Why a sustainable supply chain is good business

Why a Sustainable Supply Chain is Good Business


October 2012

These days, you would be hard pressed to find a major global company that isn’t pursuing sustainability initiatives. Few lack a strategy for reducing greenhouse-gas emissions, for example. Indeed, thanks to mounting pressure from regulators, consumers and their own employees and shareholders, more and more companies worldwide are starting to provide evidence of a shrinking carbon footprint.

Most companies also recognize that compliance with emissions reporting requirements is just one aspect of more responsible environmental and social stewardship. Many are as keen to demonstrate their commitment to community recycling projects, or human and labor rights, as they are to show that they are responding to the challenge of climate change—and small wonder. With energy costs soaring, risks of all kinds on the rise and shortages of even basic natural resources such as water, companies need to take as broad a view of sustainability as possible.

But how can you be truly sustainable if your suppliers—the raw materials producers, component providers, transport and logistics services, and other interconnected businesses that constitute the supply chain—aren’t?

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Hear more about how the chief supply chain officer can fundamentally rethink their role in a sustainable organization.

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The supply chain, after all, accounts for between 50 percent and 70 percent of both total expenses and greenhouse-gas emissions for most manufacturing companies. Accenture experience suggests that both manufacturers and retailers, for example, commonly spend at least half of their revenues on raw materials and packaging. And a 2010 report from the US Environmental Protection Agency observes that for many sectors of American industry, more than three-quarters of greenhouse-gas emissions originate in the supply chain.

Supply chains, moreover, can be frighteningly fragile. As they have been extended in response to globalization, they have also become increasingly vulnerable to natural disasters, civil conflict and many other common risks. Just consider the impact of the 2011 floods in Thailand, where roughly a quarter of the world’s personal computer hard drives are made: Global prices jumped by 28 percent.

Most companies now recognize that a sustainable supply chain is no longer just an optional nice-to-have—it’s a business imperative, critical to the success of the organization as a whole in a perilous world. In 2010, when Accenture surveyed more than 700 members of the United Nations Global Compact on sustainable business practices, 96 percent of CEOs told us that sustainability should be integrated into all aspects of strategy and operations. And 88 percent of them singled out the supply chain as an area of specific importance. Companies don’t yet use a common measure for their carbon emissions.

 

Yet only 54 percent of those CEOs affirmed that they had actually achieved supply chain sustainability. And other evidence strongly suggests that their suppliers are still serious sustainability laggards.

To be sure, these players are starting to disclose their greenhouse-gas emissions. Some 44 percent of the suppliers to the 50 member companies of the independent, nonprofit, United Kingdom-based Carbon Disclosure Project supply chain program responded to its annual information request last year, for example. However, only 28 percent of those suppliers said they had actually achieved a reduction in emissions—a poor showing compared with the 43 percent of their end customers that had reduced greenhouse-gas emissions.

Quantifying the benefits
Companies can do much more to motivate their suppliers. They could start by helping them quantify the financial, reputational and risk management benefits of a sustainable supply chain—something that fewer than 25 percent of CDP supply chain program member companies currently do.

Developing mechanisms that can capture and calculate all of those benefits—let alone share them with suppliers—is certainly a challenge, to say nothing of a considerable added cost. Companies don’t yet use a common measure for their carbon emissions, for example. Some report absolute, or overall, emissions year-on-year; others reckon that intensity levels, which measure carbon emissions per unit of product or sales, are more appropriate.

Leading players know that sustainable sourcing has no encompass all elements of the supply chain.

Furthermore, although the reporting of direct and some indirect (so-called Scope 1 and 2, respectively) emissions is now commonplace, a protocol for Scope 3 emissions—which encompass all indirect emissions not included in Scope 2 that occur in the entire business value chain—was only recently published by the World Resources Institute, an independent think tank based in Washington, D.C., and the World Business Council for Sustainable Development. To date, few companies use it.

The benefits of engaging suppliers in managing sustainability, however, are just too significant to ignore (see chart).

Click to Enlarge

Almost 40 percent of CDP members report that they have realized financial savings from their emissions reduction activities, for example, while more than a third have benefited from new revenue streams or, indeed, from savings gained as a result of their suppliers’ carbon reduction activities.

When it comes to individual experiences, the benefits can be even more striking. Witness, for instance, how much a leading beverage company saved in both fuel consumption and CO2 emissions—more than 1.4 million liters and 3,900 tons, respectively, in 2010 alone—when it boosted the efficiency of its truck fleet by engaging in a shared logistics exercise with other companies.

A comprehensive strategy
Leading organizations are clearly forging ahead, despite the measurement challenges. And our experience suggests that those with a dedicated and comprehensive strategy—across governance, processes and data—are more likely to engage successfully with their suppliers. Such players, in fact, achieve supply chain sustainability in three specific ways.

