By: Lloyd Macfarlane
Water scarcity, landfill capacity and peak oil are just some of the manifestations of a planet whose natural resources are being depleted at an alarming rate. The world’s population has just reached the 7 billion mark and is projected to reach at least 9 billion by 2045. Most of the planet’s people consume natural resources via elaborate networks that are the supply chains of companies and organisations that bring us the food, products, services and entertainment that we so desperately want and need. The organisation therefore has a moral and civil obligation to recognise its extended impact on resources and to act responsibly to reduce or even eliminate that impact. However, we are fortunate that there are many other good economic reasons for companies to reduce their impact – the incentives of joining the green economy and the avoidance of consumer risk are driving change in an increasingly regulatory business landscape.
The supply chain is the large artery of the organisation. It typically consists of the most significant financial, environmental and social impacts (and opportunities) for a business. An organisation’s supply chain is the system or network of processes, technologies and other organisations that are involved in the creation and distribution of a product to the customer (and sometimes beyond). The supply chain will most often include activities that source and transform natural resources and raw materials into finished products which are used and either disposed of or recycled by the customer.
A Life Cycle Analysis (LCA) of the organisation’s supply chain can reveal the true measure of its environmental impact. LCA is the technique used to assess environmental impacts associated with all the stages of a products life – from cradle to grave – in other words, from raw material extraction through materials processing, manufacture, distribution, use, repair and maintenance and disposal or recycling.
Tackling sustainability in the supply chain can appear to be like the challenge of eating the proverbial elephant, however, a ‘one bite at a time’ solution is just as metaphorically applicable and companies who embark on this journey can experience meaningful returns from the achievement of mini-goals along the way.
A well balanced and sustainable supply chain will be directed at the achievement of certain key stakeholder objectives:
- Promote the Green Economy
- Lower environmental impact
- Reduce risk
- Increase efficiency (and margin)
- Increase competitive advantage
- Increase brand equity and leverage
Promoting the Green Economy
Being involved in the Green Economy has its advantages. Not only can it have reputational value but there are an increasing number of new opportunities that flow from being a ‘member’ of this economic community, whether they be formal (e.g. organisational membership or tender qualification) or informal (e.g. word of mouth referrals or invitations)
Companies that pursue supply chain sustainability play their part in growing the Green Economy. The Green Economy is widely recognised as the most sustainable tool to drive environmental change. Regulation, passion and education all play a role in changing the way we consume and produce, but an economy that is in alignment with sustainable practices will create more natural momentum for change than anything else. Green procurement drives green production and for as long as this is a true economic cycle there will be opportunity, competitiveness and profit for organisations that re-engineer a low carbon supply chain. The power that an organisation has to stimulate and influence its supply chain lies in its ability to specify and procure for low impact.
Companies that set solid supply chain goals do well to take an inclusive and phased approach with suppliers. Suppliers need to be communicated with, convinced and influenced if they are to buy in to changes that will affect or even inconvenience them. The opportunity for these suppliers is more than just your custom – it is a place in the green economy. An inclusive and patient approach will cement relationships and create loyalty. The supplier process should first seek to optimise and innovate with suppliers and only then seek to measure. Systems of influence should incorporate positive and negative incentives and mutual benefits of association.
Lower Environmental Impact
Reducing environmental impact across a large supply chain can be complex. The starting point for most organisations is the lowest hanging fruit which can usually be identified quite easily.
In order to reduce impact, the organisation needs to first create baseline measurements by collecting and describing data under environmental impact headings. Here are some examples of some broad headings:
- Energy – emissions from direct and indirect energy sources, including transport
- Water – by volume and water quality impact from operations
- Waste – by volume and by type
- Pollutants – by volume and type
- Biodiversity – area and/or volume and species displaced or negatively affected
Once the baselines have been established, the objective will be to reduce impacts and then credibly report the baseline and the reductions over each annual cycle. It is advisable to use a respected standard for reporting, such as the GRI Framework, which will also help to inform the process of gathering the data for the baseline. In time the organisation can start extending the scope of measurement and reduction even further into the supply chain.
Companies face all sorts of legal, operational and consumer risks in this information age, much of which is being driven by increased regulation that holds companies responsible for their (extended) supply chain activities. Environmental infringements are now particularly under the spotlight and risk can flow well beyond the boundary of compliance into the social realm where companies can suffer the consequences of a trial by social media – a modern phenomenon that some have found very difficult to control.
In much the same way as Extended Producer Responsibility is forcing supply chains in South Africa to change, so too will imminent regulation around carbon footprint, water consumption, water quality, waste and emissions. By setting standards within the supply chain companies can avoid, transfer or share risk. They can also avoid reputational risk by ensuring that they have sufficient knowledge of the extended impacts of their activities.
Increased Efficiency and Margin
Post World War II production in Japan was known for its ‘Just-in-Time’ approach to production, a system in contrast to the American consumer approach leading up to the war which was ‘Just-in-Case’. Efficiency in the supply chain is not a new concept. However, in the same way that consumption and activity in a supply chain are usually linked to cost, so too are they generally linked to environmental impact. A sustainable supply chain is one that treads lightly and does not waste – the sustainable organisation will measure and manage data in its supply chain to reduce consumption, reuse and recycle wherever possible. Efficiency and sustainability drive down costs and drive up margin.
