Managing Green Supply Chains: Best Practices and Long-term SolutionsPublished in Knowledge@Wharton
One inescapable fact dominated the discussion at a recent conference organized by the Initiative for Global Environmental Leadership at Penn/Wharton (IGEL) entitled, "Greening the Supply Chain: Best Business Practices and Future Trends." As much as customers value sustainability, very few are willing to pay more for it, at least right now. Study after study (as detailed elsewhere in this report) has confirmed this conclusion, which explains why the focus of several of the conference presentations was about how to green supply chains and cut costs.
According to Rajat Kapur, project manager of "ecomagination" at General Electric (GE), despite the widespread perception that companies have to choose between what is good for the environment and what is good for the bottom line, GE believes this is a "false choice" and that companies can do both. Several other speakers and supply chain experts interviewed for this report shared this perspective and offered a wealth of ideas and approaches that have allowed their companies to do good and do well.
But will what's best for the environment always be in the best financial interest of companies? Many are skeptical, including Eric W. Orts, faculty director of IGEL and a Wharton legal studies and business ethics professor. Orts pointed out that most academics think "there are often costs associated with environmentally responsible choices. It is cheaper if you can externalize pollution to somebody else, and then it doesn't come into your product cycle. That way, you don't have to account for it in the supply chain."
One reason for this skepticism is that the relatively easy, short-term steps companies are now taking, as beneficial as they may be -- installing more on-off switches and valves, reducing the distances products travel to market, using rather than losing excess heat generated during manufacturing -- are not enough to carry the day. Robert Giegengack, a professor emeritus at the University of Pennsylvania's department of earth and environmental science, made the point early on in the conference: "We are congratulating ourselves that we are becoming more sustainable," he said, "but we are not. We are becoming less unsustainable. And we'll begin to approach the question of global sustainability when we carry this discussion back to the beginning of the supply chain, because in every case but two [water and oxygen], we are extracting natural resources at rates that far exceed the rate at which they are being replenished."
These twin themes -- the good work companies are doing right now and the need to address much more difficult, longer-term solutions -- run throughout the discussion of how best to manage green supply chains.
Current Best Practices
Underlying the generally painless and often profitable steps companies are taking to green their supply chains are a few core principles.
Choose the right suppliers: One of the most obvious first steps to take is to choose the most environmentally responsible suppliers. Yet, even this seemingly simple task means different things in different industries and is approached by companies in a variety of ways.
When it came time for Walmart to roll out its environmental initiative, said Edwin Keh, former COO and senior vice president of Walmart global procurement, and now a lecturer at Wharton, the company sent a letter to a thousand CEOs of major suppliers in China. In essence, the letter said, "We're having a meeting in Beijing. Show up." When they arrived, the CEOs were told that half of them would be getting more business from Walmart and the other half would no longer be doing any business at all with the retail giant. Walmart's new environmental rules were then handed out and the CEOs were told to make sure they figured out how to end up in the winning half.
That's one way to approach the selection of suppliers. But Tim Riordan, vice president of supply chain for Interface, a pioneering carpet company, noted that "We're not Walmart. We're a middle market company ... so we need to be having a conversation with our suppliers at a completely different level, which is around trying to drive value, trying to drive product performance, trying to innovate, to differentiate."
While less confrontational towards suppliers than Walmart, Riordan said that Interface does "speak with our wallet." One key supplier that did not step up as much as Interface expected lost a good deal of business over the last approximately six years, said Riordan, dropping from 50% or 60% of Interface's supply chain to less than 10% now.
But in general, Interface relies less on turning away unhelpful suppliers than it does on attracting helpful ones. "Interface does have a reputation for being innovative," said Riordan, "and because of that, I think we're getting a competitive advantage. A lot of suppliers, either incumbent or prospective companies, are coming to us with technology that they feel can work for us."
The company also uses its request for proposals (RFP) process to good effect, including very specific questions as part of its selection criteria -- everything from "What's your carbon-neutral strategy?" to "We're looking to lower our carbon footprint in transportation. What tools do you have that you can provide to us?" Riordan noted that the formality of the RFP process often helps even long-term suppliers break free of their routine operations, take a fresh look, and come back with new ideas they never thought to use before.
For International Paper (IP), the challenge is less about choosing suppliers than it is about ensuring that suppliers provide wood fiber from sustainable sources. There are three types of fiber that meet this standard, according to James McDonald, manager of sustainability at IP. The first, roughly 30% of IP's global supply, comes from forests certified by one of several third-party organizations. While there is some controversy over the relative merits of specific forest certification programs, IP views all of them as valuable. As Dave Kiser, IP's vice president for environment, health, safety and sustainability, said at the IGEL conference, "The key is to work with the certification agencies rather than starting to get into arguments around differentiating very subtle differences between the approaches of the different certification bodies."
Unfortunately, many small landowners in North America and elsewhere are not willing to go through the certification process. To deal with these uncertified forests, IP has developed, as its second source of acceptable fiber, a Certified Procurement System. This ensures that only environmentally trained loggers contribute to the company's supply chain and that small landowners are educated in sustainable forestry management.
