Being PrOaCtive aBOut SuPPLy CHain envirOnMentaL ManageMent

w w w . i m d . c h N o . 18 3 AUGU S T 2 0 10

Being proactive about supply chain environmental management The attention dedicated to environmental

In the nineties, global trade volumes started

issues has drastically increased over the

to grow at a faster pace. As a consequence

last 25 years. Governments have become

of such globalization, the complexity of

involved

and

supply chain networks has increased and

participated in events such as the Earth

the ability to regulate them through national

Summit (1992), the World Summit on

environmental policy has been reduced.

Sustainable Development (2002) and the

In the last decade, it has become clear

UN World Summit (2005). They have further

that to be truly sustainable, focusing on the

shown their commitment to sustainability

environmental performance of individual

by approving increasingly stringent policies,

firms is not enough. Life cycle or supply chain

e.g. on the emission of ozone depleting

thinking needs to be taken into account. In

substances, the use of chemicals and the

2002, the Life Cycle Initiative was launched

disposal of electronic waste. In the mid-

by the United Nations Environment Program

nineties, firms started to feel this regulatory

(UNEP) and the Society of Environmental

and public pressure and some began

Toxicology and Chemistry (SETAC) to promote

to proactively report and take action on

sustainable consumption and production

improving their environmental performance.

patterns through life cycle management.

A multitude of organizations, standards

Since then, NGOs and consumers have

and guidelines have been developed both

increasingly been demanding environmental

internally by companies themselves and by

and social accountability from firms for their

external government agencies to support

entire supply chains.

sustainability efforts by businesses.

With this evolution in ideas, supply chain

Over the last quarter century there has

environmental

been a clear evolution in thinking about

emerging as a new frontier. Guidelines are

sustainable development. In 1983, The

being developed to incorporate a supply

Bruntland Commission provided the first

chain dimension into corporate sustainability

definition of the term as “…development

initiatives. For example, the Greenhouse

that meets the needs of the present

Gas Protocol, a corporate accounting

without compromising the ability of future

and reporting standard developed by the

generations to meet their own needs.”

World Resources Institute (WRI) and the

One decade later, it became evident that

World Business Council for Sustainable

businesses needed to get more involved.

Development (WBCSD), includes scope

They therefore, needed to move beyond

3 emissions. These encompass all GHG

traditional financial performance to the

emissions from operations not owned or

“triple bottom line,” a term coined by the

controlled by a firm. However, there is still

British environmentalist John Elkington

a clear lack of well-established, robust

in 1994. It describes how to determine and

methods for measuring and reporting

measure an organization’s value creation

supply chain environmental performance as

ability by taking into account environmental,

respondents to a survey by the Greenhouse

social and economic aspects, or the 3Ps –

Gas Protocol Product and Supply Chain

planet, people and profits.

Initiative unanimously indicated.

in

sustainability

issues

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management

(SCEM)

is

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Ralf W. Seifert (IMD, EPFL)

Joana M. Comas (EPFL)

In our analysis, the electronic equipment and automobile sectors stand out as those with the most proactive approach, and a high number of positive/proactive actions were identified in their reports. In contrast, the clothing sector obtained the lowest score. Even leading firms in this last sector seem to be more concerned with social rather than environmental issues. 2. Supply chain vs. firm orientation We identified different supply chain or life cycle stages whose environmental performance was meant to be improved by the firms’ actions. These stages are materials extraction, raw materials, packaging, tier 2 suppliers, firm, additional, downstream echelons, distribution,

Figure 1: Timeline of the attention paid to environmental issues

product use, product disposal, packaging disposal, Today all stakeholders – customers, governments,

total and external. The tier 2 supplier category includes

communities and other pressure groups – are thus

the operations of the companies supplying products or

pushing for a supply chain approach to sustainability,

resources to the primary suppliers of the analyzed firm.

but to what extent is such an approach integrated

The additional category includes building construction and

into actual practice? Do firms really take a supply

demolition, business travel, employee commuting and

chain approach or do they remain firm-oriented? To

equipment not core to a firm’s operations such as office

what extent does SCEM vary across sectors?

