Sustainable Supply Chain

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Welcome to Supply Chain Management G.
A topic on Sustainable Supply Chain will be discussed in the following presentation.

Today, the word “sustainability” is almost synonymous to standard practices for most business enterprise worldwide.
Small to Medium Enterprises (SMEs) through to publicly traded companies are instilling sustainable practices explicitly (e.g. its vision and mission) or implicitly (e.g. local initiative of certain division) within their daily operation.

Despite the lack of direct quantifiable link between sustainability and improvement in overall business performance, many business leaders agree that there are intangible benefit in adopting sustainable practices such as improvement in staffs’ morale, improve in overall productivity within the company, etc. As a result, the subject has attracted many business leaders to collaborate with academic institution, not-for-profit organisation and/or other businesses hence produce a standardise guideline to best link sustainability and daily business performance (Bonini & Gorner, 2011).

In this presentation, we will focus on the holistic view of sustainable business operation that is sustainability in supply chain.

Firstly, we will explore the definition of sustainable supply chain and followed by;
Exploring the key drivers for businesses to adopt sustainable supply chain practice;
Exploring the commonly used key performance indicator for measuring and managing companies’ sustainable performance and business activity;
Lastly exploring real-life example of the implementation of sustainable supply chain management in an operation of a company.

Traditionally, supply chain can be viewed as the integration of key business processes from end user through original supplier that provides projects, services and information and information that add value for customer and other stakeholders. (Chopra, 2001). Mann, Kumar, Kumar, & Mann, 2010 suggested in their recent paper “Drivers of sustainable supply chain” published in IUP Journal of Operation Management that the traditional view has a strong focus on efficiency and effectiveness flow of goods, information and funds from supplier’s supplier through to the customer’s customer and less emphasis on the management of waste, recovered products as well as overall product life cycle; Contrary to Sustainable supply chain.

Sustainable supply chain can be viewed as management of raw materials and services from suppliers to manufacturers/service provider to customer - with improvement of the social and environmental impacts explicitly considered (Amer, 2013). This definition suggest that it requires companies to adopt a holistic approach from selecting their raw material through to service provider that make a best available processes, manufacturing methods for ensuring minimal waste generation, energy consumption hence better overall product/service life cycle, cradle-to-grave approach.

In its recent survey, McKinsey has reported that there are a steady increase in the number of businesses adopting sustainable supply chain practice (Bonini & Gorner, 2011). Leading corporation such as Apple Inc., P&G, and Walmart are leading the world by example on managing environmental and social impact of its product and services throughout its entire value chain.

In one of the keynote speakers in 2011 Steve Jobs – former CEO of Apple Inc. declared that apple has eliminated the use of harmful chemical within any of its product;
In fall 2010, P&G has committed a minimum of 30% in the use of renewable energy to power its factories around the world, use at least 25% of sustainably sourced renewable material to replace its petroleum derived product, and to have more than 99.5% of its manufacturing waste recycled or re-use by 2020 (Scott, 2011)
In July 2009, Walmart announced to double the company’s solar program in California, started the first of four annual wind energy purchases for store in Texas, started Carbon Disclosure Project and measure energy use and emission throughout its supply chain, aim to reduce product packaging in its supply chain 5% by 2013 (Quinn, 2009).

In the next slides, we will detailed list of key drivers behind these emerging trends.

The various key drivers that motivate companies in taking on sustainability practice within their supply chain operation are (Mann, Kumar, Kumar, & Mann, 2010): Government Legislation, Financial Drivers, Environmental Drivers, Internal Business Process Drivers, and Customers.

Firstly, Government Legislation and other regulatory body. Government legislation form the first and foremost motivator for companies to embed sustainability practice into their organisation. Compliance with government regulations, leverage government program and stay ahead of government are the main motivating factors (Amer, 2013). From strategic point of view, compliant with government regulation can yield a competitive advantages for the companies’ future. For example, in 2009 Walmart has worked together with The Sustainability Consortium (TSC) to develop a Sustainability Index, reporting system and measurement tools that are now become standard for determining companies’ sustainability ranking around the globe (Walmart, 2012). The proactive approach provides the opportunity for government and business to collaborate in developing a more practical, realistic, achievable expectation of sustainable supply chain.

