Stakeholder pressure from investors, shareholders, customers and nonprofits to push sustainability into the supply chain has significantly increased in recent years, with a record number of shareholder resolutions on supply chains issued during the past two proxy seasons. The recently launched Global Reporting Initiative (GRI) G4 Guidelines also requires an increased focus on sustainability throughout the supply chain.
By managing and improving environmental, social and economic performance throughout supply chains, companies can conserve resources, optimize processes, uncover product innovations, save costs, increase productivity and promote corporate values. Research shows the business case for supply chain sustainability is growing.
While more companies expand their sustainability programs to include suppliers, they struggle with implementation. The UN Global Compact's 2013 Global Corporate Sustainability Report finds that companies are increasingly talking about supply chain sustainability and making solid progress on setting expectations for suppliers. However, they are not yet supporting expectations with concrete actions that drive sustainability performance in their supply chain. Incidents such as the factory collapse and fires in Bangladesh last year highlight the need for increased and urgent actions in this area.
Incorporating sustainability into a company's supply chain is complex but the failure to act may be the biggest risk of all. Companies can take several initial steps to move toward sustainable supply chains:
1. Map your supply chain
Many companies do not have a comprehensive understanding of the sustainability impacts of their supply chain. An early step is to inventory suppliers, identify the most significant environmental and social challenges they have, and prioritize efforts with suppliers.
New Balance Athletic Shoe Inc. reduced the number of suppliers it does business with, in part based on performance against sustainability criteria. The company reduced its footwear supply chain by 65 percent and is focused on forming strong, positive partnerships with its suppliers. Some criteria that may be helpful for prioritizing suppliers include level of spending, importance to business continuity, and geography as a proxy for risk.
CH2M HILL established a supply chain sustainability strategy for evaluation and election of products, complete with procedures, tools, communications, training and metrics for reporting implementation progress. Since 2010, CH2M HILL has identified suppliers with strategic or preferred status based on volume and business impact. Tier 1 and Tier 2 suppliers are required to provide information about their sustainability programs and demonstrate continuous improvement. Suppliers are classified into four groups of environmental performance, with each incorporating specific key performance indicators (KPIs). CH2M HILL's direct procurement organization has begun incorporating sustainability into the design, procurement and construction of projects by promoting the selection of suppliers and subcontractors that value sustainability.
2. Communicate expectations
Focusing on sustainability within your supply chain is a great way to communicate corporate values and culture to your suppliers and customers. Establishing and communicating expectations through a supplier code of conduct is a critical step in involving suppliers in your sustainability efforts.
Many resources and tools have been created to assist companies with the development of a supplier code of conduct. For example, the United Nations Global Compact publication, "Supply Chain Sustainability — A Practical Guide for Continuous Improvement" [PDF], has guidelines and tips for writing and adopting a successful supplier code of conduct. A new tool developed by the Global Environmental Management Initiative (GEMI) helps companies prioritize where in their organization's value chain they may have opportunities to improve supply chain sustainability, and then provides case studies of companies that have leveraged these opportunities.
3. Baseline supplier performance
Once you know who your target suppliers are and have set compliance standards, collecting data from suppliers through a simple benchmarking questionnaire or self-assessment will provide you an understanding of your starting point.
Many organizations, such as retailers, major brands and the U.S. Federal Government, have started evaluating the performance of their suppliers through questionnaires and surveys. Increasingly, organizations incorporate all areas included in their code of conduct with special focus and weight in the self-assessments related to areas that are important to their business. Our client work shows that more companies are aligning the content of their assessments with the GRI guidelines and CDP questionnaires. Some sectors, such as the electronics (Electronics Industry Citizenship Coalition Self-Assessment Questionnaire) and pharmaceutical (Pharmaceutical Supply Chain Initiative Self-Assessment Questionnaire) industries, have developed industrywide surveys to reduce the burden on suppliers of responding to multiple requests for information that varies in content and format.
The baseline assessments form the starting point for future programs to improve supply chain sustainability and help assess where the greatest need for improvement exists. For example, Pacific Gas and Electric (PG&E) uses response from the Electric Utility Industry Sustainable Supply Chain Alliance survey to gauge performance of its top tier suppliers on important aspects of environmental performance, including greenhouse gas emissions, energy and water usage, and waste generation. The information is used to compile the environmental metric in the annual scorecards for top tier suppliers and to identify opportunities to partner with suppliers to advance business practices in target areas
Communicating back to suppliers in a constructive way is critical for future engagement and provides encouragement for improvement.