Systems and Efficiency
The supply chain contains various ‘decision systems’ which when altered have a material effect on stakeholders. By isolating, analysing and developing these supply chain systems, companies can improve the quality and quantity of information that can then be used to change behaviour and process. In order to drive efficiency, data must be consolidated and managed with systems which are a crucial part of supply chain sustainability. Many automated reporting and management systems have been based on good non-automated systems of policy and structured communication.
Design and Efficiency
Design is a term that is often associated with sustainability because some of the most significant environmental impacts are determined in the design phase of a product. For example, the organisation’s ability to reuse production waste or to recycle end-of-life materials is often linked to design phase specification. Retrospective environmental interventions are usually more difficult, have less supply chain impact and cost more than initial design phase interventions.
Designers are changing the lifecycle impact of products and driving efficiency in the process:
- Designing with alternative materials and sources
- Designing for easy dis-assembly and recycling
- Designing for easy reuse
- Designing for bio-degradation
When a business has a strategic advantage over its competitors or rivals it is said to have achieved a Competitive Advantage. Competitive Advantage may have been achieved because that business may have acquired or developed attributes that allow it to offer value that its competitors can’t. Competitive Advantage is that ‘place’ that every organisation should strive to reach. Organisations gain advantage by lowering their costs (Supply chain efficiencies), lowering their risk (Resource dependence), and increasing demand (Offering better value). Organisations that achieve sustainability targets also increase levels of employee morale, customer loyalty and shareholder value, which are also drivers of Competitive Advantage.
Value is a function of ‘worth over price’, in other words the worth that a stakeholder places on a product or relationship compared with the price that he/she pays is the value attributed. Stakeholder engagement and green supply chain interventions are platforms for the development of better value products and services for customers.
The green economy is growing because its values are also simply ‘best practice’. Green business simply requires that an organisation go deeper into those values, and those that do will find Competitive Advantage.
Reputation and Leverage
Reputation and brand equity are not immediately or easily measurable (like revenue or savings are for instance.) Reputation has an enherent, pottential value for stakeholders in the supply chain. The value of a reputation will be realised in critical moments that result in additional orders, or extended or terminated contracts for example. Reputation and Stakeholder perception of a company or its products are increasingly important to manage as news can travel quickly and even virally, whether good or bad. It takes time to build stakeholder equity but it can take no time at all to destroy it. By engaging with stakeholders across the supply chain the organisation is already investing in the platform that can stimulate growth in perception/reputation.
The organisation should celebrate and leverage its environmental achievements in a credible way with supply chain stakeholders. Leverage is best achieved with momentum over time and taking short cuts can often have negative consequences. A true green journey will provide an organisation with more than enough opportunity for leverage.
When leveraging sustainable activities in the supply chain a company should bear the following principles in mind:
- Transparency – Report material impacts and planned interventions without fear
- Authenticity – Seek out clarity, measurability and materiality. Avoid omissions, embellishment and spin.
- Consistency – Make it easy for stakeholders to follow and interpret key messages, progress and comparative gains and/or losses.
- Accountability – Remain accountable to shareholders but also to other key stakeholders.
Environmental compliance issues are increasingly under the spotlight but risk can flow well beyond the boundary of compliance into the social realm where companies can suffer from the viral spread of news and opinion in the media. The organisation has a moral and civil obligation to recognize environmental impacts within its extended supply chain and Life Cycle Analysis must be used to assess impact– the cradle-to-grave measurement of impacts through all stages of life of a product or service.
The green economy is gathering momentum and is the most sustainable tool to drive environmental change. Companies who are part of the green economy are now generally more capable of realizing competitive advantage because they have acquired or developed attributes that allow them to offer value that their competitors can’t.
Companies should measure, report and reduce environmental impacts in a credible way and should embark on a green journey that increases in scope, through the extended supply chain over time. They can do this by reducing waste and emissions and reducing, reusing and recycling resources. There should be a strong focus systems and product design/redesign but also a focus on influencing and incentivizing suppliers to collaborate around design and information.
Environmental achievements can and should be leveraged but this must be done with transparency, authenticity, consistency and accountability.
Sources and References:
McKinsey Quarterly, July 2008. “Climate Change and Supply Chain Management” Chris Brickman and Drew Ungerman
Green to Gold, “How Smart Companies use Environmental Strategy to Innovate, Create Value and Build Competitive Advantage.” Daniel C. Esty and Andrew S. Winston. Yale University Press. New Haven and London
Harvard Business Review Blog Network. “Supply Chain, Not Sustainability, Should Manage Your Carbon Footprinting.” Ellie Moss
United Nations, Department of Economic and Social Affairs, Population Division June 2009. “Number 87 World Population Prospects: The 2008 Revision.”
US Environmental Protection Agency 17 October 2010. “Defining Life Cycle Assessment (LCA).”