Secondly, Financial Drivers. Some of sustainability often require company to innovate and moving away from a conventional means to satisfy the essentials in its daily operation. In the article of “Walmart’s Sustainable Supply Chain” Barbara Quinn suggest that the innovation often minimise business risk, enhance existing business, and creates news business opportunities (e.g. reverse logistics).
It is worth noting that the size of reverse logistics was estimated to be about $56 billion in 2007 in the USA alone and growing which implies a positive relationship between green practices and the economic competitiveness of a company (El Saadany, Jaber, & Booney, 2011).

Thirdly, Environmental Drivers. “It is expected that more socially responsible firms may have systems in place to take into account environmental sustainability. Also, organizations sustained partially or completely by the government are generally expected to adhere to environmental concerns” (Mann, Kumar, Kumar, & Mann, 2010).

Fourthly, Internal Business Processes Drivers. Sustainability in supply chain often involved reduction in energy consumption, minimise waste generation, less usage of raw material, more use of recycled material, etc. These requirements often align with business goal for reducing its operational cost. For example: There are an increasing number of food and textile companies that are using biotech processes to manufacture their product since Biotech Process are typically run at ambient temperature and may yield energy savings compared with more energy intensive chemical process (Scott, 2011).

Fifth, Customer.
“In the end, the consumer pull will be what really shapes the future,”

In his article – “Corporate Social Responsibility Greening the Supply Chain” Alex Scott, suggested that there are number of customer who prefer sustainable product/services over non-sustainable alternatives.
He also added that government intervention in setting up governing structure as well as rules and regulation for a companies to offer more sustainable product have helped many companies to offer more of sustainable product/services variety to its customers as well as motivates larger corporation to become more socially responsible companies.

In the next slide, the relative comparison between these key drivers will be presented to enhance understanding on its relative importance to companies.

Harvard Business Review performed a survey on several major companies in United States and summarise the relative importance of these drivers to companies’ CEO.
And the result is presented in the diagram.

It is interesting to note that financial driver plays key role over regulatory compliance when it comes to opting to implement sustainability practices into businesses’ value chain.
Fortunately, research has shown that most companies who are willing to embark into the journey for making its value chain more sustainable are often reaching to new customer/markets, new technology and products hence adding new composition to its business portfolio which in turn improves companies overall financial performance (Bonini & Gorner, 2011).

Despites the promising result for embarking in the journey to achieve sustainable value chain, there are many companies that are still reluctant in adopting this practices.
Survey has indicated that the following items are dominating the concerns for many companies to implement sustainable practice in its value chain:

Cost and financial concern that are affecting companies’ core business
Focus on more pressing priorities that are affecting companies’ core business (other than financial issues)
Limited resource available for implementation, monitoring, etc. (i.e. “to make the process sticks” in the long run)
Lack of guidance and uncertainty in quantifying Return On Investing in sustainable practice within value chain
In-sufficient understanding hence buy-in for the overall process.

Close observation on the matter has indicated that there are numbers uncertainty within the subject of supply chain sustainability hence cause reluctance to business to adopt this practice.
Therefore, in the next slide we will discuss method that are commonly used for measuring sustainability in supply chain.

As discussed previously, measuring Sustainability performance in supply chain can become a demotivating challenge to an organisation due to lack of standardise method for doing so.
Fortunately, many researchers, academia and not-for-profit organisation have worked with many businesses in defining a clear manageable boundaries in order to generate quantifiable measure for supply chain sustainability.

