As nongovernmental organizations heighten their monitoring and the Chinese government enforces new laws to increase transparency and accountability, multinational corporations can expect growing pressure to run a clean supply chain.

But rather than simply monitoring Chinese suppliers’ compliance with local environmental, health and safety (EHS) standards, leading companies are giving suppliers tools and incentives to independently improve environmental performance.

And at the same time, they are overcoming their traditional reluctance as competitors to cooperate in monitoring and fixing problems at common suppliers.

We group the lessons multinational corporations have learned into two categories based on “the knowing-doing gap” -- that is, what you need to know and how you should act on what you know.

Any sustainability effort in China must start by creating a context that facilitates identification and visibility into the supply chain. Activities that can help foster a knowing environment in China include:

• Providing incentives for identifying, disclosing and addressing problems.
• Collaborating with nongovernmental groups to facilitate monitoring and helping Tier 1 and subtier suppliers self-identified problems.
• Making use of improving Chinese government data to augment internal supply chain transparency efforts.
• Working with multibrand forums to standardize Chinese supplier audit data at Tier 1 and subtiers.
• Encouraging environmental transparency as an efficiency tool.

Photo of Shenzhen electronics factory provided by Steve Jurvetson via Wikimedia Commons

Act on Knowledge from Improved China Transparency

Once buyers have created an environment that provides visibility into their Chinese supply chain, they need to respond effectively to the knowledge they have gained. To accelerate this process in China, companies should follow seven courses of action:

1. Encourage the training of more Chinese environmental professionals. China may enjoy an abundance of factory labor, but it suffers from a severe shortage of sustainability professionals. Not recognized as important in China until recently, the discipline was not taught at Chinese universities, and few Chinese entered the profession.

2. Put skin in the game. Prospects for ownership of environmental improvement are greatest at Chinese factories where concerned buyers have invested time and money. Consider the case of Nike. Over the last six years, the Beaverton, Ore., athletic shoe and sports apparel brand has implemented an intensive environmental engineering program at some 40 footwear suppliers located primarily in China, Vietnam and Indonesia.

3. Learn from your suppliers and facilitate learning among suppliers. A nascent movement among proactive Chinese suppliers to share environmental data and plans with buyers is beginning to grow. 

4. Collaborate with other buyers to drive change in your common suppliers. To get the many more unenthusiastic suppliers to take requests for environmental improvements seriously, concerned buyers are working together in China to boost their collective leverage.

5. Find like-minded buyers with whom to build collaborative auditing and remediation processes at shared factories. Striking up collaborations on EHS audits with one or two other brands, however, can be complicated, however, as a globally accepted environmental accountability standard does not exist yet.

6. To reach Tier 2, you need friends. Given resource constraints and the complexity of having all the conditions in place for successful buyer-to-buyer collaboration on environmental monitoring and remediation, collaboration via multi-stakeholder forums led by NGOs or industry groups may offer greater hope for environmental improvement, particularly further up the supply chain.

7. Tailor programs to local realities. Similarly, buyers may run into problems finding credible technical service providers in China to work with their suppliers.

Halfway Up the Mountain

None of this will be quick or easy. Unlike with earlier initiatives, buyers and NGOs alike are under no illusion that Chinese supply chains -- indeed, any emerging-market supply chain -- can be brought into environmental compliance overnight. Instead, concerned buyers now see improving transparency and environmental performance as a gradual process that requires thoughtful engagement with suppliers.

As Andy Ruben, Walmart’s vice president of private brands and former vice president for sustainability puts it, “We need to push what we and our supplier base are comfortable with, but at the same time we realize that if we are halfway up the mountain and our supply base is not with us, we’re not really halfway up the mountain at all.”

This article is adapted from Improving Environmental Performance in Your Chinese Supply Chain by Erica Plambeck, Hau L. Lee and Pamela Yatsko, which appeared in the Winter 2012 issue of MIT Sloan Management Review.  This interview is part of MIT SMR’s research and content theme, Sustainability & Innovation.  The complete interview is available at http://mitsmr.com/LBn3cF.

Copyright © Massachusetts Institute of Technology, 2012. All rights reserved.