Supply Chains: Green and Sustainable, Part 2

Stephen DeAngelis

February 8, 2011

In yesterday’s post, I noted that more and more companies are reaching the conclusion that sustainability equals profitability. Although they gain the public relations benefits associated with being a responsible corporate citizen, the motivation for green initiatives is increasingly a better bottom line. As one analyst put it, “Companies don’t compete — only supply chains do.” Reducing waste and costs along every point in the supply chain contributes to better profitability. In yesterday’s post, I noted that I would be looking at what several analysts are saying about sustainable supply chains including risks and opportunities associated with them. I’d like to begin with a post written by Kimberly Knickle, an IDC consultant, who relates the ten things she hears most often from manufacturers when discussing sustainability [“Top 10 Sustainability Comments From Manufacturers,” IDC Manufacturing Insights, 14 December 2010]. She begins with a point made by Paul Teague in the previous post — unless sustainability results in profitability it probably won’t be pursued. Knickle writes:

1 – We have to build a business case for sustainability. This sounds obvious to me, but it’s true –- manufacturers are still talking about the need for a business case. I think the reason this comment keeps coming up is that many people believe we should be more environmentally sustainable for the good of our grandchildren. You can replace grandchildren with any number of words, but the basic problem is that not everyone agrees with an emotional (or moral or ethical) argument. I find that within organizations and out to stakeholders there’s a tremendous amount of inconsistency in how these groups perceive the need for sustainability. A business case helps overcome reluctance and enables the company to justify resource investments – time and money – in sustainability. Ultimately, sustainability is about change, and people need convincing that change is worth doing.”

In the previous post, a number of analysts concluded that sustainability is becoming a business imperative — that is, a good business case can be made to pursue sustainability initiatives. The second comment that Knickle hears most deals with public perception. She writes:

2 – More and more customers are asking me about my sustainability programs and my footprint. I’ve written quite a bit about some of the more visible ‘sustainability requests’, including those from Walmart and P&G, but behind every one of those publicly available supplier surveys is a multitude of not-so-visible requests in the form of RFPs and RFIs.”

With the rise of social media, activist-minded consumers have a ready outlet for their rants and raves. More and more companies are learning that ignoring remarks and concerns found on social media outlets like Facebook and Twitter can come at a high cost. Knickle’s third most heard comment deals with corporate data. She writes:

3 – I need a corporate view of my sustainability data. Centralizing sustainability data or at minimum rolling up the data (including regulatory data) is an important step toward calculating a corporate footprint and exposing that information internally and externally in the form of annual reports, Carbon Disclosure Reports, RFPs, and more. Of course, once the data is available, manufacturers also are trying to use it to track progress and decide where (which types of projects or in which facilities) to invest more resources. The companies that are having the greatest challenge with this task are those that have many different kinds of products and businesses.”

Collecting sustainability data sounds a lot easier than it actually turns out to be. To learn more about the challenges of determining a company’s carbon footprint, for example, read my post entitled Counting Carbon. Since it is so difficult (and costly) to count carbon, it’s not surprising that the next two comments most often heard by Knickle concern this topic. She writes:

4 – I have to find an easier (i.e., cheaper and faster) way to demonstrate my environmental footprint. We can talk all we want about wanting the data, but the reality is that this is a resource-constrained task, and any way to make it more efficient is critical, especially as expectations escalate in terms of the frequency and scope of sustainability-related analysis.

5 – The process of collecting sustainability data is not very automated or integrated. Manufacturers don’t necessarily perceive lack of automation or integration as a bad thing, at least not yet. I think this is an attitude that will change over time, especially as the frequency of collecting sustainability data (and analysis) increases. To support a much needed pace of tactical and strategic decision making related to sustainability, to achieve any level of scaleability, and to maintain higher degrees of accuracy, the goal is automation at minimum and integration at best. At some point, the frequency of external requests and a desire for greater responsiveness and faster decision making will force manufacturers to change position.”

Without standards relating to the collection and analysis of sustainability data, this entire topic will remain a matter of concern and debate. I do agree with Knickle that better ways to automate and integrate data collection will make a difference in the future. Knickle continues:

6 – I don’t have a sustainability budget. I consider this to be good and bad. On the good side, I interpret this to mean that sustainability projects can’t be done without gathering support from those that hold the budget(s). To become an integral component of the business, sustainability requires buy-in from internal stakeholders; sustainability can’t be imposed upon an organization. Convincing those budget-holders that sustainability makes sense is part of the transition. On the bad side, it means that sustainability initiatives have to compete with short term projects even though it’s also about long-term viability. I’m afraid this isn’t an issue that is going to fade away.”

