Conflict Minerals- Can Consumers, Manufacturers & Policy-Makers Rise to the Challenge? – Part 2

Part 1 of this series highlighted the issues, regulatory and supply chain complexities and efforts by industry to tighten the control of precious minerals sourcing.  This is especially critical in developing nations, where human trafficking, regional conflict and lack of environmental laws and basic human rights are the rule rather than the exception.  This post will look into a few examples of key manufacturers and efforts to date audit, validate and trace the precious minerals supply chain and what roles non-governmental organizations and we consumers have played so far in addressing this prickly issue.

“Conflict Areas” 101

The Organisation for Economic Co-operation and Development (OECD) issued a comprehensive guidance document in 2010 entitled Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas.  In this document, the OECD defined conflict-affected and high-risk areas as identified by the presence of armed conflict, widespread violence or other risks of harm to people.

“Armed conflict may take a variety of forms, such as a conflict of international or non-international character, which may involve two or more states, or may consist of wars of liberation, or insurgencies, civil wars, etc. High-risk areas may include areas of political instability or repression, institutional weakness, insecurity, collapse of civil infrastructure and widespread violence. Such areas are often characterised by widespread human rights abuses and violations of national or international law.”

Recent efforts by global industry associations and grassroots efforts by non-governmental organizations such as the Enough Project and its Raise Hope for Congo initiative have shed a good deal of light on a previously ignored issue. Unlike other countries, ore extraction in the Congo is both cheap and lucrative for the militias that control many of the artisanal mines. There has been widespread reporting about how child laborers are kidnapped from neighboring nations to work under forced conditions in the mines, (where miners often work for an average of $1 to $5 per day). An excellent article that describes the political and institutional issues that affect conflict affected areas, see the article Behind the Problem of Conflict Minerals in DR Congo: Governance by the International Crisis Group.  This analysis places a lack of governance  within the Congo squarely as a cause of the rampant growth of the conflict minerals trade and diversion of proceeds from sale to armed militias.  Despite the “technical assistance” the author says the country receives from outside organizations, this “is not enough to compensate for the notorious lack of administrative capacity”.

Industry Under the Microscope

Courtesy David Lieberman/Flickr (Creative Commons license)

The intensity of recent news reports and discerning lack of detail in publicly reported data to date begs the question- have Intel and Apple really completely taken the “conflict” out their precious minerals sourcing, as recent headlines suggested?  Or has their recent announcement been taken out of context and only another (positive) phase in their supply chain sourcing strategy.   And if neither actually procures these materials from the Congo, are they merely shifting the issues to Asia?

Intel

To start answering these questions, I looked more deeply into the efforts to date by Intel to “get the DRC out” of the sustainable sourcing question.  According to Suzanne Fallender of Intel on their corporate social responsibility blog, the company has made significant strides since 2009 to stay ahead of this issue.  Specifically, according to Ms. Fallender (who I attempted to reach out to but had not yet returned my inquiries), Intel initiated a series of efforts in 2009 (prior to the CFS program), including: 

• Posted its Conflict-Free Statement about metals on its Supplier Site
• Requested that its suppliers verify the sources of metals used in the products they sell us
• Increased the level of internal management review and oversight, as well as  transparency and disclosure on this topic in this report
• Engaged with leading NGOs and other stakeholders to seek their input and recommendations.
• Hosted an industry working session at its offices in Chandler, Arizona in September 2009 with more than 30 representatives from mining companies, traders, smelters, purchasers, and users of tantalum to address the issue of conflict minerals from the DRC.
• Funded a study with EICC members on defining metals used in the supply chain, and continues working on a similar project to increase supply chain transparency for cobalt, tantalum, and tin.

Important to note is that Intel was the first company in the electronics supply chain to conduct on-site smelter reviews. Since the end of 2010, Intel has visited more than 30 smelters to assess if any of its suppliers were sourcing metal from conflict zones in the.   According to Ted Jeffries, Director of Fab Services and Consumables at Intel (who I also attempted to reach for this article), he recently stated “I don’t know that we have a complete handle on the whole supply chain, but we at least have a better handle on the nuances”.   Despite a letter campaign to its suppliers, Intel elected to visit each site and see for themselves to verify what was being self reported. “For the most part, for the Intel supply chain, the smelters that we’ve visited have been very truthful. There have been little caveats here and there, but for the most part, we can trace all of their sources to plants in Australia, South America and other parts of the world,” Jeffries said at the Strategic Metals for National Security and Clean Energy Conference in Washington D.C. in mid March.

