Survey: Leading Organizations ‘Embrace’ Sustainability, Create “Cultures of Innovation”

On the heels of my most recent post (Surveys Lift the Lid on Innovation & Sustainable Supply Chain Management, Uncovering Value & Leadership Traits http://bit.ly/h941Jb) comes another survey by the MIT Sloan Management Review and the Boston Consulting Group.  Like the Aberdeen and Capgemini studies, Sustainability: The ‘Embracers’ Seize Advantage uncovered two distinct camps of companies: “embracers” — those who place sustainability high on their agenda — and “cautious adopters,” who have yet to focus on more than energy cost savings, material efficiency, and risk mitigation.

According to the MIT/BCG study , the survey indicated that many companies view sustainability as eventually becoming “core,”; however the more advanced “embracers” were already acting on the belief that the sustainability ‘business case” was already a functional, core element of its organizational risk management and efficiency strategy. Embracers were also seeing the “payoff of sustainability-driven management largely in intangible advantages, process improvements, the ability to innovate and, critically, and in the opportunity to grow.”  Plus, and this is no surprise, embracers were found to be the highest performing businesses queried in the study.

Key MIT/BCG Findings

Several interesting findings emerged that synced up well with the Aberdeen and Capgemini studies, from an innovation and leader/laggard perspective:

1. Embracer companies are implementing sustainability-driven strategies widely in their organizations and have largely succeeded in making robust business cases for their investments.
2. All companies — both embracers and cautious adopters — see the benefits of strategies such as improved resource efficiency and waste management.
3. Embracer companies are assigning value to intangible factors (employee engagement, stakeholder concerns) when forming strategies and making decisions.
4. Embracers are more aggressive in their sustainability spending, but the cautious adopters are catching up and increasing their commitments at a faster rate than the embracers.
5. The sustainability-driven management approaches of embracer companies — which claim to be gaining competitive advantage via sustainability — exhibit seven shared traits that together suggest how sustainability may alter management practice for all successful companies in the future.

From a supply chain perspective the study found that embracers appear to be able to make a more compelling business case for sustainability, developing and integrating sustainability strategies in “everything from procurement and supply chain management to marketing and brand building.”

The MIT/BCG study discovered seven practices or characteristics that “embracers share. They are:

1. Move early — even if information is incomplete. Embracers tend to be bold and see the importance of being a “first mover” from a competitive perspective. What the study found most compelling was that embracers generally accepted that they need to act before they necessarily have all the answers.

“Embracers are not paralyzed by ambiguity, and instead see action as a way to generate data, uncover new options and develop evidence iteratively that makes decision-making increasingly effective. Movement diminishes uncertainty”.

2. Balance broad, long-term vision with projects offering concrete, near-term “wins.” Leading companies find a way to balance corporate visions with concrete, action oriented projects that will produce short-term successes.

“Smart embracers balance those aims with narrowly defined projects in, say, supply chain management, which allow them to produce early, positive bottom-line results. They exhibit relentless practicality”.

3. Drive sustainability top-down and bottom-up. Embracers find ways to engage its organization vertically and horizontally early and creating champions that can collectively ensure the 360-degree perspective that’s vital to sustainability.

4. Aggressively de-silo sustainability — integrating it throughout company operations. Embracers openly encourage cross-functional problem identification and problem solving and seek ways for more open innovation, group-think and collaborative action.

5. Measure everything (and if ways of measuring something don’t exist, start inventing them). I am not certain that I would measure EVERYTHING, but rather look for key performance metrics that matter to the core vision of sustainability that organizations seek to satisfy.  Measure what matters, don’t just measure just for measurements sake.

6. Value intangible benefits seriously. Embracers are clearly distinguished from cautious adopters in their readiness to value intangibles as meaningful competitive benefits of a sustainability strategy. However, embracers accept that it takes time to develop their ability to measure — or even to understand fully — intangible advantages, and they need to make their investment decisions on the basis of a combination of tangible benefits, intangibles and risk management scenarios.

7. Try to be authentic and transparent — internally and externally. Finally, companies leading the charge on sustainability are fundamentally realistic. They do not overstate motives or set unrealistic expectations, and they communicate their challenges as well as their successes.

