The past few weeks I have been wrapped up in some circle of life issues involving my aunt and mother, so writing has taken a back seat.  During this time,  I have been observing the dissolution and redistribution of my 91-year-old aunts’ household and supported the challenge of deciding which belongings should go temporarily with my 86-year-old mother to assisted living.   My current role as a duly appointed member of the ”sandwich generation” is fulfilled too when my teenage daughter asks to go on yet another trip to the mall to view the latest fashions.  All these events have brought to mind the material possessions that we accumulate over the course of our lives, the ingrained value we place on “things” and how they somehow give us more pleasure or worth.

 

Ironically, last week I also had the chance to participate in a number of one on one and group discussions revolving around the role(s) that we as consumers have in managing resources, waste generation and sustainable development.  I weighed in on the responsibility that consumers have in the 21st century supply chain (related to conflict minerals), just as I had mentioned in a keynote speech to the European Petrochemical Association this March.  Other participants reflected on how individuals bear a high degree of responsibility for the explosive growth in electronic and other consumer product waste.

 

What is abundantly clear is that we (as consumers) are all accountable for our own individuals actions in deciding what we buy, how much, how long we keep and maintain what we do have, and what we replace it with.  From cell phones, to cars, to clothes and home products, Western society has lost the passion for “thrift”.  I believe, like my parents generation did, that thrift is one of the key principles that built this great nation, but it has seemed to have gotten shoved aside in the name of consumerism and  growth,  which by the way is different than prosperity.  Of course Keynesian economists will take me to the woodshed about the meaning of  thrift in growing an economy. According to an article by the CATO Institute, ” The paradox of thrift refers to how–in the Keynesian model of the economy–an increase in saving reduces production and employment. This supposedly occurs because a decrease in spending leads to a decrease in employment, which leads to a further decrease in spending, which leads to a further decrease in employment, which leads to a yet further decrease in spending, and so on. Thus, if people try to increase their saving, there will supposedly be a decrease in spending, and a fall in employment and production.”

 

Prosperity versus Growth?

 

“Economic growth is supposed to deliver prosperity. Higher incomes should mean better choices, richer lives, an improved quality of life for us all. That at least is the conventional wisdom. But things haven’t always turned out that way.” 

 

chickenprosper.jpgSo states Professor Tim Jackson (Director of the Research group on Lifestyles, Values and Environment (RESOLVE) at the University of Surrey) in a very important and compelling work, Prosperity without Growth.  The research was commissioned in 2009 by the U.K. Sustainable Development Commission and puts in focus the rather serious nature of what “progress” really is in society and the norms on which its measured.

 

The economic slump of the last three years has also sharpened this debate over whether more is better, whether growth in consumer goods and spending really supports a sustainable economy and whether the environment and human rights are placed in harm’s way in the name of economic growth.  As Jackson notes, “The profit motive stimulates a continual search by producers for newer, better or cheaper products and services. This process of ‘creative destruction’, according to the economist Joseph Schumpeter, is what drives economic growth forwards.”   The past several years have prompted a series of key questions that I’ll throw out here for thought:

 

  1. Has quantity in life trumped quality in life?
  2. Does producing more and having more truly lead to a prosperous economy and long-term sustainability?
  3. Does producing more and having more truly lead to a prosperous economy and long-term sustainability? Can we still flourish?
  4. Does having more truly make us happier, lead more productive lives and allows us as a society to be the better social animals that we are wired to be?

 

All tough questions, and way more to ponder in the limits of this one post for sure.  But Professor Jackson’s commission report and follow-up book on the subject mirrored what was reflected the conversations that participated in last week.   Jackson himself admits that “Prosperity has undeniable material dimensions.  It’s perverse to talk about things going well where there is inadequate food and shelter (as is the case for billions in the developing world). But it is also plain to see that the simple equation of quantity with quality, of more with better, is false in general.”

 

I’ve no doubt that economic growth is vital for stimulating an economy that appears to be headed toward a dreaded “double dip” recession.  However, what is critical for policy makers, economists, the financial community and electorate to grapple with is what types of investments are best to lead us out of this morass and into a future that is stable and prosperous.  Jackson, among others has argued that “targeting that investment carefully towards energy security, low-carbon infrastructures and ecological protection offers multiple benefits [in other words a more sustainable, green economy]. These benefits include:

 

• freeing up resources for household spending and productive investment by reducing energy and material costs

• reducing our reliance on imports and our exposure to the fragile geopolitics of energy supply

• providing a much-needed boost to employment in the expanding ‘environmental industries’ sector

• making progress towards demanding global carbon reduction targets

• protecting valuable ecological assets and improving the quality of our living environment for generations to come.”

 

Producers vs. Consumers- Who Holds the Key?

 

So am I arguing in favor of a reaching a “steady state economy” with no growth?  To be honest, I’m not sure at this point.  There have been debates over this concept for generations, and I am no economist.  Jackson himself admits that no clear model exists for achieving economic stability without at least some measure of consumptive growth.  While goods producers have control over what they make, where they source their goods to make the things we buy, the “making” side of the economy is but one side of the debate that is in play here.  There is also the “using” side of the debate that drives deep in the social fabric and psyche of the consuming public. We as consumers can shape the debate around and effects that can have on the products that are made, mass-produced, sold and consumed.   This is perhaps the toughest nut to crack, because it’s the consumer that drives the demand that in turn drives production, which then drives consumption of resources, which of course determines the stresses on the environment.  You see, we hold the key…as the old Pogo cartoon says, “We have met the enemy and it’s us”.

 

spending.jpgIn a recent article in the Guardian Sustainable Business Blog, Tim Jackson again weighs in on the strong psychological attachment that humans by nature have to material things and their feelings about the environment.  “People do indeed hold deeply felt motivations to protect the environment. Occasionally they can even save money by doing so. But powerful psychological forces still hold them in thrall. The creeping evolution of social norms and the sheer force of habit conspire to lock us into expanding material aspirations.”

 

You see, letting go of things that make us feel good is hard.  But the instant gratification that comes with these choices has undoubtedly led us all down a slippery slope, which only we can muster the power to crawl back up.  But only if we make sound, greener choices that recognize a balance between consumption, thrift and ecological limits.

 

These questions and issues, among others will be reflected upon to some degree this week at Sustainable Brands ’11 in Monterey CA.  I’ll be there also with over 750 other sustainability, corporate social responsibility, consumer marketing/ branding and industry professionals to learn, communicate and exchange ideas.  Look for my occasional tweets (@DRMeyer1) and observations as the event rolls along.

 

building block.jpgAs we approach the mid-point in 2011, the tea leaves of the economic recovery have ‘sustainability’ in supply chain planning and management firming as key "rebuilding" blocks in company activities.  Two recent studies from two different continents bear that notion out.  First, consultancy BearingPoint Ireland has released a report which says two thirds of companies surveyed in Europe believe that a green supply chain is a strategic priority. The report, entitled Green Supply Chain: from awareness to action, is the fourth of a series of “supply chain monitors” from the private consultancy.  The study was conducted among about 600 European decision-makers by Novamétrie between 2010 and 2011, with a position within Supply Chain, Sustainable Development or Industrial Divisions.   Key industries captured includes: consumer goods, transportation, construction, automotive, industrial goods, retail, energy and utilities, chemicals, IT/electronics and pharmaceuticals, among others.


The goal of the report, according to the authors was to summarize “the evolution over the past two years in terms of mindset, maturity and actions efficiency [and] explores the green Supply Chain practices in Europe, in order to identify the significant improvements in the most representative industries. The results clearly underline a growing interest of executive managements in developing products with a low environmental impact. What was seen as a constraint is now considered as an opportunity.”


Executive Management Mandates, Reputational Risk Management Are Key Drivers


A notable “inflexion” occurred between this survey round and prior surveys.  For instance, in 2008, findings suggested that supply chain ‘greening’ was primarily being driven by important environmental and regulatory developments (such as REACH, WEE, RoHS or the European Union Emissions Trading Scheme).  Now, with compliance programs associated with these initiatives firmly entrenched or in initial development, the drivers appear to be shifting toward meeting internal executive management commitments and addressing reputation management and/or consumer demands.  In other words, according to the report, “Environmental actions presently address new constraints and motives, which are more mature and integrated to companies’ decision processes.” Key findings from BearingPoint’s report include:


 

- 70% of surveyed companies declare that green Supply Chain is a true economical lever.


- For 47% of the companies, the return on investment of a green Supply Chain is reached within 3 years.


- More than half of European companies now use environmental criteria to assess their Supply Chain performance: share of recycled packaging material, CO2 emissions.


- Two-thirds of companies adopted or plan to adopt a green policy for their purchases.


- Manufacturers must be able to measure and reduce their carbon footprint if they are to succeed on export markets


- Over half of the respondents in the survey said they did not renew contracts with suppliers who did not respect their green charter.


- Buyers are preferably choosing suppliers with certified processes such as ISO 14001.


According to Bearing Points recent press release, Irish Exporters Association chief executive, John Whelan, said: "There is no question that Irish businesses which produce transparently environmentally positive products, delivered by carbon neutral logistics services will succeed on international markets.”


Sustainability Drivers Both Inside and Out the 'Four Walls'


In yet another study, Prime Advantage, a buying consortium for midsized manufacturers, unveiled its seventh (2011) Prime Advantage Group Outlook (GO) Survey.  This survey queried small and midsized North American manufacturers, and found that more than 80 percent of North American companies surveyed indicated that they developing more sustainable or energy efficient products largely driven by customer requirements and compliance regulations.  According to the study, “the biggest driving factors behind these changes are customer requirements (80 percent), followed by compliance regulations (53 percent) and shareholder directives (12 percent). In addition, 57 percent of respondents have also started buying more sustainable indirect products for internal consumption.”


A Systems Perspective Breeds Competitive Intelligence


images.jpgThe Bearing Point study made a statement that caught my eye and for which I wholeheartedly agree.  Identifying with a systems-based mindset that recognizes the intrinsic and realized value sustainability-focused business management is a critical fulcrum for green supply chain practices. I noted in a post last fall that The Fifth Discipline and The Necessary Revolution author Peter Senge argued (in the October Harvard Business Review) that to make progress on environmental issues, organizations must understand that they’re part of a larger system. Senge also makes a great point that companies will be in a better competitive position if they understand the larger system that they operate within and to work with people you haven’t worked with before.


I’ve cited companies like Hewlett Packard and Danisco as supply chain innovators in their product sectors.  These companies, among other innovators like Intel, P&G, IBM, GE and others, who’ve viewed supply chain in a systematic or holistic manner, organizations successfully have been applying that “big-picture thinking” needed to be truly innovative. Doing so can create leverage points that companies never realized they had before with their suppliers.


Clearly, the environmental (and often the social) footprint of a product extends beyond the four walls of the company who “brands” the product.  This footprint extends upstream and downstream, and must capture, control or influence inputs and outputs all along the way.  Some of the largest footprints (like energy and carbon) lie upstream or in the final hands of the consumers.  This is why leading companies are rethinking the global extents of their supply chains, exploring local sourcing options and implementing other operational efficiencies. 


The results of the recent surveys indicate that companies in a wide number of sectors are waking up to the fact that sustainability is more than business innovation- it’s business intelligence.

