Walking the Talk: Speed Bumps in the Road to GreenPublished in Knowledge@Wharton
No company sets out to lose money by going green, and there's ample evidence that reining in waste can have substantial material benefits to the bottom line. At the same time, switching to a sustainable path also means significant capital investment, and especially in an uncertain regulatory climate, that can be a deal breaker.
These were some of the ideas tackled at a recent conference hosted by the Initiative for Global Environmental Leadership at Penn/Wharton (IGEL) entitled, "Greening the Supply Chain: Best Business Practices and Future Trends."
Consumers are fickle partners, often unwilling to pay for what they say they value. But since a green aura enhances brand image, every company talks about it. There are other significant drivers as well, including an increasingly demanding regulatory environment. Taken together, these factors add up to the prevailing argument among corporate boards that environmental spending, however painful, has to go beyond window dressing. To get a true measure of sustainability, however, it's necessary to separate rhetoric from reality.
Howard Kunreuther, Wharton operations and information management professor, noted that, despite what companies may say publicly, when it comes to dealing with suppliers, myopia is a constant challenge. "The supply chain requires long-term investments, and there is a focus on short-term returns. The term 'NIMTOF,' or 'not in my term of office,' is relevant, so we have to create incentives to deal with that issue."
And even well-intentioned companies often find that what seem like obvious "home runs" don't work. Dan Guide, professor of operations and supply chain management at Penn State, said at the conference that it's hard to make a business case for some environmental supply chain initiatives. In many cases, he suggested, recycling, "is a sucker bet," especially when it comes to plastic. "The recycled plastic in park benches is more expensive as a source material than virgin timber. And contamination is an issue. If plastic from cell phones is 98% pure, buyers will want to know what's in the other 2%." The complex nature of modern products such as cell phones, which contain many different materials tightly bound together, is one reason, he said, that "reuse is kind of going away."
When it comes to the supply chain, it's not easy being green. But companies are increasingly driven to do it. After all, it's the law. According to CSC's Stephen Bogart, "we are living in an increasingly regulated world. Regulations are affecting businesses everywhere, which is one reason we have designed 200 new business processes. We have to provide assurances that materials can be sold safely in your country, but also shipped around the world."
Walmart's Long Road
In 2009, Walmart, the world's largest retailer, sent a questionnaire to its 100,000 suppliers asking such questions as "Have you measured your corporate greenhouse gas emissions?" and "Have you set publicly available waste reduction targets?"
As part of the company's Sustainability Index, Version 1.0, Walmart said it expected its suppliers to achieve three daunting goals: Achieving zero waste (also known as "nil to landfill"), using 100% renewable energy, and producing sustainable products. By 2015, Walmart pledged to reduce global supplier-sourced greenhouse gas emissions by 20 million metric tons. It was, the retail giant said, not only a challenge, but also a "tremendous business opportunity."
More than most, and despite the many difficulties, Walmart walks the talk. A company that used to spend $15 million a year hauling its plastic waste to landfills now makes $28 million in the same period by pelletizing that waste and selling it back to packaging suppliers. But the company is perhaps best known for its low prices, which it maintains by scrupulously -- some would say ruthlessly -- controlling supplier costs. While Walmart's suppliers will see impressive results from cutting waste, will they be able, at least in the short term, to incorporate environmental reforms and also meet the company's continuing price targets?
Supply chain reform is a two-way process, and Walmart deserves credit for changing some of its longstanding practices -- such as giving suppliers only short-term contracts -- to foster the change it seeks. In 2006, for instance, organic cotton farmers got a verbal five-year purchasing commitment from Walmart, assuring them that their investments in sustainable production were justified.
In 2008, as it held a sustainability summit for its Chinese suppliers, Walmart also introduced a new set of social standards aimed at working conditions. By 2012, for instance, suppliers had to secure 95% of their own materials from factories with high audited scores in both environmental and social performance. Child and forced labor were banned, as was sub-minimum-wage pay. It was a strong answer to critics who said that the company had been lax in protecting its workers from sub-standard conditions.
Walmart's relationship with its suppliers is deepening, said former Walmart COO Edwin Keh. "There used to be three things that Walmart wanted from its suppliers -- price, price and price," he said. "If someone offered the same product for a nickel less, we would go across the street and buy from a competitor. But now it's more of a long-term relationship, and Walmart has skin in the game."
When the Guidelines Fail
Yet the mere drafting of cutting-edge mandates does not itself ensure they will be observed throughout the supply chain. Apple, a major employer in China, also had a Code of Conduct for its workers, but it failed to prevent the crisis that gripped the company in March 2012 when it was revealed that one of its biggest suppliers, Foxconn Technology, forced some of its employees to work more than 60-hour weeks and as many as 11 days in a row, sometimes under hazardous conditions. According to a Fair Labor Association (FLA) report, nearly two-thirds of Foxconn employees said their pay failed to "meet their basic needs."