Global Reporting Initiative (GRI) has proposed that it is best proceed from broad category through definite aspects to specific indicator to make quantifiable measure for sustainability possible. Each of this stages can be define as follows (Clift, 2002):

Categories: broad areas or groupings of economic, environmental or social issues of concern to stake-holders
Aspects: general types of information related to a specific category (e.g. greenhouse gas emissions, or donations to host communities)
Indicators: specific measurement of an individual aspect that can be used to track and demonstrate performance.

Once determined, analytical model such as Life Cycle Analysis, Supply Chain Operation References (SCOR) Model, Design For Environmental Model, etc can be used to link environmental and economic benefits which in turns can be analysed, monitor and improved overtime.

The SCOR-based sourcing function business and environmental performance measures is presented in this slides to provide an example on the list of categories that are commonly analysed and monitored by businesses’ to ensure its perform sustainably.

Cost dimension includes: supplier cost-saving initiatives, labour efficiency, cost variance from expected cost, etc.
Time dimension includes: supplier lead time against industry norm, supplier’s booking in procedures, purchase order cycle time, etc.
Quality dimension includes: Buyer-supplier partnership level, Level of supplier’s defect-free deliveries, supplier rejection rate, etc.
Flexibility: Supplier ability to respond to quality problems, response to product changes, materials variety (number of materials available), etc.
Innovation: satisfaction with knowledge transfer satisfaction, technological capability levels, involvement in new product design, etc.

It is worth noting that not all companies are prepared to monitor all category listed within the table.
Therefore, one often find that many company choose to develope its own category to reflect the sustainability of its supply chain more accurately.

In the next slides, we will show an example on how to use items listed within the table and use them to measure environmental quality and its associated costs.

In the technical journal titled Environmental Performance Measures for Supply Chains, El Saadany, Jaber, & Booney, 2011, demonstrate the use of numerical method to measure environmental quality and its associated costs by using two-level supply chain coordination model as an example.

El Saadany, Jaber, & Booney, 2011 demonstrate that by combining the mathematical formula of two-level supply chain coordination model and the quality function one can generate graphical representation that illustrate the behavior of the total profit, price, demand for varying aggregate quality measure for certain number of product, process and environmental quality characteristics. In the nutshell the steps can be summarise as follows:

Determine the essential quality measures of the company or organization in order to improve both product and environmental quality.
Assign weights to each measure relevant to its importance.
Determine maximum expectations for each quality measure and associated costs (either +ve or -ve) to reach this maximum.
Determine the final quality function.
Apply quality function in an operations decision-making process.
Optimize for optimum quality and other optimal operational decision variables.
Set and plan for new optimal environmental quality targets.
Apply the DMAIC methodology (www.dmaictools.com/) to bridge gaps and improve performance towards the optimal environmental targets.

Please note that the derivation of equation and details calculation are beyond the scope of this presentation. Should viewer decides to investigate further, list of references are listed at the very end of this presentation.

From the graph, it is interesting to note that as aggregate quality measure continue to increase (i.e. increase in environmental cost) so does price per unit of item.
Consequently, the phenomena cause reduction in company’s profit.

The graphical representation given in previous slides have provided us with good example on how sustainability should be measured within the organisation.
In addition, it has also shown that many model can be use to simulate several different scenario thus select the one that best suited company operational performance to allow for better internal reporting, monitoring, and improvement management tool.

Large company such as Walmart for example, published result of the their environmental performance in addition to its financial performance to promote transparency. This has also shows company’s commitment to achieve sustainability within its operation.
An up-to-date report of Walmart’s sustainable performance can be obtained from the following webpage www.corporate.walmart.com/global-responsibility/environment-sustainability.

In summary, many companies realises that the importance of adopting sustainable supply chain to its daily operation is no-longer driven by regulatory compliance, social/corporate responsibility, or company’s reputation management. Today, Sustainable supply chain is part of many companies’ growth strategy as well as best investment area with quantifiable and better return on capital in some instances.
In addition, the ever increasing collaboration between academia, not-for-profit organisation and businesses have generated tremendous advantages in standardising evaluation processes and methods to allow companies to monitor, manage and improve sustainability within its supply chain.