4. Develop training and capacity building programs
This is an important step in improving sustainability and driving behavioral changes throughout your supply chain. Many external resources are available to support these efforts and some are tailored to specific sector needs.
In our experience, one effective way to transfer knowledge across the supply chain is to leverage the best practices and case studies from top performing suppliers at annual vendor conferences, via online training modules and through capacity building campaigns. By showcasing the success stories of selected suppliers, companies not only recognize their efforts but also demonstrate the practical benefits of sustainability initiatives to others in the supply chain. For example, HP has established supplier- and peer educator-run programs that have provided training to a large number of workers. Since the start of their capacity building program in 2006, HP has carried out 22 training programs in 12 countries on topics such as antidiscrimination, energy efficiency, labor rights and women's health. Through programs conducted jointly with its first-tier suppliers, HP has already trained 155 second-tier suppliers, leveraging the investment and knowledge-sharing efforts dedicated to Tier 1 supplier capacity building.
5. Drive performance improvement
Once supplier baseline performance is understood, an audit program can measure performance improvement over time. While in many cases, the self-assessments are completed by a corporate group, such as EHS, procurement or marketing, onsite audits can reveal local practices, behavioral challenges and practical opportunities for improvement that are difficult to identify through questionnaires alone.
Once your organization implements an audit program, be prepared to act on the findings by developing and executing corrective action plans by clearly communicating the results and your expectations to suppliers, developing a capacity-building program and, if necessary, terminating suppliers if non-compliance persists.
Assessments and audits paired with incentive programs that reward sustainability efforts have a greater ability to drive sustainability performance. Encouraging transparency and selecting or awarding more business to suppliers with stronger sustainability performance can be very effective in driving improvement. Where this is not possible, incentives — greater access to your value chain, such as access to customers or clients — also can be effective.
In an effort to avoid audit fatigue and to provide a common framework for evaluation, some industries have developed common auditing and assessment tools. For example, the Sustainable Apparel Coalition developed the Higg Index, a performance assessment tool for the apparel and footwear industries. The Electronic Industry Citizenship Coalition has developed the validated audit process that covers both social and environmental performance and includes an auditor certification program to drive for further consistency in audits. Chemical companies have formed a joint initiative called Together for Sustainability (TfS), with the mission of developing and implementing a global supplier engagement program that assesses and improves sustainability sourcing practices.
6. Join industry collaboration
Many companies recognize that complex supply chain challenges cannot be solved by individual efforts and that industrywide collaboration is required. Working in a pre-competitive environment, peer companies that share similar supply chains can set common standards and best practices for sustainability performance and allow suppliers to be evaluated on the same metrics. These collaborations help prevent audit fatigue, training redundancy and mountains of paperwork for suppliers working to meet similar requirements from their customers. Working with your industry peers is a great way to share knowledge about the sustainability performance of your suppliers.
The Zero Discharge of Hazardous Chemicals Programme (ZDHC), the Sustainable Apparel Coalition, the Outdoor Industry Association and the American Apparel and Footwear Association are a few examples of industry collaborations in the apparel and footwear sector. CH2M HILL is the program manager for the highly ambitious ZDHC Joint Roadmap, which has grown from six founding brands (adidas Group, C&A, H&M, LiNing, Nike Inc., and Puma SE) into a coalition that includes Esprit, G-Star Raw, Gap Inc., Inditex, Jack Wolfskin, Levi Strauss & Co., Limited Brands, Li Ning, M&S, New Balance Athletic Shoe, Inc., PVH Corp. and United Colors of Benetton. These brands are working together to integrate higher standards of environmental and business practices for their industry by eliminating the use of 11 classes of hazardous chemicals from textile production by 2020.
If you have a more mature supplier sustainability program, your company can do even more:
• Develop and/or deploy robust tracking tools, including software solutions, to monitor supplier performance and improvement over time
• Perform a logistics assessment to determine where sustainability improvements can be made
• Integrate supply chain sustainability criteria into the procurement process
• Create a shift towards supply chain sustainability by leveraging your buying power and influence
• Expand your sustainability goals beyond your direct operations across your supply chain
• Encourage innovation
But don't get caught by the biggest risk of all: not acting.
Jigsaw image by billdayone via Shutterstock.