Recognize the Risk in Your Supply Chain
Tsunamis in Japan and Thailand shuttered factories and hurt profits in automotive and electronics companies half way around the world; protesters dressed as Ken and Barbie stalked Mattel’s headquarters, saying the company’s toy packaging was promoting the destruction of rainforests; accusations flew online that Apple was funding rape in Eastern Congo by sourcing components containing minerals from mines controlled by warlords. These are just a few examples of how unsustainable supply chain practices can create unacceptable risks for companies.
Increasingly, companies are focusing on sustainability in their supply chains to manage risk. Corporate sustainability is the idea of operating a firm in a way that allows the firm to create value for its stakeholders over the long term, without sacrificing the interests of future stakeholders in the pursuit of near-term gain. Companies that maintain positive relations with their workers and with communities in which they operate; that do not depend on the use of non-renewable resources; that minimize their environmental impacts; that cultivate the ability to innovate in order to successfully navigate a constantly changing marketplace; and that do so while generating attractive financial returns – these companies are sustainable. Firms that don’t do all these things face risks that threaten their long-term viability.
In a recent survey of supply chain experts by professional services firm PwC, the connection between supply chain sustainability and risk management is clear. According to the survey, experts see four main reasons for investing in sustainable supply chain management:
- To manage the risk of unintended environmental or social damage.
- To manage their company’s reputation and the expectations of its shareholders.
- To reduce costs and realize productivity improvements.
- To create sustainable products, thereby increasing revenues and enhancing the corporate brand.
Business Case Tough but Real
Companies increasingly see the risk and reputational implications of supply chain sustainability, but many have yet to make a case for supply chain sustainability on cost-savings or revenue-enhancement grounds. After all, supplier efficiency improvements and cost savings don’t automatically benefit customers. Nonetheless, some leading firms have been successful at demonstrating that by helping suppliers to reduce costs, such as energy expenses, some share of the savings will flow to them as well. For instance, making the supply chain more sustainable has been “an easy sell” at Procter & Gamble, according to Huw Waters, product supply director at the P&G. “It takes cost out of our supply chain and the retailer’s supply chain. Why would you not want to do this?”
Even if companies are not always able to see a route to hard financial benefits by improving supply chain sustainability, the benefits in risk management are becoming clear, and most believe it is possible to improve sustainability without compromising their business goals. Last year Green Research surveyed 30 senior sustainability executives at large companies globally. Two-thirds said their companies can have moderate to high influence over their suppliers’ environmental sustainability performance. The vast majority felt their companies could obtain significant performance improvements without compromising the company’s business goals.
Despite this, so far companies have made limited progress in improving the sustainability of their supply chains. The latest report from the Carbon Disclosure Project supply chain initiative, for instance, shows that companies were around twice as likely as their suppliers to have a carbon emissions reduction target or to have invested in reducing carbon emissions.
What are the obstacles to improving sustainability in the supply chain? There several. A few of the main ones:
- Supply chains can be complex. Supply chains in some industries can run 12 levels deep and feature a diverse range of suppliers. They may include thousands of suppliers across dozens of countries and numerous industries. Some suppliers are large companies and others are small; some may have sophisticated management systems while others have the most basic information systems.
- Supplier engagement is more art than science. Companies may have little knowledge of their suppliers’ ability to respond to sustainability information requests with accurate information, or their capacity to improve. Requests to suppliers for sustainability information are often met with bafflement or ignored. Companies are still experimenting with ways of motivating suppliers to improve their sustainability performance.
- Data challenges abound. It is difficult to obtain timely, accurate data about suppliers’ sustainability performance. In many industries, standard means of calculating the environmental impacts associated with the production of materials and goods are just now being developed. Standard formats for exchanging sustainability information with supply chain partners only now emerging. And at some companies it can be maddeningly difficult even to compile an accurate supplier contact list for the purpose of requesting supplier sustainability performance information. Some companies, particularly in developing countries, even lack adequate means of measuring the energy used in their facilities.
Got to Have Good Data
Establishing effective systems for measuring and sharing sustainability performance across the supply chain is a prerequisite for improving supply chain sustainability performance and mitigating supply chain risk. But many companies only have a partial picture of their supply chain’s performance. Most of the companies we surveyed that request sustainability information from their suppliers have seen response rates of less than 60 percent. There are many reasons for this. Suppliers may ignore such information requests, fail to understand them or lack the information or the staff time necessary to respond. Most companies have not imposed mandatory sustainability reporting requirements on their suppliers. But this is starting to change. Levi Strauss & Co., for instance, recently announced it is going to require its suppliers in China and Mexico to report their discharges of hazardous chemicals.
Even when companies do receive responses to their requests for sustainability information, the results can be hard to work with. The most common way companies receive this information is in documents, spreadsheets or proposals, meaning that the data cannot be automatically analyzed. Just a third of the companies we surveyed that are receiving this information from suppliers get it through an IT system of some sort. The relatively low adoption of automated systems for tracking, reporting and sharing sustainability information across the supply chain has motivated vendors to introduce a variety of solutions to ease the burden.