 

1871875063_5e2eff217e.jpgPart 1 of this series highlighted the issues, regulatory and supply chain complexities and efforts by industry to tighten the control of precious minerals sourcing.  Part 2 of the series dove a bit deeper into efforts by key manufacturers in how they are auditing, validating and tracing the conflict minerals supply chain.  The post also presented some ideas on and what responsibilities non-governmental organizations have had in shaping the debate over conflict minerals, and the roles or responsibilities that we as consumers should take in this thorny human rights- environmental impacts meets consumer products issue.

 

The final part of this series highlights specific international guidance and steps that industries and consumers can and are taking to proactively address supply chain minerals sourcing and maintain a high level of corporate social responsibility.


But before I go further, a postscript to Part 2.  Following my second post, I was contacted by Suzanne Fallender of Intel with an update on the company’s efforts that I described in the second post.  In her response, for which he apologized for the delay, she provided a copy of a white paper prepared and posted in late April.  In it, the company states “we continue to work diligently to put the systems and processes in place that will enable us, with a high degree of confidence, to declare that our products are conflict-free. Our efforts on conflict minerals are focused in three main areas: (1) driving accountability and ownership within our own supply chain through smelter reviews and validation audits; (2) partnering with key industry associations, including the Electronic Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI); and (3) working with both governmental agencies and NGOs to achieve in-region sourcing”. 


The Intel white paper concludes by stating “From the time we became aware of the potential for conflict-metals from the DRC to enter our supply chain, we have responded to this issue with a sense of urgency and resolve. We have approached this issue like we would address other significant business challenges at Intel.”  I believe Intel and their efforts to date bear that out.  They are encouraging comments on their plans and efforts, which can be submitted at http://www.intel.com/about/corporateresponsibility/contactus/index.htm. 


By the way, I am still waiting on Apples reply to my inquiries.

 

Comparing Proposed Steps to Action


As mentioned in the second post, the OECD guidance, Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, serves as a common reference for all suppliers and other stakeholders in the mineral supply chain.  The guidance also meshes well with current industry-driven schemes like the EICC and GeSi and AIGG guidance, and clarifies expectations regarding responsible supply chain management of minerals from conflict-affected and high-risk areas.


The OECD guidance approaches minerals sourcing and supply chain management from a “risk management” and “due diligence” perspective and offers a framework to promote accountability and transparency.  A fundamental problem with the OECD guidance is that it’s voluntary.  And with any voluntary guidance, there’s reluctance or little pressure to fully commit to implementation, unless key market or financial drivers threaten or pressure companies to do so.  Also, what is challenging as mentioned before are the many steps and sometimes fragmented nature of the minerals sourcing supply chain.  The myriad of hands that minerals often pass through on the way to the smelter, and in turn on to intermediate and final product manufacturers is numerous and admittedly difficult to accurately trace. Risk levels are particularly high when minerals are derived from the artisanal mining operations (as compared to larger scale operations). Consequently, being able to control and influence risk along the entire minerals sourcing network and assure that adequate due diligence mechanisms are in place to keep track of intermediary activities is daunting to say the least.  All the more reason to seek ways to streamline the sourcing process by limiting the number of materials exchanges, stepping up oversight, and disengaging activities with under-performing  or high-risk suppliers.


The OECD suggests a five step framework for risk-based due diligence in the mineral supply chain  that strongly advocates for traceability and accounting systems for both upstream and downstream supply chain organizations:



Step 1: Establish strong company management systems


Step 2: Identify and assess risks in the supply chain


Step 3: Design and implement a strategy to respond to identified risks


Step 4: Carry out independent third-party audit of smelter/refiner’s due diligence practices


Step 5: Report annually on supply chain due diligence


In some contrast to the OECD guidance, the Enough Project offers its own set of valuable ideas and frameworks for the electronics sector and others working in east Africa to follow.  Enough Project, in its recent report entitled  Certification: The Path to Conflict-Free Minerals from Congo , states that international certification efforts are vital to long term solutions to conflict minerals issues  and on assuring revenue “transparency”.  The Enough Project offers its “five key lessons that should be incorporated into a certification scheme for conflict minerals:

 

 

  1. A “conductor” is needed to convene a high-level diplomatic partnership on certification and help transform words into action. A “conductor”—a leader with gravitas and political support—is needed to bring stakeholders to the table and to issue a call to action. President Bill Clinton provided a precedent for this when he called together companies and sweatshop labor campaigners in 1996, resulting in the Fair Labor Association certification process.
  2. Certification should be governed and funded by a multi-stakeholder body that includes companies, governments, and NGOs. The legitimacy of a process rests on a multi-stakeholder governing and funding framework that ensures accountability.
  3. Certification must include independent third-party auditing and monitoring. Regular independent audits assure the public that the process is credible, and on-the-ground monitoring ensures accuracy.
  4. Transparency of audits and data is essential to making certification work. Certification processes are moving rapidly towards full disclosure of data and audits.
  5. Certification must have teeth.Certification can only work if its standards have meaning on the ground and are enforced through penalties for noncompliance.”


chain.jpgThe Enough Project report calls on the United States, through Secretary of State Hilary Clinton, to convene a senior partnership on certification with industry and the International Conference on the Great Lakes Region (ICGLR).  The report also states that “the United States must act quickly, as minerals traders in Congo are already seeking alternative, opaque markets for their minerals. An internationally accepted certification process would deter this development.”  Last week, a letter writing campaign launched encouraging U.S. Secretary of State Clinton to state a public U.S. position on this issue and convene a high-level partnership on certification with leading electronics and end-user companies, together with Congolese President Kabila and regional governments.  The goal of this summit would be “aimed at unifying the regional and industry-led initiatives and gaining consensus on a system of independent checks on the ground”.


 

In the meantime, Conflict-Free Smelter the industry protocols proposed and under development by the EICC and GeSi are focused on two key areas targeted at what they characterize as the “pinch point” in the supply chain- the smelter:

 

Business Process Review: Evaluate company policies and or codes of conduct relating to conflict minerals


 

Material Analysis Review: 1) Conduct a complete material analysis to demonstrate that all sources of materials procured by the smelting company are conflict-free; 2) Evaluate whether source locations are consistent with known mining locations; and 3) Establish whether material identified as “recycled” meets the definition of recycled materials.

 

The CFS program is moving forward in spite of the delay by the SEC for final rulemaking.   CFS assessments for tantalum began in the fourth quarter, 2010 and are expected to be posted on the EICC website starting this month. Tin, tungsten and gold are planned to commence later this year.


 

What Makes a Good Auditor?


In addition to “what” types of certification schemes are needed and how they should be administered or governed, there’s the matter of “who” should do the auditing and third- part certifying.  What I see as critical here is Step 4 of the OECD process and Step 3 of the Enough Projects documents, both of which the EICC and GeSi programs are attempting to fulfill.  However, key to this audit process is the “independence” and competency factor as well as what qualifications auditors have to perform these assessments.  The Enough Project gleaned through numerous frameworks in order to develop its proposed certification approach, which deserves careful consideration. 


In addition, while the SEC has yet to clarify the specifics of the Dodd-Frank provision, ELM Consulting’s Lawrence Heim in a recent AgMetal Miner series, notes:



… There are a number of auditor certifications that could be considered applicable to this scope of audit, but none should be considered to automatically qualify an auditor for these engagements. These audits require a unique blend of expertise in general auditing processes/procedures, environmental knowledge, accounting basics, chemistry/industrial processes, procurement controls, contracts and supply chain fundamentals. Finally, the auditor must be able to execute the engagement in accordance with the auditor/engagement standards of the Government Auditing Standards, such as the standards for Attestation Engagements or the standards for Performance Audits (GAO–07–731G) GAO-07-731G contains standards on auditor independence.

 

Associations  consist of multiple members who have varying degrees of business  relationships with each other and the audited entities, putting the  auditor in a position of serving “multiple masters” relative to  influence over the audit scope, process, information, report and  payment. Our research and inquiries to qualified experts in SEC auditing  requirements indicates that there appears to be no precedent in any  other legally-required audit in the US that has been fulfilled in this  manner.


I had the chance last week to listen in on an informative webinar by STR Responsible Sourcing.  The company is an accredited monitor for numerous social certification programs, and partners with many organizations that share our mission of assuring responsible sourcing practices.  The company compared governmental, regional, industry schemes for addressing minerals mined in conflict regions.  The figure below summarizes each of the initiatives and target areas.

 

STRGraphic.png

According to STR, there are a series of challenges lying ahead for both upstream suppliers (e.g. miners (artisanal and small-scale or large-scale producers), local traders or exporters from the country of mineral origin, international concentrate traders, mineral re-processors and smelters/refiners) and downstream users (e.g. metal traders and exchanges, component manufacturers, product manufacturers, original equipment manufacturers (OEMs) and retailers) of precious minerals.   Downstream Supply Chain parties are faced with some unique challenges, namely:



  1. No clearly defined requirements of “due diligence”
  2. No guarantees for “conflict-free”
  3. Limited transparency in upstream supply chain
  4. No traceability in downstream supply chain
  5. No generally accepted standard / certification


For the upstream supply chain, primary challenges include:


  1. Complexity of the supply chain
  2. Difficulty to include small and artisanal mining
  3. Challenges for implementation of traceability schemes in the DRC due to militarization of mines and widespread lack of formalization of small scale mining


Meanwhile the downstream supply chain might consider the following approaches to start on the path of responsible sourcing of precious minerals:


  1. Implement a procurement policy and due diligence procedures
  2. Develop consistent supplier engagement processes (awareness raising, communication and training) throughout the supply chain
  3. Monitor downstream suppliers’ due diligence procedures and gather data on organization of supply chain (desktop or onsite)


For the upstream supply chain consider the following:

  1. Support certification schemes and industry efforts
  2. Join certified trading chains / buy certified products
  3. Government lobbying


Where to Start


If you are a manufacturer of electronics, jewelry, automotive parts or other goods that may be subject to sourcing through the DRC or other conflict prone areas of the world, consider (at a minimum), the following steps:



  1. Read the OECD and Enough Project guidance documents to understand the issues and risks associated with responsible sourcing
  2. Stay tuned into the progress that your industry associations are achieving to bring a better sense of responsible management to this issue
  3. Follow the development of the SEC conflict mineral guidelines
  4. Work with procurement, operations, legal, environmental and communications staff to craft a procurement policy & selection of supplier selection process (along the lines that Intel, HP, Motorola and others have)
  5. Request origin and chain of custody documentation for purchases to assure traceability
  6. Establish adequate record-keeping system
  7. Ensure that relevant staff is trained on procurement policies, procedures to receive material and identification of potential conflict material


crossroad-signs.jpgIf I were to look at where industry was a few short years ago on this issue compared to now, there’s no doubt that increased minerals sourcing tracing and accountability in conflict-free minerals is improved.   The system as presently planned, in pilot stages or in process certainly has some flaws as most new initiatives have.  But given the industry, region, national and international levels of cooperation that is rapidly becoming evident, I’ve no doubt that the positive outcomes will be great. 

 

Aaron Hall, Policy Analyst at the Enough Project in a recent interview with Resource Investing News said “It’s a start. You have to take small steps forward. The fact that governments and industry are thinking about this shows concern and to a large extent they are willing to tackle the problem,” said Hall. “I think it’s remarkable that the multiple stakeholders involved in this process have been able to come together in such a short amount of time and make progress towards setting up a regional certification regime for these minerals.