“It really takes someone stepping up to the plate and taking a leadership role and taking a risk on a strategy. We can sit around and debate these things until the cows come home and nothing will change. At the end of the day, if we want to move forward on this debate, someone needs to make a strategic decision and start moving in that direction”. -Ted Jeffries (Intel)

Apple and Hewlett-Packard

As I’ve reported in Part 1 of this series, the multitude of supply chain layers and sourcing channels developed over the years may be a difficult weave to untangle (often 5-10 layers between the mine and the end product).  Take Apple, who (according to its recently released 2011 Supplier Responsibility Progress report ) has 142 suppliers using tin; these suppliers source from 109 smelters around the world. As a key participant in the EICC/GeSi CFS initiative, smelter audits are in process.  Additional efforts to contact Apple supply chain and sustainable sourcing staff have been unanswered.  Unlike Apples sub-par sustainability efforts with its Chinese electronics supply chain, it’s heartening that the company is taking some leading action in this area.

Hewlett-Packard says, “[T]hese issues are far removed from HP, typically five or more tiers from our direct suppliers.”  But they have gone a long way in developing an aggressive auditing, tracking and reporting mechanism. HP and Intel have published the names of their leading suppliers for the 3T metals, as well as some smelters.  On April 8^th, HP issued its revised Supply Chain Social and Environmental Responsibility Policy as part of list supplier compliance program (which HP began developing ten years ago). HP’s suppliers are expected to “ensure that parts and products supplied to HP are DRC conflict-free”. Moreover suppliers are to establish policies, due diligence frameworks, and management systems, consistent with the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.

Confronting Our Electronics Addiction

“I’m a Mac and I’ve got a Dirty Little Secret”.  That was the title of parody of the Apple ad campaign, issued last year by the Enough Project.  While the video took a soft-handed approach to helping consumers make a visceral connection with conflict minerals, it also suggested that consumers’ purchasing power can influence corporate sourcing behaviors…and they can.

Last year, Newsweek magazine looked at this issue square in the eye.   The article stated “It takes a lot to snap people out of apathy about Africa’s problems. But in the wake of Live Aid and Save Darfur, a new cause stands on the cusp of going mainstream. It’s the push to make major electronics companies (manufacturers of cell phones, laptops, portable music players, and cameras) disclose whether they use “conflict minerals… Congo raises especially disturbing issues for famous tech brand names that fancy themselves responsible corporate citizens. As Newsweek also reported, the Enough Project and its allies “believe awareness drives better policy. So as we lovingly thumb our latest high-tech device, perhaps some self-reflection: after all, the final point in the supply chain is us.”

As an effort to raise consumer awareness of efforts that companies are (or are not) taking, the Enough Project[1] surveyed the 21 largest electronics companies to characterize progress made toward establishing documented and verifiable conflict-free supply chains in Congo.  The project ranked electronics companies in and four other product sectors on actions in five categories that have significant impact on the conflict minerals trade: tracing, auditing, certification, legislative support, and stakeholder engagement.  Four levels of progress (ranging from Gold Star to Red) were established based on efforts to date and suggestions to shore up perceived weaknesses.  The user-friendly ranking can be used by consumers to support purchasing decisions and offers a way to get in contact with each company to communicate calls to action. 

Enough Projects analysis (as shown in the graphic) indicates that six electronics companies are leading industry efforts to address conflict minerals, while two-thirds of the appeared to be taking limited action.  This graph also suggests that the bottom -third are way behind the industry curve.

Meanwhile, the auto, jewelry, industrial machinery, medical devices, and aerospace industries are well behind the electronics sector and only now beginning to address the role that conflict minerals may play their respective supply chains.  I’ll be watching with interest what the Automotive Industry Action Group does.  So the opportunity for direct end-consumer advocacy to influence corporate social responsibility in sourcing is bountiful.

Evidently, the biggest challenges to grabbing the conflict minerals issue by the reins is in untangling the convoluted supplier network, building a robust product traceability and independent verification process, and enacting sound policy that drives accountability and transparency among all stakeholders.  Not an easy task, but compared to years past, a vast improvement for sure.  The final part of this series will highlight specific international guidance and steps that industries and consumers can continue taking (while we wait for the SEC rules to get finalized) to proactively address supply chain minerals sourcing and maintain a high level of corporate social responsibility.

