The Elephant in the Sustainability Program

It should come as no surprise that the large majority of environmental impact takes place outside a company’s physical boundaries. Greenhouse gas emissions (GHGs) reporting probably gives us the best estimate of this; the Carbon Disclosure Project (CDP) estimates that over 50% of an entity’s greenhouse gas emissions are indirect ‘Scope 3’ emissions, while AT Kearny says the number is closer to 80% (source: CDP 2011 Supply Chain Report). In this article, we look at why so many companies are now addressing sustainability in the supply chain, and what approaches are used to reduce environmental impact in the supply chain. We use AMD, a Chamber BCLC Environmental Innovation Network member, as a case study, which reports that 63% of total GHGs are Scope 3, over 90% of which comes from the supply chain. (The rest comes from business travel and employee commutes; see this page for more information or the AMD 2010 Corporate Responsibility Report.)

Even the most far-reaching climate legislation, either passed or proposed, recognizes that supply chain emissions are not the legal responsibility of a firm. So why are so many companies beginning to measure and manage supply chains for sustainability? The reasons are simple. First, many companies are feeling pressure from a wide array of stakeholders, including consumers, shareholders, retailers and nonprofits. Second, a sustainable supply chain is an efficient supply chain, so improving supply chain performance can provide multiple benefits to a firm by saving money while reducing impact.

Despite the high impact of supply chains and the potential benefits from addressing them, most companies have still not looked closely at the issue. CDP reports that, of the 57 companies participating in their supply chain initiative, 87% have GHG reduction targets but only 45% of these include supply chains.

Which companies are diving in? From our experience, companies that have a high level of accountability to stakeholders and have more public visibility are feeling more pressure to act. In addition, companies that can more easily influence their suppliers find it easier to act and reap the benefits. So when companies are insulated from stakeholders or when supply chains are unruly, large, or often in flux, implementing a deep sustainability program isn’t easy.

Learning from others’ experiences can help smooth the path. Companies are finding a host of ways to reduce supply chain impacts, and these include: (1) using ecodesign principles to make more sustainable products; (2) implementing green procurement policies that select more environmentally friendly providers; (3) helping suppliers improve onsite operational efficiency; (4) improving logistics to save time and money while reducing impact; (5) reducing or switching to eco-friendly packaging; (6) using footprinting or life cycle analysis as a tool to understand impact; and (7) improving and managing communication with suppliers.

But which approach is right to take for your company? The key is to understand how your supply chain is structured and use that to find opportunities.

When a firm has a large number of suppliers, when competition between potential suppliers exists, or when the final product is a commodity with infrequent innovations, developing reporting systems to grade suppliers is a promising approach. CDP call this ‘Buyer Advantage’, since buyers can pick and choose suppliers. This can also be thought of as a technical approach to manage an efficient supply chain structure (Parmigiani, A., Klassen, R.D., Russo, M.V., 2011. Journal of Operations Management, 29: 212–223.) A reporting or scorecard approach gives yet another set of criteria, in addition to cost and quality considerations, by which firms can judge suppliers and determine where to purchase. Wal-Mart’s sustainability scorecard is a well-known example of this approach, and balancing a comprehensive and accountable set of criteria with minimizing the burden to suppliers is critical to success.

On the other hand, when a firm has fewer suppliers, when each supplier fills a critical role that would be difficult to replace, when relationships with suppliers are longer and deeper, or when supplier innovation is critical to maintaining market advantage, the ‘threat’ of a scorecard system is less of an option, and enhancing communication with suppliers may be the best way forward. This is often called ‘Supplier Advantage’ (CDP) or a relational approach in a responsive supply chain (Parmigiani et al.).

This is precisely AMD’s situation. A relatively small number of foundries produce AMD wafers, and these suppliers make up the lion’s share of supply chain risk. Over the past two years, the AMD Corporate Responsibility team has established quarterly reviews with these foundries. During these reviews, the foundries report several key metrics to track progress, such as GHG emissions, energy use, water consumption, waste volume, and environmental regulatory compliance. For other suppliers, sustainability is integrated into existing supply chain processes by leveraging the strong existing relationships and close communication between lead source managers and suppliers. Through AMD’s business review process, sustainability and corporate responsibility are incorporated as part of suppliers’ performance evaluation, and the frequency of reviews – either quarterly or semiannually – is determine by supplier risk. According to AMD’s Corporate Responsibility Manager, Heather O’Cleirigh, “through this process, and due to strong existing relationships, AMD and our suppliers work together to reduce environmental and social impact.”

Given the complexity of the issue, it isn’t surprising that there is no one-size-fits-all solution. For us, there are three key steps in any comprehensive supply chain initiative: (1) Determining and building support for an approach, (2) Developing a system to collect and track information, and (3) Influencing supplier decision-making. Underlying all of this is a set of robust performance metrics, which are critical for executive buy-in, determining cost-effective actions, and creating competition among suppliers. In a survey of 582 European companies, over half are already using sustainability performance criteria with suppliers, and among Scandinavian countries 77% do so (BearingPoint 4th Supply Chain Monitor, 2010-2011).

It may seem paradoxical that supply chains constitute the bulk of environmental impact and are still a relatively new frontier in corporate sustainability. Clearly, there are good reasons to attack supply chains only after low-hanging fruit has been picked. But as we get better at understanding and managing supply chains, and as the tools and metrics get standardized within industries, supply chains will rise to the forefront of corporate sustainability.

Article by James Barsimantov, Principal and Cofounder of EcoShift; Article appearing courtesy 3BL Media.

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