 

chemicals-used-chemistry-high-school-1.1-800x800.jpgThis past week, GreenBiz editor Jonathan Bardeline highlighted a cross-sectoral effort by a unique assemblage of manufacturers and retailers, focused on meeting consumers demand for less toxic products. "Meeting Customers' Needs for Chemical Data," is a tool with information from major companies such as Johnson & Johnson, Walmart and Hewlett-Packard, SC Johnson, Nike and Seagate, detailing how they interact with chemical suppliers.  The scope of the document focuses on assisting suppliers to product fabricators and formulators[1] , and steps they can take to collaborate to bring safer products to the consumer.

(Photo Courtesy of Milosz1 under the Creative Commons license)


The guidance document was prepared by the Green Chemistry in Commerce Council (GC3)[2], which promotes itself as a “business-to-business network which provides an open forum for participants to discuss and share information and experiences related to advancing green chemistry, design for environment, and sustainable supply chain management.  The projects focus is to “provide the opportunity for cross-sectoral collaboration on enhancing chemical data sharing along supply chains”.   The guidance provides clear signals to suppliers on the needs that fabricators and formulators have for chemical data and the consequences of not providing such data.


Chemical Data 101


To begin to understand what we are really talking about, let’s start at the beginning.  The document lays a great foundation by describing what types of chemical data exist.  Basically, chemical data includes, but is not limited to, the following types of information:



1. Chemical name, trade name, and CAS number of all chemical ingredients in an article or chemical mixture, including known impurities.


2. Function of a chemical ingredient in an article or chemical mixture (e.g. catalyst, plasticizer, monomer, etc.).


3. Human health and ecotoxicological characteristics of chemical ingredients and chemicals used in making that ingredient, as well as their physical safety properties such as flammability.


4. Potential for human or environmental exposure to chemical ingredients in an article or chemical mixture.


Much of the chemical data that exists for products is typically captured in Materials Safety Data Sheets (MSDS) or Safety Data Sheets (SDS).  A great deal of the chemical data must be made available to employees coming into contact with these materials in the workplace through Hazard Communication rules or (in the case of California, Proposition 65).  Other chemical disclosure requirements like TSCA, REACH, RoHS, WEEE[3] are in place to assure proper notification to customers of the potential of toxic constituents and to meet country or sector specific restricted materials rules. 


387803980_d4a1aeb2ba.jpgGenerally, this information is not necessarily required to be made available to the public unless that are product safety related issues i.e. lead or BPA free products.  The SC3 guide correctly notes that “MSDSs are often a company’s only resource for chemical ingredient, hazard, and toxicity information. While they could be more useful, they are better than having no information at all. Unfortunately, MSDSs fall short of providing enough information to satisfy the chemical data needs of many fabricators and formulators.”  This is primarily due to the fact that many MSDS’s do not contain all product constituents, different MSDS’s exist for a similar chemical constituent offered by different manufacturers, and MSDS’s do they apply  to specific products or intermediate products.

 

(Photo Courtesy of Nebarnix under Creative Commons license)



Ways Leading Companies are Engaging Suppliers


There are already many efforts already underway within various product sector supply chains to actively share relevant chemical information between fabricators, formulators, and their suppliers, and this report has no shortage of fantastic examples.  When engaging suppliers, the report suggests a few basic steps that every company depending on a deep supplier base must consider taking:



  1. Written guidance detailing chemical information needed
  2. Supplier questionnaires with specific questions addressing chemical ingredients, concentrations, toxicity information on chemical ingredients, etc
  3. Web portals for chemical data entry.
  4. Training suppliers on chemical data reporting requirements

 

For example, the report cites Hewlett Packard and how they developed a web portal that suppliers use to enter chemical data (the company uses the SAP/Environmental Health and Safety module to process the information.  SC Johnson provides training to suppliers on its internal Greenlist™ raw material rating system. The company focuses particularly on obtaining toxicity data from its suppliers for scoring chemicals and materials.

 

Managing Confidential and Proprietary Information

 

Notwithstanding suppliers efforts to obtain data, there are natural concerns that many suppliers may have in releasing confidential and/or proprietary information.  The GC3 guide offers some valuable advice and examples that companies can use to protect the often proprietary nature of their products.  As I have reported before, high end office furniture manufacturer Herman Miller executed hundreds of Non-Disclosure agreements with its Tier 1 -4 suppliers in its effort to attain zero-landfill waste status and reduce its overall product lifecycle footprint. Method uses a third party reviewer to evaluate all chemical ingredients for safety prior to their selection for a product formulation.  And SC Johnson uses three layers of confidentiality protection depending on the public availability, types, quantities and specialty formulations of the materials.


On the regulatory front, the U.S.  Environmental Protection Agency last year that it is taking steps to increase the public’s access to chemical information of consumer products, by restricting efforts chemical manufactures to keep chemical information confidential, except under narrower circumstances.  This only underscores the increased emphasis on product transparency, pushing the envelope on placing proprietary information in the public domain, and the possible negative consequences on a company’s business competitiveness.  Or maybe such openness can have a positive business outcome too!


Chemical Industry and the Consumer …Two Green Peas in a Pod


This development gels nicely with the issues recently brought up at the European Petrochemical Association Interactive Supply Chain Workshop that I attended. During my keynote speech on sustainability efforts by the chemical industry, I noted that a number of key indicators were coming to light, particularly in the chemical industry. I noted growing customer concern, public-driven mandates, product preferences, and growing demand for supply chain transparency. I noted too that customers and consumers want to know what’s in that product, it’s environmental footprint, what chemicals it contains, the carbon emissions generated in manufacture.


For many year the internationally accepted Responsible Care Initiative has been a hallmark effort within the chemical industry in safeguarding materials transport and driving innovation in manufacturing, and making safer products. Along with Responsible Care, there has been increased emphasis on environmental and “greener” specification in logistics, and the expansion of communications relating to toxic and hazardous materials. Now, the industry is seeing the growth of environmental indexing, environmental footprints and benchmarking, and safer, less toxic) products in response to the demands of consumer-facing customers such as WalMart and other major retailers.


There is, as the GC3 document states “ a need for communication to be a two-way street to enhance the ability of suppliers and fabricators, formulators, and retailers to work more effectively together in advancing transparency, product safety, and sustainability.” 


Get Your Green Chemistry Hat On


 

GreenChemistry-SS.jpgDemands for chemical data are likely to increase as government agencies, customers and consumers ask for detailed information on lifecycle impacts of chemicals, materials, and products.  Therefore, its advantageous for suppliers to jump ahead of coming trends, work with their customers to identify data gaps and work collaboratively to fill them.

 

 


 

Photo: © Sebastian Kaulitzki - Fotolia.com

 

So if you are a supplier just starting to collect chemical data for your customers; or if you are currently responding to customers’ requests for chemical information and additional information that to fulfill your customers ‘requirements; or are a chemical user that needs to communicate with your suppliers about their chemical data; it’s time to begin gathering this value-added data.

 

 

The GC3 Guidance provides some great advice, offers solid tools and case studies to drive the business case, and tools to effectively engage both upstream suppliers and downstream customers to green up the supply chain and make consumer products safer.

 



[1] The document defines “fabricator” as a manufacturer (or a company that directs suppliers to fabricate) of an “article”. The document defines an” article” as a “finished product, component of a product (such as a circuit board), or source material (such as a textile or leather) sold to other organizations or directly to consumers.  The document also describes a “formulator” as a manufacturer of a chemical preparation or a mixture of substances, such as paint, liquid cleaning products, adhesives or a surfactant package”.

[2] a project of the Lowell Center for Sustainable Production at the University of Massachusetts Lowell (http://www.greenchemistryandcommerce.org)

 

[3] Toxic Substances Control Act (TSCA), Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH), Restriction of Hazardous Substances (RoHS) Directive, Waste Electrical and Electronic Equipment Directive (WEEE)

 

Part 1 of this series highlighted the issues, regulatory and supply chain complexities and efforts by industry to tighten the control of precious minerals sourcing.  This is especially critical in developing nations, where human trafficking, regional conflict and lack of environmental laws and basic human rights are the rule rather than the exception.  This post will look into a few examples of key manufacturers and efforts to date audit, validate and trace the precious minerals supply chain and what roles non-governmental organizations and we consumers have played so far in addressing this prickly issue.


Conflict Areas 101


The Organisation for Economic Co-operation and Development (OECD) issued a comprehensive guidance document in 2010 entitled Due Diligence Guidance for Responsible Supply Chains of Minerals From Conflict-Affected and High-Risk Areas.  In this document, the OECD defined conflict-affected and high-risk areas as identified by the presence of armed conflict, widespread violence or other risks of harm to people.



“Armed conflict may take a variety of forms, such as a conflict of international or non-international character, which may involve two or more states, or may consist of wars of liberation, or insurgencies, civil wars, etc. High-risk areas may include areas of political instability or repression, institutional weakness, insecurity, collapse of civil infrastructure and widespread violence. Such areas are often characterised by widespread human rights abuses and violations of national or international law.”


Recent efforts by global industry associations and grassroots efforts by non-governmental organizations such as the Enough Project and its Raise Hope for Congo initiative have shed a good deal of light on a previously ignored issue. Unlike other countries, ore extraction in the Congo is both cheap and lucrative for the militias that control many of the artisanal mines. There has been widespread reporting about how child laborers are kidnapped from neighboring nations to work under forced conditions in the mines, (where miners often work for an average of $1 to $5 per day). An excellent article that describes the political and institutional issues that affect conflict affected areas, see the article Behind the Problem of Conflict Minerals in DR Congo: Governance by the International Crisis Group. 


Industry Under the Microscope


PowerPC.jpgThe intensity of recent news reports and discerning lack of detail in publically reported data to date begs the question- have Intel and Apple really completely taken the “conflict” out their precious minerals sourcing, as recent headlines suggested?  Or has their recent announcement been taken out of context and only another (positive) phase in their supply chain sourcing strategy.   And if neither actually procures these materials from the Congo, are they merely shifting the issues to Asia?


Intel


To start answering these questions, I looked more deeply into the efforts to date by Intel to “get the DRC out” of the sustainable sourcing question.  According to Suzanne Fallender of Intel on their corporate social responsibility blog, the company has made significant strides since 2009 to stay ahead of this issue.  Specifically, according to Ms. Fallender (who I attempted to reach out to but had not yet returned my inquiries), Intel initiated a series of efforts in 2009 (prior to the CFS program), including:                                                   

                                                                                                                                                           Courtesy David Lieberman/Flickr (Creative Commons license)



  1. Posted its Conflict-Free Statement about metals on its Supplier Site
  2. Requested that its suppliers verify the sources of metals used in the products they sell us
  3. Increased the level of internal management review and oversight, as well as our transparency and disclosure on this topic in this report
  4. Engaged with leading NGOs and other stakeholders to seek their input and recommendations.                                                                                                                      
    1. Hosted an industry working session at our offices in Chandler, Arizona in September 2009 with more than 30 representatives from mining companies, traders, smelters, purchasers, and users of tantalum to address the issue of conflict minerals from the DRC.
    2. Funded a study with EICC members on defining metals used in the supply chain, and are working on a similar project to increase supply chain transparency for cobalt, tantalum, and tin.

    Important to note is that Intel was the first company in the electronics supply chain to conduct on-site smelter reviews. Since the end of 2010, Intel has visited more than 30 smelters to assess if any of its suppliers were sourcing metal from conflict zones in the.   According to Ted Jeffries, Director of Fab Services and Consumables at Intel (who I also attempted to reach for this article), he recently stated "I don’t know that we have a complete handle on the whole supply chain, but we at least have a better handle on the nuances”.   Despite a letter campaign to its suppliers, Intel elected to visit each site and see for themselves to verify what was being self reported. "For the most part, for the Intel supply chain, the smelters that we’ve visited have been very truthful. There have been little caveats here and there, but for the most part, we can trace all of their sources to plants in Australia, South America and other parts of the world," Jeffries said at the Strategic Metals for National Security and Clean Energy Conference in Washington D.C. in mid March.