---

[1]  The Enough Projects focus is on conducting field research, consumer and issues advocacy, and communications to support a grassroots consumer movement.

Conflict Minerals- The “Perfect Storm” of CSR, Sustainability, Politics and Supply Chain Management- Part 1

Photo Courtesy of Sasha Lezhnev/Enough Project (under Creative Commons License)

Last week, it was widely reported that both Intel Corporations and Apple Computers had pulled the plug on sourcing of precious minerals typically used in the manufacturing of its high-tech products from the Democratic Republic of the Congo (DRC).  These basic building blocks of our cell phones, computers and other consumer electronics are widely known as “conflict minerals”, mainly because of the large spread connection the “artisanal” and industrial mines that produce the materials and the flow of money to supply arms to rebels fighting in the DRC.  Conflict minerals are to the 21st Century high-tech world what “blood” diamonds were to the 19th and 20th centuries.

Apple, Intel and other U.S. based corporations have signed onto the Conflict-Free Smelter (CFS) program, which applies to shipments of tin ore, tungsten, gold and coltan from Congo and its neighbors.  The CFS program demands mineral processors prove purchases don’t contribute to conflict in eastern Congo[1]. The regulations were developed by the Washington-based Electronic Industry Citizenship Coalition  (EICC) and Global E-Sustainability Initiative (GeSI) in Brussels (Belgium), representing electronics companies including Intel and Apple, Dell etc.  The program is being marshaled by the GeSI Extractives Work Group, and summarized on the EICC website.

Regulatory Framework

The CFS initiative was established in response to the conflict minerals provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010), signed into law last July (page 838 of the 848 page Act  to be exact). Section 1502 requires companies to make an annual disclosure to the Securities and Exchange Commission regarding whether potential conflict minerals used in their products or in their manufactur­ing processes originated in the DRC or an adjoining country. If the minerals were sourced from these countries, companies must report on the due diligence measures used to track the sources of the minerals if they were derived from the DRC or neighboring nations. In addition, the Act will require a 3^rd party audit to verify the accuracy of the company’s disclosure. Finally, a declaration of “DRC conflict-free” must be provided to support that goods containing minerals were not obtained in a manner that could “directly or indirectly … finance armed groups in the DRC or an adjoining country”.

The U.S. Securities and Exchange Commission was to have issued regulations to stem purchases of conflict minerals this week.  However, on Monday the SEC delayed issuance of the specific rules to the August-December timeframe.  Ultimately, U.S. companies will be required to audit mineral supplies next year to identify purchases that may be tainted by the Congo fighting, according to draft SEC regulations.

Two groups of companies will be directly impacted by the Conflict Minerals Law: companies that are directly regulated by the SEC, and companies that are not SEC-regulated, but are suppliers to impacted companies. Starting April 1, the CFS scheme began requiring due diligence and full traceability on all material from the Congo and other neighboring conflict zones.  Then, these audits, or at least their summaries, are to be incorporated into SEC regulatory findings (in some manner, as yet to be defined by the SEC).

California Steps Up

Meanwhile, this past Tuesday, committee of the California State Senate passed a Senate Bill 861 Tuesday that will curb the use of conflict minerals from Congo.  The 9-1 vote in the Governmental Organization Committee was a first step to making California the first “conflict-free state”.   If it passes the full assembly, the bill would prohibit the state government from contracting with companies that fail to comply with federal regulations on conflict minerals.

According to D.C. attorney Sarah Altshuller (@saltshuller) “The California legislation, even if passed, is unlikely to impact many companies: it would apply only to companies against which the SEC has filed a civil or administrative enforcement action. That said, California’s legislative activity reflects significant stakeholder concern, as well as advocacy activity, regarding the ways in which the sourcing of specific minerals may be contributing to the ongoing conflict in the DRC.”  Many engaged in the initial debate were concerned too that the state was too early to move forward in the absence of final SEC rules.

Supply Chain Ripples?

Courtesy of rasberrah (Creative Commons Licence)

Leon Kaye (@leonkaye), reporting last week in Triple Pundit, “The CFS identifies smelters through independent third-party auditors who can assess that raw materials did not originate from sources that profit off the conflict in the Democratic Republic of Congo.  Now Intel and Apple have stopped purchasing minerals from this region, which has transformed a voluntary program to what the president of an exporter association in Congo called “an embargo.”

