A Green Supply Chain Starts in China
[Editor's note: This article was authored by BSR, a global business network and consultancy focused on sustainability.]
As companies work to reduce their carbon footprint, the easiest steps to take are often the closest to home.
Yet for companies with global operations or supply chains, the biggest practical wins are likely to be found in improving energy efficiency of owned and supplier facilities overseas, where they have the ability to multiply impacts across tens, hundreds, or even thousands of sites through relatively simple central coordination.
For companies looking to increase their supply chain’s energy efficiency, China is a good place to start, for a number of reasons:
• China is a top location for energy-intensive manufacturing and a key node of many supply networks.
• As the No. 1 emitter of greenhouse gases, China is likely to face more regulatory pressure to improve its performance.
• Due to its size, China is an ideal place to take energy-efficiency programs to scale.
BSR has spent the last several months helping Walmart establish its supplier energy efficiency program in China, where the company has set a target of improving the energy efficiency of 200 factories by 20 percent over the next three years. Working with Walmart, we have seen firsthand how initiatives from other countries can be adopted and adapted to the Chinese context.
This is BSR’s guide to starting energy efficiency programs at company operations and in company supply chains in China.
First, the Basics of Building a Successful Program Anywhere
Be Flexible. Effective energy-savings programs, particularly for owned operations, often focus on a specific goal but leave significant flexibility for how corporate targets will be met. Rather than taking a strictly top-down approach that regulates specific changes in technology and behavior, BSR recommends developing an initiative based on strong leadership and a clear mandate for change. This allows internal business units to find their own solutions and strategies for meeting targets.
The need for flexibility and autonomy is even more pronounced when companies deal with suppliers. Companies often have limited visibility into where the most significant energy savings might be in supplier operations. The best approach is therefore to provide specific tools or approaches that suppliers can use to discover and implement customized solutions for themselves.
Focus on the People and Systems, Not Advanced Technology. Companies usually gain more by investing in existing people and systems rather than expensive new technologies. For example, Swire Beverages, a major Hong Kong-based bottler, has created energy-management committees composed of production, engineering, environmental health and safety (EHS), and facilities managers who meet regularly to explore possible opportunities for reducing waste and increasing the productivity of manufacturing and logistics processes.
Get Buy-in From Senior Management. This is essential to establish a clear direction and goals for people within the company. Many of the most successful initiatives have been started by executives who challenged employees to reduce energy use or carbon emissions, and then charged each department with determining how to do it. In this way, management can solicit opinions from employees and reward those with innovative ideas. Inter-departmental competition can make the process fun and increase employee engagement. These management techniques can turn employees into an asset rather than a barrier to energy efficiency and waste reduction.
Management buy-in is also necessary when working with suppliers, even if they are small factories. In this situation, while you may target facilities or EHS personnel with trainings and tools, the general manager or other central decision-maker should be your direct liaison.
Don’t Wait to See the Data Before You Act. Good data can help you justify new programs and is important for evaluating progress toward goals, but program development can be unnecessarily slow if the initial focus is on assessment of current energy usage. During start-up, while you are building the system and processes for data reporting, most information should actually be flowing toward suppliers, in the form of trainings, tools, and ongoing support. With this approach, suppliers are more likely to align with the emphasis on action, which subsequently can be supported by trustworthy reporting.
Managing from Afar
The lack of hands-on operational control can present challenges -- especially for companies with a large supplier base. To ensure that your program is creating the right incentives, invest time and resources in designing the appropriate system for reporting, monitoring, verification, and communicating the right message to suppliers.
Here are some tips for an effective supplier program:
• Clearly communicate goals, progress, and incentives. Demonstrate your own commitment with clear, quantitative expectations, and then work closely with suppliers to monitor and track progress, and share successes and challenges with other relevant stakeholders.
• Focus on multiple benefits. Energy-saving efforts can provide significant financial returns for suppliers.
• Emphasize that you are building long-term relationships with suppliers. Suppliers will recognize the need to be in line with the company’s goals and values to maintain the relationship, and with an emphasis on long-term partnership, suppliers can make investments that require a longer payback period.
• Explore cost-sharing options. In one supplier program, a global furniture firm paid the program and consulting fees, while the factory paid for energy meters.
• Promote open communication. Frequent and transparent communication on progress is an important way to provide both support and resources, and to collect credible data to verify claims about energy savings and emissions reductions.
Second, What’s Special About the Chinese Context?
Many of the lessons from BSR’s energy-efficiency work in China are equally valid for other locations, but working with suppliers in China has specific challenges related to the regulatory context, economic incentives, and the availability of technical and financial resources.
When working in China, business leaders should:
• See the government as not just a regulator but also a resource. The Chinese government has become increasingly proactive in encouraging improvements in energy intensity (amount of energy used per unit of GDP), and the government’s new regulatory targets have been accompanied by resources and training support for manufacturers. Government can also provide advice on project implementation as well as clear direction on how energy-intensity targets are being applied and measured.
• Watch utility and fuel prices. Currently, water and electricity are heavily subsidized, which limits the return on energy-savings investments. The economic argument for energy efficiency will be stronger when utility prices rise in accordance with government plans. Some cities and provinces are already beginning to test price increases. Be prepared to take advantage of improvements in the economic argument for energy savings, but meanwhile look for other ways to strengthen the business case.
• Seek financial help. Many sources provide financial help for energy-efficiency investments, including local governments, energy service companies (ESCOs), the Hong Kong Productivity Council, the International Finance Corporation’s China Utility-Based Energy Efficiency Program, the P2E2 program (a partnership between the U.S. Environmental Protection Agency and China’s State Environmental Protection Administration), and international and local banks.
• Use ESCOs to fill knowledge gaps. The ESCO market in China is young but growing rapidly, with both domestic and foreign service providers offering a range of consulting and project-management services. Some cheap, do-it-yourself methods such as installing energy meters can create useful data to help suppliers understand where the energy savings opportunities lie, so they can make an informed decision about when to call for external consulting expertise. BSR has also been working with ESCOs to provide low-cost technical training sessions for factory managers, as consultants are often willing to share basic information and tips on energy management at supplier forums and workshops.
Work on energy efficiency in China has been gradually building for a few years, and it is now expanding rapidly as an increasing number of global companies endeavor to improve supplier performance along with their own environmental impacts. This presents a real opportunity for global companies with operations and supply chains in China to make a bigger impact in emissions reduction.
For more information about how your company can get started, contact Ryan Schuchard, BSR’s manager of environmental research and innovation in San Francisco or Laura Ediger, BSR’s environmental manager in Hong Kong.
Image CC-licensed by Flickr user Erik Charlton.