The Evolution of a Sustainability Mindset- From Laggard to Innovator

The results of all three studies compare well with Peter Senges and Bob Willards remarks in several of their books, mirroring the development phases in organizations toward a sustainability culture, governance and business strategy. Willards model shows how as companies progress toward being sustainable enterprises, they can be roughly nested into a five-stage sustainability continuum. They evolve from an unsustainable model of business in Stages 1, 2 and 3, to a sustainable business framework in Stages 4 or 5. Willard explains that “executive mindsets also evolve from thinking of “green,” “environmental,” and “sustainable” initiatives as expensive and bureaucratic threats in the early stages, to recognizing them as catalysts for strategic growth in the later stages.”

Source: Bob Willard- Fives Stages of Sustainability

As leading organizations implement more efficient, creative, less resource intensive and wasteful practices, they quickly can realize direct and indirect financial and brand benefits. Truly innovative, agile and resilient companies with a leaning toward change management tend to ‘embrace’ this new paradigm as part of organizational ‘core values’ as successes rack up…it’s like a snowball effect.   The more that is achieved in the name of sustainability, the greater and larger the positive benefit.  Sustainability can become positively addicting!  At the same time, the chasm between the leaders and followers tends to widen, and the followers have to spend much more time, energy and resources to play catch up…if they catch up at all.

With the MIT/BCG and other two studies,  one common thread that is clear to me (and hopefully you) is that organizational dynamics have a lot to do with how well companies adapt to change, especially when it involves issues surrounding the three legs of sustainability.  The MIT study hit the nail on the head when it stated that “Where companies struggle when it comes to making sustainability an integral part of the business is often not so much with the technical side of things but with the human dimension of managing it.” In fact it was Peter Senge (in The Fifth Discipline), who states that a learning organization is one in which “people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning to see the whole together.”

Seeing business from a  “whole systems”  perspective is truly what characterizes innovative, leading organizations from the competition.  Embracing organizations typically are more agile, adaptive, and (ultimately) more productive.  As businesses seek stronger competitive positions and reach outside their four walls to integrate innovations across supply chains, one critical, intangible element will still remain- the “human dynamic”.

Upcoming posts  will dive into management and organizational culture, its effects on driving the sustainability business case, and approaches to drive “cultures of innovation” and leadership beyong “the four wall” and throughout the value chain.

Surveys Lift the Lid on Innovation & Sustainable Supply Chain Management, Uncovering Value & Leadership Traits

This is a tale of two surveys…one innovation focused, the other supply chain focused.  What both have in common is how the reports focused on define the traits and qualities of those who lead and those who follow in their respective business spaces.  Those who innovate tend to lead while those who follow…well, often play catch up.  That’s not too efficient and can lead to wasteful use of resources.  Trust me-as I learned last fall (see photo), it’s better to be the lead horse rider in a dusty trail ride.

The Leaders vs. Laggards Survey

In 2010, as part of its Innovation Survey Series, Cap Gemini Consulting performed a “Leader versus Laggard” study.  The goal of the study was understand the “current state of affairs regarding innovation, and … to identify what drives the success of companies that view themselves as successful”.  Over 375 companies responded to the survey.  Those reporting ‘over 75%’ of innovation efforts having a positive material impact on the company’s business results were considered “leaders” (slightly more than 11%). The ‘less than 25%’ category represents the innovation “laggard” group (nearly 25% of the respondents).  The remaining 65% percent were somewhere in the middle, innovation-wise. The primary drivers of innovation were: evolving customer needs, technological advances and changes, executive direction/internal demands, macroeconomic/external factors, globalization, and changing supplier capabilities. Innovation efforts were generally wrapped into the following five categories: customer focused innovation, new product development, incremental product improvement, business process innovation, and, business model innovation.