On the whole, I agree with Knickle that not having a separate sustainability budget is probably a good thing. After all, most analysts believe that you have to make a business case for sustainability and a separate sustainability budget looks more like overhead than profit. Sustainability works best when it is part of normal business practices. Knickle continues:

7 – I’m not sure that sustainability is helping me attract a better pool of new candidates, but my sustainability progress has a positive impact on my existing employees. This comment could be a reflection of the current job market as hiring remains at relatively low levels, and newer generations of workers that prioritize sustainability are still searching for their first ‘real’ job.”

I suspect that sustainability experts will be used more for oversight and consultation than to fill slots in large corporate divisions. Will new technology and techniques permit these experts to contribute to a company’s bottom line in the future? I’d bet on it. Knickle continues:

“8 – I need to customize my approach to sustainability to my industry, to my products, and to my processes. I was speaking to a representative from an IT vendor about this comment, and his first response was that this is just a delay tactic, with manufacturers using this an excuse for not moving ahead at all or not moving quickly, because they couldn’t buy a customized approach (though many IT firms I speak to are happy to help manufacturers with that customization). But I also think that manufacturing is complex, and it will be difficult for many to do certain types of sustainability analytics without some customization. I think this topic is worth exploring more, and I’ll follow up with more research in the coming year.”

It doesn’t surprise me that companies would use customization as an excuse; but, I also believe there is more than a little truth about the need to customize. Every industry has its idiosyncrasies. Every manufacturing process has unique paths for trying to deal with waste products. I agree with Knickle that it’s a topic that deserves more study. She continues:

9 – My sustainability initiatives are strengthening my relationships with my suppliers. I have a few reactions to this statement, with the first being ‘do the suppliers agree?’ And in some cases, the answer is probably yes. I think manufacturers are taking a closer look at their suppliers because of sustainability, and for suppliers, this means another opportunity to make it more difficult to switch suppliers. While I’d like to believe this is about sustainability, I think it may be more often about regulatory compliance.”

This is an interesting topic. I agree with Knickle that regulatory compliance plays a role in the need for monitoring supplier relations, but anytime that stakeholders share information (coerced or not) the supply chain generally benefits. This sharing of information can strengthen relationships as trust grows. Knickle’s final most-often-heard comment returns to the PR aspect of sustainability. She writes:

10 – Sustainability relates to my brand and reputation in the marketplace. I struggled with the right wording for this last statement. For sustainability leaders, I think this is absolutely true. But for many companies, I think they are trying to convince themselves when they say it, and they aren’t quite sure. Plus there are nuances that I haven’t flushed out. Do they mean internal or external reputation? How do they know? Are they measuring and incorporating some measurement into how they evaluate projects? I know it’s difficult to calculate the impact on brand and reputation, but I’d like to remind you that in our data analysis, we have seen stronger financial results for those manufacturers that are in the Dow Jones Sustainability Index. … I also think the connection to brand and reputation is closely linked to higher expectations for the data (and information and analysis) behind sustainability initiatives. Manufacturers want to know where their data is coming from, that it’s accurate, reliable, and credible, especially when it’s going to be exposed in a sustainability report. I think that desire for credibility is going to be a big factor in why manufacturers increasingly look to third-party sustainability audits and create some sort of verification process, perhaps an IT-based audit trail, to make sure sustainability enhances their brand and reputation.”

Frankly, consumers have demonstrated time and again that their pocketbooks trump their idealism. Given two products that perform their intended function with the same effectiveness, most consumers will buy the cheaper of the two products. If sustainability efforts can contribute to lowering manufacturing costs, they have a much better chance of being implemented and sustained by a corporation. That said, let’s look at what other analysts are saying about the opportunities and risks associated with sustainability.