 

1. Evolving procurement strategies and a cross-functional approach

Leading companies recognize that procurement plays a key role in any effort to achieve a sustainable supply chain. For instance, 39 percent of corporate members and 28 percent of their suppliers told the Carbon Disclosure Project that they have seen cost savings as a result of having embedded sustainability practices into the procurement function. And fully 63 percent of CDP supply chain program members are now training their procurement staff in supply chain carbon management—more than twice as many as in 2009.

The Clorox Co., in fact, aims to embed environmental sustainability into all of the company’s core business processes, from product supply and manufacturing through R&D to procurement. And the company’s environmental sustainability office works with each business to develop a list of annual commitments.

Leading players know, too, that sustainable sourcing has to encompass all elements of the supply chain. At Unilever, for example, sustainability is integral to the company’s core business strategy. It enjoys the kind of C-suite commitment essential for strong governance, and is recognized right across the organization as a key enhancer of long-term brand equity. The result: Unilever aims to source 75 percent of paper and board for packaging, all palm oil and half of agricultural raw materials sustainably by 2015.

What’s more, 39 percent of CDP supply chain project members say that if suppliers fail to adopt sustainable practices, they will no longer do business with them. Apple, for example, conducts rigorous on-site audits to ensure that suppliers comply with its code of conduct—and if a violation is unearthed, the facility has to remedy it immediately and implement a preventive action plan within 90 days.

 

2. Moving from compliance to performance improvement

Sustainability, of course, needs to be much more than a box-ticking exercise—though many companies still appear to believe that simply communicating their carbon management information to the outside world will suffice.

The leaders, however, are starting to move beyond sustainability as merely a compliance issue, or even an exercise in risk management. They actually identify opportunities for business improvement—a strategy that is more than twice as likely to bring their suppliers onboard, according to joint CDP-Accenture research.

Indeed, such efforts can generate significant business value for suppliers. Consider, for example, how Walmart helped several of its supplier apparel mills in China undergo onsite energy assessments, which allowed one, Dana Undies, to identify and implement energy-efficient practices that cut more than 70 percent from its annual energy bill. Or witness how Tata Steel encourages entrepreneurs from disadvantaged communities in India to become suppliers through a combination of local training initiatives and help with working capital, as well as by giving them preference over larger multinationals, providing certain standards are met.

Nestlé, meanwhile, is engaging with the farmers who provide the bulk of its raw materials to share best practices and drive innovations that have significantly improved their lives (see Sidebar 1).

 

3. Building on communications for better decision making

Most companies are drowning in sustainability-related data, but few are actually mining it for the rich insights that can drive better decision making for themselves and their suppliers. Leading organizations, by contrast, recognize that information management is key to successfully achieving a sustainable supply chain. And they are investing in the development of information management platforms that can integrate with their own existing databases to enable more efficient information exchange.

These initiatives take different forms (see Sidebar 2). But they are all aiming toward the same goal: better communications with suppliers in the interests of improving sustainability performance right across the supply chain.

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As businesses move toward sustainability as a driver of competitive advantage and higher performance, they will need to develop even more collaborative and cross-functional supply chain teams. They will also benefit from exploring new business models with their suppliers, including opportunities for co-branding. And they will need to continue to develop sophisticated new tools to measure and allocate the gains from sustainable practices among the supply chain’s stakeholders—quantification techniques that allow users to value entire business ecosystems and include sustainability in assessing the total cost of an economic activity.

The disparate contributors to greenhouse-gas emissions in the supply chain are slowly converging on common sustainability standards. But companies remain split on which measure—absolute or intensity-based—more accurately quantifies CO2 emissions.

Clearly, there needs to be a balance. Absolute reduction targets might appear most desirable—global warming, after all, will continue, no matter how much emissions per unit of product sold decline, if only because companies will go on making more product. But it’s important to recognize that organizations can also meet such targets by divesting emissions-intensive operations or by outsourcing—always, of course, paying special attention to the impact of such a move on the overall supply chain.

Much, in short, remains to be done before supply chain sustainability becomes more widespread across both industries and geographies. In the meantime, the business case for it is indisputable. By collaborating with their suppliers to drive mutual benefits, leading companies are making significant headway toward its achievement.

 

For further reading
The Sustainable Organization: The Chief Procurement Officer’s Perspective,” Accenture, May 2012
The Sustainable Organization: The Chief Strategy Officer’s Perspective,” Accenture, February 2012
Preparing for the unpredictable,” Outlook 2012, No. 1

 

Sidebar 1 | Nestlé RISE-ing: Engaging with suppliers to share sustainability best practices
Driven by a desire to gain a better knowledge and understanding of its “farm to fork” supply chain, Nestlé, the Switzerland-based global food company, has developed a procurement procedure that has helped deepen relationships with suppliers on issues ranging from water management and nutrition, right through to using sustainable procurement for rural development.

The Nestlé Supplier Code covers all of the company’s suppliers, worldwide and forms an integral part of all purchase orders and supply contracts across every market and business, including the supply of agricultural raw materials—a critical area of any food company’s supply chain. By applying the code, Nestlé has encouraged best practices in sourcing and has thus helped ensure the long-term supply of safe, quality-assured and regulatory-compliant agricultural materials for its business.