Innovation was considered a top-three strategic priority by more than 76 percent of the respondents to the Capgemini survey. Further, over half of the respondents indicated they have developed relationships with third parties to support their innovation efforts on an ongoing basis. The key study takeaways were:

1. Innovation leaders have advanced beyond other innovators by having an accountable innovation executive or other form of formal innovation governance structure that deals with this kind of decision-making.
2. Laggard companies hadn’t mastered collaborating effectively with external partners to improve their innovation results. Leaders however had been able to successfully leverage suppliers, customers and other third parties in the innovation process, including filling in missing capabilities or resources – such as technology and talent.
3. Business model innovation will be the next big differentiator for companies aspiring to innovation leadership. Innovation leaders are allocating increasingly more resources to business model innovation.

Why is this study valuable in terms of supply chain sustainability?  Read on.

The Sustainable Supply Chain Survey

A revealing and promising study was released by the Aberdeen Research Group a couple of months ago.  The Sustainable Supply Chain surveyed 360 companies and found that sustainable supply chain management and supply chain risk management are among the top three areas for improvement in their organization for one third of the respondents.  While that isn’t a stellar number there are some positive trends.  For instance, the survey showed that 76% of the overall survey respondents have incorporated sustainability criteria into some or all of their supply chain management processes. The results provide further proof that in 2010 more companies viewed sustainable supply chain and greening as a foundational aspect of their business operations.

This survey fared compared well with another survey conducted by eyefortransport (EFT) that I reported on in a prior post).  In the EFT survey, well over 60 percent of those companies surveyed had implemented or were initiating sustainability focused efforts in 2010- ranking around 10th out of nearly 40 supply chain management project categories.   In the logistics survey, most respondents noted a far higher level of positive environmental performance in 2010 compared with 2009.

The Aberdeen survey found that two primary drivers for sustainability revolved around achieving “competitive advantage” and assurance that companies were compliant “with current and future regulations”.   Additional drivers noted by about a third of the respondents included interest in positive impacts to bottom line financials and responding to consumer demands for ‘eco friendly’ products.  These drivers, according to the reports highlighted perspectives of five different stakeholders along the end-to-end supply network: customers, suppliers, regulators, competitors and shareholders.

What makes the Aberdeen survey unique was how it distinguished business pattern between “leaders” and “laggards” (like the Capgemini report).  Two key take-aways were:

1) Best-in-Class companies were twice as likely to incorporate sustainability principles throughout all supply chain management (SCM) processes and

2) a principal characteristic of “laggards” was their lack of focus on incorporating sustainability into their SCM processes.

For example, the Aberdeen study identified a 29% spread between leaders who’ve achieved 12% emission reductions versus laggards corresponding 17% increase in emissions.  Similar polar opposite movement was found in areas related to energy consumption and operating margin containment.  And like the Capgemini study, best in class (leaders) companies were 70% more likely to establish corporate governance teams, making technology investment to collect and report metrics, and engaging their suppliers.  Think of the potential savings that leaders have realized compared to their laggard counterparts.

Logistics Providers Leading the Way

As one example, two logistics giants, FedEx and UPS have done deep dives in their business practices and implemented industry leading solutions to bake supply chain sustainability into their operations and supplier networks. UPS has deployed “package-flow” software to map out its most efficient delivery routes. Besides limiting left-hand turns, UPS estimates it shaved nearly 30 million miles off its delivery routes, saved 3 million gallons of gas and reduced CO2 emissions by 32,000 metric tons.  FedEx has deployed cleaner vehicles, sourced alternative power sources for its facilities and engaged its supply chain to promote recycling, product reuse and greener packaging to support FedEx’s operations. The company reports that they’ve improved total fleet miles per gallon within the U.S. by 14.1 percent since 2005, saving over 53 million gallons of fuel or approximately 472,700 metric tons of carbon dioxide emissions, with a goal of improving by 20 percent by 2020.  And like UPS, FedEx  is (according to its web site) redesigning its “physical distribution models to maximize the density of … ground and air shipments. This reduces the amount of fuel it takes to ship each package….”

The Aberdeen study also mentioned how the UK based non-profit Supplier Ethical Data Exchange (Sedex) has developed a secure online platform for companies to share and monitor sustainability data across supply chain.  Sedex’s mission is “connecting businesses and their global suppliers to share ethical data and enabling continuous improvement in ethical performance”.  Currently used in over 160 countries, the membership driven initiative focuses on metrics capture across four “key pillars”: Labor standards, health and safety, business integrity and environment.  Being on Sedex does not mean that a company has met any ethical standards or is in compliance with any code but it does mean that suppliers have made a commitment to continuous improvement.  Suppliers to major retailers and brand owners continue to own the data and manage its use, and keep it updated on a semiannual basis.  Suppliers’ customers then have the option to run a “risk profile” which can allow them in turn to prioritize suppliers for additional collaboration to manage the sustainability footprint of their products or practices.

