Sustainable SCM - Essay Example

?The paper will analyse the shift from conventional supply chain management to ‘sustainable SCM’. The concept shall be elaborated by brief cases of corporations such as Sony, L’Oreal and Alcatel – Lucent to show what strategies companies have adopted to achieve sustainable SCM, including partnership with waste handlers and auditing of the supply chain. Finally, the challenges to this technology shall be considered which include, but are not limited to, the dearth of information about suppliers, insufficient communication between the suppliers and the organization as well as the frequent ‘outsourcing’ of training programmes to third parties who lack sufficient knowledge about the organizational goals and culture. The recent years have witnessed mounting pressures from various stakeholder groups for corporations to incorporate sustainability into their supply chain management procedures. Sustainable or green supply chain management can be roughly defined as the management of all activities right from the purchase from suppliers to taking back the disposed product from the customers with a special focus on improving the social and environmental impacts of those activities (Business Guide, 2003). This can be contrasted with the conventional supply chain management focused only on the activities until delivery of manufactured products or services to the customers. Therefore, the environmental responsibility has drifted away from the consumer to the manufacturer and retailer (Business Guide, 2003). However, research has suggested that companies require not only the internal capacities, resources and corporate culture to achieve sustainability but also an ‘external fit’ to achieve strategic collaboration with their suppliers (Kanter, 1994) which presents a challenge to companies embracing this philosophy. Furthermore, the grey area surrounding the definition of ‘sustainability’ and ‘green supply chain’ means that sustainable SCM has to be discussed in terms of reverse logistics, closed loop supply chain and various other drivers. There are several drivers for a sustainable supply chain management primarily because of the related benefits to various stakeholders. These include government Regulations, Market forces, Customers, Investors and Employees. The government owns the primary responsibility to influence supply chain sustainability. Government can achieve progress on this by effective use of bans, subsidies and incentives. The government can come up with measures such as environmental labels, licenses and product design guidelines (Business Guide, pp. 42). There are already a number of regulations in place for sustainability. These include U.S. Farm security and rural investment act (2002), European Union’s Restriction of Hazardous Substances (RoHS), China ROHS, E.U. Cosmetics directive, E.U. Packaging Directive, Waste Electrical and Electronic Equipment (WEEE) and REACH. In addition there are International Standards such as WRAP, FLA, ICTI CARE, ISO 14000 and ISO 26000 for addressing environmental causes (Business for Social Responsibility, 2007). As far as the market forces are concerned, the relationship between brand owners and retailers is changing. Big retailers such as Wal-Mart have a huge clout over the manufacturers and control the types of products they want to keep on their shelves. In addition, the retailers and brand owners are also under tremendous pressure from NGOs and other organizations working for environmental causes. As far as the customers are concerned, there is a long way to go before the customer becomes mature enough to buy only environment friendly products. However, the shift has already begun and the customers are willing to spend a few extra dollars to promote or support green supply chain initiatives. WholeFoods charges higher prices for its products than a retailer such as Wal-Mart but is still acceptable to customers because of the sustainable practices being followed in the manufacturing of those products. Furthermore, there are several socially responsible ‘investors’ such as Sustainable Asset Management (SAM), Calvert and Domini who take their investment decisions based on overall performance of the company on economic, social and environmental development which in other words is called ‘Triple bottom line’. In addition, the various investment firms and rating agencies have come up with indices or ratings to account for sustainability. A few of these are Goldman Sachs Sustain, Dow Jones Sustainability Index and Financial Times/London Stock Exchange (FTSE4Good). These ratings have an impact on the decisions of firms (Business for Social Responsibility). Finally, employees, especially the top level executives have become aware of sustainability in supply chains. They prefer to work in such organizations as they also attain personal growth in these companies. After having accounted for the major elements driving sustainability in SCM, it is important to understand the role of carbon emissions in product life cycle & the phenomenon of de-carbonization. Research has proven that significant carbon emissions are done at every stage of a product lifecycle. Of the world’s total 50,000 mega-tonnes of annual carbon dioxide greenhouse gas emissions, 2800 mega-tones are due to logistics and transportation. Road freight forms the largest component of this carbon footprint while minerals and food sectors are the largest sectors by product category (World Economic Forum, 2009). The major factors which are likely to impact De-carbonization are government