Creating a Sustainable Supply Chain – Best Practices and Business Drivers

Spend Matters welcomes this guest article by Elizabeth Ichniowski from The Hackett Group.

Many multi-billion dollar companies have been making headlines, announcing important and ambitious sustainability initiatives ultimately designed to reduce total carbon emissions. August saw Coca-Cola, a $46.9 billion company, announce an additional $5 billion investment in its Africa supply chain project. The investment will support new manufacturing lines, cooling and distribution equipment and production, as well as a program called "Source Africa," which will seek to secure more "consistent and sustainable" local ingredients and raw inputs for Coca-Cola from across Africa. Following Coca-Cola's announcement, Kellogg, a $14.8 billion company, announced a more comprehensive program to commit to a sustainable supply chain. Kellogg plans to disclose its greenhouse gas emissions and require its suppliers to do the same, promoting accountability and transparency throughout its own supply chain.

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Kellogg and Coca-Cola are 2 companies that are making important strides in creating sustainable supply chains. While most large corporations have acknowledged corporate social responsibility (CSR) initiatives are good business, all companies may soon be required to mitigate their environmental impact through reduced carbon emissions. President Obama has announced that he may act unilaterally to pass laws regulating carbon emissions. Research shows that 50%-70% of all greenhouse gas emissions for manufacturing companies originate in the supply chain, indicating companies will need to take steps to create a more sustainable supply chain.

While the concept of a “sustainable supply chain” is still relatively new, there is a budding consensus over best practices to follow when building a more sustainable supply chain. The National Bureau of Sustainability, in conjunction with various corporations, summarized these best practices (which have been modified slightly):

  1. Define Company Objective:
    • Define ways management will communicate sustainable initiatives internally and externally
    • Develop a business case that illustrates the costs and payback period. Highlight all benefits, even those where the financial benefit is less obvious but the sustainability value is clear.
  2. Create Meaningful Expectations:
    • Interview and leverage experience and opinions of all stakeholders to create relevant documents to enhance the applicability, legitimacy and efficacy of policies.
    • Conduct appropriate environmental research, in the context of international supply chains, to better anticipate challenges and to allow for organization to pro-actively manage supply chains.
    • Search for and assess the applicability of pre-existing standards that the company might adopt, thus improving efficiency and avoiding audit fatigue.
  3. Select Suppliers and Agree to Targets:
    • Create an interview process with qualitative measures to select and develop a supplier base, relying less on the traditional “tick box” selection scenario.
    • Create a safe and open environment that allows for and promotes supplier-led solutions. This includes developing key performance indicators (KPIs) with suppliers, benchmarking KPIs across suppliers to guarantee that standards and metrics will stand up to external inspection and creating a set of clear and systematic processes to obtain performance data.
  4. Evaluate and Develop Suppliers:
    • Communicate effectively with suppliers regarding performance in relation to sustainability targets. Advise suppliers early if performance is not meeting goals.
    • Create a development a program for suppliers as a means to understand supply chain failures and as a way to support and improve future performance.
  5. Build on Past Successes:
    • Cultivate and prioritize a culture of learning, highlighting the importance of transparency and accountability as imperative for success and persistent growth.
    • Measure continuously the company’s performance against KPIs and metrics developed above.

The shift to a sustainable supply chain typically requires a sizable upfront investment as well as a significant change in the culture of the organization. However, current research indicates that the business case for more sustainable business operations is quite strong. The noted benefits include the ability to reduce costs significantly with the potential to increase revenue through innovation and enhanced market demand. Companies with best practices around sustainability will continuously screen customers for unmet needs generated by sustainability developments in the marketplace. McKinsey notes that GlaxoSmithKline is developing flexible pricing schedules for drug deployment in developing countries. By reducing prices, GSK hopes to have a first mover advantage in developing markets, gaining significant revenue and market share. Specifically, a preemptive shift to a sustainable supply chain has positive business impacts including risk management, realizing gains through more efficient operations and creating sustainable products.

Early research and case study examples show that pro-active management of sustainable supply chains allows for companies to better protect themselves from supply chain interruptions that arise due to environmental risk as well as unforeseen governance challenges, particularly in developing markets. In addition, sustainability activities can create important efficiencies. For example, responsible management of inputs can greatly reduce overall costs. An Accenture report titled, “Why a Sustainable Supply Chain is Good Business,” noted that in a sustainability effort, a beverage company was able to decrease the amount of fuel used for distribution trucks by 1.4 million liters (a significant cost savings), thereby reducing CO2 emissions by 3,900 tons.

In summary, while the short-term impact of transitioning to a sustainable supply chain may cause growing pains, the long term benefits that can be achieved are impossible to ignore.

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