Key Pillars of Sustainability in a Supply Chain

Sustainability in a supply chain can be viewed along three pillars—social, environmental, and economic. Major global corporations such as Walmart and Starbucks report their economic per­formance in their annual reports and their social and environmental performance in their global responsibility reports (also called corporate social responsibility reports). As we mentioned ear­lier, many actions taken in a supply chain can improve performance in all three dimensions. For example, the use of modular design by IKEA allows the company to tightly pack its parts when they are shipped from the production location to its retail stores. Modular design allows the com­pany to simultaneously reduce emissions as well as its transportation costs. SC Johnson, a manu­facturer of cleaning supplies and other consumer goods, has reported that between 1990 and 1999 the company used its eco-efficiency efforts to cut more than 420 million pounds of waste and save $125 million. The majority of sustainability-related efforts, however, have a cost that the supply chain incurs for a benefit that may be more universal. In such situations, measuring performance along all three pillars is required to evaluate the impact of sustainability-related efforts in the supply chain.

Two fundamental challenges exist in a supply chain in the measurement and reporting of the social and environmental pillars. The first challenge relates to the scope over which a cate­gory is measured. Consider a company that reports only energy consumption within its own operations. If it decides to outsource some production to an offshore supplier, its own energy consumption will show a decline even though the energy consumption in the entire supply chain may have increased. If it decides to bring some production in-house and onshore, the energy consumption within its operations will show an increase even if the energy consumption for the entire supply chain has decreased. Thus, it is important to clearly define the scope across which all metrics are measured and reported. In the context of greenhouse gas emission, the Green­house Gas Protocol (GHG Protocol) initiative defines three scope levels. Scope 1 refers to emis­sions from GHG sources that are owned or controlled by the reporting entity, also referred to as direct emissions. Scope 2 refers to the inclusion of indirect emissions from grid-sourced electric­ity and other utility services, including heat, steam, and cooling. Scope 3 refers to the inclusion of other indirect emissions coming from the production of purchased materials, outsourced activ­ities, contractor-owned vehicles, waste disposal, and employee business travel. For most firms, the extent of direct emissions is typically only a small fraction of the extent of indirect emissions in the supply chain. For example, a detailed analysis by the pharmaceutical company Abbott indicated that its indirect emissions were about 6 to 14 times its direct emissions. For a typical retailer, only about 7 percent of the environmental impact is direct, with the remaining 93 percent coming from other parts of the supply chain. It is thus crucial to measure the social, environmen­tal, and economic impacts across the entire supply chain.

The second challenge in measurement and reporting relates to the use of absolute or rela­tive measures of performance. An absolute measure reports the total amount of energy consump­tion, whereas a relative measure may report the energy consumed per unit of output. The advantage of using an absolute measure is that it reports the full impact of the supply chain (assuming we use scope 3) along the category being measured. The disadvantage is that a drop in supply chain sales and production will show a lower absolute measure of energy consumption even though the company may not have improved anything. This was the case in Europe around 2012, when the economic slowdown resulted in lower emissions even when firms had made no improvements. A relative measure of performance, such as emissions per ton of output, is more effective at capturing improvement. The challenge with using a relative measure is the choice of basic unit because each category can be measured relative to a variety of units, such as dollars of sales, kilograms of output, or square feet of space. In general, it is better for firms to measure and report both absolute and relative measures to get a true picture of their performance.

Next, we elaborate on different dimensions of the social and environmental pillars using Walmart and Starbucks as examples.

1. Social Pillar

The social pillar measures a firm’s ability to address issues that are important for its workforce, customers, and society. Workforce-related factors include employment quality, health and safety, training and development, and diversity and opportunity. Customer-related factors include accu­rate product information and labeling, along with the impact of the product on the customer’s health and safety. Social issues include human rights and the impact on local communities.

In their global responsibility reports, both Walmart and Starbucks report on each of these social factors. Walmart and Starbucks source significant amounts of product from third parties all over the world. Thus, their performance with regards to workforce must include their suppli­ers. Walmart has focused on issues related to worker safety, women’s empowerment, and anti­human trafficking at its suppliers. It has created “Standards for Suppliers” that require suppliers to eliminate forced or child labor, offer wages and labor hours consistent with local law, and look after the health and safety of workers. When third parties are involved, it is not enough to set standards; the company must perform credible audits to ensure that the standards are being fol­lowed. Walmart claims to audit each facility every 6 to 24 months. Some audits are performed by the company, but most audits are performed through third-party organizations. The company claims that it performed 11,568 audits in 2012 and that “our suppliers were required to cease production in 214 factories due to serious violations.” Similarly, Starbucks claims to have sourced 95 percent of its coffee in 2013 “through C.A.F.E. practices, Fairtrade or another exter­nally audited system.” Besides standards and audits, it is important for large firms such as Walmart and Starbucks to provide support to their (often much smaller) suppliers in emerging economies as they move on their journey toward greater sustainability. Simply setting standards followed by audits may not suffice if suppliers do not have the capability to make changes on their own. A 2013 study by the Global Supply Chain Management Forum at Stanford University found that “supplier collaboration and capability building” seem to be “strongly associated with social and environmental responsibility performance improvement and lower operating costs.”