The Work’s Not Done

The Aberdeen study did uncover several challenges that companies face, especially those with wide supply chain networks.   The study found that about 40% of companies outsourcing at least some of their manufacturing struggle to establish operational capabilities that yield measurable results (less than 10% efficiency).  This underscores the difficulties that many manufacturers have in effectively controlling or influencing supply chain behavior.  And while sustainability initiatives focused on improved energy use efficiency and practices to reduce environmental footprints are highly relevant in improving operations efficiencies, execution still remains challenging.

“The focus on sustainability has changed from being a philanthropic, ‘nice to have’ initiative, to the one that is core to the success of organization…Consistently adhering to the sustainability mandates established by clients as well as establishing mandates for your suppliers is an important strategy to gain incremental business value in the current environment” – Nari Viswanathan, Vice President and Principal Analyst of Supply Chain Management at Aberdeen.

Pushing the Supply Chain Envelop Requires Innovation and Leadership

Many of my prior posts have suggested that “supply chain successes are driven by those who lead through innovation and don’t procrastinate.  These organizations have vision– for the short term and long-term”.  The Aberdeen and Capgemini surveys are proof that ‘first mover’ companies are changing the way business gets done, sometimes in marked, ‘greener’ ways.

I believe that innovative companies are those who consider business operations through a “sustainability lens” by 1) developing key performance goals and metrics to make supply chain sustainability initiatives thoughtful, effective and believable; 2) implementing sustainability initiatives that create environmental and social benefit and that are aligned with the company’s financial strategies and business vision; and 3) identifying and developing value-added transparency and proactive collaboration throughout the supply chain.

Who is up to pushing the supply chain envelope, be a sustainability leader and reap the benefits?

Can Apple Redeem Itself on Supply Chain Sustainability? Taking a Cue on Accountability from Nike’s Playbook

NOTE: Portions of this piece originally appeared as a guest column in Sustainable Business Oregon

Last week, on the way to a business meeting in downtown Portland I tuned into the local sports radio station.  Nationally syndicated sports commentator Dan Patrick (“DP”) was providing his one minute Above the Noise segment.  The focus was on if, how and when sports icons that have fallen from grace (due to an off the field indiscretion) they could ever redeem themselves in the public court of opinion.  And could they ever regain public acceptance to be ‘marketable’ commodities again.  Think player product endorsements.  Think Tiger Woods, Michael Vick, Ben Roethlisberger, Kobe Bryant, Ron Artest- well the list is WAY to lengthy to cover here, but you get the idea.  Most that have regained endorsement status (like Bryant) have either redeemed themselves through community service and on field performance, but often the public-at-large (er, consumers) just forget.  The past indiscretions have faded from the tabloids.

So I got to thinking that this sounded very familiar when it comes to companies (manufacturers and service industries in particular), and the ways in which they address sustainability matters.  I am thinking of manufacturers who have made environmentally impactful products, and willingly or knowingly conducted socially irresponsible or possibly unethical business practices that have led to public backlash.  And I thought about how some have been able to successfully “redeem” themselves and regain a positive marketplace reputation, while others never quite recovered.

Since this past week Apple was in the news, I thought DP’s radio op-ed was a perfect parallel.  According to a report issued by anti-pollution activists in China, Apple is more secretive about its supply chain than almost every other American company operating in the country. Apple came up among the laggards among 29 major electronics and IT firms in a transparency study drawn up by a coalition of China’s leading environmental groups.  The reports focused on “the openness of IT firms and their responsiveness to reports of environmental violations at suppliers”.  Though Apple is known in the industry for the secrecy it wraps around its newest product offerings, the “mystery of its supply chain is more a matter of covering up than preventing leaks”, the report stated. The report claimed that Apple’s suppliers have been involved in breaches of environmental regulation, including major waste discharge violations in recent years at several Chinese firms that are believed to be  part of Apple’s supply chain.  To be fair, Nokia, LG, SingTel, Sony and Ericsson also fared poorly in the survey, but Apple stood out in how it did not address and respond to the findings.

