The Role of Sustainability in a Supply Chain

This book has focused on designing and operating supply chains with a goal of growing the sup­ply chain surplus. Each supply chain, however, is only a small part of the world in which it resides. Ultimately, the health and survival of every supply chain and every individual depend on the health of the surrounding world. It is thus important to expand the goal of a supply chain beyond the interests of its participants (which the supply chain surplus represents) to others that may be affected by supply chain decisions. It is in this context that the twenty-first century has seen a growing focus on sustainability. The Brundtland Commission of the United Nations defined sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” The 2005 World Sum­mit of the United Nations introduced a framework identifying economic, environmental, and
social sustainability as the “three pillars” of sustainable development. All three pillars must be reconciled for sustainability to occur.

The focus on sustainability has increased as the economies in large countries such as Bra­zil, China, and India have grown. On the one hand, the growth of emerging markets is improving global living standards in a way that perhaps has not happened before in human history. On the other hand, this growth puts pressure on resources and the environment in a way that has also never happened. It has become increasingly clear that if supply chains do not become more sus­tainable than they have been in the past, the world’s resources and environment will not be able to maintain this level of growth.

The factors driving an increased focus on supply chain sustainability can be divided into three distinct categories:

1. Reducing risk and improving the financial performance of the supply chain
2. Community pressures and government mandates
3. Attracting customers that value sustainability

Even though there has been a great deal of talk about all three categories, most concrete action has been observed in reducing risk for the supply chain and improving financial perfor­mance. The early part of the twenty-first century has seen an increase in community pressure and government mandates in some parts of the world. Much less success has been driven by cus­tomer demand or a firm desire to make the world more sustainable. It is interesting to note that significant opportunity exists even if supply chains focus only on reducing risk and improving financial performance. A McKinsey report (Creyts et al., 2007) focusing on greenhouse gas emissions reported, “Almost 40 percent of [greenhouse gas] abatement could be achieved at negative marginal costs, meaning that investing in these options would generate positive eco­nomic returns over their lifecycle.” Despite the existence of financially viable opportunities to increase sustainability, activity has been slow because many of these actions require upfront investment that pays off in the long term. An example is the investment in light-emitting diode (LED) lighting by Walmart. Even though it has required upfront investment, installing LED lights has significantly reduced energy consumption at Walmart stores. Despite the long-term payoff, though, few other firms have followed Walmart because of the large upfront investment.

Although much still needs to be done, many companies have reported success in improv­ing sustainability. Unilever, the Dutch-British consumer goods giant, has invested significant effort to help emerging economies such as Brazil and India wrestle with poverty, water scarcity, and climate change. In Brazil, the company helped tomato growers convert to drip irrigation to save water. The company sees almost half of its sales and the majority of its growth coming from emerging economies. It buys roughly “10 percent of the world’s crops of tea and 30 percent of all spinach.”^[1] A focus on sustainability helps Unilever improve the environment and economic health of markets where it is likely to see most of its future growth, while simultaneously ensur­ing supply of products it needs to feed this growth.

Walmart started its focus on sustainability as a defensive move, given the criticism it was receiving from environmental activists. The company, however, has seen many benefits to its bottom line. Switching to more efficient light bulbs at its stores and adding skylights for natural light have helped significantly reduce its energy costs. Reducing packaging has helped reduce material costs and transportation costs. Another example is the redesign of the one-gallon milk jug by Walmart and Costco to use less material and increase packing density during transporta­tion. Even though it took the public some time to accept the new design, the effort saved “10 to 20 cents a gallon compared to old jugs.”^[2]

Starbucks is another example of a company that has focused on sustainability for signifi­cant business reasons. In the late 1990s, the company realized that its growth plans could not be sustained without helping coffee growers increase their production in a sustainable manner. The company thus started its coffee and farmer equity (C.A.F.E.) practices, which evaluate the sus­tainable production of coffee along four dimensions: product quality, economic accountability, social responsibility, and environmental leadership. According to the company, “the first two categories are prerequisites to participation in the program and ensure basic coffee quality and financial transparency, equity, and the viability of the coffee supply chain.” Social responsibility measures the extent to which the working conditions are safe and humane. Environmental lead­ership measures the actions that suppliers are taking to “manage waste, protect water quality, conserve water and energy, preserve biodiversity and reduce agrochemical use.” Applicants are given “preferred supplier” status based on the score they achieve across the four categories. Pre­ferred suppliers get a pricing premium of $0.05 per pound along with favorable contract terms. The company claims that it sourced 95 percent of its coffee in 2013 from sources that were “third-party verified or certified through C.A.F.E. practices, Fairtrade or another externally audited system.” Besides helping attract customers who care about sustainability, these efforts have helped Starbucks reduce supply risk and ensure an ongoing supply of high-quality coffee, the most critical input for its business.

Sustainability has presented more of a challenge when it requires efforts that do not pro­vide obvious return on investment for a company. In fact, customers themselves have not always backed up their words about the importance of sustainability with a willingness to pay more for sustainable products or make more of an effort to support sustainability. As an example, Star­bucks has been able to increase the percentage of beverages served in customer-owned tumblers from 1.4 percent in 2009 only to 1.8 percent in 2013. Of all the dimensions the company reported in its 2013 Global Responsibility Report, this was the dimension that saw the smallest improve­ment. In a survey, business leaders identified insufficient return on investment, customers’ unwillingness to pay a premium for green products, and difficulty evaluating sustainability across a product life cycle as the major barriers to an increased focus on sustainability.³ When the business rationale for an increased focus on sustainability is not clearly defined for individual firms, maintaining the focus needed for building more sustainable supply chains is much harder. As we discuss in the next section, one of the biggest challenges to building sustainable supply chains is that in the short to medium term, an improved focus on sustainability provides benefits that are shared but costs that may be local to a firm or individual, whereas the current status quo provides benefits that are local to firms or individuals but a cost that is global.

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