regulations, fuel prices and consumer awareness. Several initiatives have already been taken on this account. EU ETS was introduced a few years ago for penalizing heavily polluting industries in EU where heavy polluters would have to effectively pay 5-16% of actual prices for fuels (World Economic Forum, 2009). De-carbonization offers a promising future and there are a number of opportunities to enable De-carbonization. One of these is in improving vehicle manufacturing technologies and making them cleaner. Sourcing goods from efficient suppliers and outsourcing tasks to nearby locations can also help in achieving the objectives of Decarbonisation. Focus also needs to be laid on the proper recycling of used goods. Energy efficient buildings, better packaging & design and effective training and communication programmes are some of the initiatives which can help make quick progression on Decarbonisation. Having understood the significance of sustainable supply chain and the mounting needs of the stakeholders, it is important for companies to move towards its implementation. Successful implementation requires a step-by-step process which is detailed in the following part of the paper. For successfully realizing a sustainable supply chain, an organization needs to go through several steps. The first step involves Business Case Development / Commitment. The foremost step in implementing a programme for supply chain sustainability is to develop a business case. This can be done by looking at the external environment and study case studies of companies which have done so successfully in the past. An analysis should be done of the differences before and after this implementation (United Nations Global Compact, 2000). These initiatives have to be driven by the top management. After this study a commitment has to be made by the board members to work on the same. The second step revolves around “Risk, Gap and Scope assessment”. Such an initiative has a number of risks which could have a short term impact on finances or new operational bottlenecks. These risks have to be listed and mitigation plans have to be developed. A gap analysis between the current state and future state is required so that efforts could be made to bridge the gap. It is also essential to decide the scope of the initiative at this stage in line with organizational strategies and priorities (United Nations Global Compact, 2000). The third step in the process if “Supply chain identification”. Many organizations are unaware of the length and width of their supply chains especially in case of complex supply chains. Therefore, an internal assessment is required. It needs to be assessed where the company’s supply chain holds a position within other supply chains (Business Guide, pp.15). The next step involves the actual Implementation. In this step, the expectations of the organization are communicated to suppliers, distributors and all other partners in the upstream and downstream supply chains. Internal operations are realigned to adjust to the new priorities. The organizations try to build strategic partnerships if required to realize its goals. These may include partnerships with third party logistic providers, IT outsourcing firms, consultants and so on (Nunes et. al., 2004). The next stage involves Measurement. New metrics have to be introduced to track performance on sustainability. Therefore, traditional scorecards need to be replaced by balanced scorecards and new versions of SCOR Model. Absolute transparency is required in tracking performance against goals. Finally, and most importantly, it is important to “Communicate the sustainable development as a part of business strategy”. After the new order has been established, it is very important to communicate the same to all business partners especially employees and customers. This would ensure seriousness on the issue as well as help in efficient change management. Training and counselling sessions need to be arranged for the same. However, the process requires certain pre-requisites. These pre-requisites define the several ways to achieve Supply Chain Sustainability in various areas. The first pertains to “Supplier engagement”. For achieving sustainability in this area, a code of conduct for the suppliers must be created. For this a core team has to be established consisting of a board member, members from purchasing, quality & HR and major suppliers. After this, a list of major global and domestic suppliers needs to be prepared. The risks are assessed and priorities are decided. After this the actual code of conduct is prepared. The suppliers are given audit tools and acceptance criteria are decided. Continuous monitoring and evaluation is done to ensure quality. Levis Strauss & Co. was the first multinational company to establish global sourcing and operating guidelines (United Nations Global Compact, 2010). Secondly, Internal Operations & Logistics must be aligned in a way so as to facilitate sustainable SCM. The internal operations which may include manufacturing, warehousing and logistics have to be optimized. Reverse logistics is generally one of the most neglected areas but can go a long way in determining the sustainability of a supply chain. Proper recycling of wastes is another area of concern. Also efforts should be made to make strategic partnerships with Third Party and Fourth Party Logistic providers to realize economies of scale and minimize costs. Finally, Product development is the most critical part of the supply chain. Organizations must adopt a ‘cradle to grave approach’ in product design and movement within the supply chain. Nokia is one of the few companies which are very conscious in this regard. Vodafone has also launched a mobile recycling campaign in conjunction with Nokia for proper recycling of mobile phones. The process of sustainable SCM does not end at implementation. Successful implementation requires measurement of sustainability using Green SCOR Model. The conventional tools or frameworks being used for measuring the performance of a supply chain do not account for green measures or sustainability. SCOR model is the best known model for supply chain performance measurement. The SCOR model includes best practices from a number of industries and business areas. It includes 5 processes from end to end which are Plan, Source, Make, Deliver and Return. In Green SCOR model, the environmental metrics and best practices were included (Green SCOR Model, 2003; Best practices in implementing green supply chains, 2005). A typical Green SCOR model is shown in Figure 10.1(See appendix). Literature on sustainable SCM includes several Case Studies & Innovations in Green Supply Chain Management that demonstrate the practical usefulness of this technology in real-life situations. The first of these pertains to Sony Electronics and Waste Management Inc. Waste Management Inc. (WMI) is one of the world’s largest solid waste handlers. WMI has opened about 75 recycling centres in the U.S. to date. WMI believes that there is a significant economic value in e-waste especially in electronics industry due to the high value of metals being used. Therefore, it is looking forward to build strategic partnerships with electronics manufacturers. Sony was one of the first partners of WMI. Generally, WMI charges fee to the customers who drop their e-wastes at WMI’s facilities for disposal. However, with partners such as Sony the payment is based on weight/volume. This fee turns out to be very small for Sony in comparison with the profits due to positive responses from the customers (PriceWaterHouseCoopers, 2008). A second useful demonstration of sustainable SCM is that of L’Oreal. L’Oreal is a French cosmetics company which has adopted sustainable supply chain practices. It has a condition for the suppliers to be audited by signing an Ethical Commitment Letter. All subcontractors, suppliers of raw materials, packaging, security, cafeterias etc. are audited by L’Oreal according to SA8000 standard. The audits are done by third parties without notice. L’Oreal’s vision statement reflects its concern for green measures. It states “We are committed to building strong and lasting relationships with our customers and our suppliers, founded on trust and mutual benefit. We do business with integrity: we respect laws of the countries in which we operate and adhere to good corporate governance practices. We are mindful of our impact on the natural environment. We are committed to the respect of human rights…” Another company, named Alcatel-Lucent, has also taken up this concept in its operations. Alcatel-Lucent is a French Telecommunications company which developed an assessment methodology to evaluate the performance of suppliers’ performance management systems. The company in collaboration with EcoVadis developed a web collaborative platform based on UN Global Compact, Global Reporting Initiative Indicators and ISO 26000. The scorecard developed combined outputs from suppliers, audits and multiple stakeholders and yielded very beneficial results for the company. Having discussed the issues, drivers, implementation steps and a few case studies, the benefits of a sustainable supply chain seem very obvious. However there are many challenges in achieving significant progress on the same. First is the lack of supplier information. There are very few organizations which have accurate information of their suppliers. Either the information is limited to functional silos or there are just not enough efficient information systems to get real time information. The situation has improved with the emergence of ERP and SCM systems. However, there is a lack of central compliance and CSR repository which can capture information on social and environmental performance of the suppliers (Business for Social Responsibility, 2007). Another challenge is presented by the communication gap. The organizations and suppliers do not have a proper understanding of what information needs to be shared. Many times the suppliers are very small to invest in IT infrastructure and communication. Also third parties for logistics, data cleansing and audits are generally not well integrated into organizational systems (Business for Social Responsibility, 2007). A final challenge is presented by the non alignment of training programs and monitoring. Training programs are arranged generally by independent departments and are carried out by external trainers who are unaware of organizational objectives. Similarly monitoring and compliance activities are carried out independently in many companies (Business for Social Responsibility, 2007). To conclude, this paper has focused on the emerging trend of companies incorporating CSR into their supply chains by using models such as Green SCOR. Despite the challenges presented by the lack of supplier information, outsourcing of training activities and communication gap, companies have adopted the ‘cradle to grave approach’ in order to reap the benefits of meeting the needs of their stakeholders as well as reducing costs and enhancing profits. 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