Apples Supplier Commitment

Of course this revelation was not the first time that Apple’s supply chain management oversight (or lack thereof) has been ‘shaken to its core’. Despite Apples Supplier Code of Conduct, it appears that they are not fully conforming to their own internal commitment and policies.  An insightful post from back in mid 2009 highlighted the series of issues that Apple has had with its supply chain, from human rights violations and pollution to lax supplier oversight and unfortunate subcontractor worker suicides.  Apple itself admitted its complacency in addressing social and environmental sustainability issues in a pragmatic but resolved manner.

Nikes Redemption Story- a Work in Progress

Apples current predicament is not unlike another company that relies on a deep contractor supply chain, whose headquarters in my backyard- Nike.  In the late 1980’s reports were starting to circulate from Indonesia and Asia concerning Nikes alleged “sweatshops”.  Over the course of the 1990’s, continued exposure of unscrupulous labor and human rights practices, combined with intensive public protests and campaigns continued to hound Nike and dragged down its reputation.

By 2001, the issue erupted and Nike was stung by reports of children as young as 10 making shoes, clothing and footballs in Pakistan and Cambodia.  Phil Knight, Nikes CEO admitted the company “blew it”. Nike, like many other companies (like Nestle, PepsiCo, Wal-Mart and other consumer products manufacturers and retailers) learned the hard way that taking liberties with “social license” to operate (especially in foreign countries) has its negative financial and reputational consequences.

That’s not to say of course that all is perfect in Niketown.  But with the corporate and supply chain infrastructure now in place to monitor, validate and continually improve supplier relations and accountability, fewer violations have occurred. Nike has continued to push open innovation and environmentally focused product design with social accountability in mind.  The Ethisphere Institute named Nike as one of the World’s Most Ethical Companies for 2010. The Institute recognizes organizations annually that “promote ethical business standards and practices by going beyond legal minimums, introducing innovative ideas benefiting the public and forcing their competitors to follow suit.”   Also, last October, Newsweek magazine took 500 of the largest publicly traded U.S. companies and produced a 2010 Green Rankings List.  Nike, was 10th on the list, and was noted for having a strong commitment to evaluating and improving the environmental footprint of its suppliers.  They also scored a 97 in the reputation category. (Apple by the way scored 65^th, with a reputation score of 71.  I guess that low score represents that missing piece in Apples iconic logo.

Stepping Up to the Plate on “Social License to Operate” and Accountability

A great research study from 2002 (from the Center for the Study of law and Society at University of California Berkeley)  highlights the steps that companies in the apparel, forest products, consumer goods, oil and energy and other highly capitalized industries have gone through to “redeem” themselves and restore brand trust.  They’ve achieved this through rigid compliance with local environmental rules, product  and environmental stewardship, verification  and proactive social engagement.

Apple needs to do the same thing and implement a proactive supplier sustainability and verification program.  As I have laid out in prior posts, companies like Nestle, Corporate Express, Danisco, Starbucks, Unilever and the apparel industry stepped up in a big way to address human rights, fair labor and sustainable development in areas in which they operate throughout the world.  So too have major electronics companies like Hewlett Packard and IBM in leveraging their supply chains in assuring that corporate sustainability performance objectives are met.   Further, in 2010 the International Organization for Standardization (ISO) unveiled its ISO 26000 Corporate Social Responsibility guidance document.  In addition, two prominent organizations, UL Environment and Green Seal unveiled and vetted two sustainability focused product (GS-C1) and organization (ULE 880) standards this past year, both of which may markedly affect supply chain environmental and social behaviors in the future.  That’s not to mention the issue of conflict minerals, which strikes deep at the cell phone manufacturing sector.  Finally, the age of openness and collaboration has arrived on the heels of Wikileaks and numerous high profile reputational back breakers.