    "It really takes someone stepping up to the plate and taking a leadership role and taking a risk on a strategy. We can sit around and debate these things until the cows come home and nothing will change. At the end of the day, if we want to move forward on this debate, someone needs to make a strategic decision and start moving in that direction". -Ted Jeffries (Intel)

    Apple and Hewlett-Packard


    As I’ve reported in Part 1 of this series, the multitude of supply chain layers and sourcing channels developed over the years may be a difficult weave to untangle (often 5-10 layers between the mine and the end product).  Take Apple, who (according to its recently released 2011 Supplier Responsibility Progress report ) has 142 suppliers using tin; these suppliers source from 109 smelters around the world. As a key participant in the EICC/GeSi CSF initiative, smelter audits are in process.  Additional efforts to contact Apple supply chain and sustainable sourcing staff have been unanswered.  Unlike Apples sub-par sustainability efforts with its Chinese electronics supply chain, it’s heartening that the company is taking some leading action in this area.


    Hewlett-Packard says, “[T]hese issues are far removed from HP, typically five or more tiers from our direct suppliers.”  But they have gone a long way in developing an aggressive auditing, tracking and reporting mechanism. HP and Intel have published the names of their leading suppliers for the 3T metals, as well as some smelters.  On April 8th, HP issued its revised Supply Chain Social and Environmental Responsibility Policy as part of list supplier compliance program (which HP began developing ten years ago). HP’s suppliers are expected to “ensure that parts and products supplied to HP are DRC conflict-free”. Moreover suppliers are to establish policies, due diligence frameworks, and management systems, consistent with the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.



    Confronting Our Electronics Addiction




    I’m a Mac and I’ve got a Dirty Little Secret”.  That was the title of parody of the Apple ad campaign, issued last year by the Enough Project.  While the video took a soft-handed approach to helping consumers make a visceral connection with conflict minerals, it also suggested that consumers’ purchasing power can influence corporate sourcing behaviors…and they can.


    Last year, Newsweek magazine looked at this issue square in the eye.   The article stated “It takes a lot to snap people out of apathy about Africa’s problems. But in the wake of Live Aid and Save Darfur, a new cause stands on the cusp of going mainstream. It’s the push to make major electronics companies (manufacturers of cell phones, laptops, portable music players, and cameras) disclose whether they use “conflict minerals… Congo raises especially disturbing issues for famous tech brand names that fancy themselves responsible corporate citizens. As Newsweek also reported, the Enough Project and its allies “believe awareness drives better policy. So as we lovingly thumb our latest high-tech device, perhaps some self-reflection: after all, the final point in the supply chain is us.”


    As an effort to raise consumer awareness of efforts that companies are (or are not) taking, the Enough Project[1] surveyed the 21 largest electronics companies to characterize progress made toward establishing documented and verifiable conflict-free supply chains in Congo.  The project ranked electronics companies in and four other product sectors on actions in five categories that have significant impact on the conflict minerals trade: tracing, auditing, certification, legislative support, and stakeholder engagement.  Four levels of progress (ranging from Gold Star to Red) were established based on efforts to date and suggestions to shore up perceived weaknesses.  The user friendly ranking can be used by consumers to support purchasing decisions and offers a way to get in contact with each company to communicate calls to action. 


    Enough Projects analysis (as shown in the graphic below) indicates that six electronics companies are leading industry efforts to address conflict minerals, while two-thirds of the appeared to be taking limited action.  This graph also suggests that the bottom -third are way behind the industry curve.

    73273-Fig1_ConflictMinerals.jpg



    Meanwhile, the auto, jewelry, industrial machinery, medical devices, and aerospace industries are well behind the electronics sector and only now beginning to address the role that conflict minerals may play their respective supply chains.  I’ll be watching with interest what the Automotive Industry Action Group does.  So the opportunity for direct end-consumer advocacy to influence corporate social responsibility in sourcing is bountiful.


    The final part of this series will highlight specific international guidance and steps that industries and consumers can take to proactively address supply chain minerals sourcing and maintain a high level of corporate social responsibility.




    [1]  The Enough Projects focus is on conducting field research, consumer and issues advocacy, and communications to support a grassroots consumer movement.


    3794908995_ceaf55c901_b.jpg

    Last week, it was widely reported that both Intel Corporations and Apple Computers had pulled the plug on sourcing of precious minerals typically used in the manufacturing of its high tech products from the Democratic Republic of the Congo (DRC).  These basic building blocks of our cell phones, computers and other consumer electronics are widely known as “conflict minerals”, mainly because of the large spread connection the “artisanal” and industrial mines that produce the materials and the flow of money to supply arms to rebels fighting in the DRC. Conflict minerals are to the 21st Century high tech world what “blood” diamonds were to the 19th and 20th centuries.

     

     

     

    Photo Courtesy of Sasha Lezhnev/Enough Project

    (under Creative Commons License)

     

    Apple, Intel and other U.S. based corporations have signed onto the Conflict-Free Smelter (CFS) program, which applies to shipments of tin ore, tungsten, gold and coltan from Congo and its neighbors.  The CFS program demands mineral processors prove purchases don’t contribute to conflict in eastern Congo[1]. The regulations were developed by the Washington-based Electronic Industry Citizenship Coalition (EICC) and Global E-Sustainability Initiative (GeSI) in Brussels (Belgium), representing electronics companies including Intel and Apple, Dell etc.  The program is being marshaled by the GeSI Extractives Work Group, and summarized on the EICC website. 

     

    Regulatory Framework

     

    The CFS initiative was established in response to the conflict minerals provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010), signed into law last July (page 838 of the 848 page Act  to be exact). Section 1502 requires companies to make an annual disclosure to the Securities and Exchange Commission regarding whether potential conflict minerals used in their products or in their manufacturing processes originated in the DRC or an adjoining country. If the minerals were sourced from these countries, companies must report on the due diligence measures used to track the sources of the minerals if they were derived from the DRC or neighboring nations. In addition, the Act will require a 3rd party audit to verify the accuracy of the company’s disclosure. Finally, a declaration of “DRC conflict-free” must be provided to support that goods containing minerals were not obtained in a manner that could “directly or indirectly … finance armed groups in the DRC or an adjoining country”.

    The U.S. Securities and Exchange Commission was to have issued regulations to stem purchases of conflict minerals this week.  However, on Monday the SEC delayed issuance of the specific rules to the August-December timeframe.  Ultimately, U.S. companies will be required to audit mineral supplies next year to identify purchases that may be tainted by the Congo fighting, according to draft SEC regulations.

     

    Two groups of companies will be directly impacted by the Conflict Minerals Law: companies that are directly regulated by the SEC, and companies that are not SEC-regulated, but are suppliers to impacted companies. Starting April 1, the CFS scheme began requiring due diligence and full traceability on all material from the Congo and other neighboring conflict zones.  Then, these audits, or at least their summaries, are to be incorporated into SEC regulatory findings (in some manner, as yet to be defined by the SEC).

     

    California Steps Up

     

    Meanwhile, this past Tuesday, committee of the California State Senate passed a Senate Bill 861 Tuesday that will curb the use of conflict minerals from Congo. The 9-1 vote in the Governmental Organization Committee was a first step to making California the first “conflict-free state”.   If it passes the full assembly, the bill would prohibit the state government from contracting with companies that fail to comply with federal regulations on conflict minerals. 

     

    According to D.C. attorney Sarah Altshuller (@saltshuller) “The California legislation, even if passed, is unlikely to impact many companies: it would apply only to companies against which the SEC has filed a civil or administrative enforcement action. That said, California's legislative activity reflects significant stakeholder concern, as well as advocacy activity, regarding the ways in which the sourcing of specific minerals may be contributing to the ongoing conflict in the DRC.”  Many engaged in the initial debate were concerned too that the state was too early to move forward in the absence of final SEC rules.

     

    Supply Chain Ripples?

     

    1620108684_c05c1db167_b.jpgLeon Kaye (@leonkaye), reporting last week in Triple Pundit, “The CFS identifies smelters through independent third party auditors who can assess that raw materials did not originate from sources that profit off the conflict in the Democratic Republic of Congo.  Now Intel and Apple have stopped purchasing minerals from this region, which has transformed a voluntary program to what the president of an exporter association in Congo called “an embargo.”

     

    Also, as  reported also last week by Bloomberg, “There is a de-facto embargo, it’s very clear,” said John Kanyoni, president of the mineral exporters association of North Kivu, in the Democratic Republic of Congo. “We’re committed to continue with all these programs. But at the same time we’re traveling soon to Asia to find alternatives.”

     

    Defacto or preemptive, this move is long overdue and is bound to bring to light an elephant in the room that manufacturers and consumers alike have been quick to run from and avoid.  I’ve reported in recent posts my dismay over the approach that Apple has taken in addressing its supply chain sustainability issues, especially in Asia.  The fact that Apple has electively chosen, along with Intel to be a first mover to shake the supply chain up and seek right some corporate social responsibility wrongs is encouraging.  However as my colleague Mr. Kaye correctly notes, neither may have had a choice. 

     

    As noted in an article by Future 500’s Juliette Terzieff this week, “buyers for Chinese, Indian and other countries’ manufacturers who are not part of the CFS program or subject to U.S. legislative requirements coming in effect in early 2012 face no regulatory requirements to ensuring their purchases are conflict-free. This could prove particularly valuable for those seeking to sidestep controls given that Chinese demand for minerals like copper are predicted to rise 7% every year between 2010 and 2014.”

     

    How Many Companies are affected?

     

    In an excellent analysis by ELM Consulting and reported in a series on AgMetal Miner last fall, the amount of companies falling into the two previously mentioned categories is unclear.  According to the analysis:

     

    For the first category, the SEC estimated that 1,199 companies will require a full Conflict Minerals Report. The methodology for determining this number is worthy of mention. The SEC began by finding the amount of tantalum produced by the DRC in comparison to global production (15% – 20%). The Commission selected the higher figure of 20% and multiplied that by the total number of affected issuers, which they stated is 6,000. (75 Fed. Reg. 80966.)  Clearly, this methodology does not consider many additional factors and the actual number of companies that will require the full audit is certain to be higher. For the second category – the suppliers – no estimate has been made.  But if one anticipates 10 suppliers (we have data indicating that the number of suppliers ranges from one to well over 100 for a single directly-regulated company; an average of 10 suppliers may be conservative, especially given the wide range of conflict mineral-containing products) for each company directly regulated, the number of additional companies impacted would be 12,000.

     

    Verifying Mineral Sources Is Tough Work

    As I noted in a past post on “materiality”, surveys taken from manufacturers suggest a lack of confidence in being able to confidently trace conflict minerals to the source (excluding the likelihood that illegal extracted minerals are also blending into the marketplace).  So you could see the difficulty in companies demonstrating due diligence in tracing the chain of materials flows from point of origin.

