Pearson on Excellence: Lighting a sustainable supply chain fire under suppliers

A growing number of manufacturing companies are warming up to sustainability—taking aggressive steps to soften and shrink their environmental footprints. However, buy-in from those companies’ suppliers has been less encouraging.

These insights come from research coordinated by the Carbon Disclosure Project (CDP), a UK-based organization that works with companies to document greenhouse gas emissions. According to CDP, 34 percent of its member companies have established absolute and intensity-based emission reduction targets. However, only 5 percent of the suppliers that serve CDP member companies have enacted such targets. Nearly 40 percent of suppliers working with CDP companies have no sustainability programs whatsoever.

What can companies do to stimulate suppliers’ commitment to ecologically responsible practices? And why is it in their best interests to do so? In the aforementioned report, CDP offers some ideas.

The most important incentive related insight, elegant in its simplicity, may be that “suppliers listen to their customers.” According to CDP, 55 percent of suppliers that received more than three requests to participate in a supply chain sustainability program made emissions reductions. Among suppliers receiving just one request, the acquiescence rate was 26 percent. Financial benefits tracked closely to this frequency-of-request pattern: The more responses, the more environmental and economic benefits.

Suppliers may also respond to preferential treatment. For example, a buyer might incentivize sustainability performance by favoring a supplier that delivers on a particular sustainability metric. CDP notes the good example set by Vodafone Group Plc, which allocates shares of business to approved suppliers based on a sustainability scorecard the latter must fill out.

Companies can also engage suppliers by helping align risk management programs. Currently, 94 percent of CDP member companies integrate climate issues into company-wide risk management processes, compared with only 51 percent of suppliers. Clearly, it’s in everyone’s best interests to get a solid handle on risks that could lead to business interruption.

Another angle of persuasion is finding common ground. As part of its research, CDP identified a disconnect between the types of collaboration deemed most effective by suppliers and the types of collaboration pursued by CDP member companies. Suppliers tend to focus on process and product design changes to drive emission reductions. However, the most favored investments made by CDP member companies are behavioral change initiatives and transportation and fleet-management investments.

Naturally it pays to accentuate the benefits that sustainability related collaborations can generate. According to CDP, companies that engage with multiple suppliers greatly increase their chances of benefiting financially from an emissions reduction program. Consider Cisco, which reduced greenhouse emissions by 41 percent compared to a 2007 baseline. One of the effort’s cornerstones was collaborating with supply chain partners and involving industry consortia to develop common reporting and auditing tools. Here are some other success stories:

• Coca-Cola works with its bottlers to identify financially beneficial emission-reduction initiatives. From 2004 to 2011, Coca-Cola achieved close to $900 million in savings, predominantly from investments in energy efficiency.

• Working closely with contract footwear manufacturers, Nike’s Manufacturing Energy & Carbon Program achieved a 6 percent absolute reduction in CO2e (equivalent carbon dioxide) in four years, despite a 20 percent increase in production.

• PepsiCo’s Tropicana brand worked with farmers to develop carbon neutral fertilizers using orange rinds that are a byproduct of orange juice processing.

• Wal-Mart has been working with MeadWestvaco (MWV) to develop a more environmentally efficient package for the former’s retail pharmaceutical adherence business. The new package is up to 80 percent more greenhouse-gas efficient to develop and reduces transportation costs and emissions. The result for MWV’s key retail customers will be greenhouse gas emission savings of more than 12,000 metric tons annually.

According to one of Wal-Mart’s suppliers, “Wal-Mart has driven our efforts to become sustainable and has made us aware of many areas where we can make a difference. Wal-Mart’s interest in reducing their own carbon footprint pushed our company to consider all initiatives in order to be a more responsible supplier.”

In one sense, this supplier is simply acknowledging what all companies should know: Sustainability is good business, and the more a company collaborates with its suppliers and business partners, the more “good business” gets done.