Engaging and Leveraging the Supply Chain

The most successful greening efforts in supply chains are based on value creation through the sharing of intelligence and know-how about environmental and emerging regulatory issues and emerging technologies.  Leading edge, sustainability –minded and innovative companies have found “reciprocal value” through enhanced product differentiation, reputation management and customer loyalty.  Suppliers and customers must collaboratively strengthen each other’s performance and share cost of ownership and social license to operate.  But supply chain sustainability and corporate governance must be driven by the originating manufacturers that rely on deep tiers of suppliers and vendors for their products.

So Apple should take a cue from Nikes playbook- “Just Do It!”  This issue will not go away on a wing and a prayer.  Here’s how to get it done- right:

1)  As the 2009 post that I mentioned said, get your company on the ground and enforce your Supplier Code of Conduct – now.

2)  Open Up and reach out to external stakeholders, not just your suppliers.  Engage non-governmental organizations early and often.   Find a respected international organization or other third-party to facilitate the engagement process.   Treat communities, NGO’s and suppliers with respect.

3) Work with your supply chain and with industry peers to standardize requirements. Create or revisit the resources allocated in internal procurement networks to collaborate on environmental and social sustainability issues.

4) Construct environmental and social accountability requirements at the purchasing phase. Build environmental and social conformance criteria into supplier contract specs and incorporate sustainability and environmental staff on sourcing teams

5) Inform suppliers of corporate environmental concerns. Standardize supplier questionnaires and make sure that the Supplier Code of Conduct lands in the right hands.  Promote exchange of information and ideas by sponsoring charettes to facilitate discussions between customers and suppliers on environmental and social license issues.  Develop a supplier/vendor peer or mentoring program that promotes co-innovation on sustainability issues

6) Build environmental considerations into product design w/ suppliers. Apple already considers Design for environment (DFE) product innovation and life cycle analyses in its product design.  You’d be well served to coordinate minimization of environmental impact in the extended supply chain and work with suppliers to manage end-of-pipe environmental issues.  Give your suppliers an incentive to reduce their environmental loading associated with their products and improved worker conditions.

7) Follow up! Without adequate on-the-ground follow-through, on-going supplier engagement and long-term commitment of human and financial capital, your sustainability problems will persist.

So like sports stars, business stars can redeem themselves and their reputations.  But it first takes admitting that you have a problem before you can start down that path.  Apple has had a pretty rough year, what with CEO Steve Jobs taking medical leave, its products having persistent quality problems and its connection with negative environmental and human rights issues.  I’m hopeful that Apple and others will get the message that ol’ Ben Franklin stated so long ago but holds true today:

“It takes many good deeds to build a good reputation, and only one bad one to lose it.” -Benjamin Franklin

Until then, “I’m a PC”.

A Roadmap to Perform Supply Chain-Focused Materiality Assessments

Note:  this is the final part of three-part series exploring “materiality” and  the intersection of supply chain management, sustainability and  corporate social responsibility.

Part One of this three-part series explored materiality as the “nexus” point that linked sustainability, corporate social responsibility (CSR) and supply chain management.  Conflict minerals were explored in detail and highlighted the key role that developing nations and commodity goods are playing in driving supply chain management and CSR.   The second post in this series highlighted the roots of materiality analysis in the sustainability space, case studies and highlights of interviews conducted with two key sustainability and corporate responsibility thought leaders, @Jefferyhogue and @ElaineCohen.

From a corporate social responsibility reporting point of view, a materiality analysis is an ordered, rigorous evaluation of the sustainability (environmental, social, financial) issues significant to the company and its stakeholders.  This type of analysis can provide an organization with critical, informed insight that can drive strategic direction as well as tactical change management.

Typical elements of the materiality analysis process include:

1. Identification of a universe of relevant economic, social, environmental, and policy/governance issues for consideration,
2. Evaluation and ranking of the level of internal and external stakeholder concerns regarding each issue,
3. Evaluation and ranking of the potential impact on the company of each issue
4. Development of a matrix-based prioritization of the issues, and
5. Execution of a structured, collaborative strategy planning, implementation and reporting process.