     

    cell.jpgAccording to Treehugger ace writer Jami Heimbuch , plugging the supply chain to assure the at all minerals come from conflict free zones is no easy task.  Ms. Heimbuch reported that even Apple has noted how it is nearly impossible to know the exact source.  The proposed SEC rules also do attempt to take on suppliers who have “influence” over contract manufacturers who provide name brand products for larger companies.  The proposed rules also apply to retailers of private-brand products and generic brands.  Finally there is some ambiguity around how scrap electronic waste is to be treated.   The SEC has not defined what is recycled or scrap material and manufacturers have a fair degree of latitude in their disclosure reports as to how they will treat scrap/recycled material.

     

    The BBC reports that Rick Goss, of the Information Technology Industry Council (ITIC), whose members include Apple, Dell, Hewlett Packard, Nokia, states that "it will be impossible to make sure that not one single illicit shipment entered the supply chain….It is too complicated in terms of corruption - illegal taxation - to absolutely guarantee that an illegal shipment did not enter the supply chain, regardless of all private and public sector efforts,' he warns. The minerals could go elsewhere. Asian smelters are sourcing from any number of countries."

     

    Summary

     

    If it is impossible to track the source of all the minerals going into the stream, then the big question is what countries and companies will do to fix inadequate governance and systems.   And if U.S. companies shift their sourcing to other nations, will this be enough?  Is global manufacturing merely playing “kick the can”? 

     

    The conflict minerals issue just may be the “perfect storm” that combines elements of resource consumption, consumerism, corporate social responsibility, supply chain management, politics and product stewardship.

     

    The next post in the series will dive a bit deeper into efforts by key manufacturers in how they are auditing, validating and tracing the conflict minerals supply chain and what responsibilities we as consumers have in lessening the impacts of this perfect storm.



    [1] As part of the Conflict-Free Smelter program, participating tech companies must provide third-party verification that their processors don't contain commonly used minerals that fund armed conflicts in Central Africa, specifically the Democratic Republic of Congo. Minerals from Central Africa commonly sourced for tech components include gold, titanium, tungsten and tin; the DRC provides 5 percent of the world's tin supply, as well as 14 percent of tantalum.

     

     

    94012500.jpg2010 marked a watershed moment in supply chain sourcing among worldwide manufacturers and retailers. Sustainability observers and practitioners read nearly weekly announcements of yet another major manufacturer or retailer setting the bar for greener supply chain management.  With a much greater focus on monitoring, measurement and verification, retailers and manufacturers Wal-Mart, Marks and Spencer, IBM, Proctor and Gamble, Kaiser Permanente, Puma, Ford, Intel, Pepsi, Kimberly-Clark, Unilever, Johnson & Johnson, Herman Miller among many others made major announcements concerning efforts to engage, collaborate and track supplier/vendor sustainability efforts, especially those involving overseas operations.  Central to each of these organizations is how suppliers and vendors impact the large companies’ carbon footprint, in addition to other major value chain concerns such as material and water resource use, waste management and labor/human rights issues.

     


    Meanwhile, efforts from Chinas manufacturing sector regarding sustainable sourcing and procurement, was at best, mixed with regard to proactive sustainability.  From my perspective as a U.S. based sustainability practitioner (with a passion in supply chain management), the challenges that foreign businesses with manufacturing relationships in China can be daunting.  Recent events concerning Apple Computers alleged lax supplier oversight and reported supplier human rights and environmental violations only shows a microcosm of the depth of the challenges that suppliers face in managing or influencing these issues on the ground.  Apple recently did the right thing by transparently releasing its Apple Supplier Responsibility 2011 Progress Report, which underscored just how challenging and difficult multi-tiered supply chain management can be.  But all is certainly not lost and many companies have in recent years begun to navigate the green supply chain waters in China.



    3009516045_0c7fd883c5_b.jpgAccording to a World Resources Institute White Paper issued in the fall of 2010, China faces a number of supply chain challenges.  First, the recent spate of reports alleging employee labor and environmental violations can place manufacturing partnerships with global corporations at risk.  According to the report, Chinese suppliers that are unable to meet the environmental performance standards of green supply chain companies may not be able to continue to do business with such firms. Walmart has already gone on record, announcing that it will no longer purchase from Chinese suppliers with poor environmental performance records. In order to be a supplier to Walmart, Chinese companies must now provide certification of their compliance with China’s environmental laws and regulations.

     

     

    Walmart, like many other IT and apparel manufacturers also conducts audits on a factory’s performance against specific environmental and sustainability performance criteria, such as air emissions, water discharge, management of toxic substances and hazardous waste disposal. These actions are extremely significant as Walmart procures from over 10,000 Chinese suppliers.  This increased scrutiny on environmental and corporate social responsibility through supplier scoring and sustainability indexing, says the WRI report may trump price, quality, and delivery time as a decisive factor in a supplier’s success in winning a purchasing contract.

     


    Photo Courtesy of http://www.flickr.com/photos/scobleizer/ under Creative Commons license

     

    Chinese Government Stepping Up Enforcement

     

     

    Finally, what good news I hear about the depth of environmental regulations on the books in China is buffered by the apparent lax enforcement of the rules and regulations.  That is however appearing to change.  The WRI report indicated that the Chinese State Council is directing key government agencies, including the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Environmental Protection to prohibit tax incentives, restrict exports and raise fees for energy intensive and polluting industries, such as steel, cement, and minerals extraction.   Also, it’s been reported in the past years that the People’s Bank of China and the Ministry of Environmental Protection are also working with local Chinese banks to implement the ‘Green Credit’ program, which prevents loans to Chinese firms with poor environmental performance records. In addition, the National Development and Reform Commission and the Ministry of Finance have issued a notice to all Chinese central and local governments to purchase goods from suppliers that are ‘energy efficient’. Finally, on a local level, governments have developed preferred supplier lists for companies producing environmental-friendly products for their purchasing needs.

     

     

    Supplier Challenges Are Not Just Environmental

     

    A China Supply Chain Council survey conducted in 2009 identified a huge gap in knowledge between (1) clear understanding of which environmental issues posed the greatest risk (2) what to do to manage significant environmental risks.  Also, nearly 40% of the company’s surveyed thought sustainability to be cost prohibitive, too complicated or where particular expertise was lacking don’t have the expertise (on the other hand 60% did!).  Two- thirds of respondents did consider sustainability to be a supply chain priority, although many were not confident of the return on investment.  However, more than half of the respondents reported that they had begun collaborating with their larger supply chain partners.    In fact, according to the World Resources Institute White Paper, despite increasing pressures to improve their environmental performance, Chinese suppliers face many financial challenges to operating in a more sustainable manner

     

     

     

     

    World Resources Institute White paper notes increasing  non-environmental pressures, including:


    ·     “Extended green investment “payback”: While improving resource consumption, such as energy and water, provideslong-term cost savings, the payback for making such environmental investments may be as long as three years, which is financially impossible  for many Chinese suppliers.

     

    ·      Lack of financial incentives from green supply chain buyers: Multinational buyers are often unwilling to change purchasing commitments and long-term     purchasing contracts to Chinese suppliers that make the investments to improve their environmental performance.

     

    ·      Rising operational costs: Chinese suppliers face     rising resource and labor costs. For example, factory wages have increased  at an average annual rate of 25 percent during 2007 to 2010. Rising costs dissuade suppliers from making environmental investments which may raise     operating costs.

     

    ·     Limited access to finance: The majority of Chinese suppliers are small and medium-scale enterprises (SMEs) with limited access to formal financing channels such as bank loans.  Chinese SMEs account for less than 10 percent of all bank lending in China,  and as a result, Chinese suppliers frequently do not have the capital to     make the necessary environmental investments.

     

    ·       Intense domestic and global competition: Chinese suppliers face intense competition from thousands of firms, both  domestic and international, within their industries. This intense competition puts constant pressure on suppliers to cut costs, which can  include environmental protections, in an effort to stay in business.

     

     

    Leveraging the Supply Chain to Gain “Reciprocal Value”

     

     

    2031002_com_environmen.jpgLeading edge, sustainability –minded and innovative companies have found “reciprocal value” through enhanced product differentiation, reputation management and customer loyalty.  I recently highlighted the model efforts that GE has implemented with its China based suppliers to implant responsible and environmentally proactive manufacturing into their operations.  GE’s comprehensive supplier assessment program evaluates suppliers in China and other developing economies for environment, health and safety, labor, security and human rights issues. GE has leaned on its thousands of suppliers to obtain the appropriate environmental and labor permits, improve their environmental compliance and overall performance.   In addition, GE and other multi-national companies (including Wal-Mart, Honeywell, Citibank and SABIC Innovative Plastics) have partnered to create the EHS Academy in Guangdong province.  The objective of this no-profit venture is to create a more well-trained and capable workforce of environmental, health and safety professionals.

     

    Summary

     

    Many of my prior posts have highlighted the critical needs for increased supply chain collaboration among the world’s largest manufacturers in order to effectively operationalize sustainability in Chinese manufacturing plants. This is especially evident for large worldwide manufacturers operating subcontractor arrangements in developing nations and “tiger economies”, such as India, Mexico and China (and the rest of Southeast Asia). Global manufacturer efforts underscore how successful greening efforts in supply chains can be based on value creation through the sharing of intelligence and know-how about environmental and emerging regulatory issues and emerging technologies.

     

    Suppliers and customers stand so much to gain from collaboratively strengthening each other’s performance and sharing cost of ownership and social license to operate.  But as I have stated before, supply chain sustainability and corporate governance must first be driven by the originating product designers and manufacturers that rely on deep tiers of suppliers and vendors in far-away places for their products. 


    Note: This piece is adapted from a recent article that I wrote, "Navigating China's Green Road" that appears in China Sourcing Magazine

     

     

     

    .

     

    Competition.jpgI always find it rewarding when a study comes out that underscores the business value of sustainability, especially when backed up with statistics and hard dollars.  Such is the case with a 2008 study by researchers from the Georgia Institute of Technology (GIT).  The research study, entitled An Empirical Investigation of Environmental Performance and the Market Value of the Firm, was authored by Brian W. Jacobs, Vinod R. Singhal, and Ravi Subramanian.  The study analyzed the shareholder value effects of environmental performance by measuring the stock market reaction associated with announcements of environmental performance. 


    The study focused on how markets react to Corporate Environmental Initiatives (CEI) and Environmental Awards and Certifications (EAC).  The results of the study provided compelling data that suggested that “announcements of philanthropic gifts to environmental causes are associated with significant positive market reaction, voluntary emission reductions are associated with significant negative market reaction, and ISO 14001 certifications are associated with significant positive market reaction”.  For me this report validates my devotion over the past 15 years working with small to large manufacturers and public agencies in designing, implementing and maintaining ISO 14001 certifications and in making the argument that “proactive environmental management makes business sense”.  I’m not some crazed environmentalist after all (although my passion occasionally borders on the “evangelical” side)!


    The research study focused on reviewing the “market value impacts of specific events (such as use environmental announcements) as a “proxy for the difficult-to-measure construct of environmental performance”.   The study found a statistically significant market reaction to the hundreds of environmental performance announcements evaluated, suggesting a causal link between environmental performance and financial performance.   Specific to ISO 14001 announcements, the market was seen as reacting positively (on a statistical basis) to announcements of ISO 14001 certifications. Years of literature and case studies have offered volumes of data that support the positive impact of EMSs in general as well as direct evidence that ISO 14001 certification improves company performance over long periods of time. The authors of the GIT believe that they are the “first to provide empirical evidence of the impact of ISO 14001 certification on market value.


