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Navigating Sustainable Supply Chain Management in China Takes a Keen Eye & Business Sense

7 Apr

2010 marked a watershed moment in supply chain sourcing among worldwide manufacturers and retailers. Sustainability observers and practitioners read nearly weekly announcements of yet another major manufacturer or retailer setting the bar for greener supply chain management.  With a much greater focus on monitoring, measurement and verification, retailers and manufacturers Wal-Mart, Marks and Spencer, IBM, Proctor and Gamble, Kaiser Permanente, Puma, Ford, Intel, Pepsi, Kimberly-Clark, Unilever, Johnson & Johnson, Herman Miller among many others made major announcements concerning efforts to engage, collaborate and track supplier/vendor sustainability efforts, especially those involving overseas operations.  Central to each of these organizations is how suppliers and vendors impact the large companies’ carbon footprint, in addition to other major value chain concerns such as material and water resource use, waste management and labor/human rights issues.Meanwhile, efforts from China’s manufacturing sector regarding sustainable sourcing and procurement, was at best, mixed with regard to proactive sustainability.  From my perspective as a U.S. based sustainability practitioner (with a passion in supply chain management), the challenges that foreign businesses with manufacturing relationships in China can be daunting.  Recent events concerning Apple Computers alleged lax supplier oversight and reported supplier human rights and environmental violations only shows a microcosm of the depth of the challenges that suppliers face in managing or influencing these issues on the ground.  Apple recently did the right thing by transparently releasing its Apple Supplier Responsibility 2011 Progress Report, which underscored just how challenging and difficult multi-tiered supply chain management can be.  But all is certainly not lost and many companies have in recent years begun to navigate the green supply chain waters in China. 

According to a World Resources Institute White Paper issued in the fall of 2010, China faces a number of supply chain challenges.  First, the recent spate of reports alleging employee labor and environmental violations can place manufacturing partnerships with global corporations at risk.  According to the report, Chinese suppliers that are unable to meet the environmental performance standards of green supply chain companies may not be able to continue to do business with such firms. Wal-Mart has already gone on record, announcing that it will no longer purchase from Chinese suppliers with poor environmental performance records. In order to be a supplier to Wal-Mart, Chinese companies must now provide certification of their compliance with China’s environmental laws and regulations.

Photo Courtesy of http://www.flickr.com/photos/scobleizer/ under Creative Commons license

Wal-Mart, like many other IT and apparel manufacturers also conducts audits on a factory’s performance against specific environmental and sustainability performance criteria, such as air emissions, water discharge, management of toxic substances and hazardous waste disposal. These actions are extremely significant as Wal-Mart procures from over 10,000 Chinese suppliers.  This increased scrutiny on environmental and corporate social responsibility through supplier scoring and sustainability indexing, says the WRI report may trump price, quality, and delivery time as a decisive factor in a supplier’s success in winning a purchasing contract.

Chinese Government Stepping Up Enforcement

Finally, what good news I hear about the depth of environmental regulations on the books in China is buffered by the apparent lax enforcement of the rules and regulations.  That is however appearing to change.  The WRI report indicated that the Chinese State Council is directing key government agencies, including the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Environmental Protection to prohibit tax incentives, restrict exports and raise fees for energy intensive and polluting industries, such as steel, cement, and minerals extraction.   Also, it’s been reported in the past years that the People’s Bank of China and the Ministry of Environmental Protection are also working with local Chinese banks to implement the ‘Green Credit’ program, which prevents loans to Chinese firms with poor environmental performance records. In addition, the National Development and Reform Commission and the Ministry of Finance have issued a notice to all Chinese central and local governments to purchase goods from suppliers that are ‘energy efficient’. Finally, on a local level, governments have developed preferred supplier lists for companies producing environmental-friendly products for their purchasing needs.