The cost of audits and capability building at suppliers are often borne by a firm, whereas the benefits from supplier improvement accrue to all that use the supplier. As discussed in the tragedy of the commons, large firms do not spend sufficient effort on audits and capability building at sup­pliers because of the absence of effective mechanisms for “mutual coercion.” This can be a chal­lenge even with the best of intentions. For example, Western retailers and apparel brands reacted to public outrage resulting from the collapse of the Rana Plaza factory near Dhaka, Bangladesh, in 2013 by starting a major push to improve building safety. Instead of coordinating this effort, how­ever, they formed two distinct groups. One group—the Bangladesh Accord for Fire and Building Safety—included many European brands, such as H&M, Carrefour, and Mango, whereas the other group—the Alliance for Bangladesh Worker Safety—included 26 companies from Canada and the United States. The two groups often clashed, detracting from the overall effort. “Some members of the American-dominated alliance said that their side had performed more inspections than the European-dominated accord, while some accord members asserted that the alliance’s inspections were less rigorous.” Clearly, the absence of coordinated action hurt outcomes in Bangladesh even though the companies involved may have had the best of intentions.

2. Environmental Pillar

The environmental pillar measures a firm’s impact on the environment, including air, land, water, and ecosystems. Firm activities that improve the environmental pillar can be categorized as resource reduction, emission reduction, and product innovation. Resource reduction activities result in a more efficient use of natural resources in the supply chain. Starbucks’ ability to reduce water consumption in company-operated stores by 21 percent between 2008 and 2013 is an example of resource reduction. Emission reduction activities reduce hazardous air emissions (e.g., greenhouse gases), waste, water discharges, or the environmental impact of the company in the community. Walmart’s ability to reduce greenhouse gas emissions in its 2005 adjusted base of stores by more than 20 percent is an example of emission reduction. Product innovation reflects a company’s ability to reduce the environmental costs and burden for its customers through the development of eco-efficient products or services. The high-efficiency toilet, for example, is a product innovation that allows users to significantly reduce their water discharge.

Resources used by firms include materials, energy, water, and land. Starbucks has reduced water consumption at its North American stores from 24.35 gallons per square foot/month/store in 2008 to 19.22 gallons in 2013 through the use of efficient fixtures and equipment, along with active monitoring of consumption. To reduce its energy consumption, Walmart has focused on its HVAC, refrigeration, and lighting. The installation of LED freezer case lighting by the company followed by the rollout of LED sales floor lighting has allowed the company to reduce energy consumption at its stores. According to its 2013 Global Responsibility Report, Walmart reduced fuel consumption in 2012 and “delivered 297 million more cases while driving 11 million fewer miles.” Resource reduction activities not only help the environment, but they also save money for a company. For example, Walmart claimed that the improved fuel and delivery efficiency of its fleet “saved the company and our customers almost $130 million.”

Emissions from a firm that may harm the environment include greenhouses gases, carbon dioxide, ozone-depleting substances, nitrogen and sulfur oxides, waste, and water discharges. Given that about 80 percent of Starbucks’ direct greenhouse gas emissions come from the energy used to power its stores and facilities, the company has focused on building new company- operated stores to the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) certification standards. In 2012 and 2013, about 65 percent of the new stores built were LEED certified. Single-use shopping bags are a significant source of waste; retailers have made a concerted effort to get customers to start using multi-use bags. This effort has been fairly successful in most parts of the world where it has been implemented. Walmart claimed to have reduced its plastic shopping bag waste per store by more than 38 percent between 2007 and 2013. Emission reduction activities can be more challenging to implement because they often require upfront investment and changes in behavior from employees and customers.

Although there are several examples of environmentally friendly product innovation, this is also an area in which most claims should be skeptically viewed. According to a study led by marketing consultancy TerraChoice, “more than 98 percent of supposedly natural and environ­mentally friendly products on U.S. supermarket shelves are making potentially false or mislead­ing claims, and 22 percent of products are making green claims that have no inherent meaning.”¹¹ The term greenwashing is often used to refer to products and practices that seem green but fun­damentally aim to grow profits.

The Institute for Local Self-Reliance (ILSR) has questioned whether Walmart’s claims with regard to environmental responsibility are entirely justified. It points to the fact that Walmart’s demands for lower prices from its suppliers has driven down the quality and durability of consumer goods. This has sped up the “flow of goods from factory to landfill, vastly expand­ing the amount of stuff Americans buy and discard.”¹² It also notes that Americans “throw away an average of 83 pounds of textiles per person, mostly discarded apparel, each year.” The issues cited by ILSR have some validity and point to the difficulty of assessing claims on environmental responsibility. Should Walmart be held responsible for the things customers throw away? Or should customers bear the responsibility of wanting cheaper products, which may be less dura­ble? It also points to the importance of expanding the scope of analysis to the entire supply chain, from the customer to the last supplier, when evaluating the environmental impact of an action.

When starting on its sustainability improvement journey, it is best for a firm to first focus on resource reduction activities. Whether reducing packaging material, energy use, or transportation, resource reduction activities are most likely to provide a win-win outcome that helps the environ­ment while improving profits. Such successes can provide the momentum for more challenging sustainability activities. The push for resource reduction is likely to be aided by the increase in fuel and shipping costs. As shipping costs grow, supply chain networks are likely to become somewhat more regional, helping reduce emissions from transportation. In the long run, however, the biggest benefits to society are likely to accrue when firms include the social and environmental pillars when making their sourcing decisions. The biggest challenge to social and environmental improvements is likely to be the fact that most of the effort is local to a firm (and maybe its supply chain), whereas the benefits are more widely distributed. The tragedy of the commons and the dif­ficulty of measuring change across the entire scope of the supply chain are likely to make real progress slow while companies continue to claim large improvements related to sustainability.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.