The third acceptable source of fiber is from recycled paper products. While appealing environmentally, this source is limited by the availability of recycled fiber, the market for recycled paper products and the relative benefits (or downsides) of recycling in specific situations. There are times when recycling is not the best environmental choice.
Put your effort where it will do the most good: Large corporations often have tens of thousands of suppliers. So in one form or another, most companies use a version of what has been called the 80/20 Rule to decide where to focus their efforts. Before rolling out its energy-saving program, for example, Walmart began by pulling together its top 200 suppliers in China in 2008, which, Keh explained, constitute 60% to 80% of its total supply chain. The company then worked with these suppliers to develop best practices that could be used with everybody else. (If the suppliers needed help, Walmart had energy-efficiency consulting companies lend a hand.)
GE takes a slightly different approach. Instead of focusing on the relatively few suppliers who represent the bulk of the company's supply chain, Kapur said, GE uses life-cycle analysis (LCA) tools to identify the areas of greatest potential. These LCA tools help GE "prioritize ... to figure out which products within GE and which suppliers may be the best target to go after [to achieve] the biggest environmental impact."
Successful smaller companies tend to avoid this kind of detailed analysis, fearing "paralysis by analysis." According to Allen Hershkowitz, senior scientist at the National Resources Defense Council (NRDC), it is best for companies to create teams of "people who have legitimacy in the organization, in operations and procurement ... people who have been there a long time, but who buy into the environmental vision." These teams, he suggested, "cultivate buy-in from the organization more broadly."
It is also important, said Hershkowitz, to garner some early wins in order to start gaining momentum. This means plucking that low-hanging fruit and, surprisingly, not focusing too much on goals right at the outset. "We go easy on the goals because we don't want people to feel intimidated or overwhelmed."
Collaborate to innovate: Many companies engage their suppliers in the greening process. Both GE and IBM, for instance, have collaborated with their supply chain partners to come up with environmental guidelines and innovative approaches to environmental challenges. Few companies, however, have integrated collaborative innovation as thoroughly as Interface.
In some cases, suppliers come to the company with new ideas that they think Interface will value. Knowing that Interface was grinding up whole carpets to recycle the polyvinyl chloride (PVC) backing, for example, an Italian company brought Interface a technology that allowed it to separate the PVC base fiber from old rugs. This improved the purity of the recyclable PVC. It also left Interface with a quantity of Nylon 66 fluff that had always been considered unrecyclable. But Interface worked with yet another supplier over several years to develop a method of recycling the nylon fluff to be reused either in its own products or in the products of other companies in other industries. "Those are innovations that have been pretty critical to our success," said Riordan.
In other cases, Interface convenes a Supplier Summit, a one-on-one meeting with key suppliers, to help tackle specific challenges. To keep the discussion focused on practical, often technical issues, the Summit does not get going until the sales and purchasing teams are out of the room. That allows all the operations people to meet together and, separately, all of the R&D people to meet as well. These summits have generated many useful solutions, including a bio-based binder that Interface pioneered.
Use suppliers as force multipliers: With considerable experience operating its own global environmental management system (EMS), IBM rolled out its Social & Environmental Management System program to its 28,000 first-tier suppliers in 2010. The program requires companies to deploy and sustain a corporate responsibility and environmental management system, which includes objective measures of their performance against stated environmental goals.
What makes this program so potentially powerful are two additional requirements: Suppliers must publicly disclose their metrics and results, and "cascade" the program to any suppliers that are material to IBM's products. These two requirements, said Louis Ferretti, director of environmental compliance at IBM's integrated supply chain, are "clearing a major step forward in driving the industry to a high level of performance."
"Transparency is a very powerful tool," stated Andrew Winston, co-author of Green to Gold and Green Recovery. The new openness that IBM is requiring will "encourage improved performance like no other incentive," he writes in his blog. Even more importantly, "The fourth component, 'cascading,' means that IBM's requirements will ripple up the supply chain. Businesses will move a step closer to the holy grail of environmental measurement -- knowing the footprint of every product without conducting a costly and time-consuming lifecycle analysis."
Other companies are adopting similar cascading approaches. Charlene Wall-Warren, North American sustainability manager for BASF Corp., told conference attendees about her company's "1+3 Program" in China, which asks suppliers to engage three of their own business partners in the program so that BASF's efforts can spread more rapidly.
The elephant in the room is compliance: Of course, many of these best practices are only as good as their execution, which raises the thorny issue of compliance and enforcement.
As Charles Howland, senior assistant regional counsel for the Environmental Protection Agency (EPA), said during the conference, "The only way that you can ensure that your supplier is green, by whatever standards you set, is your own people in the field doing enforcement the way the government here does under U.S. laws." Others at the conference also raised questions about enforcement and compliance, mentioning among other examples, Apple's apparent inability to enforce its own high standards at Foxconn in China.