Supplier Challenges Are Not Just Environmental

A China Supply Chain Council survey conducted in 2009 identified a huge gap in knowledge between (1) clear understanding of which environmental issues posed the greatest risk (2) what to do to manage significant environmental risks.  Also, nearly 40% of the company’s surveyed thought sustainability to be cost prohibitive, too complicated or where particular expertise was lacking don’t have the expertise (on the other hand 60% did!).  Two- thirds of respondents did consider sustainability to be a supply chain priority, although many were not confident of the return on investment.  However, more than half of the respondents reported that they had begun collaborating with their larger supply chain partners.    In fact, according to the World Resources Institute White Paper, despite increasing pressures to improve their environmental performance, Chinese suppliers face many financial challenges to operating in a more sustainable manner

World Resources Institute White paper notes increasing  non-environmental pressures, including:

  • “Extended green investment “payback”: While improving resource consumption, such as energy and water, provides long-term cost savings, the payback for making such environmental investments may be as long as three years, which is financially impossible  for many Chinese suppliers.

  • Lack of financial incentives from green supply chain buyers: Multinational buyers are often unwilling to change purchasing commitments and long-term     purchasing contracts to Chinese suppliers that make the investments to improve their environmental performance.

  • Rising operational costs: Chinese suppliers face  rising resource and labor costs. For example, factory wages have increased  at an average annual rate of 25 percent during 2007 to 2010. Rising costs dissuade suppliers from making environmental investments which may raise  operating costs.

  • Limited access to finance: The majority of Chinese suppliers are small and medium-scale enterprises (SMEs) with limited access to formal financing channels such as bank loans.  Chinese SMEs account for less than 10 percent of all bank lending in China,  and as a result, Chinese suppliers frequently do not have the capital to     make the necessary environmental investments.

  • Intense domestic and global competition: Chinese suppliers face intense competition from thousands of firms, both  domestic and international, within their industries. This intense competition puts constant pressure on suppliers to cut costs, which can  include environmental protections, in an effort to stay in business.

Leveraging the Supply Chain to Gain “Reciprocal Value”

Leading edge, sustainability –minded and innovative companies have found “reciprocal value” through enhanced product differentiation, reputation management and customer loyalty.  I recently highlighted the model efforts that GE has implemented with its China based suppliers to implant responsible and environmentally proactive manufacturing into their operations.  GE’s comprehensive supplier assessment program evaluates suppliers in China and other developing economies for environment, health and safety, labor, security and human rights issues. GE has leaned on its thousands of suppliers to obtain the appropriate environmental and labor permits, improve their environmental compliance and overall performance.   In addition, GE and other multi-national companies (including Wal-Mart, Honeywell, Citibank and SABIC Innovative Plastics) have partnered to create the EHS Academy in Guangdong province.  The objective of this no-profit venture is to create a more well-trained and capable workforce of environmental, health and safety professionals.

Summary

Many of my prior posts have highlighted the critical needs for increased supply chain collaboration among the world’s largest manufacturers in order to effectively operationalize sustainability in Chinese manufacturing plants. This is especially evident for large worldwide manufacturers operating subcontractor arrangements in developing nations and “tiger economies”, such as India, Mexico and China (and the rest of Southeast Asia). Global manufacturer efforts underscore how successful greening efforts in supply chains can be based on value creation through the sharing of intelligence and know-how about environmental and emerging regulatory issues and emerging technologies.

Suppliers and customers stand so much to gain from collaboratively strengthening each other’s performance and sharing cost of ownership and social license to operate.  But as I have stated before, supply chain sustainability and corporate governance must first be driven by the originating product designers and manufacturers that rely on deep tiers of suppliers and vendors in far-away places for their products.


Note: This piece is adapted from a recent article that I wrote, “Navigating China’s Green Road” that appears in China Sourcing Magazine

Studies Prove Business $en$e From Proactive Environmental Management Initiatives & Certifications

31 Mar

I always find it rewarding when a study comes out that underscores the business value of sustainability, especially when backed up with statistics and hard dollars.  Such is the case with a 2008 study by researchers from the Georgia Institute of Technology (GIT).  The research study, entitled An Empirical Investigation of Environmental Performance and the Market Value of the Firm, was authored by Brian W. Jacobs, Vinod R. Singhal, and Ravi Subramanian.  The study analyzed the shareholder value effects of environmental performance by measuring the stock market reaction associated with announcements of environmental performance.