In a statement, Apple said that its team "had been working for years to educate workers, improve conditions and make Apple's supply chain a model for the industry." It joined FLA and asked it to conduct the audit that led to the devastating findings, but some noted that the company had been there before.
In fact, in 2006 Apple said that Foxconn (which makes 40% of electronic products worldwide and has 1.2 million workers) had "enacted a policy change to enforce the weekly overtime limits set by our Code of Conduct." And in 2011, when the company conducted 229 audits (up from just 39 in 2007), it said reducing overtime was a "top priority." Still, the 2012 progress report on supplier responsibility found that, at 93 companies, more than 50% of employees worked more than 60-hour work weeks, violating the Code of Conduct.
Walmart, too, faced embarrassing revelations in 2012, when a New York Times investigation indicated a pattern of its Mexican subsidiary paying bribes to expedite new store construction. Faced with evidence of such payments, Walmart had earlier conducted a cursory internal investigation that led to no action being taken. The headlines tarnished Walmart's sincere efforts to incorporate sustainability into every facet of its business, especially the supply chain.
It is, of course, hard to quantify the business costs of these embarrassing mistakes, but for companies working hard to burnish their brands, years of hard work can be undone. Clear leadership will help avoid that pitfall. Eric W. Orts, faculty director of IGEL, and Wharton legal studies and business ethics professor, said it can be tempting for companies to violate their own internal codes -- on working conditions and hazardous emissions, for example -- as a routine cost of doing business abroad, with no likely consequences. "Companies have to make basic choices," he said. "Pollution issues have to be addressed on a higher level than just talking about bottom-line costs. It's sometimes a choice between economics and the environment."
Building a green reputation takes time, and superficial efforts risk charges of "greenwashing." Radical transparency is a "challenge" for companies seeking sustainability, according to Natural Logic's Gil Friend. "There are a lot of noble efforts in trying to achieve transparent supply chains," he said. But there are a lot of challenges as well. "There is the challenge of confidential business information, and the data is often hard to get; it can be garbage in, garbage out." Inefficient data collection compounds these problems and adds costs. "In some cases," noted Friend, "you have senior vice presidents doing the collating, which makes no sense."
To help meet these challenges, Friend suggests that businesses think about a "web of goods," with every piece they move through a supply chain having a restricted-access, addressable URL. This gives you data that is both "open and protected at the same time. It's like a Zen koan."
Launching Data Networks
Taking just such an approach is Better Place, the American electric car battery-charging company headed by Israeli-born Shai Agassi. The company, which has raised $750 million for an ambitious plan that combines vehicle sales with battery leasing, and battery swapping with a network of charge points, is working in Israel, Denmark, the Netherlands and the U.S., among other places. It also has ambitious plans to wire China.
Better Place sets up data centers to intensively monitor each transaction in real time, tracing its electric cars as they charge and swap batteries. The aim is to both ensure a good customer experience and create an electronic record that will enable rapid tracing of faultsand a quick response to problems, including those that come from suppliers.
Better Place has a high-level web of suppliers that includes major companies such as Intel and Microsoft, but also smaller firms like China's Flextronics, which produces its charging stations. Jenny Cohen-Derfler, a former Intel manager, now monitors supply chains as a Better Place global vice president. "Monitoring compliance can be a challenge, particularly when you're working in China," she said.
Better Place is well aware of Apple's problems in China, and as the company gears up, it is planning to monitor its suppliers with regular quality audits. But Cohen-Derfler also said that there are limits to what her company can accomplish on its own. "We are doing business with international companies, and they're responsible for their own supply chains," she said. "We can't ask other companies to do our audits for us, but at the same time we're working with brands that have histories and track records. We have to trust them to a certain extent."
Rubicon Global, a new, sustainable waste and recycling company that emphasizes reducing costs by reusing materials instead of trucking them to the landfill, is taking sophisticated supply chain monitoring to an industry where record-keeping was in the Dark Ages. "Our consolidated billing and continued measurement optimizes efficiency gains," said Rubicon Global's Nate Morris.
The Natural Resources Defense Council (NRDC) is applying some of those same lessons to professional sports. According to Alice Henly, a research fellow there, "We started by setting up environmental data tracking, because few teams had tracked usage at their facilities. Today, Major League Baseball has a league-wide tracing system, launched in 2010, and it's being tested in real time right now."