Also, as  reported also last week by Bloomberg, “There is a de-facto embargo, it’s very clear,” said John Kanyoni, president of the mineral exporters association of North Kivu, in the Democratic Republic of Congo. “We’re committed to continue with all these programs. But at the same time we’re traveling soon to Asia to find alternatives.”

Defacto or preemptive, this move is long overdue and is bound to bring to light an elephant in the room that manufacturers and consumers alike have been quick to run from and avoid.   I’ve reported in recent posts my dismay over the approach that Apple has taken in addressing its supply chain sustainability issues, especially in Asia.  The fact that Apple has electively chosen, along with Intel to be a first mover to shake the supply chain up and seek to right some corporate social responsibility wrongs is encouraging.  However as my colleague Mr. Kaye correctly notes, neither may have had a choice.

As noted in an article by Future 500’s Juliette Terzieff  this week, “buyers for Chinese, Indian and other countries’ manufacturers who are not part of the CFS program or subject to U.S. legislative requirements coming in effect in early 2012 face no regulatory requirements to ensuring their purchases are conflict-free. This could prove particularly valuable for those seeking to sidestep controls given that Chinese demand for minerals like copper are predicted to rise 7% every year between 2010 and 2014.”

How Many Companies are affected?

In an excellent analysis by ELM Consulting and reported in a series on AgMetal Miner last fall, the amount of companies falling into the two previously mentioned categories is unclear.  According to the analysis:

For the first category, the SEC estimated that 1,199 companies will require a full Conflict Minerals Report. The methodology for determining this number is worthy of mention. The SEC began by finding the amount of tantalum produced by the DRC in comparison to global production (15% – 20%). The Commission selected the higher figure of 20% and multiplied that by the total number of affected issuers, which they stated is 6,000. (75 Fed. Reg. 80966.)  Clearly, this methodology does not consider many additional factors and the actual number of companies that will require the full audit is certain to be higher. For the second category – the suppliers – no estimate has been made.  But if one anticipates 10 suppliers (we have data indicating that the number of suppliers ranges from one to well over 100 for a single directly-regulated company; an average of 10 suppliers may be conservative, especially given the wide range of conflict mineral-containing products) for each company directly regulated, the number of additional companies impacted would be 12,000.

Verifying Mineral Sources Is Tough Work

Photo Courtesy of The Enough Project

As I noted in a past post on “materiality”, surveys taken from manufacturers suggest a lack of confidence in being able to confidently trace conflict minerals to the source (excluding the likelihood that illegal extracted minerals are also blending into the marketplace).  So you could see the difficulty in companies demonstrating due diligence in tracing the chain of materials flows from point of origin.

According to Treehugger ace writer Jami Heimbuch , plugging the supply chain to assure the at all minerals come from conflict free zones is no easy task.  Ms. Heimbuch reported that even Apple has noted how it is nearly impossible to know the exact source.

The proposed SEC rules do attempt to take on suppliers who have “influence” over contract manufacturers who provide name brand products for larger companies.  The proposed rules also apply to retailers of private-brand products and generic brands.   Finally there is some ambiguity around how scrap electronic waste is to be treated.   The SEC has not defined what is recycled or scrap material and manufacturers have a fair degree of latitude in their disclosure reports as to how they will treat scrap/recycled material.

The BBC reports that Rick Goss, of the Information Technology Industry Council (ITIC), whose members include Apple, Dell, Hewlett Packard, Nokia, states that “it will be impossible to make sure that not one single illicit shipment entered the supply chain….It is too complicated in terms of corruption – illegal taxation – to absolutely guarantee that an illegal shipment did not enter the supply chain, regardless of all private and public sector efforts,’ he warns. The minerals could go elsewhere. Asian smelters are sourcing from any number of countries.”

Summary

If it is impossible to track the source of all the minerals going into the stream, then the big question is what countries and companies will do to fix inadequate governance and systems.   And if U.S. companies shift their sourcing to other nations, will this be enough?  Is global manufacturing merely playing “kick the can”?

The conflict minerals issue just may be the “perfect storm” that combines elements of resource consumption, consumerism, corporate social responsibility, supply chain management, politics and product stewardship.