The study focused on how markets react to Corporate Environmental Initiatives (CEI) and Environmental Awards and Certifications (EAC).  The results of the study provided compelling data that suggested that “announcements of philanthropic gifts to environmental causes are associated with significant positive market reaction, voluntary emission reductions are associated with significant negative market reaction, and ISO 14001 certifications are associated with significant positive market reaction”.  For me this report validates my devotion over the past 15 years working with small to large manufacturers and public agencies in designing, implementing and maintaining ISO 14001 certifications and in making the argument that “proactive environmental management makes business sense”.  I’m not some crazed environmentalist after all (although my passion occasionally borders on the “evangelical” side)!

The research study focused on reviewing the “market value impacts of specific events (such as use environmental announcements) as a “proxy for the difficult-to-measure construct of environmental performance”.   The study found a statistically significant market reaction to the hundreds of environmental performance announcements evaluated, suggesting a causal link between environmental performance and financial performance.   Specific to ISO 14001 announcements, the market was seen as reacting positively (on a statistical basis) to announcements of ISO 14001 certifications. Years of literature and case studies have offered volumes of data that support the positive impact of environmental management systems in general as well as direct evidence that ISO 14001 certification improves company performance over long periods of time. The authors of the GIT believe that they are the “first to provide empirical evidence of the impact of ISO 14001 certification on market value”.

Body of Evidence

Forays into proactive environmental management and attainment of internationally recognized certifications like ISO 14001, RC 14001 or LEED are not always “window dressing’ to demonstrate commitment to sustainability, as some may believe.  These efforts are more often than not the real deal when it comes to demonstrating value-added savings and long-term return on investment and access to new market.  While the skeptics continue to throw cold water on CEI’s and EAC’s the evidence continues to stack up in favor of long-term benefits.

The results were based on analysis of 811 announcements (430 CEI announcements and 381 EAC announcements) that appeared in the daily business press during the period 2004-2006.  Now, you may pause and say “well that was a long time ago…what about post recession?” A recent article by Phil Covington in Triple Pundit asked that same question. Covington cites a recent Fast Company’s recent article concerning Bloomberg’s business of measuring companies “Environmental, Social and Governance” (ESG) performance, which found that “the number of investors accessing ESG data is up by 29% comparing the first half of 2010 with the second. Investors use it to identify smart practices – for example, companies who operate in a socially responsible manner may be viewed as forward thinking and well-managed.” While this report suggests that there is increased attention being paid to companies that “do good” or that implement proactive ESG practices, the results are still not statistically treated like the GIT study.  But either way, as Covington concludes “This surely portends that markets will inevitably respond favorably to sustainability efforts, especially when the data shows improved governance and profits result directly, and in the long run, from sustainability”.

Since the 2006 study period cited in the GIT study, there have been more studies that provide compelling proof of the market value of environmental initiatives or certification.  Here are a couple of stand-out examples.  First, a study entitled Which Competitive Advantages can Firms Really Obtain from ISO 14001 Certification? demonstrate statistically that there is a significant difference between firms with ISO 14001 certification and firms without ISO14001 certification.  Internal efficiency benefits are considered significantly higher for firms with ISO 14001 certification.  Therefore managers’ expectations of improving internal efficiency might be the real reason that encourages firms to make the voluntary decision of investing in ISO 14001 certification.

Another study, by the Arava Institute for Environmental Studies entitled Comparative Advantage: The Impact of ISO 14001 Environmental Certification on Exports, suggested that EMS certification appears to imply a supplier who is managing its business well and is showing ethical responsibility. The fact that a supplier was awarded the ISO 14001 or EMAS certification by an independent entity enhances perceived reliability. Importers evaluated felt more confident engaging a new supplier, saving time and effort associated with clarification and research prior to placing a purchase order.  The survey results, as well as other available literature, corroborate the view that ISO 14001 accreditation confers economic benefits and greater “market value”. These include a standard of worldwide recognition, organizational efficiency, better waste management resulting in costs reduction, marketing advantages, and competitiveness by reducing risk and exposure to costly litigation.

What Are You Waiting For?