In the dairy sector, for instance, the company has worked with the Swiss College of Agriculture to help develop the Response-Inducing Sustainability Evaluation (RISE), which assesses sustainability holistically across multiple ecological, economic and social dimensions, including energy consumption. The evaluation is based on data collected at the farm level, using a comprehensive questionnaire. Ten key, computer-generated indicators identify potential strengths and weaknesses with regard to sustainability, and Nestlé discusses intervention points for improvement with the farmers themselves.

RISE has not only helped identify opportunities to reduce greenhouse-gas emissions. By simultaneously providing assessment analysis feedback to farmers as the data is collected, the company also stimulates other improvements. Indeed, Nestlé’s engagement with its farmers has helped them innovate to enhance the quality of their own lives—just the sort of mutually beneficial outcome that is key to success in the quest for a truly sustainable supply chain (see story).

In China, for example, the company’s specialists have trained farmers to handle and store animal manure safely by using biogas digesters, or waste management solutions that trap methane as it is produced. The technology clearly helps reduce greenhouse-gas emissions—but it also makes methane readily available for cooking or even for electricity generation in farming communities.

Thanks to education and outreach programs that have stimulated demand, this technology has been replicated in other countries whose farmers supply Nestlé—Indonesia and Mexico among them. In Mexico, for example, 16 industrial biogas digesters have been built in regions that provide more than 35 percent of the milk bought by Nestlé Mexico. (Back to story.)

 

Sidebar 2 | Collaborating for better information management
Learning from others by sharing information can help any organization. And when it comes to developing a sustainable supply chain, such a strategy can be critical—especially as research shows that companies still struggle to persuade their suppliers that sustainability makes sound business sense.

Many companies are joining forces with their suppliers in a variety of information management initiatives designed to encourage collaboration and the effective exchange of relevant sustainability information. As a result, the participating parties are not only eliminating redundancy—multiple stakeholders requesting the same information—reducing costs and managing risk better. Suppliers are also gaining strategic advantages—preferred vendor status among them.

Take, for example, the Carbon Disclosure Project supply chain program, an initiative launched in 2007 as part of the independent, nonprofit CDP’s program to collect data on corporate greenhouse-gas emissions. The project provides a global process for disclosing carbon emissions along the supply chain by enabling its 50 members to engage better with suppliers on the measurement and management of their emissions. Among the participants is Anglo-Dutch consumer packaged goods giant Reckitt Benckiser, which in 2012 exceeded its goal of reducing carbon emissions by 20 percent—by a full percentage point and eight years ahead of time.

Meanwhile, the Supplier Ethical Data Exchange, known as Sedex, provides the secure exchange of sustainability information for more than 25,000 suppliers and their customers worldwide via an online database that allows members to store, share and report on sustainability information, including self-assessed and third-party social audit results.

And Paris-based EcoVadis is used by several thousand global companies to assess the environmental and social performance of their suppliers by using simple and reliable suppliers’ scorecards, covering 150 purchasing categories and 21 corporate social responsibility criteria.

Some of these exchange platforms are industry-specific. The New York-based Fair Factories Clearinghouse, for example, provides its members with the technology to share ideas about how to improve conditions in their plants and factories globally. It was set up in the United States by the National Retail Federation, and Reebok International in particular, as well as the Retail Council of Canada and World Monitors, a New York-based consulting group committed to aligning business practices with human rights.

Brussels-based COCIR, meanwhile, brings together the constituent companies of Europe’s healthcare IT, electromedical and radiological industry, and helps them develop responses to evolving sustainability standards. Case in point: The European Commission’s Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) directive, which came into force in 2007 and aims to minimize the risk chemicals pose to human health and the environment. (Back to story.)

 

About the authors
Gary L. Hanifan is the North American managing director of the Accenture Operations group. He is based in Seattle.

Aditya E. Sharma is a New York-based manager of sustainability in Accenture Supply Chain.

Paras Mehta is a manager of strategic planning services in Accenture’s Global Talent & Innovation Network group. He is based in Mumbai.

The authors would like to thank Kevin Eckerle, Orsella Reyes, Mrinal Pareek, Pushkar Potdar and Shabber Badshah for their contributions to this article.

 

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 This Article is Tagged: Supply Chain Management. Sustainability.
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The Sustainable Organization: The Chief Procurement Officer’s Perspective

The Sustainable Organization: The Chief Strategy Officer’s Perspective

The Sustainable Organization: Lessons From Leaders Series

 

Hear more about how the chief supply chain officer can fundamentally rethink their role in a sustainable organization.

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Why a sustainable supply chain is good business | Accenture Outlook 
By working with their suppliers to systematically monitor, measure and communicate the benefits of cleaner and more socially responsible business, leading companies are starting to turn supply chain sustainability into a driver of competitive advantage.
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