Procurement According to McKinsey, goods & services can represent at least 2/3 of a company’s costs. BP spends about $35 billion a year on over 100,000 suppliers or 80% of BP’s total spend Sustainability impacts Wal-Mart estimates its value chain impacts at 90% M&S says the same, with its supplier impacts 60% and consumer impacts at 30%
What is supply chain management? Definitions vary, but they all have one basic insight in common: the idea that collaboration between the various players in a supply chain will deliver more value at less cost to the supply chain as a whole Modern supply chain management thinking represents a shift in corporate strategy from a focus on maximizing value and minimizing costs from the point of view of a single firm, to a focus on maximizing value and minimizing costs across the entire chain. It understands that there are often hidden costs and unexpected consequences (e.g. sourcing from China may result in lower labor costs, but also longer lead times, costs associated with customs, and other potential disruptions) It focuses on creating value through collaboration that is greater than the sum of the parts. It engages all of the different functions of the company in the pursuit of value – not just logistics managers and buyers, but also R&D and marketing. It is precisely this sort mindset that is required to drive the sustainability agenda forward. The challenge is one of mindset and defining new goals for sustainable supply chain management. Sustainability thinking also involves managing total costs and benefits over a chain or network – it’s just that the time horizon is longer and the “chain” is broader. Supply chain management thinking is naturally extended to encompass the goals of sustainable development - what is required is a shift in the goals of supply chain management from more value at less cost, to more value for all supply chain participants at lower global resource costs. Companies must not only take responsibility for the entire chain, but that they must do so from a “one planet” perspective – redefining the goals of supply chain management by recognizing that global resources are limited and value must be shared if the supply chain is to be resilient in the face of unexpected shocks. Companies must continue to move beyond efficiency (focus on immediate cost-savings and a just-in-time approach to save both time and materials) to resilience (which is more about taking a long-term approach to managing and responding to fluctuations in supply). Such a shift in mindset should deliver not only on long-term, global sustainability goals, but is also likely to deliver on shorter-term, competitive supply chain management goals – e.g., using resources more efficiently results in cost savings, and building new sources of capacity in the supply chain helps to reduce supply risk.
“ Tomorrow’s mission, goals and performance expectations for supply management will [include] anticipating and managing supply risk to ensure business continuity and contributing more broadly to revenue generation .” Source: CAPS Research, Institute for Supply Management & A.T. Kearney, “Succeeding in a Dynamic World: Supply Management in the Decade Ahead” (2007)
Reputation Nike: As migration rises, forced labor violations in supplier factories continues to be a problem (latest investigation by an Australian TV station in July 2008 found trafficked Bangladeshi, Cambodian and Vietnamese workers in Malaysian Nike factories), despite long-established programs to combat following its 1990s image as the symbol of child labour and soccer balls. UK retailer Primark has now hired its first-ever ethical trading director, embarrassed by a BBC exposé in January 2009 detailing allegations that one of Primark's UK suppliers paid workers about half the minimum wage for a 12-hour day, seven days a week Gap, Tesco, M&S: All banned cotton grown in Uzbekistan, the 3 rd largest grower of cotton in the world, citing their use of child labour as the reason: though cotton is several tiers down in their supply chains. Global Witness is calling on mobile phone manufacturers to audit their supply chains in order to exclude the high-value minerals financing the armed conflict in eastern Democratic Republic of Congo. Under US law, US companies can be prosecuted for labour violations in subsidiaries overseas Legal / traceability The January 2009 peanut butter recall earlier in 2009 may cost Kellogg up to $70 million. It purchased up to $10 million in peanut products a year from the salmonella-contaminated supplier. Nestle USA managed to avoid this – its staff had inspected the factories and turned it down as a supplier (while Kellogg had relied on an independent auditor). Some in Congress agree and have proposed a traceability measure as part of the proposed F.D.A. Globalization Act of 2009, which would give the Food and Drug Administration and the Department of Agriculture the authority to require food makers to trace individual products back to the farms that produced them if necessary.
