Responsible and profitable supply chains
Responsible and profitable is possible
“Responsible can be profitable” said Stuart Rose, CEO of Marks and Spencer – an up-market UK retailer in 2007. Fast forward to 2012 and Marks and Spencer announce that their ‘Plan A’ sustainability program has delivered a net benefit of £105m ($170m) this year: a material contribution to the retailer’s £700m ($1100m) annual profit. With supply chain as a major component of the Plan A program, Marks and Spencer is surely a poster child for the central theme to this year’s Ethical Corporation Sustainable Supply Chain Summit – ‘turning risk into opportunity’. The summit featured a diverse range of companies describing how they are championing sustainability in their supply chain and moving from a risk focussed mind-set to innovation and opportunity.
Understanding risk and opportunity for sustainable supply chain
Sustainability risk in the supply chain is not new to companies. Nike was targeted by NGO’s for consumer boycott campaigns in the 1990’s – a boycott reportedly hurting profits, whilst also incurring collateral damaging to the brand. One apparent positive outcome of these campaigns is that supply chain sustainability is now a burning platform for Nike: this has enabled the organisation to drive towards sustainability leadership. Transparency is today a major part of Nike’s sustainability agenda, with public partnering with NGO’s, a published supplier scoring regime – the ‘Manufacturing Index’ , and the disclosure of factory audits available to any interested party through third party verification organisations such as the Fair Labor Association. For Nike, supply chain sustainability has switched from a bête-noir to an opportunity to grow trust in the brand – through demonstrating responsibility and openness, and to stronger collaborative relationships with their suppliers as a foundation for better business.
With 160,000 suppliers globally Nestlé understands the importance of managing supply chain risk and need solid systems in place to support them in this task. Social issues such as child labour and living wages are some of the key concerns for its supply chain. In response Nestlé developed and distribute responsible sourcing guidelines tailored to 12 strategic commodities. Nestlé, like Nike, has been targeted by campaigners – most recently on the issue of non-sustainable sources of palm oil – a commodity associated with deforestation. Like Nike, Nestlé are working to transform a risk to their brand into an opportunity to build brand value, through partnering with NGO’s and tangible successes in supply chain improvements. Nestlé work with The Forest Trust to improve its palm oil supply chain and has also joined the Fairtrade scheme for select products, to simultaneously mitigate risk through certification of their cocoa supply whilst differentiating their products in the marketplace.
The transformation from risk-centred approach to opportunity-led thinking fits with Reckitt Benckiser’s sustainability agenda. Managing risk through ensuring a reliable and responsible supply chain is an essential corporate practice. Reckitt Benckiser is also driving for to product innovation as a key pillar of product innovation: Reckitt Benckiser has set targets to derive one third of net revenue from more sustainable products by 2020.
Trends in sustainable supply chain and products
Indeed, growing the portfolio and revenues attributable as sustainable products is an increasingly evident component of corporate sustainability leaders’ core business strategy. Alternatively, some companies are pledging to improve the sustainability performance across the entire product portfolio. Reckitt Benckiser is joined by Nestlé, Nike, Marks and Spencer, B&Q, H&M and Marshalls in building sustainable supply chain and products into business strategy.
According to a 2012 Sustainability Leadership Report from Brandlogic Corp. and CRD Analytics, 88% of respondents – investment companies, buyers and graduating university students – state that good corporate citizenship is “important” in the decisions they make. A growing number – nearly half of all respondents – cite this as “extremely important”. Furthermore the report claims that social factors such as labour rights – factors that require buying companies to have good transparency and effective management of their suppliers – are twice as important as environmental or governance factors in determining respondents’ perceptions of good corporate citizenship.
Figure 1: Stated importance of good corporate citizenship (Source: Brandlogic Corp., CRD Analytics)
But delivering sustainable supply chain and products is not easy. One common message at the summit was “You can’t outsource sustainability”. Companies need transparency in their supply chains, clear and comprehensive policies, robust processes and supporting tools to manage sustainability across their supply base and upstream in their supply chain. Buying companies and brand owners cannot simply expect that suppliers hold the same sustainability values. Sustainability criteria and goals must be clearly articulated, included in commercial terms and embedded in supplier evaluations for sourcing decisions and on-going supplier management.
Supplier audits are an essential part of assuring sustainability in your supply chain. Audits can be expensive and are worthless unless managed carefully. With many companies having tens of thousands of suppliers, companies need to approach supplier auditing with intelligence and pragmatism, to balance audit costs and supply chain risks: a higher level of auditing is expensive and a lower level increases risk of a sustainability catastrophe and supply chain disruption. Business tools that assess supplier risk and enable a strategic, informed approach on which supplier to audit, and when, would help companies balance the risk and save unnecessary costs.
Speakers at the summit articulated supply chain transparency as a growing concern for responsible businesses. Many businesses have ‘deep’ multi-layer supply chains and cannot afford to be blind to supplier activities and relationships beyond their direct tier 1 suppliers. For brand owners their supply chain sustainability risks and opportunities lie further up the supply chain. Companies at the conference found challenges in knowing the ultimate source of some commodities, because of layers of intermediaries such as traders and merchants. Businesses need intelligence on their tier 2+ suppliers – the full supplier network – to have confidence that their supply chain is ‘clean’ and that sourcing is sustainable. Circling back to supplier auditing trends, a number of companies stated that going forward they will use their audit budgets for inspections of suppliers beyond tier 1, where transparency allows and risk assessment dictates.
Many companies already have sustainability embedded in supplier scorecarding.Importantly, some companies at the summit are beginning to build sustainability targets for buyers and for suppliers. Thus for suppliers sustainability becomes a mix of compliance – the right to play in the market – and opportunity, improving your standing for customers, and consequently your share of their procurement spend. Additionally, for buyers the need for reliable sustainability information about your suppliers is elevating as it is forms part of your spend decisions and terms of business. Enterprises have growing demands for auditable procurement solutions that formalise these commercial terms and goals, and support reliable and rich assessment of supplier performance against them.
Responsible and profitable supply chains needs integrated sustainability
Perhaps the clearest trend we see from hearing companies describe their supply chain sustainability program is that leading enterprises – particularly brand owners – need sustainability as an embedded capability in their procurement and supply chain management tool-set. Making sustainability part of how you do business means that businesses must empower a range of roles to plan and execute holistically – sustainability criteria folded into conventional business activities. For example, during the sourcing process buying companies request information from prospective suppliers: that same information request – and the subsequent evaluation across supplier responses – can be expanded relatively effortlessly to accommodate sustainability characteristics as a part of the criteria set. Category managers, buyers, sourcing departments, demand planners and portfolio managers will particularly benefit from a new generation of business software; solutions that move away from silo sustainability to instead fully support companies in integrating sustainability into daily business processes. After all, embedding sustainability into business is the only outcome that makes sense if enterprises are to meet sustainable supply chain goals enshrined in their business strategy, and are to succeed in delivering responsible and profitable supply chains and products.