     

    Body of Evidence


     

    Forays into proactive environmental management and attainment of internationally recognized certifications like ISO 14001, RC 14001 or LEED are not always “window dressing’ to demonstrate commitment to sustainability, as some may believe.  These efforts are more often than not the real deal when it comes to demonstrating value-added savings and long term return on investment and access to new market.  While the skeptics continue to throw cold water on CEI’s and EAC’s the evidence continues to stack up in favor of long term benefits.


    The results were based on analysis of 811 announcements (430 CEI announcements and 381 EAC announcements) that appeared in the daily business press during the period 2004-2006.  Now, you may pause and say “well that was a long time ago…what about post recession?” A recent article by Phil Covington in Triple Pundit asked that same question. Covington cites a recent Fast Company’s recent article concerning Bloomberg’s business of measuring companies “Environmental, Social and Governance” (ESG) performance, which found that “the number of investors accessing ESG data is up by 29% comparing the first half of 2010 with the second. Investors use it to identify smart practices – for example, companies who operate in a socially responsible manner may be viewed as forward thinking and well managed.” While this report suggests that there is increased attention being paid to companies that “do good” or that implement proactive ESG practices, the results are still not statistically treated like the GIT study.  But either way, as Covington concludes “This surely portends that markets will inevitably respond favorably to sustainability efforts, especially when the data shows improved governance and profits result directly, and in the long run, from sustainability”.


     


    strategy.jpgSince the 2006 study period cited in the GIT study, there have been more studies that provide compelling proof of the market value of environmental initiatives or certification.  Here are a couple of stand-out examples.  First, a study entitled Which Competitive Advantages can Firms Really Obtain from ISO14001 Certification? demonstrate statistically that there is a significant difference between firms with ISO14001 certification and firms without ISO14001 certification.  Internal efficiency benefits are considered significantly higher for firms with ISO14001 certification.  Therefore managers’ expectations of improving internal efficiency might be the real reason that encourages firms to make the voluntary decision of investing in ISO14001 certification.  


     

    Another study, by the Arava Institute for Environmental Studies entitled Comparative Advantage: The Impact of ISO 14001 Environmental Certification on Exports, suggested that EMS certification appears to imply a supplier who is managing its business well and is showing ethical responsibility. The fact that a supplier was awarded the ISO 14001 or EMAS certification by an independent entity enhances perceived reliability. Importers evaluated felt more confident engaging a new supplier, saving time and effort associated with clarification and research prior to placing a purchase order.  The survey results, as well as other available literature, corroborate the view that ISO 14001 accreditation confers economic benefits and greater “market value". These include a standard of worldwide recognition, organizational efficiency, better waste management resulting in costs reduction, marketing advantages, and competitiveness by reducing risk and exposure to costly litigation.


     

    What Are You Waiting For?


     

    As of 2008, when the GIT study was published, more than 188,000 organizations worldwide had become ISO 14001 certified in 155 countries and economies. Worldwide, ISO 14001 certifications grew by more than 77,000 from 2004 to 2008 - a 70% increase.  These companies must be onto something.    As I had written about previously, throughout a variety of industries, there are leaders and there are laggards.  Innovators who lead and can establish “first mover” status have the most market share to gain from proactive environmental management and attaining certifications like ISO 14001. 


     

    The GIT studies and the many others that have been produced over the past five years or so are healthy indicators of how proactive approaches to sustainability can positively influence behavior up and down the supply chain, and can add total market value in a recovering economy.

     

    IMG_0927.JPGLast week, I was honored to be the dinner keynote speaker at the European Petrochemical Associations 2nd Interactive Supply/Demand Chain Workshop  in Brussels, Belgium.  What a beautiful place, where cobblestones meet bullet trains- two completely differing eras of transportation systems still working after all these years.  This years’ workshop theme was “21st Century Supply Chains for the Chemical Industry”.  2011 has also been declared by the United Nations Educational, Scientific and Cultural Organization as the International Year of Chemistry (see the EPCA’s cool new video, “Chemistry- It’s All About You” here).


    Throughout the highly interactive, roll up your sleeves workshop, the dialogue centered on innovative tools and value-added approaches to drive supply chain sustainability. Discussion focused on how the chemical industry and its supply chain can support an evolution from the old linear, materials economy mindset to a more circular, systems based sustainability minded economy, as Annie Leonard describes in the Story of Stuff.  As a matter of fact, that short film was the lead-in to my speech on supply chain sustainability and the nexus with consumerism, and the important role of chemical industry and its supply chain.



    As I noted in last week’s post, consumer demand appears to be contributing (at least in part) to some of the gains in eco-friendly and sustainability focused design and manufacturing progress that’s being made in the global marketplace. In addition, shipping and logistics partners are showing leadership in embedding sustainability in the “source, make, deliver and return” product value chain as well. 


    The (Re) Emergence of “Co-opetiton”


    Picture1.pngThe 21st Century Supply Chain is a rapidly evolving business landscape.  Prior to around 2005,   the supply chain landscape centered on vertical collaboration between subsequent actors in the same supply chain, or between suppliers, manufacturers and customers.  Since the mid 2000’s, collaboration has refocused along the horizontal axis.   What appears to be happening is more evidence of collaborative exchanges between companies in the same market, or alliances, partnerships, clusters, and networked organizations.  This represents a real paradigm shift” that collaboration between producers, service providers and their customers. 


    Another older term coined in the mid 1990’s, “co-opetition” (or cooperative competition), may now find its place in the 21st century supply chain lexicon.  Co-opetition occurs when companies work together for parts of their business where they do not believe they have competitive advantage and where they believe they can share common costs.   The basic premise of co-opetition strategy relies on leveraging alliances, partnering with other shippers (even competitors!) to control logistics  and transportation costs.   In  “games theory, this would be called a “plus-sum” scenario, in which the sum of what is gained by all players is greater than the combined sum of what the players entered the scenario with.  For instance, co-warehousing or load consolidation in transportation and warehousing are straightforward examples where collaborative competition has enormous financial and environmental benefits.  Co-opetition can in effect lead to expansion of the market and the formation of new business relationships, perhaps even the creation of new forms of enterprise.


    Co-opetition partners typically include:


    1. Producers, Customers, Consumers who drive producer demand and determine product eco-footprint
    2. Shippers and Terminal Operators: who generate the freight flows and provide the critical infrastructure for product flow
    3. Logistic Service partners (3PLs): who can design and implement optimized solutions and move the freight
    4. Fourth Party Providers: who can facilitate partnerships, referee blockages, find common ground; and
    5. Governments who can assure that legal and regulatory arrangements are in place to support seamless collaboration


    At the same time, though for co-opetition to be truly sustainable, there must also be  a cultural fit, strategic fit,  economic and operational fit,  and, trust and resources.


     

    Co-opetition implies that cooperation and competition merge together to form a new kind of strategic interdependence between firms, giving rise to a co-opetitive system of reciprocal value creation.   This new era of globalization has opened the door to co-opetition for small to midsized businesses that lack the scalable resources that larger companies have.  So this makes me think that if competition is a key driver behind innovation, and collaboration is a key 21st Century supply chain success factor, then collaborative competition (co-opetiton) may be a new solution to drive supply chain sustainability. I posed this theory to a generally warm response by the 60 plus chemical industry logistics professionals in Brussels. Yes, it’s a bit of a heretical idea, but one that has shown in some industries to work.  Take Proctor & Gamble’s Connect + Develop or Nikes Considered Design and the Environment open innovation models.  Both offer opportunities to collaborate and drive innovative solutions that can benefit consumers, and open business channels to entrepreneurs lacking resources to bring new (possibly more sustainable) products or processes to market.

     


    Summary- Forging New Links in the Chain


    Co-opetition offers opportunities for manufacturers and their upstream suppliers and customers to strengthen each other’s performance, enhance differentiation and foster end-consumer brand loyalty in the following ways:


    1. By tapping into to customer and consumer preferences, industry can adapt its processes, products and services to enhance competitiveness
    2. By collaborating, customer-supplier teams can address Triple Bottom Line (3BL)-related technical challenges that affect the profitability and performance of the overall supply chain.
    3. Reciprocal value creation through vertical and horizontal “co-opetition” means recognizing and quantifying each other’s value contributions
    4. By sharing intelligence and know-how about 3BL issues & emerging technologies.
    5. By incorporating 3BL advantages into their products and services, e.g., reduced cost of ownership.


    What ideas do you have to forge new links in the sustainable supply chain?  Let's start the collaboration now, shall we?

     

    Next week, I’ll have the honor being the dinner keynote speaker at the European Petrochemical Associations 2nd Interactive Supply/Demand Chain Workshop  in Brussels, Belgium.  This years’ theme is “21st Century Supply Chains for the Chemical Industry”.  The topic is timely given how there’s been so much talk concerning over-consumption, consumer behavior, corporate social responsibility and increased growth of sustainability in manufacturing and supply chain management.  And the chemical industry indeed plays a large role in much of what we consume.  It reminds me of the old Monsanto commercial…”without chemicals, life itself would be impossible”.  It’s just that these days, chemicals in the global marketplace appear to be getting ‘greener’.


    Consumer Demand for Sustainable Products


    consumer_shopping.jpgConsumer demand appears to be contributing (at least in part) to some of the gains in eco-friendly and sustainability focused design and manufacturing progress that’s being made in the global marketplace.  There is certainly a higher degree of consumer awareness and understanding of the need to make healthier, socially conscious and eco-friendly products.  However, the Green Confidence Index, a monthly online survey (~2,500 Americans by GreenBiz.com) noted last year that U.S. consumers cite price and performance as the principal reasons for not buying more green products- the flat growth was partially attributed to stale economy.  The slow economic growth of 2010 appeared to also be slowing widespread innovation by small to medium sized businesses focused on green manufacturing.


    In contrast, the consumer business disconnect appears to be alive and well in other parts of the world. In fact, it’s my thinking that businesses are significantly underestimating consumer interest and awareness in sustainability and green issues.  For instance, consumer demand for sustainably manufactured or ‘green’ products and services in China, India and Singapore are outstripping supply (according to an independent survey conducted by TÜV SÜD Asia Pacific). I’ve no doubt the same is the case in Europe, often considered way ahead in terms of consumer sensitivity regarding sustainability. The TÜV SÜD Asia Pacific found that:


    1. 84% of consumers prepared to pay an average 27% premium for green products, services.
    2. Only 43% of business believes consumers to be willing to pay more  or even produce or trade green products in China, India and Singapore.
    3. 74% of businesses either do not have a policy or guideline to  minimize environmental in place or are failing to clearly communicate  they have one.

    ·        

    Chemical Industry Response to Sustainability and Supply Chain Impacts


    Manufacturers in the chemical industry and peripheral services have progressively been responding to end-consumer and customer driven pressures. The emergence of ‘green, (or sustainable) chemistry” and restricted materials initiatives over the past half dozen or so years have propelled the chemical industry and global consumer products manufacturers to rethink how products are made, consumer health effects and long term eco-impacts.  Traditionally, supply chain management of hazardous products has focused more on reducing the exposure to hazards than on hazard elimination. The advent of green chemistry has provided opportunities to refine supply chain management, including procurement policies and practices, by developing safer products. Redesigned products and processes can dramatically reduce the risks encountered in manufacturing, storage, transportation and waste control by mitigating the hazards associated with them. From a risk management perspective, since it is fundamentally better to mitigate hazards than to try to protect against them, green chemistry has proven to be highly beneficial and contributes by default to greener supply chain management and supply chain-related risk management


    Many manufacturers have risen to the occasion in recent years to drive green chemistry and supply chain management to lessen their eco-footprints and support development of safer products.  Global chemical manufacturer BASF chooses its carriers, service providers and suppliers not just on the basis of price, but also include their performance in the fields of environmental and social responsibility when making our decisions. In addition to following the internationally recognized Responsible Care program requirements for environmental, health and safety, BASF has established product stewardship goals designed to reduce its overall eco-footprint.