As of 2008, when the GIT study was published, more than 188,000 organizations worldwide had become ISO 14001 certified in 155 countries and economies. Worldwide, ISO 14001 certifications grew by more than 77,000 from 2004 to 2008 – a 70% increase.  These companies must be onto something. As I had written about previously, throughout a variety of industries, there are leaders and there are laggards.  Innovators who lead and can establish “first mover” status have the most market share to gain from proactive environmental management and attaining certifications like ISO 14001.

The GIT studies and the many others that have been produced over the past five years or so are healthy indicators of how proactive approaches to sustainability can positively influence behavior up and down the supply chain, and can add total market value in a recovering economy.

Taming the Tiger: GE Manages China Supply Chain Sustainability Issues with Education & Collaboration

1 Mar

Many of my prior posts have highlighted the critical needs for increased supply chain collaboration among the world’s largest manufacturers. This is especially evident for large worldwide manufacturers operating subcontractor arrangements in developing nations and “tiger economies”, such as India, Mexico and China (and the rest of Southeast Asia). I have stressed how 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.  I’ve further stressed how suppliers and customers can collaboratively strengthen each other’s performance, share cost of ownership and social license to operate and create “reciprocal value”.  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.

Recent events concerning Apple Computers alleged lax supplier oversight and reported supplier human rights and environmental violations only shows a microcosm of the depth of the challenges that suppliers face in managing or influencing these issues on the ground.  Apple recently did the right thing by transparently releasing its Apple Supplier Responsibility 2011 Progress Report, which underscored just how challenging and difficult multi-tiered supply chain management can be.

GE’s “Bringing Good Things to…”  it’s Supply Chain

In the fall of 2010, GE conducted a Supply Chain Summit in Shanghai, China. China was selected as the first supplier summit venue outside the United States mainly because of the ‘unique set of challenges global manufacturers face in conducting overseas manufacturing’. As GE’s Supply Chain Summit site notes, “China’s manufacturing industry has grown immensely over the past decade, faster than its environmental controls and the availability of skilled managers. Thirty percent of GE’s suppliers covered by the company’s Supplier Responsibility Guidelines Program are in China, yet more than half of the environmental and labor standard findings under the Guidelines Program have been identified in the country. Many factories continue to struggle to meet standards and local laws regarding overtime, occupational health, and environmental permits.”  This suggests that the ratio of negative supplier findings to supplier location is higher in China than in other geographies where GE operates.

To meet that deficiency, a key element of GE’s supply chain management program relies on intensive supplier auditing and oversight.  GE’s comprehensive supplier assessment program evaluates suppliers in China and other developing economies for environment, health and safety, labor, security and human rights issues. GE has leaned on its thousands of suppliers to obtain the appropriate environmental and labor permits, improve their environmental compliance and overall performance. GE performs due diligence on-site inspections of many suppliers as a condition of order fulfillment and as part of its tender process.

In a two-year period from 2008 to 2010, GE’s supplier environmental and social program focused assessments were conducted in 59 countries, in addition to performing “spot checks” or investigating complaint or media initiated concerns at particular factories. Some suppliers noted “audit fatigue” which can be perfectly understandable (being an auditor myself I can appreciate the wear and tear this causes on the mind and body after a while!). Third-party firms conduct some of the inspections. However, many of those participating in the audits found that third-party firms often did not provide the critical “how to” guidance as to altering business practices to assure future compliance.

What appeared to be most beneficial to manufacturers is GE’s detailed auditor-training program, which includes instruction on local law requirements and field training followed by a supervised audit with an experienced GE auditor.   The summit findings noted that dealing with the hands on “how to” aspects of solving non-compliance issues greatly helped Chinese manufacturers to “understand the importance of treating their employees fairly and the need to systematically manage the environmental impacts of their operations”. Suppliers at the summit also highlighted the business benefits that resulted from this “maturing approach to labor and environmental standards, including improved worker efficiency and morale, an enhanced reputation, and increased customer orders”. GE’s more advanced suppliers shared that they were developing management systems or integrated processes to proactively address issues and risks.

Education First!