The next post in the series will dive a bit deeper into efforts by key manufacturers in how they are auditing, validating and tracing the conflict minerals supply chain and what responsibilities we as consumers have in lessening the impacts of this perfect storm.

---

[1] As part of the Conflict-Free Smelter program, participating tech companies must provide third-party verification that their processors don’t contain commonly used minerals that fund armed conflicts in Central Africa, specifically the Democratic Republic of Congo. Minerals from Central Africa commonly sourced for tech components include gold, titanium, tungsten and tin; the DRC provides 5 percent of the world’s tin supply, as well as 14 percent of tantalum.

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

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

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.

Collaborative Competition + Sustainability = The 21st Century Supply Chain Solution

Last week, I was honored to be the dinner keynote speaker at the European Petrochemical Associations 2nd Interactive Supply/Demand Chain Workshop in Brussels, Belgium.  What a beautiful place, where cobblestones meet bullet trains- two completely differing eras of transportation systems still working (collaborating?) after all these years.  This years’ workshop theme was “21st Century Supply Chains for the Chemical Industry”.  2011 has also been declared by the United Nations Educational, Scientific and Cultural Organization (UNESCO) as the International Year of Chemistry (see the EPCA’s cool new video, “Chemistry- It’s All About You” here).

Throughout the highly interactive, roll up your sleeves workshop, the dialogue centered on innovative tools and value-added approaches to drive supply chain sustainability. Discussion focused on how the chemical industry and its supply chain can support an evolution from the old linear, materials economy mindset to a more circular, systems based sustainability minded economy, as Annie Leonard describes in the Story of Stuff.  As a matter of fact, that short film was the lead-in to my speech on supply chain sustainability and the nexus with consumerism, and the important role of chemical industry and its supply chain.

As I noted in last week’s post, consumer demand appears to be contributing (at least in part) to some of the gains in eco-friendly and sustainability focused design and manufacturing progress that’s being made in the global marketplace. In addition, shipping and logistics partners are showing leadership in embedding sustainability in the “source, make, deliver and return” product value chain as well.

The (Re) Emergence of “Co-opetiton”

The 21^st Century Supply Chain is a rapidly evolving business landscape.  Prior to around 2005,   the supply chain landscape centered on vertical collaboration between subsequent actors in the same supply chain, or between suppliers, manufacturers and customers.  Since the mid 2000’s, collaboration has refocused along the horizontal axis.   What appears to be happening is more evidence of collaborative exchanges between companies in the same market, or alliances, partnerships, clusters, and networked organizations.  This represents a real paradigm shift” that collaboration between producers, service providers and their customers.

Another older term coined in the mid 1990’s, “co-opetition” (or cooperative competition), may now find its place in the 21^st century supply chain lexicon.  Co-opetition occurs when companies work together for parts of their business where they do not believe they have competitive advantage and where they believe they can share common costs.   The basic premise of co-opetition strategy relies on leveraging alliances, partnering with other shippers (even competitors!) to control logistics  and transportation costs.   In  “games theory, this would be called a “plus-sum” scenario, in which the sum of what is gained by all players is greater than the combined sum of what the players entered the scenario with.  For instance, co-warehousing or load consolidation in transportation and warehousing are straightforward examples where collaborative competition has enormous financial and environmental benefits.  Co-opetition can in effect lead to expansion of the market and the formation of new business relationships, perhaps even the creation of new forms of enterprise.

Co-opetition partners typically include:

1. Producers, Customers, Consumers who drive producer demand and determine product eco-footprint
2. Shippers and Terminal Operators: who generate the freight flows and provide the critical infrastructure for product flow
3. Logistic Service Partners (3PLs): who can design and implement optimized solutions and move the freight
4. Fourth Party Providers: who can facilitate partnerships, referee blockages, find common ground; and
5. Governments who can assure that legal and regulatory arrangements are in place to support seamless collaboration

At the same time, though for co-opetition to be truly sustainable, there must also be  a cultural fit, strategic fit,  economic and operational fit,  and, trust and resources.

