Nike (NYSE: NKE) is making some big changes to how it manages its supply chain. As part of its sustainability report released Thursday, the retailer said it plans to launch a new manufacturing index in 2012 that will place factories' sustainable practices "on equal footing" with the traditional supply-chain measures of quality, cost and delivery. The index will now include environmental and labor-sustainability metrics, according to the report. And Nike will use that index to evaluate its suppliers.
It's an interesting move with potentially widespread implications globally among suppliers -- and would-be suppliers -- to Nike. And with other retailers -- including Walmart, which said last month that it was expanding its supplier scorecard program -- taking steps to add sustainability to its supply-chain requirements as well, it appears that the supply-chain landscape may be poised for a shakeup that could give greener and more socially responsible suppliers a competitive edge. Retail suppliers will likely be keeping a close watch on these leaders' criteria, which will begin to define sustainability for different products.
We recently caught up via phone with Hannah Jones, Nike’s vice president of sustainable business and innovation, for more insight into Nike’s goals and its manufacturing index. Here’s an edited excerpt of our conversation:
GreenBiz: The report talks about making your factories faster, leaner and more efficient. How do you accomplish that without descending into a Foxconn situation?
Jones: [There are] two elements to 'lean.' One is the process change piece of it, and the engineering change around how you think about products’ efficiencies and quality. And the other is really about the culture of empowerment that is core to making lean really work. For our industry, this is key. It requires…management [to] understand that the worker is the closest to the process and to the act of manufacturing and therefore has the greatest insight. And that actually what you need to do is put greater value on the worker and enable the worker to feel empowered, so that they can speak out and speak up and talk about where they can see improvements could happen.
It starts to change the conversation between the managers and the workers. It starts to change the conversation with the management, in how they have to stop viewing workers as a cost and start seeing them as one of the core, valuable assets that they have. That makes them think more about turnover rates. It makes them think more about HR systems, it makes them think more about supervisors being trained in management and it makes them really think through how do they communicate, how do they work with the workers to retain them. Because they want to invest much more in them, in terms of building up skill sets.
So to us, 'lean' is one of the components [of] how we think about building better working conditions. Because we think it’s the business conditions that enable a lot of the additional work we do, through our code of conduct and through our Sustainability Manufacturing and Sourcing team. Then we have this new manufacturing index, which locks in performance on sustainability, performance on lean, performance on workers’ rights into the core conversation between the buyer and the supplier around where growth and volume will go and where orders will go.
GreenBiz: What do your sustainability goals mean for current and potential suppliers to Nike?
Jones: I think it’s a shift. And I think that the shift that’s been happening over the last two or three years, that this report kind of begins to capture and signal, is that we have been rewiring the conversation internally and rewiring the conversation with our suppliers in which we really explain to them that there are some new rules of engagement. And that our sourcing strategy and our sustainability and working conditions strategies are one in the same. We’ve built a sourcing strategy that looks at having fewer partners for the longer term that are optimized, to enable us to have those fewer partners. And then really building in to how we have a business discussion with them.
So if you think before, in our industry, the traditional conversation between a buyer and a supplier is one of cost, delivery on time and quality. Those are always the driving kind of indicators [determining] are we going to give you more orders or less orders? And so now what was done is we’ve said: sustainability. And I want to emphasize [that] when I say sustainability it includes workers’ rights. Sustainability is one-fourth of that equation now.
So our suppliers now know two things: one, their business with us is going to be dependent on how much they show their commitment to sustainability. And two, we’ve changed also from a ‘make your systems less bad’ [approach] to actually describing a vision of good. It’s saying if you’re going to be on the journey with us…we’re going to need you to really think about investing in your workers, investing in lean and investing in efficiencies and green.
Next Page: How to get good sustainability grades
GreenBiz: What do your suppliers need to do to stand out, to get good grades from your auditing team?
Jones: We have a whole set of indicators, performance indicators that they need to be meeting. So there are kind of incentives along the way, but there are also sanctions for failing to meet standards and [for] repeat offences, which go up to and including termination of the relationship. If you look at some of the data in the labor section of this [report], you’ll see that we have eliminated a number of factories because of their unwillingness to consistently shift management strategy and culture [and] to build in sustainability and workers’ rights.
GreenBiz: Other big retailers are on the sustainable supply-chain bandwagon: Walmart, for example, has a supplier scorecard program. Is the writing on the wall now for suppliers that transparency is needed to remain competitive?
Jones: I think the signals are getting louder and louder. I think what was a whisper is now a shout. I think that’s a good thing. And I think that a lot of our suppliers are beginning to wake up; that there are new rules of engagement and that they will be, in this era of transparency, owning their reputations. And that it will be important; that it is a competitive advantage.
GreenBiz: How do you balance environmental and labor issues?
Jones: We’ve been pursuing a huge amount of work around… the labor side of things and the environmental side of things. And then you’ll see in the manufacturing index, the environment piece is coming into it. I think what you’re going to see is even more convergence in the years to come, where we pull all these different sorts of indicators together. And it’s a balancing act.
GreenBiz: Where does Nike still need work to achieve its goals? Where are the places where you have the most catching up to do?
Jones: There are different areas that I think about and that the team thinks about. We run sustainability now as you would almost an innovation pipeline. There are different kind of issues that hit at different times in that pipeline. For some issues that we have out there, there simply isn’t a solution yet that’s obvious. And what we need is… solutions. We need new technology and new chemistry, new materials, to swap out with the old. So there is an innovation challenge and it’s really about sending a signal to innovators in the company and outside the company, that we are in the hunt for alternatives.
As you get further down into the commercialization nature of things it’s about how you get mainstream adoption. Because at the moment sustainability, absent strong policy levers being pulled, faces a scaling challenge. There is a cost to early leadership, and it’s the early cost of investing at a prototype level and all the money that goes into that R&D. So the faster we can get this to market and the faster we can get sustainable options to be the default, the more viable it becomes. It becomes a kind of self-fulfilling prophecy in a very good way.