EHS Academy, courtesy GE

In addition, GE and other multi-national companies (including Wal-Mart, Honeywell, Citibank and SABIC Innovative Plastics) have partnered to create the EHS Academy in Guangdong province.  The objective of this no-profit venture is to create a more well-trained and capable workforce of environmental, health and safety professionals, and give them the management, implementation and technical knowledge to be able to proactively assure ensure “that real performance is sustainable and integrated fully into the overall business strategy and operating system” of a company.  Chinese regulatory agencies are also invited to participate as well. The model that GE is using in China offers a positive example of collaborative innovation.

As large companies like GE and Apple expand their production capabilities throughout the globe, it’s vital that they continue to seek ways to train and educate contract manufacturers on environmental and social issues.   This may be tough to do because countries like China are still in the “ramp-up” phases of economic development.  Plus it’s been evident for some years that enforcement of environmental and social laws and regulations by government agencies has not been on  par with the intent of the laws.  It’s also likely that (for the foreseeable future) Chinese political and economic systems will remain focused on rapid development at all costs. So it’s critical that local/in-country government policies be aligned as well to support capacity-building for companies to self-evaluate, learn effective auditing and root- cause evaluation,  institute effective corrective and preventive action programs and seek means to systematically achieve continuous improvement through proactive environmental  and social management systems.

The GE program offers a glimmer of hope that (in China and similar developing economies) that multi-stakeholder, collective and timely collaboration may (someday soon) tame the tiger.

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

17 Feb

follow_the_leader.jpgOn 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.”

Blog-07-27-10-Slide-1.jpg

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.”

image_carrousel.jpgSeeing 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.

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

3 Feb

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 65th, 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

2 Feb

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 21st 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.

“First Movers” Use Materiality Analysis to Link Sustainability, Supply Chain Management & CSR

25 Jan

By Dave R. Meyer (SEEDS Global Alliance)

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

My first post in this series suggested that there was an intersection or cross-walk between sustainability, corporate environmental responsibility and supply chain management.  This “sweet spot” can be found in conducting “materiality” analyses.  Although the concept of materiality in the finance sector has a long track record in accounting circles, its application in the sustainability space is much newer.  Whereas financial reporting has taken a more short-term view and approach to handling performance and risk, sustainability generally factors in a much longer, strategic planning and implementation horizon.

Businesses have learned that in a world that has grown more transparent, they need to clearly identify what is material to their operations and stakeholders, and communicate this in trustworthy and convincing ways in order to drive creativity and innovation.  Materiality determination is a lot like the aspects and impacts analysis that is common to ISO 14001 based Environmental Management Systems.  ISO 14001 seeks to identify those elements of their activities, processes, services and products that have the greatest impact on the environment.  Materiality analysis does not only that but dives deeper into operations and stakeholder issues.  Let’s take a moment to explore materiality’s origins in the sustainability space.

Roots of Materiality in Sustainability Reporting

In 2003, The UK- based think tank, AccountAbility developed the  AA1100 Standard.   AA1000AS (2008) assurance provides a “comprehensive way of holding an organization to account for its management, performance and reporting on sustainability issues by evaluating the adherence of an organization to the AccountAbility Principles and the reliability of associated performance information. It also provides a platform to align the non-financial aspects of sustainability with financial reporting and assurance through its understanding of materiality”.    The framework for a materiality assessment is depicted in the adjoining graphic, jointly developed by AccountAbility, BT Group Plc and LRQA (The Materiality Report- Aligning Strategy, Performance and Reporting- November 2006).

The AA1100 Standard was revised in 2008.  In it, the AA1000 Materiality Principle requires that the “Assurance Provider states whether the Reporting Organization has included in the Report the information about its Sustainability Performance required by its Stakeholders for them to be able to make informed judgments, decisions and actions.”  Materiality norms taken into account by this standard are:

(a) Compliance performance (considering those aspects of non-financial performance where a significant legal, regulatory or direct financial impact exists).

(b) Policy-related performance (considering identification of aspects of performance linked to stated policy positions, financial consequences aside).

(c) Peer-based norms (considering how company’s peers and competitors address the same issues, irrespective of whether the company itself has a related policy or whether financial consequences can be demonstrated; and

(d) Stakeholder-based materiality (taking into account stakeholder behaviors and perceptions).