Source: Adapted from GEMI, Forging New Links

Co-opetition implies that cooperation and competition merge together to form a new kind of strategic interdependence between firms, giving rise to a co-opetitive system of reciprocal value creation. This new era of globalization has opened the door to co-opetition for small to midsized businesses that lack the scalable resources that larger companies have.  So this makes me think that if competition is a key driver behind innovation, and collaboration is a key 21^st Century supply chain success factor, then collaborative competition (co-opetiton) may be a new solution to drive supply chain sustainability. I posed this theory to a warm response by the 65-plus chemical industry logistics professionals in Brussels. Yes, it’s a bit of a heretical idea, but one that has shown in some industries to work.  Take Proctor & Gamble’s Connect + Develop or Nikes Considered Design and the Environment open innovation models.  Both offer opportunities to collaborate and drive innovative solutions that can benefit consumers, and open business channels to entrepreneurs lacking resources to bring new (possibly more sustainable) products or processes to market.

Summary: Forging New Links in the Chain

Co-opetition offers opportunities for manufacturers and their upstream suppliers and customers to strengthen each other’s performance, enhance differentiation and foster end-consumer brand loyalty in the following ways:

1. By tapping into to customer and consumer preferences, industry can adapt its processes, products and services to enhance competitiveness
2. By collaborating, customer-supplier teams can address Triple Bottom Line (3BL)-related technical challenges that affect the profitability and performance of the overall supply chain.
3. Reciprocal value creation through vertical and horizontal “co-opetition” means recognizing and quantifying each other’s value contributions
4. By sharing intelligence and know-how about 3BL issues & emerging technologies.
5. By incorporating 3BL advantages into their products and services, e.g., reduced cost of ownership.

What ideas do you have to forge new links in the sustainable supply chain?  Let’s start the collaboration now, shall we?

Consumerism & Supply Chain Meets Sustainability in the Chemical Industry

Next week, I’ll have the honor being the dinner keynote speaker at the European Petrochemical Associations 2nd Interactive Supply/Demand Chain Workshop in Brussels, Belgium. This years’ theme is “21st Century Supply Chains for the Chemical Industry”.  The topic is timely given how there’s been so much talk concerning over-consumption, consumer behavior, corporate social responsibility and increased growth of sustainability in manufacturing and supply chain management.  And the chemical industry indeed plays a large role in much of what we consume.  It reminds me of the old Monsanto commercial…”without chemicals, life itself would be impossible”.  It’s just that these days, chemicals in the global marketplace appear to be getting ‘greener’.

Consumer Demand for Sustainable Products

Consumer demand appears to be contributing (at least in part) to some of the gains in eco-friendly and sustainability focused design and manufacturing progress that’s being made in the global marketplace.  There is certainly a higher degree of consumer awareness and understanding of the need to make healthier, socially conscious and eco-friendly products.  However, the Green Confidence Index, a monthly online survey (~2,500 Americans by GreenBiz.com) noted last year that U.S. consumers cite price and performance as the principal reasons for not buying more green products- the flat growth was partially attributed to stale economy.  The slow economic growth of 2010 appeared to also be slowing widespread innovation by small to medium-sized businesses focused on green manufacturing.

In contrast, the consumer business disconnect appears to be alive and well in other parts of the world. In fact, it’s my thinking that businesses are significantly underestimating consumer interest and awareness in sustainability and green issues.  For instance, consumer demand for sustainably manufactured or ‘green’ products and services in China, India and Singapore are outstripping supply (according to an independent survey conducted by TÜV SÜD Asia Pacific). I’ve no doubt the same is the case in Europe, often considered way ahead in terms of consumer sensitivity regarding sustainability. The TÜV SÜD Asia Pacific found that:

1. 84% of consumers prepared to pay an average 27% premium for green products, services.
2. Only 43% of business believes consumers to be willing to pay more  or even produce or trade green products in China, India and Singapore.
3. 74% of businesses either do not have a policy or guideline to  minimize environmental in place or are failing to clearly communicate  they have one.

