Manufacturing overhead
Direct labor (COGS does not include salaries and other general and administrative expenses; however, certain types of labor costs can be included in COGS, provided that they can be directly associated with specific sales. For example, a company that uses contractors to generate revenues might pay those contractors a commission based on the price charged to the customer. In that scenario, the commission earned by the contractors might be included in the company’s COGS, since that labor cost is directly connected to the revenues being generated.)
Freight and shipping costs (but not the cost of shipping products to customers)
Source: Investopedia

Low income - Definitions for "low income" vary by geography, but those that are generally accepted in the BIA are based on generally accepted definitions (e.g. government definitions), rely on reputable socioeconomic data, and/or focus on small-scale geographic areas (i.e. a regional or local income threshold is more likely to be accepted than a national one). Companies should be prepared to explain the methodology, income thresholds, and data sources referenced.

IRIS Glossary Term: Low Income: Low-income people are individuals or households living above the poverty line but below the national median income.

IRIS Glossary Term: Poor: Using a consumption-based approach to measure poverty, the poor are defined as individuals or households living below a recognized poverty line. Poverty lines establish the minimum income or expenditure that would meet a household’s basic needs. Commonly recognized poverty lines include (1) the national poverty line set by the national government and (2) the international US $3.20 per person per day expenditure at 2011 Purchasing Power Parity (PPP).

IRIS Glossary Term: Very Poor: Using a consumption-based approach to measure poverty, the very poor are individuals or households living below a recognized extreme poverty line. Poverty lines establish the minimum income or expenditure that would meet a household’s basic needs. The $1.90 per person per day 2011 PPP line is the World Bank’s current definition of extreme poverty. Another commonly used measure of the very poor is individuals or households in the bottom 20% of the national population.

Small-scale suppliers - Suppliers that have less than 50 workers.

Premium - A premium is an additional sum of money paid on top of the product price/wage that low-income and small-scale suppliers suppliers can invest in projects they choose. (Fair Trade International)