IBM announced on Wednesday that they will require their suppliers, numbering almost 30,000 worldwide, to initiate data management systems in the areas of energy use, greenhouse gas emissions, and waste and recycling. This announcement is on the heels of Walmart's press release in February regarding the company's goal to cut 20 million metric tons of greenhouse gas (GHG) emissions from its global supply chain by the end of 2015.
Last September, I collaborated with Michael Lamereoux of Sourcing Innovation to publish a guest post on Supply Chain Sustainability and Transparency. In it, I said:
(Supply Chain Sustainability and Transparency)…a trend that requires many sourcing and procurement organizations to stretch outside their traditional bounds because of its interdisciplinary and cross-functional nature. Whether one likes it or not, for reasons of consumer demand, cost reduction and risk, and good ol' conservationism, environmental sustainability will grow in importance and the supply chain will increasingly be dragged into the limelight on this topic.
It's happening now and smart companies are getting out in front. A few points to note:
When companies set goals and standards for their suppliers like this, they generally aren't mandates. In most cases, they aren't saying "do this or we won't do business with you". Watchdogs may see this as a loophole, but the reality is that the mandate approach doesn't work as well for two reasons:
1) Suppliers deal with multiple customers and cannot effectively serve mandates developed independently by each customer. Originally, when companies began demanding adherence to social and environmental codes, each company had different requirements. Thus, suppliers would be forced to modify their practices to comply with many different types of standards–hardly efficient and when I would meet with factory managers and this topic came up, it wasn't unusual for them to voice their complaints about how difficult it was trying to modify one factory to comply with the variety of standards. Allowing factories to develop their own systems not only builds their management capacity, but allows them to address key issues for everyone in their own creative ways.
2) Companies are finding that best practices in driving sustainability make collaboration a priority. Why? Because suppliers buy-in when they have a say. The "Beyond Monitoring" Group of San Franicsco based NGO, Business for Social Responsibility (BSR), advise that focusing on suppliers' management capacity is a key indicator of how effective a supplier will be at implementing their own monitoring and reporting systems. In case studies, both Global Reporting Initiative (GRI) and BSR have noted that suppliers' managers typically express difficulty in designing, managing, and reporting on their environmental issues because they have a hard time pulling resources and time away from other operations to accommodate this. In successful cases, brands compel and guide suppliers to do the tough work of increasing the sophistication of their management systems to be able to handle these issues. Thus, they've stretched themselves and enhanced their own capabilities. They own the changes. And, they can use it for competitive differentiation. This is better than a mandate.
Because of the number of changes that must occur for these goals to be reached, both internally and externally, the companies that are most successful at this will generate wins on multiple levels that will help them gain competitive advantage.
3) Implementing the internal changes required to drive sustainability up the supply chain is not easy. At Stanford University's Responsible Supply Chain Conference last Spring (coming up again soon), I listened to execs from several large companies describe the challenges they faced in making small changes to reduce carbon footprint. A simple example which alludes to the potential complexity: modifying shipping pallet size by less than a foot to accommodate tighter packing of cartons, required workers in the factory, trucks, warehouse, and retail to change from practices that have worked for years, as well as, allocate budget to change out old infrastructure. This is change management at its core and finding ways to appeal to everyone proved key to getting the bigger, systemwide win. It all adds up, and the companies improving their skills in change management like this will continue to push their lead on competitors.
4) Much of advancing sustainable initiatives involves the "reduction" of things–energy, material, scrap, distance, and so forth. Anyone with P&L responsibility will perk up when they hear something that sounds like inspirational cost cutting. The economic conditions of the last few years have shown companies just how important it is to remain lean in good times. Companies looking for the sustainability/cost-cutting win-win will be able to fatten margins or pass savings onto customers.
5) Conveying "sustainability" to consumers is an area that is still very new and experimental. Companies have been experimenting with different approaches and had varying amounts of success. A few things are clear:
A) Consumers and watchdogs catch on quickly and greenwashers are punished.
B) As major players continue to push sustainability, sustainability will continue its transition in more and more product categories from nice-to-have selling point, to "must-have" feature–similar to quality, price, and service.
C) Despite the economic turn, a growing swath of consumers are considering sustainability in their purchasing decisions and many report being willing to pay a price premium. As sustainability continues its push to the mainstream, the price premium will likely erode–meaning you better have cost-cutting as a priority for your sustainability to be…sustainable.
D) Sustainability works well with transparency. Some of the best approaches to conveying sustainability to consumers seems to involve simply showing them what you're doing. Method, Patagonia, and Timberland, are three companies that seem to blend authenticity, transparency, and sustainability in an exceptional way that drives brand value. Integrating sustainability into the company and/or product brand may be the most effective method of increasing brand value and maintaining price premiums as sustainability becomes more commonplace.