Chemical Industry Response to Sustainability and Supply Chain Impacts

Manufacturers in the chemical industry and peripheral services have progressively been responding to end-consumer and customer driven pressures. The emergence of ‘green, (or sustainable) chemistry” and restricted materials initiatives over the past half-dozen or so years have propelled the chemical industry and global consumer products manufacturers to rethink how products are made, consumer health effects and long-term eco-impacts.  Traditionally, supply chain management of hazardous products has focused more on reducing the exposure to hazards than on hazard elimination. The advent of green chemistry has provided opportunities to refine supply chain management, including procurement policies and practices, by developing safer products. Redesigned products and processes can dramatically reduce the risks encountered in manufacturing, storage, transportation and waste control by mitigating the hazards associated with them. From a risk management perspective, since it is fundamentally better to mitigate hazards than to try to protect against them, green chemistry has proven to be highly beneficial and contributes by default to greener supply chain management and supply chain-related risk management

Many manufacturers have risen to the occasion in recent years to drive green chemistry and supply chain management to lessen their eco-footprints and support development of safer products.  Global chemical manufacturer BASF chooses its carriers, service providers and suppliers not just on the basis of price, but 0n their performance in the fields of environmental and social responsibility when making our sourcing decisions. In addition to following the internationally recognized Responsible Care program requirements for environmental, health and safety, BASF has established product stewardship goals designed to reduce its overall eco-footprint.

“What counts for us is acting responsibly throughout the entire supply chain because we want to build stable and sustainable relationships with our business partners. This is why we choose carriers, service providers and suppliers not just on the basis of price, but also include their performance in the fields of environmental and social responsibility when making our decisions.”

The company also maintains several key features of its global supply chain management program, including:

1. Safe transportation to our customers
2. Evaluate and support partner companies
3. Monitoring of suppliers
4. Product types and sources important
5. Providing advice for better services
6. China: sustainability in the value chain
7. Minimum social standards for suppliers

Meanwhile, DuPont’s Mission is focused on “creation of shareholder and societal value while we reduce the environmental footprint along the value chains in which we operate”.  Throughout the production-supplier-consumer value chain, DuPont strives through end to end supply chain communication to 1) manage risk and be adaptable; 2) gain efficiencies & profitable flexibility; and 3) enable sustainable product performance and verification through its entire supply chain. Sustainability efforts are tracked and managed for continual improvement through a combination of business management integration approaches and supply chain design and operation.

On the retail side, Walmart has asserted itself in the past several years, by clarifying its stance about reducing toxics in products.  In response, American Chemistry Council members have pledged to lower GHG intensity by 18% by 2012 using 1990 as a base-reporting year and has exceeded that initial commitment and has reduced carbon intensity by 36%.  In addition, Dow Chemical’s is working to harmonize the Walmart goal with its own sustainability objectives of decreasing its environmental footprint and maximizing product performance throughout the supply chain.

“Given the challenges associated with running a global chemical manufacturing supply chain, we have been focused on sustainability for a long time – not just our own but also how we address sustainability with our customers and our customers’ customers,” – Anne Wallin, director of sustainable chemistry and life cycle assessment at Dow Chemical.

Logistics Providers Stepping Up to the Challenge

Among supply chain and logistics businesses, the 2009 14th Annual 3PL Study found that shippers want to create more sustainable, environmentally conscious supply chains. The survey found a need to strike a balance between labor & transportation costs.  Surveyed 3PL’s also noted the market value of carbon-reducing processes, compressed production cycles, and less carbon intensive transportation modes that beat the competition.

Most recently, American Shipper just published its Environmental Sustainability Benchmark Study of over 200 shipping companies.  According to the study, “survey respondents clearly see environmental sustainability has an emerging impact and increasing importance in their supply chain. On a scale of one to five (one lowest; five highest) the study average ranked sustainability as 2.42 two or three years ago, 3.41 today, 3.95 in five years, and 4.17 in 10 years”. Interestingly, customer demands, at 25% percent (see graphic below) are on a par with company policies as a leading driver of environmental sustainability adoption.  Most respondents saw potential return on investment (ROI) although ROI was clearly a potential barrier to sustainability adoption.

In response, leading 3PLs and fourth party logistics providers (4PL’s) are focusing more attention on business practices that are intentionally drive business efficiencies , but (perhaps unintentionally) enhance overall environmental performance, namely:

• In-Store Logistics
• Collaborative warehousing & infrastructure
• Reverse Logistics
• Demand Fluctuation Management
• Energy/Fuel Use Management

End consumer preference certainly has its place in deriving sustainability in the 21^st century, but as I see it, the chemical industry and its shipping and logistics partners are showing proactive leadership in embedding sustainability in the “source, make, deliver and return” product value chain.

My next post will explore how competitive collaboration, or “co-opetition”, is making resurgence in the supply chain sustainability conversation.  In the meantime, I’m looking forward to next week’s conference and all the hospitality that Brussels has to offer.

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

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”

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?

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.