From WWF Living Planet Report (October 2008): Our global footprint now exceeds the world’s capacity to regenerate by about 30% - so our current rate of consumption needs 1.3 planets – and at this rate, by the mid-2030s we will need the equivalent of 2 planets to maintain our lifestyles. Land: Rich governments and corporations are triggering alarm for the poor as they buy up the rights to millions of hectares of agricultural land in developing countries in an effort to secure their own long-term food supplies (Daewoo Logistics / Madagascar; Saudi Binladin Group / Indonesia; Abu Dhabi investors / Pakistan and Sudan; UEA / Kazakhstan; China (short of water) / Laos; Libya / Ukraine; Kuwait & Qatar / Cambodia) Water: Water is an important resource for the high-tech industry - esp semiconductor manufacturing. Intel and Texas Instruments alone used more than 11 billion gallons of ultra-pure water in 2007. A JPMorgan study estimates that a water-related shutdown at a fabrication facility operated by Intel or Texas Instruments could result in $100–$200 million in lost revenue during a quarter, or $0.02 or $0.04 per share. Already, China and India are seeing growth limited by reduced water supplies from depleted groundwater and shrinking glaciers that sustain key rivers. China has constrained the location of new textile, leather, metal smelting and chemical industries, and has set water conservation criteria for other manufacturing industries. California is limiting agricultural water withdrawals due to drought. France, Germany and Spain were forced to shut down dozens of nuclear plants due to a prolonged heat wave and low water levels: Bees: Bees the world over have been dying from a mysterious syndrome termed colony collapse disorder, or CCD. Honeybees are vital for the pollination of around 90 crops worldwide. In addition to almonds, most fruits, vegetables, nuts and seeds are dependent on honeybees. Crops that are used as cattle and pig feed also rely on honeybee pollination, as does the cotton plant. The British Beekeepers Association has warned that honeybees could disappear entirely from the island by 2018, along with £165 million worth of apples, pears, canola and other crops they pollinate. Pollination expenses are now 20% of a California almond farmer's annual budget—more than fertilizer, water or even labor. (In 2007 it cost $160-180 for an almond grower to rent a honeybee hive - it was $3 in 1960.) Pollination of fruit orchards in China’s Sichuan province is now being done by thousands of villagers who hand-pollinate trees by dipping brushes made of chicken feathers and cigarette filters into plastic bottles of pollen and then touching them to each of the billions of blossoms.
Traceability Eggs in China: Beijing Degingyuan increased market share and price through selling traceability to consumers China accounts for 40% of total world egg consumption, but a series of food safety and health issues – SARS, bird flu, the Sudan 1 carcinogen undermined confidence. Beijing egg producer Deqingyuan branded its eggs with distinctive packaging and stamped them with the date they were laid - the first time this has been done in China. It now has 70% of the branded egg market in Beijing and in March 2007 began to sell its eggs at a premium price in Hong Kong – which had not traditionally sourced eggs from mainland China. Cocoa in Ecuador: Large Ecuadorean candy maker Universal Sweets gains access to export markets through traceability as a result of purchasing cocoa direct from a cocoa co-op In turn, the cocoa growers gain security and 20% higher prices via long-term purchase agreement for higher quality cocoa as a result of investments Brand Many companies – from big multinationals to supermarkets to small premium manufacturers are looking to enhance the product “story” by enabling consumers to see photos or other details of the original producer via the internet Sara Lee’s Douwe Egberts Utz-certified “Good Origins” coffee, Dole’s organic bananas San Francisco-based Stone-Buhr flour company, Icebreaker’s New Zealand merino wool via its Baa Code, US-based Askinosie chocolate Tesco and Sainsburys and Waitrose all label various vegetables and cheeses with the name of the growing farmer and provide farmer profiles Companies are still committing to Fairtrade – arguably the best-marketed certification scheme – even in this recessionary yyear Sainsbury’s went 100% Fairtrade bananas in Aug 2007 – 6 months later its banana sales had increased by 30% Cadbury committed to 100% Fairtrade for Dairy Milk by end summer, Starbucks committed to 100% Fairtrade espresso beans in the UK by end 2009 and plans to double its US Fairtrade imports, Wal-Mart is quadrupling its purchases of Fairtrade bananas.
http://www.flickr.com/photos/teachandlearn/2861079750 Better quality Direct-trade coffee: Working with coffee farmers on achieving a good cup a coffee Direct-trade coffee roasters such as Portland-based Stumptown spend months every year working with coffee farmers, showing them what qualities constitute a good cup of coffee and how to achieve it Business benefit: “exquisite, unique coffees” that command premium retail prices SD benefit: increasing grower income (these coffee beans go for up to $40+/lb, versus ~$1.40/lb for organic free trade or ~$0.50 for regular blends). New inputs, capabilities and product ideas ITC: Gaining “farmer insight” ITC set up e-choupals, or network of internet kiosks in rural farming villages. ITC benefit: direct connection to new product ideas and other feedback from over 3.5 million farmers ...in addition to reduced procurement costs and logistics costs (through bulk supplying and cutting out commissions). SD benefit: Farmers gain higher prices for their crops through access to critical market and consumer data (in some regions farmers have increased their production of profitable soy from 50% to 90% as a direct result of their access to demand data), and reduced input prices through bulk purchases. By 2012, ITC plans for the e-choupal network to cover over 100,000 villages and 10 million farmers, representing one-sixth of rural India. Nokia and Txteagle: Crowd-sourcing in rural Kenya Txteagle is making it possible for many people in countries like Kenya to earn small amounts of money by completing simple tasks like translations or transcriptions via text message, for companies such as Nokia who want to localise their software. Contributors are sent text messages with the English words that need translation. The same word or phrase is sent to multiple users, and if a high percentage of people return the same answer, it is accepted by the system. Those who are right more often get paid more. Txteagle’s founder estimates that if the transcription service takes off, contributors could earn $3 to $4 for each hour's work, a substantial amount of money in rural Kenya. The total amount of idle time that literate, English-speaking mobile phone subscribers have within the developing world is estimated to be more than 250 million hours every day. Pepsi: An innovative ingredient from India Pepsi has established seaweed cultivation and processing plants in India to produce a gelling and growth-accelerating nutrient patented by an Indian research center. Pepsi benefit: A valuable manufacturing input for Pepsi SD benefit: Flexible, well-paid jobs in local communities Unilever: Diversifying its inputs, developing a local market Unilever is working with farmers, transporters and a crushing company in Kenya to develop a supply chain for allanblackia oilseed for input into Unilever soap and margarine. Unilever benefit: Reduce reliance on palm oil – it’s the world’s largest buyer and has committed to 100% RSPO-certified palm oil by 2015 SD benefit: Contribute to income generation by creating a market for a previously unused local crop that is available in the tropical forests and agricultural areas of wet, tropical Africa.