equipment. The downstream echelons category refers

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we thoroughly analyzed the

to those entities that act as intermediaries between the

corporate responsibility (CR) reports of firms that

analyzed firm and the final customers (e.g. retailers or

are recognized sustainability leaders (i.e. Gold or

dealers). The total category covers a whole supply chain

Silver Class companies in the SAM Sustainability

or product life cycle, e.g. it applies when conducting a

Yearbook 2009) to assess their SCEM practices.

life cycle assessment (LCA). The firm category applies

We studied twelve companies covering six sectors

to actions improving the performance of the firm overall

(automobiles, building materials and fixtures,

or particular processes it owns that are not covered in

clothing and footwear, computer and electronic

other categories. The external category refers to any

equipment, food producers and general retailers).

activities outside of the supply chain (e.g. efforts to protect

In our research,

biodiversity in a local natural park). 1. Firms’ proactiveness

We measured the emphasis that each company gives

We identified different types of actions as the

to the aforementioned supply chain/life cycle stages

proactive efforts that firms make in SCEM and

and again, we observed significant differences across

measured the number of actions in the most recent

sectors. Figure 3 presents the number of actions for each

CR report (as of 1 May 2009) of each company. This

firm in each stage. We observed that firm-orientation

indicator, which can be interpreted as a measure

prevails given that 39.5% of actions on average referred

of the firms’ SCEM proactiveness, strongly varied

to the firm stage. The sector most focused on this stage

across sectors, but remained similar within them,

and therefore most firm-oriented is, without a doubt,

as shown in Figure 2. From the 12 firms that we

the building materials sector which invests heavily in its

analyzed, we obtained a total of 3,205 actions.

manufacturing base. On the other hand, the sector with the highest dispersion across the different supply chain/life cycle stages and, therefore, the most supply chain-oriented, is the computer hardware and electronic equipment sector, which has made widespread use of outsourcing in the past decades. Finally, we can observe that certain stages, such as tier 2 suppliers and downstream echelons, receive relatively little attention.

Figure 2: Number of actions/proactive efforts per firm

Being proactive about supply chain environmental management

Figure 3: Firms’ attention to different supply chain or life cycle stages and stages subject to major regulation and public pressure

3. The effect of regulation and public pressure

patterns. Consumer awareness of the greenhouse gas

Particular supply chain or life cycle stages are

emissions from vehicle and computer use is increasingly

subject to major regulation such as EU environmental

determining customer choices. As a consequence,

directives. For example, the product disposal stage

firms in these sectors are dedicated to developing

in the electronics sector is affected by the Waste

technologies that are more fuel and energy efficient

Electric and Electronic Equipment (WEEE) directive,

during the product use phase.

which is intended to implement the extended producer

In

responsibility (EPR) principle. This explains the

manufacturing is often outsourced and public pressure,

outstanding efforts of this sector to put the necessary

therefore, falls on the suppliers’ stage. This is why

reverse logistics infrastructure in place to facilitate

suppliers working for branded companies are subject to

equipment recycling by consumers. The raw materials

important monitoring and auditing processes.

used by this sector are also regulated by the EU

Nestlé, the world’s largest food producer, also feels

Restriction on Hazardous Substances (RoHS) Directive,

consumer pressure at the suppliers’ stage and

which also explains why this life cycle stage receives

responds to it with the implementation of multiple

considerable attention.

supplier training programs. With the same objective of

The use phase of automobiles is subject to emissions

improving environmental performance upstream in the

standards and in the EU, vehicle fuel efficiency must be

supply chain, Unilever has set quantitative targets on the

available to customers. This explains the efforts of firms

percentage of the sourced tea and palm oil to be certified

in this sector to develop less polluting technologies and

according to the standards set by the Rainforest Alliance

the sector’s focus on the use stage.

and the Roundtable on Sustainable Palm Oil (RSPO).

Processes for the production of building materials, like

This explains why these companies dedicate particularly

cement, emit significant amounts of greenhouse gases

high attention to the suppliers and the raw materials

the

clothing

and

footwear

sector,

product

and other air emissions (nitrogen oxides, sulfur oxides,

categories, as we also observe in Figure 3.

particulate matter) and are therefore tightly regulated.

