[Editor's note: This article has been updated to correct a reference to the size of Walmart's emissions reduction goal compared to the annual commitment of Climate Leaders members.

This article was authored by BSR, a global business network and consultancy focused on sustainability.]

Late in 2008, following Walmart Vice Chairman (now CEO) Mike Duke’s announcement that the company would improve the energy efficiency of its top 200 China-based suppliers by 20 percent by 2012, Walmart enlisted BSR to help launch its first supply chain energy-efficiency efforts in China.

From our post in Walmart’s Shenzhen global procurement headquarters, we started by studying how the successes of Walmart’s U.S.-led Supplier Energy-Efficiency Project could be adapted to China’s unique environment. We then led a launch meeting, trainings, and the development of measurement tools to connect suppliers with energy-service companies.

In its first year, the program recorded an increase in efficiency of more than 5 percent in more than 100 factories, and revealed that suppliers had the capacity to do much more. That success emboldened Walmart to announce it would eliminate 20 million tons of greenhouse gas (GHG) emissions from its supply chain -- about 40 percent of the collective annual commitment of the nearly 200 companies (PDF) in the U.S. Environmental Protection Agency’s Climate Leaders program, as of late 2009. That’s progress as far as sustainability is concerned, but it’s also good business sense: Walmart, a relentless cost-saver, sees it as a way to make suppliers leaner, more resilient, and more competitive. 

Starting from Square One

If you haven't explored driving energy-led GHG reductions in your supply chain, you should. For those new to the game, consider some of these ways to move forward: • Do a "heat map" of energy inefficiency and GHG emissions in your supply chain by reviewing literature to identify likely hot spots. • Start with a handful of strategic suppliers to learn how they are addressing emissions and share best practices and lessons learned with others. • Set an energy efficiency improvement goal and report it to the Carbon Disclosure Project. The CDP 2010 questionnaire is due in May. • Monitor -- and possibly contribute to -- the development of common approaches, including the Greenhouse Gas Protocol's supply chain standard (due for publication in late 2010) and the China Climate and Energy Registry, which is looking for co-founders.

It’s time for more companies to follow Walmart’s lead. By expanding energy-efficiency efforts into their supply chains, companies can quickly and substantially decrease supplier costs, substantially reduce greenhouse gasses, produce satisfyingly quantifiable results, and provide a gateway for further sustainability initiatives. There’s never been a better time to start: With the long-awaited GHG Protocol guidance on “Scope 3” GHG accounting scheduled for release in December, an era of more comprehensive supply chain reporting is imminent.

Companies whose supply chains lead to China should start there, because the opportunity is profound. On average, Chinese supplier factories are five times less efficient than factories in the United States, and the country is the No. 1 emitter of GHGs. By cutting energy waste in China, it’s possible to reduce the world’s energy demand by 5 percent.

Fortunately, energy-efficiency investments in China are cost-effective (PDF) compared with similar initiatives in industrialized countries. In spite of this, improved energy efficiency has not taken off in China because the country suffers from an inefficient market. Factory managers and other energy users often don’t have meaningful diagnostics about the price of energy, government subsidies make it cheap to waste energy, energy-management contracts are hard to implement, and people in positions to improve efficiency -- building owners, investors, and tenants -- often aren’t the ones paying the bills.

The problem is vivid when considering that neighboring Hong Kong, one of the world’s most energy-efficient regions, has a thriving industry of energy-service companies (known as “ESCOs”) that identify energy-saving opportunities and then install and locate funding for energy-saving equipment.

On the bright side, this shows that the challenge for companies is not one of engineering, equipment, or even finance. Instead, it’s about taking pieces of the puzzle that are already there and putting them together. For these reasons, China is one of the best places for companies to start scaling up knowledge about climate-related supply chain risks and opportunities, communicating results to investors, and improving climate performance by leveraging business networks.

The job of international companies in supply chain energy efficiency is to keep China’s specific challenges in mind and build bridges between ESCOs and suppliers. What follows is a series of steps based on our recent experiences working with Walmart that can help companies effectively engage suppliers in China on energy efficiency:

1. Establish Common Ground

Often in China, suppliers see productivity as a distraction from growth (PDF), and by extension they can be skeptical about consulting services and the value of pursuing savings versus top-line sales. Such suppliers may agree to participate in a company’s program but are unlikely to make significant progress over time until their culture rewards enhanced managerial productivity in general. Therefore, companies should begin their engagements on efficiency by surveying suppliers’ views about continuous improvement broadly and then educating them on that subject early and often.