The Global Reporting Initiative has developed a framework for materiality determination as part of the G3 Sustainability Reporting Guidelines The GRI considers materiality as “ the threshold at which an issue or indicator becomes sufficiently important that it should be reported.”  The GRI defined a series of internal and external criteria to be considered when performing a materiality analysis.  Later in 2009, the GRI convened a to evaluate and create more specific guidance for determining materiality.  The draft content recognized that materiality analysis was one of the “least systematized aspects of reporting”:

“Identification of material issues and boundaries are core challenges for any standard risk assessment process. Despite the importance of these challenges to good reporting processes, they represent the most difficult and underdeveloped areas for most companies.” – Draft Report Content and Materiality Protocol, page 2.

The draft Report Content and Materiality Protocol review period closed last fall and is in review at this time.

Materiality “First Movers”

A number of companies have taken a “first mover” position in documenting materiality in their corporate sustainability reports.  Most have used a format similar in scope and criteria as the GRI or AA1100 frameworks, with some modifications.  Companies that have reported on materiality and that reach out to stakeholders what they find to be material to their interest and have some “reasonable control” over include companies from diverse manufacturing sectors such as automotive (Ford[1], BMW, Volvo), communications (BT), energy development (Exxon, Mobil) pharmaceuticals (Novo Nordisk, Pfizer, Johnson & Johnson), electronics and control Systems (Cisco, GE, Omron), consumer products (Gap, Starbucks) and mining (Holcim, Rio Tinto), among many others.  One such company is Danisco A/S.

I recently had the opportunity to visit with Mr. Jeffrey Hogue (@jeffreyhogue) of Danisco.  Mr. Hogue is Sustainability and Corporate Social Responsibility (CSR) Global Leader at Danisco A/S.  Danisco is a worldwide manufacturer of food and beverage products, including cultures, emulsifiers, gums & systems and natural sweeteners.  The company does business with the world’s largest food manufacturers.  Daniscos’ 2009/2010 Sustainability Report is extremely comprehensive and has been awarded some of the highest honors for corporate social responsibility reporting in the past year.  The company looked deeply into materiality issues in its report and has developed  strong operational programs to manage its supply chain in a proactive manner.  It’s web site indicates that they have developed and implemented a “new supplier management system…to strengthen our global supplier and material assessment programme through better audit portfolio management tools, detailed assessments, prioritised audits and improved collection of supplier and raw material data.”

Danisco catalogued and assessed stakeholder input from a variety of internal and external surveys and other sources, then indexed them according to their impact on its business. Issues emerging from the data were ranked according to their impact on the business and the degree of importance to stakeholders, forming the basis for the Materiality Matrix (see Figure 1 below).  The company strategically decided to address sustainability risks and opportunities identified as having “medium-to-high impact” on its business and being of “medium-to-high” interest to our stakeholders.


I asked Jeff if he could shed some insight on the company determined materiality and its resulting high ranking for supply chain (criteria, indicators etc).  I also asked Jeff if he’d share his thoughts on the critical nature of supply chain management relative to triple bottom line based materiality (as well as risk management).

“I think that there are three dimensions of this subject and why our supply chain is very important to our success.


Risk reduction – With a supplier base of over 3000 key suppliers it is crucial for us to manage any risk that may be present in our upstream value chain to eliminate the impact on our operations and our customers.  Therefore it is a baseline requirement that we scrutinize our supply chain and develop robust and systematic programmes to address and mitigate risk. Most of our customers expect it — and although it is in a lot of ways a compliance programme, we do derive value in knowing that we will maintain consistent raw material quality, avoid issues related to labor and human rights, and supply security.  We also have the ability to anticipate and mitigate other sustainability related endpoints like the impacts on agricultural raw materials from climate change, water scarcity, regulation, etc.

Opportunity harvesting – We also see the need to understand the potential synergies between our organization and our suppliers.  In many cases we do this to provide shared value in terms of capacity and livelihood building for our suppliers alongside our need for more secure raw material sources.  We often do this on a case by case basis — mainly on a regional level where it makes sense

Value chain pressures and expectations – We are experiencing a world where retailers and our largest customers see these issues in the light of their entire value chain and are actively seeking ways to reduce their indirect impacts.  This of course is cascaded down their supply chains through our organization to our suppliers.  We also see a tremendous opportunity in this area to be first movers and to act now based on how the retailers are moving.  This will put us in a position where we can be proactive and are faster to respond to value chain pressures.”