Materiality Assessment Templates

The CERES 21^st Century Roadmap for Sustainability 2010 provides a high level overview of materiality analysis.  The first step is to identify which stakeholders there are that interact with an organization. In this first phase, CERES recommends that organizations “engage with stakeholders to obtain feedback on the relevance of existing and proposed policies and to identify gaps. These policies should guide the company’s activities across its operations, the supply chain, logistics, the design and delivery of products and the management of its employees.

When engaging stakeholders, organizations should identify key business and operational issues of concern to the company and share this analysis with external stakeholders. CERES recommends that “stakeholder dialogue can be to identify additional issues, prioritize efforts, and recognize emerging risks that could become increasingly important to the business over the long-term. The company should then explore the links between identified material issues [that are considered significant to stakeholders] and the leadership team’s vision and strategy…and provide an explicit response to that feedback”.

AA1100 Assurance standard creator and international institute AccountAbility has established what they refer to as a “Five-Part Materiality Test” .  Like the CERES approach, this robust test is designed to help organizations 1) identify what issues are most material, or relevant, to their business and its stakeholders and 2) what information should be disclosed or reported in corporate social responsibility reports. The five different materiality tests (shown in the graphic below) are:

Test 1: Direct short-term financial impacts: Evaluate short-term financial impacts resulting from aspects of social and environmental performance

Test 2: Policy-based performance: Consider policies that are core to a business rather than add-ons

Test 3: Business peer-based norms: Issues that company peers deem to be important

Test 4: Stakeholder behavior and concerns: Identify issues relevance to stakeholders in terms of reasonable evidence of likely impact on their own decisions and behavior; and

Test 5: Societal norms:  Considerations taken from both a regulatory and non-regulatory point of view.

The issues of most significant concern would be vetted with stakeholders and validated by an external party and set the framework for ongoing action and demonstrated continual improvement.

8-Phase Supply Chain Focused Materiality Assessment

Taking a cue from CERES, AccountAbility, the ISO 14001 based environmental aspects and impacts process, and basic principles of risk management, I offer my eight point plan to effectively engage internal and external stakeholders in querying, assessing and prioritizing supply chain materiality.

1. ID Key Supply Chain Products re: Environmental Loading Characteristics and Operational Practices
2. Identify Governance, Operational and Regulatory Constraints versus Supply Chain Practices/Policies
3. Risk Management Evaluation-Screen internal  & external supply chain issues against current  business objectives & strategy, policies, current processes  & programs
4. Materiality Risk Ranking Matrix and Determination of Threshold Action Levels (Internal and External Stakeholder Specific & Aggregated)
5. Development of Materiality Mitigation Action Plans- Prioritize, Assign Resources, Timeframes & Measurement Metrics
6. Stakeholder Engagement and Issues Identification (against major supply chain variables)
7. Management Review including Strategy Performance and Reporting, and
8. Internal/ External Stakeholder Alignment; CSR Reporting

As a general rule when evaluating the ‘materiality’ of any issue (supply chain driven or not) , significance must consider a company’s short and long-term business objectives and strategy, policies, risks, and current processes and programs. Also, in order to factor into account resource management variables, it’s advised that companies consider the levels of control or influence they have over an existing or future issue to determine its significance, and ultimately management strategies and tactics.

Likely outcomes of using a structured continual improvement approach in addressing and documenting supply chain materiality are:

• Targeting and prioritizing the most significant supply chain issues to manage in the short-term, at a scale that matches existing labor, financial and capital resources
• Proactive planning to budget future resource allocations to address capital or resource intensive activities for long-term management
• Acknowledging and integrating a wide variety of interested party concerns and perspectives into strategic business planning at an early stage
• Providing a foundation for continual improvement through structure risk assessment, action planning, communication and reporting.

Materiality Assessments- The Sustainable Value Proposition

Materiality analysis can help organizations to clarify issues driving long-term business value; identify, prioritize and address risks; and capture new market opportunities.  Through structured efforts to align sustainability and business strategies with supply chain management, materiality assessments that account for financial and non-financial issues will not only strengthen business relationships with suppliers but forge collaborative bonds with external stakeholders.  This targeted focus on collaborative innovation, adaptive management, performance measurement and reporting has the potential to drive stronger brand reputation and competitive advantage over time.