We can observe then that regulation and public pressure

Since these processes are generally owned by the firms

are key determinants of whether firms adopt a supply

we analyzed in this sector (Holcim and CRH), this sector

chain approach to environmental management, and

displays a very clear firm orientation, with relatively little

explain why taking a supply chain or firm-oriented

attention paid to other stages of the overall supply chain.

approach varies across sectors.

If apart from regulation, we identify those life cycle stages subject to strong public pressure, we observe similar

4. Beyond regulation and public pressure

These are just some examples supporting the business

Although regulation and public pressure are powerful

case for sustainability. Direct financial benefits, competitive

drivers for supply chain environmental management,

advantage arising from consistent company standards and

leading companies are proactive and go beyond them, often

the development of new lines of business are some of the

for financial reasons. For example, in 2008, HP voluntarily

reasons to voluntarily adopt more sustainable practices. The

diverted 92.3% of its non-hazardous waste from landfill,

perception of a zero-sum relation between environmental

saving nearly $7.7 million from reusing items and avoiding

and financial performance is progressively declining as

landfill costs. The company also generated $2 million in

more evidence that these two can go hand in hand becomes

revenue by selling material to recyclers.

available.

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as EU directives also voluntarily choose to comply with these

5. Managers’ actions

high standards in regions with less stringent regulation.

Having highlighted the need to be proactive and to take a

As Dell’s 2008 CR report notes, “Even though the trend

supply chain approach in managing environmental issues,

toward producer responsibility has accelerated the pace of

we invite managers to ask themselves the following

legislation in the US, we are committed to implementing

questions and take the necessary actions to provide

our Product Recovery Policy without legislative mandates,”

satisfactory answers. What is our degree of management

and “As of the beginning of 2007, all Dell-branded

and control over our environmental performance in the

products worldwide were compliant with the EU RoHS

supply chain? Are we measuring, setting targets and

requirements.” Going beyond compliance and satisfying

taking action for different environmental issues at the

the highest requirements can help companies to achieve a

different supply chain and product life cycle stages?

first-mover advantage and reduce the costs of managing the

What is our upstream and downstream reach? Are we

complexity arising from having products that need to comply

assuming responsibility for supplier performance? Do we

with different standards, depending on the country in which

do so beyond tier 1 suppliers? Are we taking an active role

they are produced or sold.

in educating customers about the environmental impact of

Thinking beyond regulation and also beyond the firm’s supply

their choices? Are we leveraging downstream echelons’

chain, proactive companies also look for opportunities to

proximity to customers in this task?

reduce environmental impact in other sectors. Given that

The benefits of supply chain integration have been proven

the large batches required for cost-effective book printing

for traditional operational and financial performance. It is

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end up in 25% of books going unsold, HP has recognized

now time to take supply chain integration to the next level

a market for on-demand-printing technologies. These allow

by comprehensively improving corporate environmental

for a reduction in the number of unsold books and therefore

performance. Not only is it the right thing to do for firms as

a lower paper, ink and energy consumption as well as lower

corporate citizens, but it is a chance to improve efficiency

waste generation.

and create new business opportunities.

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World merchandise trade volume by major product group, 1950-2007. International Trade Statistics by the World Trade Organization. http://www.wto.org/english/res_e/statis_e/its2008_e/its08_charts_e.htm (accessed 20 July 2010). A corporate accounting and reporting standard. GHG Protocol, World Business Council for Sustainable Development (WBCSD) and World Resources Institute (WRI), 2004. Supply chain and life cycle survey: summary of results. GHG Protocol, World Business Council for Sustainable Development (WBCSD) and World Resources Institute (WRI), May 2008. The present article is based on a research paper: An analysis of the supply chain environmental management practices of sustainability leaders. Comas, J.M. and Seifert, R.W. (2010). Findings from the U.S. book industry: environmental trends and climate impacts. Book Industry Study Group and Green Press Initiative, 2008. For further reference on the business case for corporate sustainability: The Business Case for Corporate Sustainability: Literature Review and Research Options. Salzmann, O., Ionescu-Somers, A., Steger, U. European Management Journal, February 2005.

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