Kapur said GE deals quickly and decisively with any infractions of its rules, and Keh spoke about combating corruption in China by firing more Walmart employees than anyone in the firm's history (while recognizing that Walmart may not have acted as effectively in overseeing its Latin American operations). While laudable, these and similar efforts do not diminish the overall challenge facing well-intentioned corporations. Jeff Smoller, of the Wisconsin Department of Natural Resources, spoke for many at the conference when he said, "There's an elephant in the room ... and it's the enforcement and compliance element on a national and international basis."
Even with the best enforcement, all these efforts still represent what Giegengack and others referred to as low-hanging fruit, which begs the question, what happens once all the low-hanging fruit has been harvested?
Two paths towards long-term solutions were suggested by conference speakers.
Closed-loop supply chain: Dan Guide, professor of operations and supply chain management at Penn State, sees the ultimate problem as our consumer culture, which is based on disposable goods. Things were different during the Great Depression and World War II, when people were zealously saving, reusing and recycling everything from food to rubber. And many people around the world still see western consumerism as shockingly wasteful (one conference participant born in Vietnam spoke with amazement about how many useful objects consumers throw out in the U.S.).
But years of increasingly sophisticated and widespread advertising have trained us, said Guide, to believe that the newest product is always the best. This bias is so ingrained that when Guide asked his students what one word they most equated with "green," the majority chose the word "new." Noting that most of the energy and natural resources associated with a product are consumed during the production phase, when new products are created from raw materials, Guide calls this craving for newness "unsustainable." The problem, in his view, is found in our "make-use-dispose" business model.
The solution Guide proposes is a completely new business model based on the concept of a closed-loop supply chain. Xerox, said Guide, "is the poster child" for this approach, which he calls "servicizing." "Xerox doesn't sell their machines to companies," he explains. "They lease them, and they maintain and service them. So they know exactly what condition that product is in at all times." And when they get it back at the end, they have gained enormously valuable feedback about how the product performs in the field. Using this information, they can then re-use parts from the machines they recover and remanufacture products that are more valuable to customers and far less expensive to produce.
While Guide points out that remanufacturing is incredibly profitable, and that Xerox and others are enjoying great success with this business model on the B2B side, he readily admits that the same is not true for products sold to consumers. One challenge is that in order to make the remanufacturing of products efficient, the products need to be initially designed and engineered to have modular parts, some of which can be efficiently recycled, others of which are designed to be durable enough for multiple uses. That's easy enough, he said.
The hard part is that consumers do not want re-manufactured products; they want new ones. Changing that mindset, conference participants said, will lead to a dramatic change in consumer culture. Guide thinks that marketing, which created the current culture, is a powerful tool for that change. Once the public is sold on the idea of frugality (as happened during World War II), people will once again value performance over novelty, substance over fashion and long-term quality over disposability.
Targeted government action: Ruben Lobel, a professor of operations and information management at Wharton, puts his faith in new green technologies, which he thinks are inevitable, but likely to be slow in arriving. Rather than risk waiting for these new technologies to develop, he believes we should use government action to accelerate the process.
Based on his research, Lobel advocates combining the carrot of intelligently designed subsidies with the stick of effective regulations. On the one hand, subsidies can help create the manufacturing and consumer base new technologies need to take off and become self-sustaining. The subsidies give these new green technology companies the ability to stay in business, producing more and more of what they sell, and learning in the process how to produce it both more effectively and less expensively. This is what Lobel calls "the learning-by-doing effect."
On the consumer side, subsidies encourage more people to use new technologies, which makes more people aware of and comfortable with the new systems, creating a positive feedback loop that helps grow the consumer base. Lobel calls this phenomenon "technology diffusion." Whatever you call it, the result is greater production and increasing economies of scale.
For subsidies to be effective, however, Lobel's research shows that they must be consistent and intelligently designed. Governments that do not model the effects of various subsidy levels before settling on an amount and that make frequent small changes in response to changing market conditions, however well intentioned, are unlikely to accomplish policy goals, Lobel's research shows. Sometimes set subsidies are applied to an entire industry, rather than varying according to purchase price. (Federal tax credits for electric cars are an example, Lobel said.) Only by establishing subsidies that are properly structured to motivate the desired behavior, and keeping the subsidies constant enough that people are willing to make long-term decisions based on them, can government create incentives that effectively move consumers, manufacturers and investors.
As for regulations, Lobel pointed out that companies are currently free to engage in economic activity that harms the environment and other people without suffering any negative consequences. Essentially, they create the negative externalities Orts was alluding to, forcing taxpayers or others to bear the ultimate cost of their actions. Legislation, said Lobel, can force companies to pay for the environmental damage they cause, which in turn provides a strong financial incentive for them to change their behavior.
Whether cultural changes, government action or growing scarcity helps us become a truly sustainable society -- or more likely some combination of all three -- there is no reason to neglect the low-hanging fruit that still abounds. As Keh told conference participants, the actions companies are taking now to green their supply chains "buys time for the technology, for the legislation, for the cultural changes that need to take place for good to happen." A number of participants agreed also that new research and business planning should focus on developing effective frameworks for long-term solutions to current environmental problems: tackling the taller trees in the forest beyond the low-hanging fruit.