Standards Are Emerging
To address the supply chain sustainability data challenge, corporations are joining together through industry groups, non-profits and cross-industry consortia to pool resources, coordinate efforts and develop standards and processes to drive supply chain sustainability improvements across entire industry segments. To reduce their own costs and risks, companies should make understanding, engaging with and supporting relevant industry and NGO efforts to drive supply chain sustainability a key part of their own supply chain sustainability strategies. Table 1 lists a few of the organizations that are working to develop and promote industry standards for defining sustainability performance and managing sustainability information.
Companies are expanding their efforts to gather sustainability data about their supply chains. According to our survey, more than 80 percent say they will increase the amount of information they request from suppliers; over 60 percent say they will ask more suppliers for this information. This is both a sign of and a driver of the development of sustainability data standards. The nature of information requests will continue to evolve as data standards and measurement practices evolve. Indeed, more than 40 percent of respondents say they expect to ask for different information from their suppliers or request it via a different means in the coming year. Over time, standardization will reduce the burden of collecting and sharing sustainability information and increase its accuracy and utility. But that burden may get worse before it gets better, especially for some beleaguered suppliers.
A growing number of companies will put supply chain sustainability data to work over the next year. While nearly half of the respondents to our survey say sustainability data already influences their purchase decisions, two thirds of companies expect it to within 12 months. Walmart, for instance, announced that it is adding specific sustainability objectives to its global sourcing merchants’ annual performance evaluations. All in all, we see a broad-based trend of companies expanding the uses to which they put supply chain sustainability information. Data generally passes through a familiar lifecycle in the corporate setting. First, it is needed but doesn’t exist. Then it exists but isn’t analyzed. Then it’s analyzed but isn’t acted on. Finally, the analysis is put to use. We see this pattern in supply chain sustainability data as well.
Start by Setting Goals
Our research has identified a number of practices that leading companies are following to help them improve the sustainability of their supply chains. To manage sustainability risks in your supply chain, consider how your firm can adopt these practices.
To get results, good managers set goals. So it is with companies seeking improvements in the sustainability of their supply chains. It remains rare for companies to announce public, quantitative supply chain sustainability goals. But some companies are starting to step up to the challenge.
- Nike has set supply chain goals for the reduction of greenhouse gas emissions, water use, waste and discharge of hazardous chemicals, among others.
- Puma has a goal to reduce CO2 emissions in the factories that supply it directly.
- Deutsche Telekom says it will set mandatory target agreements with strategic suppliers to reduce greenhouse gas emissions once defines how it will calculate CO2 emissions in its supply chain.
- Johnson & Johnson has a kind of meta-goal that by 2015, all strategic suppliers have two or more publicly-reported sustainability goals.
Even if they do not set public goals, companies should set internal supply chain sustainability goals. Companies such as AllianceBoots, a pharmacy, health and beauty retailer; and Procter & Gamble encourage buyers to set supplier sustainability goals. Often goals are “soft” – a requirement to show sustainability progress over time, without a precise target, and “pragmatic” – in recognition of the constraints that certain companies in certain geographies may face.
Leading companies share knowledge about sustainability best practices with their suppliers. AllianceBoots runs what it calls “beacon days,” semi-annual meetings for about 50 suppliers at time where the company describes its sustainability initiatives and facilitates discussions about what may help its suppliers improve. Kohl's Department Stores, one of the 50 largest U.S. retailers, has been running webinars for its suppliers to teach them how they might be able to improve energy efficiency. Walmart has provided energy efficiency training to factory managers. In addition, the company has hosted roundtables for representatives of suppliers or factories to share best practices and discuss how to execute an energy efficiency programs. Johnson & Johnson has published a “Supplier Sustainability Toolkit,” a primer for suppliers new to the topic. Procter & Gamble has provided technical support to some suppliers to help with efficiency projects.
Leverage Industry Standards
To combat supplier survey fatigue and to help raise the quality of sustainability data collected, companies should utilize industry standards wherever possible to frame their requests for supplier sustainability data. So far, more than 50 companies have used the CDP Supply Chain process to obtain greenhouse gas emissions information from more than 2,400 suppliers. Some companies request sustainability information through questionnaires developed by industry groups such as the Electronics Industry Citizenship Coalition (EICC) or the Sustainable Apparel Coalition. Lacking established industry standards, others have developed their own questionnaires in collaboration with important stakeholders including strategic suppliers. Walmart and Procter & Gamble are in this camp. As always, companies should avoid reinventing the wheel.
Use Modeling to Identify Hot Spots
If it is impractical to quantify supply chain environmental impacts by directly querying suppliers, modeling those impacts with the use of an econometric input-output modeling scheme can be a useful alternative. In 2010, pharmaceutical maker GSK leveraged its in-house life cycle assessment expertise, the Ecoinvent life cycle inventory database and a snapshot of its own global annual procurement spending from the prior year to estimate the carbon emissions throughout its supply chain and to identify hotspots that had the largest contribution to emissions. Wireless telecommunications carrier Sprint Nextel worked with Trucost, a sustainability data analytics firm, to model Sprint’s total supply-chain carbon emissions and identify hot spots – suppliers or products that account for a large share of emissions. Webcor, one of the 100 largest construction firms in the U.S., used supplier sustainability data modeling to cut 7 million pounds of CO2e from a single construction project, it says. For the analysis it used tools from Climate Earth, a vendor of environmental business intelligence systems.