    “What counts for us is acting responsibly throughout the entire supply chain because we want to build stable and sustainable relationships with our business partners. This is why we choose carriers, service providers and suppliers not just on the basis of price, but also include their performance in the fields of environmental and social responsibility when making our decisions.”


    The company also maintains several key features of its global supply chain management program, including:


     

    1. Safe transportation to our customers
    2. Evaluate and support partner companies
    3. Monitoring of suppliers
    4. Product types and sources important
    5. Providing advice for better services
    6. China: sustainability in the value chain
    7. Minimum social standards for suppliers



    Dupont SSC.pngMeanwhile, DuPont’s Mission is focused on “creation of shareholder and societal value while we reduce the environmental footprint along the value chains in which we operate”.  Throughout the production-supplier-consumer value chain, DuPont strives through end to end supply chain communication to 1) manage risk and be adaptable; 2) gain efficiencies & profitable flexibility; and 3) enable sustainable product performance and verification through its entire supply chain. Sustainability efforts are tracked and managed for continual improvement through a combination of business management integration approaches and supply chain design and operation.


    On the retail side, Walmart has asserted itself in the past several years, by clarifying its stance about reducing toxics in products.  In response, American Chemistry Council  members have pledged to lower GHG intensity by 18% by 2012 using 1990 as a base-reporting year and has exceeded that initial commitment and has reduced carbon intensity by 36%.  In addition, Dow Chemical’s is working to harmonize the Walmart goal with its own sustainability objectives of decreasing its environmental footprint and maximizing product performance throughout the supply chain.


    "Given the challenges associated with running a global chemical manufacturing supply chain, we have been focused on sustainability for a long time - not just our own but also how we address sustainability with our customers and our customers' customers," - Anne Wallin, director of sustainable chemistry and life cycle assessment at Dow Chemical.


    Logistics Providers Stepping Up to the Challenge


    Among supply chain and logistics businesses, the 2009 14th Annual 3PL Study found that shippers want to create more sustainable, environmentally conscious supply chains. The survey found a need to strike a balance between labor & transportation costs.  Surveyed 3PL’s also noted the market value of carbon-reducing processes, compressed production cycles, and less carbon intensive transportation modes that beat the competition. 


    AmShipper SurveyDrivers.pngMost recently, American Shipper just published its Environmental Sustainability Benchmark Study of over 200 shipping companies.  According to the study, “survey respondents clearly see environmental sustainability has an emerging impact and increasing importance in their supply chain. On a scale of one to five (one lowest; five highest) the study average ranked sustainability as 2.42 two or three years ago, 3.41 today, 3.95 in five years, and 4.17 in 10 years". Interestingly, customer demands, at 25% percent (see graphic below) are on a par with company policies as a leading driver of environmental sustainability adoption.  Most respondents saw potential return on investment (ROI) although ROI was clearly a potential barrier to sustainability adoption.


    In response, leading 3PLs and fourth party logistics providers (4PL’s) are focusing more attention on business practices that are intentionally drive business efficiencies , but (perhaps unintentionally) enhance overall environmental performance, namely:


     

      1. In-Store Logistics
      2. Collaborative warehousing & infrastructure
      3. Reverse Logistics
      4. Demand Fluctuation Management
      5. Energy/Fuel Use Management


    End consumer preference certainly has its place in deriving sustainability in the 21st century, but as I see it, the chemical industry and its shipping and logistics partners are showing leadership in embedding sustainability in the “source, make, deliver and return” product value chain. 


    My next post will explore how competitive collaboration, or “co-opetition”, is making resurgence in the supply chain sustainability conversation.  In the meantime, I’m looking forward to next week’s conference and all the hospitality that Brussels has to offer.

     

    shenz03.jpgMany of my prior posts have highlighted the critical needs for increased supply chain collaboration among the world’s largest manufacturers. This is especially evident for large worldwide manufacturers operating subcontracting arrangements in developing nations and “tiger economies”, such as India, Mexico and China (and the rest of Southeast Asia). I have stressed how the most successful greening efforts in supply chains are based on value creation through the sharing of intelligence and know-how about environmental and emerging regulatory issues and emerging technologies.  I’ve further stressed how suppliers and customers can collaboratively strengthen each other’s performance, share cost of ownership and social license to operate and create “reciprocal value”.  But supply chain sustainability and corporate governance must be driven by the originating manufacturers that rely on deep tiers of suppliers and vendors for their products.



    Recent events concerning Apple Computers alleged lax supplier oversight and reported supplier human rights and environmental violations only shows a microcosm of the depth of the challenges that suppliers face in managing or influencing these issues on the ground.  Apple recently did the right thing by transparently releasing its Apple Supplier Responsibility 2011 Progress Report, which underscored just how challenging and difficult multi-tiered supply chain management can be.



    GE’s “Bringing Good Things to…”  it’s Supply Chain


    In the fall of 2010, GE conducted a Supply Chain Summit in Shanghai, China. China was selected as the first supplier summit venue outside the United States mainly because of the ‘unique set of challenges global manufacturers face in conducting overseas manufacturing’. As GE’s Supply Chain Summit site notes, “China’s manufacturing industry has grown immensely over the past decade, faster than its environmental controls and the availability of skilled managers. Thirty percent of GE’s suppliers covered by the company’s Supplier Responsibility Guidelines Program are in China, yet more than half of the environmental and labor standard findings under the Guidelines Program have been identified in the country. Many factories continue to struggle to meet standards and local laws regarding overtime, occupational health, and environmental permits.”  This suggests that the ratio of negative supplier findings to supplier location is higher in China than in other geographies where GE operates.



    To meet that deficiency, a key element of GE’s supply chain management program relies on intensive supplier auditing and oversight.  GE’s comprehensive supplier assessment program evaluates suppliers in China and other developing economies for environment, health and safety, labor, security and human rights issues. GE has leaned on its thousands of suppliers to obtain the appropriate environmental and labor permits, improve their environmental compliance and overall performance. GE performs due diligence on-site inspections of many suppliers as a condition of order fulfillment and as part of its tender process.

     

     

    In a two year period from 2008 to 2010, supplier environmental and social program focused assessments were conducted in 59 countries, in addition to performing “spot checks” or investigating complaint or media initiated concerns at particular factories. Some suppliers noted “audit fatigue” which can be perfectly understandable (being an auditor myself I can appreciate the wear and tear this causes on the mind and body after a while!). Third-party firms conduct some of the inspections. However, many of those participating in the audits found that third party firms often did not provide the critical “how to” guidance as to altering business practices to assure future compliance.

     

    What appeared to be most beneficial to manufacturers is GE’s detailed auditor-training program, which includes instruction on local law requirements and field training followed by a supervised audit with an experienced GE auditor.   The summit findings noted that dealing with the hands on “how to” aspects of solving non-compliance issues greatly helped Chinese manufacturers to “understand the importance of treating their employees fairly and the need to systematically manage the environmental impacts of their operations”. Suppliers at the summit also highlighted the business benefits that resulted from this “maturing approach to labor and environmental standards, including improved worker efficiency and morale, an enhanced reputation, and increased customer orders”. GE’s more advanced suppliers shared that they were developing management systems or integrated processes to proactively address issues and risks. 

     

    Education First!

     

    In addition, GE and other multi-national companies (including Wal-Mart, Honeywell, Citibank and SABIC Innovative Plastics) have partnered to create the EHS Academy in Guangdong province.  The objective of this no-profit venture is to create a more well trained and capable workforce of environmental, health and safety professionals, and give them the management, implementation and technical knowledge to be able to proactively assure ensure “that real performance is sustainable and integrated fully into the overall business strategy and operating system” of a company.  Chinese regulatory agencies are also invited to participate as well. The model that GE is using in China offers a positive example of collaborative innovation.

     

    5000_header_ehs.jpgAs large companies like GE and Apple expand their production capabilities throughout the globe, it’s vital that they continue to seek ways to train and educate contract manufacturers on environmental and social issues.   This may be tough to do because countries like China are still in the "ramp-up" phases of economic development.  Plus it’s been evident for some years that enforcement of environmental and social laws and regulations by government agencies has not been on  par with the intent of the laws.  It’s alsolikely that (for the foreseeable future) Chinese political and economic systems will remain focused on rapid development at all costs. So it’s critical that local/in-country government policies be aligned as well to support capacity-building for companies to self-evaluate, learn effective auditing and root- cause evaluation,  institute effective corrective and preventive action programs and seek means to systematically achieve continuous improvement through proactive environmental  and social management systems.

     

    The GE program offers a glimmer of hope that (in China and similar developing economies) that multi-stakeholder, collective and timely collaboration may (someday soon) tame the tiger.

     

     

     

    follow_the_leader.jpgOn the heels of my most recent post (Surveys Lift the Lid on Innovation & Sustainable Supply Chain Management, Uncovering Value & Leadership Traits http://bit.ly/h941Jb) comes another survey by the MIT Sloan Management Review and the Boston Consulting Group.  Like the Aberdeen and Capgemini studies, Sustainability: The ‘Embracers’ Seize Advantage uncovered two distinct camps of companies: “embracers” — those who place sustainability high on their agenda — and “cautious adopters,” who have yet to focus on more than energy cost savings, material efficiency, and risk mitigation.


    According to the MIT/BCG study , the survey indicated that many companies view sustainability as eventually becoming “core,”; however the more advanced “embracers” were already acting on the belief that the sustainability ‘business case” was already a functional, core element of its organizational risk management and efficiency strategy. Embracers were also seeing the “payoff of sustainability-driven management largely in intangible advantages, process improvements, the ability to innovate and, critically, and in the opportunity to grow.”  Plus, and this is no surprise, embracers were found to be the highest performing businesses queried in the study.


    Key MIT/BCG Findings


    Several interesting findings emerged that synced up well with the Aberdeen and Capgemini studies, from an innovation and leader/laggard perspective:


     

    1. Embracer companies are implementing sustainability-driven strategies widely in their organizations and have largely succeeded in making robust business cases for their investments.
    2. All companies — both embracers and cautious adopters — see the benefits of strategies such as improved resource efficiency and waste management.
    3. Embracer companies are assigning value to intangible factors (employee engagement, stakeholder concerns) when forming strategies and making decisions.
    4. Embracers are more aggressive in their sustainability spending, but the cautious adopters are catching up and increasing their commitments at a faster rate than the embracers.
    5. The sustainability-driven management approaches of embracer companies — which claim to be gaining competitive advantage via sustainability — exhibit seven shared traits that together suggest how sustainability may alter management practice for all successful companies in the future.


    From a supply chain perspective the study found that embracers appear to be able to make a more compelling business case for sustainability, developing and integrating sustainability strategies in “everything from procurement and supply chain management to marketing and brand building.”


    The MIT/BCG study discovered seven practices or characteristics that “embracers share. They are:


    1. Move early — even if information is incomplete. Embracers tend to be bold and see the importance of being a “first mover” from a competitive perspective. What the study found most compelling was that embracers generally accepted that they need to act before they necessarily have all the answers.


    Embracers are not paralyzed by ambiguity, and instead see action as a way to generate data, uncover new options and develop evidence iteratively that makes decision making increasingly effective. Movement diminishes uncertainty”.


