How "Smart" Is Your Supply Chain?
Companies are realizing that making their supply chain more sustainable will help their bottom line as well as encourage collaboration, drive innovation, and reduce risk.
Michael Jordan, National Practice Lead, Senior Vice President, Energy and Sustainability Services Consulting, Jones Lang LaSalle (August 2012)
In our global economy, efficient information and transportation networks allow people to get goods from anywhere in the world. As more people want to understand the environmental impact of the products they buy, companies are looking at every aspect of their supply chain for ways to improve green practices. And the most advanced companies are learning that a green supply chain is also a smart business strategy for reasons beyond sustainability.
Why the New Focus?
In the past, businesses focused on the supply chain mainly in regard to cost, reliability, and quality. Now, many companies are becoming equally focused on sustainability in their supply chain and procurement process. One motivation is their own financial performance: Institutional investors with trillions of dollars in collective assets have stated their preference to invest in sustainable companies based on past performance trends.
Companies also pursue sustainability as a way to engage employees, who are usually happy to help and can be the best source of ideas for improvement. But when it comes to the supply chain, customers are much more important than employees or investors. That's because your supply chain is part of your customers' supply chain, which they may in turn need to justify to their customers, and so on, all the way to the last link in the chain - consumers.
Technology has made information about products' embedded environmental and social footprint much easier to obtain. Individual pieces of lumber can be traced to their forest of origin through a bar code. Environmentally minded consumers use mobile apps to get information on the green profile of competing products and companies at the point of purchase. All of this adds up to a new era of supply-chain management, where mechanisms for negotiating price and quality are interlaced with sustainability considerations.
Jones Lang LaSalle recently surveyed more than 60 of its procurement managers, who collectively control $1.5 billion in annual expenditures for large corporate clients, to find that 57 percent of these companies view environmental sustainability as a key factor in supply-chain decisions. And about 71 percent of sourcing managers believe supplier sustainability is growing in importance at the companies they serve.
Furthermore, sourcing managers report using a range of frameworks for pursuing sustainability. Not surprisingly, LEED was the standard most commonly used by real estate procurement officers, but some reported integrating requirements from organizations like Carbon Disclosure Project and Cradle to Cradle to align real estate sourcing with clients' leadership in sustainability and procurement.
Addressing sustainability in the supply chain can help a company significantly reduce its environmental impact, but that is not the only motivation. In today's economy, companies collaborate better with suppliers for innovation, and are exposed to more risk due to increased responsibility for what their suppliers do. For example, companies in service sectors such as banking may not have a high direct impact on the environment, but they often purchase goods and services from industries with high impact. Integrating sustainability criteria into procurement procedures helps companies make better choices, not only for the planet but also, in many cases, for their own bottom line.
Many service companies are developing sustainability programs, but few are actually integrating sustainability into their core business activities. Michael Jordan describes the experience of a major financial institution that is creating a sustainability program focused on shareholder value. Recycling and energy-efficiency programs are only a start, says Jordan. The real gains lie in leveraging employee passion for sustainability to increase productivity and drive improvements in employee engagement, innovation, customer service, and product development.
Although companies are addressing sustainability with their suppliers, most programs to date are more tactical than strategic. In the first phase, companies may add green criteria to procurement policies, and they may collect basic sustainability information on suppliers to make better decisions in the future. These initiatives may be enough to satisfy corporate social responsibility and carbon-reporting requirements, but they often miss the greater opportunity to encourage collaboration, drive innovation, and reduce risk.
Collaboration - Any successful supply-chain initiative depends on cooperation from the point of origin to the end user. That level of cooperation is virtually impossible in a chain with many links - unless every firm in the chain is facing the same pressure from customers and exerting the same pressure on suppliers. That phenomenon is occurring because the supply chain represents a large portion of total carbon emissions for many companies. Sustainability has become such a universal concern that collaboration is now possible.
Innovation - Leading multinational companies have made headlines by announcing major changes in the way they manage sourcing, to align procurement practices with consumer values. In each case, the companies and their suppliers have been challenged to come up with new practices that lessen environmental impacts without having a negative effect on quality or end-user price. This shared recognition that processes need to change enables ideas to surface much more easily.
Risk Management - In its most generic sense, the word "sustainable" means "capable of being sustained." It's not surprising that environmentally conscious practices reduce certain risk factors, from oil spills to contamination of food products. Addressing climate change concerns is also a form of risk reduction; i.e., a world beset by environmental disruption is not a good business environment in which to operate. Focusing on where products come from, how they travel to end users, and what happens to them along the way helps companies uncover risks that they might not have considered in the past. There is also the risk of regulatory constraints that increase production costs, especially in high-carbon sectors such as manufacturing, agriculture, transportation, and building materials.
The Smart Supply Chain
To capture these and other benefits, companies need to do more than gather and report data from suppliers. Increasingly sophisticated procurement systems use sustainability as a focal point for creating "smart" supply chains, including features such as:
- Ratings of products and services across multiple screening criteria - such as carbon footprint, air and water quality, and supplier transparency - that enable procurement officers to give greater weight to criteria that drive their business success
- Alignment with third-party frameworks such as LEED and Cradle to Cradle that offer effective guidelines for integration into purchasing decisions
- Ongoing vendor/customer education on best practices in facilities-related commodities such as food and janitorial services
- Creation of criteria that take into account the actions suppliers are taking to improve not only their carbon emissions but also overall climate change performance
- Development of recognition programs for vendors that make strong efforts to be environmentally and socially conscious
- Data collection on green expenditures to drive decision-making and/or reporting through Carbon Disclosure Project and other vehicles
The key to engaging suppliers is to clearly communicate why they need to provide data and how it will be used. Open communication enables mutual benefits that will lead to continued improvement throughout the supply chain.