Infosys employees Ranjan Gupta, Pankaj Kalia and Ashish Shirvastava, write, “Environmental concerns such as global warming, toxic substance usage and decreasing non-renewable resources have increasingly become one of the key focal points of major debates and lobbying in the global political, social and business world in recent times. During the past few years, a consensus has emerged that environmental issues induced by industrial development should be addressed throughout the supply chain to ensure an effective and a collaborative approach is taken to tackle these issues.” [“Challenges and Opportunities for Greener Supply Chain Management in High-Tech,” SupplyChainBrain, 8 December 2010]. They continue:

“We have identified a few key areas where adoption of greener practices and greener solutions are being/should be embraced by firms in attaining goals of meeting regulatory compliance and sustainability. IT solutions can provide the required foundation to support the business processes and provide tools to measure, contain, mitigate and solve environmental problems which is critical to a sustainable future. The key IT focus areas in GSCM [Green Supply Chain Management] that enable a transition to a green organization are:

“• Product Life Cycle Management
“• Supply Chain Network and Logistics Optimization
“• Process Optimization
“• Green Reporting”

Gupta et al. then discuss each of the four areas identified above. For example, about product life cycle management they write: “Effective lifecycle management is a key short-term as well as long-term differentiator to get an edge over the competition.” Hence, they see it as an opportunity and, by the way, they are more than happy to sell you Infosys’ offerings in each of these areas. They conclude:

“Green practices and a green supply chain have now almost become a necessity due to both regulatory obligations and inherent economic benefits. Increasingly the companies are giving a greener shade to their brands to promote loyalty of customers, who are getting more aware about the socio-ecological implications of businesses. Economic activity has an impact on, and responsibility towards, the environment and the society; and industries need to factor this into their business operations and costs. … Key impact areas in the supply chain like PLM, Transportation and Logistics, Manufacturing, Procurement and Reporting can be effectively supported by various IT products available today in an organization’s endeavor towards becoming green.”

What about the risks associated with sustainability? An article posted on SupplyChainStandard.com reports, “Companies face five key areas of sustainability risk as they to eliminate waste from their supply chains, according to a study by Ernst & Young.” [“Five sustainability risks to supply chains,” 13 December 2010]. The article continues:

“[The Ernst & Young study] says that the five greatest climate change and sustainability risks to supply chain operations are:

“1. Strategic — The supply chain, for many companies, increasingly provides an opportunity to improve competitive advantage and reduce cost and waste. Leading companies understand this link, particularly as stakeholders become more interested in social and environmental costs.

“2. Compliance — Organisation that are required to comply with green supplier programmes now need to track data on energy use and make the information available for audits. On the flip side, if an organisation has instituted a green supplier program, it will need new processes to track and monitor supplier compliance and to use the data to drive decision-making.

“3. Financial — Supply chain issues impact an organisation’s financial strategy in multiple ways, such as: opportunities to cut costs, potential cash management and liquidity implications as a price for carbon is set in different jurisdictions, and new due diligence requirements for acquisitions. Additionally, as companies increase public disclosures in non-financial reports, CFOs and audit committees are exercising more oversight.

“4. Reputational — Many companies are implementing supplier qualification programs to ensure they do business with suppliers that share their values, which helps them manage brand and reputational risk. As such, these companies may conduct regular audits of suppliers, which might include compliance with emissions, waste and safety guidelines.

“5. Operational — Spare parts inventory management, manufacturing equipment utilisation, and planned maintenance are just a few areas where the level of efficiency could be improved. Other operational areas to assess include: unplanned downtime, reduction and innovative uses for manufacturing waste, transport, logistics and facilities.”

Although there are risks associated with each of those areas, the descriptive paragraphs associated with those sectors clearly didn’t detail those risks. It doesn’t take much imagination, however, to determine for oneself the types of risks that could be associated with each area. Eric Olson, a climate change and sustainability supply chain expert with Ernst & Young, makes a good point when he notes that many of the activities that affect a green supply chain “fall outside the direct control of a single business unit or enterprise.” The article concludes with a number of recommended actions from the study that supply chain operations professionals can take including:

  • “Assess climate change and sustainability reporting needs, including evaluating the integrity and alignment of data across the supply chain.
  • “Monitor and assess existing or potential government regulations on the entirety of the supply chain.
  • “Review the corporate risk register and risk management policies for appropriate inclusion of climate change and sustainability risks associated with the supply chain.”

For me, it is clear that discussions about green or sustainable supply chains are not going to go away. It’s also clear that sustainability strategies are going to be driven primarily by good business sense rather than idealism. That’s a good thing because it means that the bulk of sustainability practices that are implemented are going to have lasting consequences.