So what do we mean by strategic?
Let’s take a step back and consider how companies manage their supplier relationships. One of the core principles of supply chain management is that not all relationships are equal. Large companies have tens of thousands of suppliers, and so given limited resources, it’s neither possible nor really desirable to build close working relationships with each and every supplier. You can think of the different types of supplier relationships as falling along a continuum from transactional through to strategic. At one end are transactional relationships. These have a one-off, arms-length feel, like an insurance company buying office supplies through on-line bidding, or a chocolate processor buying cocoa beans on the spot market. The focus is efficiency, simplicity, and keeping costs down. This makes sense for the business where it’s a pretty simple item and there are a lot of potential suppliers. Agricultural commodities fall into this category. At the other extreme, you have strategic alliances like the one between Apple and Intel, where the Intel has an internal 'Apple Group' of engineers and sales staff who are dedicated to collaborating with Apple engineers on product development, while Apple created a special brand to show that its products contain Intel chips – amazing when you think about what rivals Intel and Apple have been. Here there is a huge amount of management attention on maintaining the relationship, and there is shared product development, shared goals and I am sure a very carefully negotiated share of the value. So what determines the strategic intensity of a supplier relationship? How much investment do you put to building the relationship? Basically there are two things to take into account – one, how great the supply risk is – either because the supply is scarce, or because it’s a complex item, or there aren’t many suppliers that can provide that item – and two, how much the supplier input is a part of the value delivered to the end consumer. I promise I am trying to make a point with this slightly theoretical discussion and I will come to that now. We did a research project last year with the UN Environment Programme, looking at good practice in sustainable supply chain management. Thinking about this supplier relationship continuum, it was pretty clear that most of the social and environmental issues associated with supply chain management fall into the transactional category. Makes sense, right - these are relationships that are intrinsically short-term and cost driven, and there’s a tension with integrating sustainability considerations – which as we all know tend to be longer-term. The core insight running through our research was this. The businesses that have made the most progress on developing sustainable supply chains are those that, first of all, see even their transactional relationships in a more strategic light – and second of all, manage their transactional relationships in a more strategic way. So first, strategic mindset, second, strategic management. Seeing supplier relationships in a more strategic light means seeing suppliers as partners in business success. It means considering supply risk over a longer period of time – and deeper into the supply chain. Supply managers are used to pursuing alternative sources of supply in order to manage supply risk. But at the global level, there are no alternative sources. It also means thinking not just about risk, but about how these supplier relationships might create more value both for the company and for the supplier – whether in terms of brand, or quality, or new product ideas. These are the points that we spoke to earlier
Now, mindset is one thing. Managing supplier relationships in a more strategic way means many things. In the Unchaining Value report we’ve defined a ladder of approaches that go from incremental to strategic to transformational. At the micro or company level, a strategic approach means, for example: Not just setting and enforcing standards, but seeing audits as a opportunity to work with the supplier. [One extremely large retailer we recently spoke with just re-named its in house audit team the supplier development team – specifically in an effort to change the mindset from compliance to mutual improvement.] It also means collaborating with competitors and suppliers to develop common standards and monitoring efforts, coordinating training, sharing information. It means working with suppliers AND competitors AND stakeholders, on understanding the root causes of social and environmental problems – not just the symptoms – and understanding what the supplier needs in order to change. And it means communicating these efforts to consumers – not relying on consumer demand to drive sustainability, but rather, using sustainability to enhance the brand. So really tying the two ends of the value chain – supply and demand, together. And then there’s the macro level, or what we call the transformational approach. And this is what we argue is critical to address the challenges we as a planet are facing. This means extending the notion of collaboration even further. This could mean: Working with suppliers to explore new ways of adding value. This could mean redesigning supply chains to include more participation to enhance supply, or integrating supplier expertise at the product design phase. Working with other industries (and stakeholders) to raise social and environmental standards around shared resources. These are initiatives like the CEO Water Mandate or one multi-industry initiative just starting to form to address forced labor. Defining, using and communicating company-level metrics related to key global impacts that allow both managers and consumers to understand the global context of an individual company’s actions.
