Companies are under pressure to make their supply chains greener. There are several reasons but most revolve around regulations, quality and enhancing value for companies and their suppliers.
During the last four years, the nonprofit World Environment Center has helped companies such as Alcoa, General Motors, Dow Chemical and Johnson and Johnson strengthen their extended supply chains. The results from these projects are compiled and analyzed in "Greening the Supply Chain in Emerging Markets: Some Lessons from the Field." The report is second in our new GreenBiz Reports series by thought leaders in the green business arena.
I spoke recently spoke to Terry Yosie, the WEC’s president, CEO and author of the report, to talk about the things companies need to know about green supply chain initiatives. In Terry’s words, We’re not talking about philosophy, public relations or politics. Greening the supply chain is about dollars and it’s about cents.
Tilde Herrera: Hi, Terry.
Terry Yosie: Good day to you.
TH: Now, Terry, how would you define a green supply chain?
TY: I think fundamentally a green supply chain has to be looked at as part of a business process with very direct and measurable value that greening the supply chain can create. I think that the green supply chain has to achieve several fundamental objectives. These would include raising the operating standards and practices and performance across the supply chain.
Secondly and more specifically, reducing any negative environmental energy in societal impacts from business operations while enhancing the positive aspect of how businesses conduct their activities in local communities and on a global basis. I think thirdly an effective green supply chain initiative would promote enterprise development, would make suppliers competitive, more efficient, thereby increasing the efficiency of the entire business set of activities.
I do not view greening the supply chain as a set of one off activities. Rather they have to be part of a broader business strategy that integrates sustainability together with the business operations in both specific locations, but also on a global basis.
TH: Can you give us a couple common examples of green supply chain initiatives?
TY: Sure. The kind of green supply chain initiatives that The World Environment Center conducts would include projects involving energy, supply, energy use, energy efficiency, environmental performance improvements whether that's air quality, water quality, waste management, as well as safety. These are all issues that ultimately affect both communities and consumers.
We particularly focus on energy efficiently and clean production and natural resource use from a standpoint of the opportunities they provide to reduce business costs. But also the opportunities they create for product innovation, reduction of climate footprints, decrease toxic emissions. I mean, I'll give you a very specific example where these kinds of activities need not be rocket science or bust the budget.
There are just loads of examples particularly in the emerging markets where something involving the use of natural lighting can reduce the energy cost to a facility or the substitution of light bulbs can improve energy efficiency. Those are very practical kinds of low hanging fruit that a supplier of any level of sophistication can implement and by doing so create some cost efficiencies, proves it's environmental performance and begins process of learning on how to climb that ladder of sustainability so that they, in fact, become a more sustainable enterprise.
We're working with global companies like Alcoa, like General Motors and others to implement these kinds of projects and their operations around the world.
TH: Can you talk a little bit about how those partnerships were formed?
TY: Generally, they result from a conversation with one of our member companies, and I'll use General Motors as an example.
TH: O.K.
TY: General Motors is rapidly expanding its manufacturing capacity in China because it wants to provide automotive products for the Chinese domestic market. And so several years ago GM, which is a member of The World Environment Center, approached us to undertake a demonstration project to learn how to implement greening the supply chain activities amongst its Chinese suppliers.
So we did a small project that took about a year with eight suppliers and concluded that there were in fact were measurable reductions in water consumption and emissions and other indicators that could be obtained at very reasonable levels of cost investment. In fact, in some cases reducing cost. That became part of a broader strategic examination within General Motors to look at something with their joint venture partners. They have a joint venture with a Chinese auto manufacturer and that joint venture is called Shanghai General Motors. We're now working with 40 suppliers of Shanghai General Motors that has a business strategy called The Drive to Green.
Greening the supply chain is one element of this Drive to Green that involves everything from building alternative fuel vehicles and many other kinds of product innovations. But greening the supply chain is connected to this broader business strategy that I talked about at the earlier part of my remarks. And so we're looking to work with these suppliers to achieve energy efficiencies, reducing emissions footprints, looking at opportunities for reducing water consumption. A whole range of indicators -- sometimes involving capital investments, sometimes involving just good housekeeping, but we have a system for tracking these improvements, working hands-on with the suppliers day-in and day-out.