Materiality in CSR Reports of the Future

I also had the pleasure of several e-mail exchanges with Ms. Elaine Cohen (@elainecohen).  Elaine is a well known CSR consultant, Sustainability Reporter, HR Professional (and self-avowed ice cream addict).  She’s  the Founding partner at BeyondBusiness Ltd (www.b-yond.biz/en) and consults to companies on CSR strategy, processes and sustainability communications. I asked Elaine what trends she has seen in CSR reporting these past few years where supply chain has been classified as having “high materiality” to a company’s operations and to their stakeholders.

“I believe supply chains have been becoming increasingly more important over the past few years, as the effects of inadequate supply chain accountability are more and more visible in our market place. We can split these issues broadly into two: the human rights issues in supply chains and the sourcing issues in supply chains.  The HR issues surfaced mainly with the apparel issues in the late 90’s. But the last five years have been characterized by significantly greater transparency  due to the spread of the internet and ease of access to information.”

“… Additionally, I believe the increasing focus on Human Rights and the work of John Ruggie [Special Representative of the United Nations Secretary-General on Business & Human Rights], have been clear about squarely placing the responsibility for clean supply chains on the manufacturer. There is almost nothing more material for apparel suppliers than human rights in their supply chains – just take a look at some of their Sustainability reports. Regarding sourcing, this has also become a major issue – Starbucks and Ethiopian coffee farmers, Unilever and others in palm oil issues, Nestle and the Greenpeace KitKat campaign . Manufacturers are getting clearer that sourcing decisions are now much more visible than in the past, and much more risky. So for these companies, raw materials sourcing is most definitely high materiality. Sustainability reports are reflecting these trends and the space allocated to human rights, responsible sourcing and factory auditing is significantly greater that it was some years ago.”

Trending forward in 2011, I asked Elaine to read the tea leaves on supply chain management, CSR and materiality.

“I believe these issues will continue to maintain high-profile and ultimately move towards cross sector alliances to resolve issues that affect all players in a sector such as the Round Table on Sustainable Palm Oil , work done by the apparel sector and the electronics industry  to determine common standards. We might see multi-company collaboration on third-party factory inspection and evaluation. We might see a set of industry wide agreements on core issues….countries such as China and India are also aware of risks, and greater legislation and enforcement in these countries may help resolve some issues.

Takeaways on Materiality in the Supply Chain.

Jeff related to me that a key NGO with a critical stake in Daniscos’ supply chain affairs remarked that supply chain management and sustainability go hand in hand and is basically a foundational aspect of business operations and risk management.   The challenge, according to Jeff, is in finding the “shared value proposition” that is often difficult to achieve, especially across multiple layers of an often globally distributed supply chain.  Finding localized suppliers and establishing multi-stakeholder collaborations hold promise as models where stakeholder interests and large-scale products manufacturers can find the needed common ground to advance supply chain sustainability.

Elaine summed up our dialogue with the following suggestions: “For manufacturers, don’t underestimate the importance of high-quality supply chain management – get it right before it gets you right, learn from the mistakes of others, think of supply chain management as a core business issue which goes to the heart of strategy and brand decisions, not just something that is tacked on to a new project as a deliverable…In terms of materiality, make sure you “engage, engage, engage” at [the] local level with a wide range of stakeholders, so that you are not demanding deliverables which are not reasonably  feasible. Report transparently on all aspects of supply chain because, if nothing else, this will assist in identifying hidden costs and areas of potential risk.”

Thanks Elaine! I couldn’t have said it better myself.

In Part 3 of this series, I’ll lay out the business case for materiality assessments to strengthen supply chain management and a straightforward framework for materiality analysis.


[1] Ford’s 2008/09 Sustainability Report includes an interactive materiality matrix that categorizes issues based on two dimensions: the degree of stakeholder concern and the extent of the current or potential impact on the company.