The final piece in our playing around with the title of this talk is “management”. How do companies implement these considerations and implement them?
At SustainAbility we like to think of 4 Bs of sustainable business, and we would suggest that truly sustainable businesses are those that have all four Bs in play. So I’ll use this framework to summarize the main points we’ve tried to make, and then hand off Just starting at the top left hand square and moving around. Boards means leadership and management expectations and governance. Is there a commitment from the top to understand and be accountable for and make investments in managing impacts beyond the business’s own operations. So this starts with mindset . Balance Sheets speaks to the ways in which measurement and reporting work to drive and reward sustainability efforts. There is a basic requirement to understand your footprint before you can manage it and this is particularly important for supply chains. Balance sheets also speaks to the need for businesses to move beyond a risk management mindset where sustainability initiatives are seen as a cost center, to a positive mindset of generating business value. Both of these ideas need the right metrics. Brands are about connecting supply chain sustainability initiatives with what the consumer sees, having conversations with customers and consumers, in order to help create that pull from the end-buyer, and also that sense of accountability that’s increasingly becoming a part of the brand promise. So making that connection between supply and demand. And finally Business Models are about what a company is bringing to market and how it does that. For supply chains this starts with collaboration both internally between functions and externally with competitors and stakeholders. But most of all it means trading relationships – what are the terms on which a business is trading with its suppliers, aligning incentives, seeing suppliers as partners in business success and not just as vendors.
Case For A More Strategic Approach To Sustainable Supply
The Case for a More Strategic Approach to Sustainable Supply Management Mark Lee Patrin Watanatada SustainAbility 2degreesnetwork.com 9 April 2009 Unchaining Value Photo used under Creative Commons license: www.flickr.com/photos/mklingo/245562110/
80% 90% of corporate spend is on goods & services up to of corporate social & environmental impacts are outside direct operations up to Photo used under Creative Commons license: www.flickr.com/photos/druclimb/76125566/
The Case for a More Strategic Approach to Sustainable Supply Management Photo used under Creative Commons license: www.flickr.com/photos/good_day/117131491/
What’s needed is simply another shift in mindset – to more value for all chain participants at a lower cost to global resources The essence of modern supply chain management is no longer just speed and efficiency, but collaboration and more value at less cost to the chain as a whole
The Case for a More Strategic Approach to Sustainable Supply Management Photo used under Creative Commons license: www.flickr.com/photos/catikaoe/237930661
A sustainable supply is a sustainable supply value information commercial and global goals Appropriately managing and sharing resources Cost savings Physical supply continuity Economic supply continuity Quality, brand, meeting consumer needs Better decision-making delivers on both Environmental savings Environmental resilience Sustainable livelihoods Meeting global needs Transparency and equity
Manage reputational and legal risk as sphere of accountability increases
Photo used under Creative Commons license: www.flickr.com/photos/criminalintent/2827206615 Manage operational risk as global resources tighten
Create value through quality and new capabilities, inputs and ideas Photo used under Creative Commons license: www.flickr.com/photos/teachandlearn/2861079750
The Case for a More Strategic Approach to Sustainable Supply Management Photo used under Creative Commons license: www.flickr.com/photos/ellasdad/457521627/
Strategic Transactional Nature of supplier relationship Transitory Cost-driven Arms-length Long-term Mutual benefits Shared resources Shared risks & rewards Open communication Joint planning Cross-org teams Top managers involved What do we mean by strategic ? Source: Fawcett et al., Supply Chain Management: From Vision to Implementation (2007)
Unchaining Value : a ladder of approaches to sustainable supply Shared goals, information and incentives Multi-stakeholder collaboration Industry development; market creation; resilience Collaborate, design Transformational Capacity-building Standards and audits Typical management tool Cost savings; improved productivity; brand equity Compliance; efficiency; immediate reliability and quality of supply Value drivers Engage, optimise Manage, minimise Mindset Strategic Incremental
The Case for a More Strategic Approach to Sustainable Supply Management Photo used under Creative Commons license: www.flickr.com/photos/jswaby/324191284
Collaborate internally and externally Create value (don’t just manage risk) Connect to what the consumer sees See suppliers as business partners Measure and disclose A shift in mindset BRANDS BALANCE SHEETS BUSINESS MODELS BOARDS
www.sustainability.com Mark Lee [email_address] Patrin Watanatada [email_address]