TH: So again you talked about aligning these initiatives with the companies' core values and overarching sustainability strategy. Why is this important?
TY: Well, I think you only have to read today's headlines to see the consequences of companies who don't adhere to the goal of greening their supply chain. We saw this in some of the pharmaceutical companies where their suppliers were mom and pop operations in China and the resulting products were subject to contamination that had very direct adverse impacts on public health.
I think we've seen this in the food supply. I think we've seen it in even something as mundane as pet food. And so companies, their reputations, their risks of the business become magnified when they lose control of the integrity of their operations as conducted by suppliers. So these examples continue to mount and I think global companies are under increased scrutiny to fix this situation.
TH: Now, some of these global companies that we're talking about have these massive supply chains that are spanning continents. What are the most significant obstacles that are facing these companies?
TY: Well, I think there's several significant obstacles. One of them is the sheer magnitude of the supply chain. Some of these global companies have tens and tens of thousands of suppliers. And it's very, very difficult to keep an individual tracking and accountability of their performance. So I just think the magnitude and complexity of the business operation is a big challenge here. I think there's some other challenges though.
One is that within many companies, it is often the case that the people who are calculating the value of an investment, the return on the investment, they don't believe that a greening the supply chain investment or a sustainable development investment is on an equal par with traditional kinds of construction projects or other things that they're used to. So I think there is some need for further awareness building and conversation within global companies as to how they're actually defining return on investment.
Secondly, I think there's a very growing conversation within these very large companies in terms of what their sustainability objectives are versus what their procurement objectives are. These are very different cultures, very different groups of people within company. And I think what's starting to happen is that the procurement staff, both at corporate headquarters and in the field are starting to face many more pressures, whether that's on environmental issues, whether that's on human rights, labor standards.
I think they're looking for answers and I'm beginning to see a much more robust and comprehensive dialogue, even within companies, on terms of how they integrate the procurement and sustainability objectives. I also think that a set of obstacles deals with the factors that go beyond the company.
In many of the developing country markets where companies have business operations, you don't have government regulatory standards or capacities. You don't have sufficient technical knowledge amongst the stakeholder community, or even the government. And so I think that is actually, over time, becoming an increased burden for global companies because what will happen over time is that expectations will change on the part of communities. And they're going to have to make more direct investments and support in this capacity building so that there's clarity about what the rules are and that they're enforced and things of that nature.
So those to me are some of the obstacles that are confronting global companies, and greening the supply chain is one response to that set of obstacles.
TH: Well, how do you overcome those challenges?
TY: I think where I would start is that every company that has global operations needs to construct its own value proposition. Within the corporate business objectives, within the corporate culture, there needs to be a plan. There needs to be a set of goals for how these companies are going to integrate sustainability into their business processes and objectives. That's where I would start because only when you integrate this with business objectives in a seamless way will you ever be able to continue a commitment to sustainable business practices. So that's where I would start.
I think also there's another way to recognize these challenges is (to) face a series of facts. One is green supply chain initiatives are a way to actually manage and mitigate your business risks because they give you more control of your own destiny if you are engineering risks out of your processes and products.
There're opportunities to reduce cost. There are opportunities to motivate your suppliers to perform better, and by doing so, you actually preserve your business continuity because if you're selecting suppliers that are performing well on sustainability indicators, chances are you're going to want to do business with those suppliers consistent with your economic needs. And so that actually helps you manage the complexity of your supply chain operations.
I'm seeing more evidence that companies are wanting to gain more control over their supply chain and that they're looking to use sustainability as a barometer for how to do this. I mean, I think that's what Wal-mart's trying to do in China right now. The CEO of Wal-mart was in Beijing with approximately 1,000 of its major Chinese suppliers announcing a series of commitments directly aimed at the supply chain.