Paying for Green
Companies want to believe that their sustainability investments will pay off, especially when they put R&D money into developing new green products. But according to Guide, new Penn State research casts doubt on the willingness of consumers to pay for green products or for altruism. "People in the 18- to 21-year-old age range equate green with new. They don't want to buy repurposed material," he said. "And when a brand of compact fluorescent bulbs was branded as the 'Earthsaver,' nobody wanted to buy it. But the same bulb renamed the 'Energy Miser' flew off the shelves. You just can't find evidence that people are willing to pay more for green."
A joint 2011 CoreNet Global and Jones Lang LaSalle survey found both bad and good news about spending for the environment. Although the percentage of corporate executives willing to pay more for green leased space jumped from 37% in 2009 to 50% in 2010, the same survey made clear that companies are looking for a quick payback. Some 57% think one to three years is an acceptable time for energy-efficiency gains to pay back their costs, but only 30% were happy with three-to-five-year paybacks, and just 9% want it to go longer than that.
A 2011 Nielsen Global Online Environment & Sustainability Survey found that 83% or respondents nod approvingly when asked if it's important for companies to green their businesses, but only 22% said they would actually pay more for a product that was eco-friendly. Interestingly enough, willingness to pay extra was highest in the Middle East and Africa (a third of those surveyed) and at a low in North America (only 12% willingness).
When London's Carbon Trust asked 18- to 25-year-olds in six countries about their opinion on climate change, some 68% said they would like to see companies independently certify their carbon footprints. But most participants in the same survey said they would buy products with low carbon loads only if they cost no more than the conventional version. China had the most apparent altruism, with 42% saying they would happily pay more for green products.
Actual experience sometimes affirms these impressions, because some green products have stumbled in the marketplace. Clorox, for instance, introduced Green Works cleaning products in 2008, complete with an endorsement from the Sierra Club. Walmart stocked the line, ensuring widespread distribution. Sales began well, with $100 million in the first year (leading to some copycat products), but once the recent recession hit, those sales fell to $60 million.
All is certainly not lost: In fact, green household products have held on to a fairly even 2% market share. That parallels hybrid cars, which also maintain a regular 2%-3% of the U.S. auto market. Obviously, retailers would like to see green products grow beyond a niche, even a dependable niche, but it hasn't happened yet.
"If green is just seen as a cost, forget it. It will never be truly implemented," said Eric Israel, a PricewaterhouseCoopers (PwC) managing director. "The supply-side footprint hasn't been at the forefront of corporate thinking. But companies have to understand that this is a fundamental shift. Sustainability makes complete business sense, because there are big risks in supply chain disruptions today." Israel cites water scarcity as one such risk, offering a compelling reason for companies to manage that resource properly.
Companies can and do make money from greening their operations. According to NRDC's Allen Hershkowitz, "Companies don't begin with initiatives that slow their growth or reduce their profits -- quite the opposite. Most of the greening focuses on squeezing out more efficiency, more revenue. Sports teams, for instance, use investment in environmental initiatives to attract a broader array of sponsors and investors."
General Electric's (GE) Rajat Kapur said the key to understanding its corporate strategy "is to realize that environment versus economics is a false choice, and innovation is what unlocks the opportunity. If you look at 140 products through our internal metrics, you find $150 million plus in savings to the bottom line -- from reduced energy use and other factors."
GE's savings were made against plentiful headwinds. Today, Kapur said, supply chain lifecycle analysis is built into new product development at GE. But an assessment of thousands of company suppliers in developing countries found 16,000 potential issues, many of them in China. "It is a complex landscape, because requesting large amounts of data can cripple a small provider," Kapur said. "You have to focus your efforts where they will have the greatest impact. We found that only 10% of our suppliers in developing countries even knew how much energy they used. That led to our sharing best practices and offering sessions on expectations."
Increasingly, the resources are available. Software leader SAP builds tools that jump-start companies' efforts to track waste in their supply chains. According to SAP's Robert LoBue, "Our product is based on tracking hazardous materials, electricity and water use, waste produced, and much more. There are thousands of items in the catalog. We integrate that with supply chain systems and track all the different variables. It is a continuing revelation to us how much waste is generated in the supply chain."
No company can "future proof" its business, but as Friend pointed out, there's plenty of room to prepare business for coming challenges. "In San Francisco, there's virtual certainty of another earthquake, but only 2% of homes are earthquake-protected. If oil goes to $200 a barrel, how will your company fare? There are a lot of 'small probability, high-impact' events, and you have to be ready for them."
Companies looking for quick returns by going green are likely to be disappointed. But the longer-term costs of ignoring sustainability's clarion call are almost certain to be much larger.