For years corporate buyers have used vendor scorecards to rate and rank suppliers based on criteria such as price, quality, performance and delivery time. Companies are increasingly adopting the scorecard method to incorporate a sustainability dimension to their purchasing decisions. Nike makes broad use of indexes based on scorecards to help designers choose materials with appropriate environmental performance (Nike Materials Sustainability Index); to rank products (Footwear, Apparel and Equipment indices); and to help assess manufacturers (Nike Manufacturing Index). Kohl's, Procter & Gamble, Target and Walmart all use vendor sustainability scorecards as well. Indeed, Walmart recently pledged that it will buy 70 percent of the goods it sells in U.S. stores only from suppliers that use its Sustainability Index to evaluate and share the sustainability of their products.
P&G has published its scorecard and invited companies to adopt or adapt it for their own purposes. Scorecards are not just a ranking tool; they are very effective as a communications and learning tool. Leading companies share scorecard data with their suppliers, to let them know how they compare with peers and to motivate improvement by laggards.
Use Appropriate IT tools
Given the dozens of metrics that some companies track, and the hundreds or thousands of suppliers they work with, leading companies look for IT tools that can simplify the work of managing supplier sustainability information and help with analysis and action. AllianceBoots uses a home-grown system that is integrated with its Cognos business intelligence platform to acquire, store, analyze and report on supplier information. Deutsche Telekom uses E-TASC, a web-based tool launched by two industry bodies (EICC and GeSI) to streamline the management of supplier information in the IT and telecommunications industries. Kohl's recently deployed a supply chain sustainability management tool from CSRware to help it create, distribute, track, analyze and report on supplier sustainability questionnaires. Target, a top-ten U.S. retailer uses a “Business Partner Management Tool” developed in house that maintains information on all vendors and manages sending out and tracking questionnaires.
Recognize, Reward, and Possibly Penalize
Companies are experimenting with a variety of methods to motivate supplier sustainability progress. Deutsche Telekom recognizes top-performing suppliers with awards. Walmart is developing buyer incentives to reward members of its merchandizing team who deliver improved environmental performance in their category. AllianceBoots and Target adopt a “coaching” stance with suppliers: buyers or sourcing managers work one-on-one with suppliers and make it a point to recognize progress, inquire about obstacles, and encourage improvement. Target says this method has worked well on non-environmental issues and expects it to perform well now that sustainability is a dimension of supplier performance the company is tracking.
Calculate Costs of Supply Chain Impacts
Puma did path-breaking work when it enlisted the help of PwC and Trucost to develop a methodology for calculating a monetary value for the environmental impacts of its business, including its supply chain. Beyond the substantial amount of goodwill and positive public relations this exercise generated, it helped advance thinking inside Puma, its parent company PPR, and across industry about the risks and opportunities associated with the company’s environmental impacts. Another way of exploring environmental issues through a financial lens is use of ecosystem valuation methods such as the Corporate Ecosystem Valuation methodology developed by the WBCSD, a sustainability focused group led by its member firms’ CEOs and partners. Companies with potentially large exposures to environmental risks and opportunities should consider investing in this kind of analysis.
Build Industry Knowledge and Capacity
Improving sustainability in the supply chain requires a collaborative approach. Recognizing this, leading companies co-invest in developing knowledge, tools and practices that have broad benefits. Just a few examples:
- Deutsche Telekom supports supply chain sustainability research at EBS Business School in Germany. Dozens of companies support the Sustainable Apparel Coalition.
- Nike developed a water management tool called H2O*Insight to support its own water program and then worked with a third party to make it available to other companies as well.
- Puma, Nike and others support an initiative called Roadmap to Zero that is working lead the apparel and footwear industry to eliminate the discharge of hazardous chemicals for all products across all pathways in the supply chains by 2020.
- Walmart, Nike and Target support the Clean by Design program of the Natural Resources Defense Council, which is helping to improve efficiencies in the textile supply chain.
Follow the Golden Rule
A company cannot hold its suppliers to standards it does not itself uphold. This dawned on us while reviewing the responses to our executive survey. We asked about the biggest challenges companies faced in encouraging their suppliers to improve their sustainability performance. One respondent wrote, “We do not publicly talk about our sustainability performance so it is difficult to ask someone to do something when you do not do it yourself.” Indeed. With that in mind, we offer the following suggestions to companies:Make your own public sustainability commitments before asking your suppliers to do so.
- Be transparent about your own sustainability data before you request this data from suppliers.
- Obtaining and supplying information has costs. Don’t ask for it if you don’t have a plan for using it.
Supply chain sustainability is very clearly a source of risk and opportunity for firms. Increasingly, customers and investors will reward companies whose supply chains perform well on sustainability dimensions will punish those that do not. All organizations with aspirations for long-term success must focus on understanding and improving the sustainability of their supply chains. The practices listed above can help.