And so I think this is an example of where a global company is trying to, first of all, state what the value proposition is of this green supply chain activity, link it to Wal-mart's overall corporate strategy, and then execute that strategy down across the supply chain. So I think that's a good example of how companies are trying to overcome some of the obstacles.
One other comment I'd make is a lot of attention is starting to focus on who the suppliers are -- the small- and medium-size enterprises in the majority of cases. These are companies that range from global organizations in their own right with many thousands of employees, all the way down to mom-and-pop operations where five people in the family are providing inputs into a business process and into a product.
So the variability and the complexity across these SME suppliers varies tremendously. I think one of the ways of overcoming challenges across the supply chain is increasingly to ask the question from the corporation's standpoint of how do we manage their supply chain in a way that delivers more value for the suppliers? Because ultimately what you want your suppliers to do is have incentives to perform better.
You can do some of that by issuing edicts from corporate headquarters, but a lot of this really depends on what's happening on the ground thousands of miles away from any corporate headquarters and having the management system and the incentives in place so that you're able to track what these suppliers are doing over time.
TH: Terry, what advice would you give to management overseeing these efforts?
TY: I think there're several lessons that we have learned at The World Environment Center from the work we have done in countries as varied as Romania, China, El Salvador, Brazil, Australian other places. One is that if you're going to have an effective greening the supply chain program, there has to be an on the ground capability in the countries where you're suppliers are located.
You cannot manage greening the supply chain initiatives in corporate headquarters. Can't be done, and I think maybe some companies are still under the delusion that they can issue some policy statement from on high and it will get carried out, but our experience is that a direct on-the-ground level of capability is really the place where you need to start because many of the suppliers do need training. They do need technical support in order to upgrade their systems and their knowledge of how to perform better. And I believe the catalyst in making this happen is, in fact, the global customer, the global company.
There are times when the global companies can find some very effective partners. We've been able to partner global companies together with the U.S. Agency for International Development or other multi-lateral organizations who share an interest in having emerging markets also be attractive areas for investment while implementing sustainability,
So, in addition to having this on the ground capability, I think partnerships are a very effective approach. A global company will not have all of the knowledge, all of the people in those emerging markets. And so it will by necessity have to look for other organizations to partner with, to provide services, to deliver information and the support so the supply chains achieve the objectives that the company wants.
I also think that another critical factor of success, and I couldn't be strong enough in urging senior management to recognize this, is that you have to work within the context of the local culture with local people. This is not something where Western-oriented companies can just impose their value system and their way of thinking on the SME suppliers. In many ways, I'm seeing evidence where the local suppliers are imparting knowledge that will inform the global company.
And so this is increasingly over time going to become a two-way street. But global companies need to work within the context of the local culture, local people, in order for this to be recognized as an increasingly legitimate activity that's going to benefit the SMEs in the emerging markets.
TH: What do you think, Terry, are the big take-aways here, if you could narrow it down to the three things that companies need to know about greening their supply chains?
TY: I think the three things that companies need to know about greening their supply chains are the following. One: We're not talking about philosophy. We're not talking about public relations. We're not talking about politics. Greening the supply chain is about dollars, it's about cents, it's about creating business value in a way that's aligned with sustainable development. We're talking about specific business processes that have to be managed as such.
The second take-away is that greening the supply chains should not be thought of as a series of one-off activities. Rather, what companies learn in one emerging market should be scaleable, should be transferable to other markets in other cultural settings. A global company has to have a processing place, a management processing strategy for knowing how to scale its supply chain activities to a much larger degree.
And a third take-away is that greening the supply chain really has to be a specific expression of a company sustainability strategy. That sustainability strategy, if managed in the right way, can differentiate a global company. It can produce an enhanced brand and reputation, but fundamentally, it also has to be aligned with the business objectives of the company -- to support the business strategy and to ultimately be able to communicate the results of greening the supply chain to your customers and to your stakeholders.
Tilde Herrera is associate editor at GreenBiz.com.