    2. Balance broad, long-term vision with projects offering concrete, near-term “wins.”  Leading companies find a way to balance corporate visions with concrete, action oriented projects that will produce short term successes.


    “Smart embracers balance those aims with narrowly defined projects in, say, supply chain management, which allow them to produce early, positive bottom-line results. They exhibit relentless practicality”.


    3. Drive sustainability top-down and bottom-up. Embracers find ways to engage its organization vertically and horizontally early and creating champions that can collectively ensure the 360-degree perspective that’s vital to sustainability.


    4. Aggressively de-silo sustainability — integrating it throughout company operations. Embracers openly encourage cross-functional problem identification and problem solving and seek ways for more open innovation, group-think and collaborative action.


    5. Measure everything (and if ways of measuring something don’t exist, start inventing them). I am not certain that I would measure EVERYTHING, but rather look for key performance metrics that matter to the core vision of sustainability that organizations seek to satisfy.  Measure what matters, don't just measure just for measurements sake.


    6. Value intangible benefits seriously. Embracers are clearly distinguished from cautious adopters in their readiness to value intangibles as meaningful competitive benefits of a sustainability strategy. However, embracers accept that it takes time to develop their ability to measure — or even to understand fully — intangible advantages, and they need to make their investment decisions on the basis of a combination of tangible benefits, intangibles and risk management scenarios.


    7. Try to be authentic and transparent — internally and externally. Finally, companies leading the charge on sustainability are fundamentally realistic. They do not overstate motives or set unrealistic expectations, and they communicate their challenges as well as their successes.


    The Evolution of a Sustainability Mindset- From Laggard to Innovator


    The results of all three studies compare well with Peter Senges and Bob Willards remarks in several of their books, mirroring the development phases in organizations toward a sustainability culture, governance and business strategy. Willards model shows how as companies progress toward being sustainable enterprises, they can be roughly nested into a five-stage sustainability continuum. They evolve from an unsustainable model of business in Stages 1, 2 and 3, to a sustainable business framework in Stages 4 or 5. Willard explains that “executive mindsets also evolve from thinking of “green,” “environmental,” and “sustainable” initiatives as expensive and bureaucratic threats in the early stages, to recognizing them as catalysts for strategic growth in the later stages.”

     

     

    Blog-07-27-10-Slide-1.jpg

    Source: Bob Willard- Fives Stages of Sustainability

     

    As leading organizations implement more efficient, creative, less resource intensive and wasteful practices, they quickly can realize direct and indirect financial and brand benefits. Truly innovative, agile and resilient companies with a leaning toward change management tend to ‘embrace’ this new paradigm as part of organizational ‘core values’ as successes rack up…it’s like a snowball effect.   The more that is achieved in the name of sustainability, the greater and larger the positive benefit.  Sustainability can become positively addicting!  At the same time, the chasm between the leaders and followers tends to widen, and the followers have to spend much more time, energy and resources to play catch up…if they catch up at all.


    With the MIT/BCG and other two studies,  one common thread that is clear to me (and hopefully you) is that organizational dynamics have a lot to do with how well companies adapt to change, especially when it involves issues surrounding the three legs of sustainability.  The MIT study hit the nail on the head when it stated that “Where companies struggle when it comes to making sustainability an integral part of the business is often not so much with the technical side of things but with the human dimension of managing it.” In fact it was Peter Senge (in The Fifth Discipline), who states that a learning organization is one in which "people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning to see the whole together."


    image_carrousel.jpgSeeing business from a  "whole systems"  perspective is truly what characterizes innovative, leading organizations from the competition.  Embracing organizations typically are more agile, adaptive, and (ultimately) more productive.  As businesses seek stronger competitive positions and reach outside their four walls to integrate innovations across supply chains, one critical, intangible element will still remain- the “human dynamic”.  The posts that follow will dive into management and organizational culture, its effects on driving the sustainability business case, and approaches to drive “cultures of innovation” and leadership throughout the value chain.

     

     

    This is a tale of two surveys…one innovation focused, the other supply chain focused.  What both have in common is how the reports focused on define the traits and qualities of those who lead and those who follow in their respective business spaces.

     

    The Leaders vs. Laggards Survey

     

    FollowTheLeader-615x313.jpgIn 2010, as part of its Innovation Survey Series, Cap Gemini Consulting performed a “Leader versus Laggard” study.  The goal of the study was understand the “current state of affairs regarding innovation, and … to identify what drives the success of companies that view themselves as successful”.  Over 375 companies responded to the survey.  Those reporting ‘over 75%’ of innovation efforts having a positive material impact on the company’s business results were considered “leaders” (slightly more than 11%). The ‘less than 25%’ category represents the innovation “laggard” group (nearly 25% of the respondents).  The remaining 65% percent were somewhere in the middle, innovation-wise. The primary drivers of innovation were: evolving customer needs, technological advances and changes, executive direction/internal demands, macroeconomic/external factors, globalization, and changing supplier capabilities. Innovation efforts were generally wrapped into the following five categories: customer focused innovation, new product development, incremental product improvement, business process innovation, and, business model innovation.

     

    Innovation was considered a top-three strategic priority by more than 76 percent of the respondents to the Capgemini survey. Further, over half of the respondents indicated they have developed relationships with third parties to support their innovation efforts on an ongoing basis. The key study takeaways were:


     

    1. Innovation leaders have advanced beyond other innovators by having an accountable innovation executive or other form of formal innovation governance structure that deals with this kind of decision-making.
    2. Laggard companies hadn't mastered collaborating effectively with external partners to improve their innovation results. Leaders however had been able to successfully leverage suppliers, customers and other third parties in the innovation process, including filling in missing capabilities or resources – such as technology and talent.
    3. Business model innovation will be the next big differentiator for companies aspiring to innovation leadership. Innovation leaders are allocating increasingly more resources to business model innovation.

     

    Why is this study valuable in terms of supply chain sustainability?  Read on.


    The Sustainable Supply Chain Survey


    A revealing and promising study was released by the Aberdeen Research Group a couple of months ago.  The Sustainable Supply Chain surveyed 360 companies and found that sustainable supply chain management and supply chain risk management are among the top three areas for improvement in their organization for one third of the respondents.  While that isn't a stellar number there are some positive trends.  For instance, the survey showed that 76% of the overall survey respondents have incorporated sustainability criteria into some or all of their supply chain management processes. The results provide further proof that in 2010 more companies viewed sustainable supply chain and greening as a foundational aspect of their business operations.


    This survey fared compared well with another survey conducted by eyefortransport (EFT) that I reported on in a prior post).  In the EFT survey, well over 60 percent of those companies surveyed had implemented or were initiating sustainability focused efforts in 2010- ranking around 10th out of nearly 40 supply chain management project categories.   In the logistics survey, most respondents noted a far higher level of positive environmental performance in 2010 compared with 2009.

     

    The Aberdeen survey found that two primary drivers for sustainability revolved around achieving “competitive advantage” and assurance that companies were compliant “with current and future regulations”.   Additional drivers noted by about a third of the respondents included interest in positive impacts to bottom line financials and responding to consumer demands for ‘eco friendly’ products.  These drivers, according to the reports highlighted perspectives of five different stakeholders along the end-to-end supply network: customers, suppliers, regulators, competitors and shareholders.

     

    Picture1.jpgWhat makes the Aberdeen survey unique was how it distinguished business pattern between “leaders” and “laggards” (like the Capgemini report).  Two key take-aways were: 1) Best-in-Class companies were twice as likely to incorporate sustainability principles throughout all supply chain management (SCM) processes and 2) a principal characteristic of “laggards” was their lack of focus on incorporating sustainability into their SCM processes.  For example, the Aberdeen study identified a 29% spread between leaders who've achieved 12% emission reductions versus laggards corresponding 17% increase in emissions.  Similar polar opposite movement was found in areas related to energy consumption and operating margin containment.  And like the Capgemini study, best in class (leaders) companies were 70% more likely to establish corporate governance teams, making technology investment to collect and report metrics, and engaging their suppliers.  Think of the potential savings that leaders have realized compared to their laggard counterparts.


    Logistics Providers Leading the Way


    As one example, two logistics giants, FedEx and UPS have done deep dives in their business practices and implemented industry leading solutions to bake supply chain sustainability into their operations and supplier networks. UPS has deployed "package-flow" software to map out its most efficient delivery routes. Besides limiting left-hand turns, UPS estimates it shaved nearly 30 million miles off its delivery routes, saved 3 million gallons of gas and reduced CO2 emissions by 32,000 metric tons.  FedEx has deployed cleaner vehicles, sourced alternative power sources for its facilities and engaged its supply chain to promote recycling, product reuse and greener packaging to support FedEx’s operations. The company reports that they've improved total fleet miles per gallon within the U.S. by 14.1 percent since 2005, saving over 53 million gallons of fuel or approximately 472,700 metric tons of carbon dioxide emissions, with a goal of improving by 20 percent by 2020.  And like UPS, FedEx  is (according to its web site) redesigning its “physical distribution models to maximize the density of … ground and air shipments. This reduces the amount of fuel it takes to ship each package….”


    The Aberdeen study also mentioned how the UK based non-profit Supplier Ethical Data Exchange (Sedex) has developed a secure online platform for companies to share and monitor sustainability data across supply chain.  Sedex’s mission is “connecting businesses and their global suppliers to share ethical data and enabling continuous improvement in ethical performance”.  Currently used in over 160 countries, the membership driven initiative focuses on metrics capture across four “key pillars”: Labor standards, health and safety, business integrity and environment.  Being on Sedex does not mean that a company has met any ethical standards or is in compliance with any code but it does mean that suppliers have made a commitment to continuous improvement.  Suppliers to major retailers and brand owners continue to own the data and manage its use, and keep it updated on a semiannual basis.  Suppliers’ customers then have the option to run a “risk profile” which can allow them in turn to prioritize suppliers for additional collaboration to manage the sustainability footprint of their products or practices. 


    The Work’s Not Done


    The Aberdeen study did uncover several challenges that companies face, especially those with wide supply chain networks.   The study found that about 40% of companies outsourcing at least some of their manufacturing struggle to establish operational capabilities that yield measurable results (less than 10% efficiency).  This underscores the difficulties that many manufacturers have in effectively controlling or influencing supply chain behavior.  And while sustainability initiatives focused on improved energy use efficiency and practices to reduce environmental footprints are highly relevant in improving operations efficiencies, execution still remains challenging.

     

    "The focus on sustainability has changed from being a philanthropic, 'nice to have' initiative, to the one that is core to the success of organization…Consistently adhering to the sustainability mandates established by clients as well as establishing mandates for your suppliers is an important strategy to gain incremental business value in the current environment," explained Nari Viswanathan, Vice President and Principal Analyst of Supply Chain Management at Aberdeen.


    Pushing the Supply Chain Envelop Requires Innovation and Leadership


    pushing_the_envelope.jpgMany of my prior posts have suggested that “supply chain successes are driven by those who lead through innovation and don’t procrastinate.  These organizations have vision- for the short term and long-term”.  The Aberdeen and Capgemini surveys are proof that ‘first mover’ companies are changing the way business gets done, sometimes in marked, 'greener' ways. 

     

    I believe that innovative companies are those who consider business operations through a “sustainability lens" by 1) developing key performance goals and metrics to make supply chain sustainability initiatives thoughtful, effective and believable; 2) implementing sustainability initiatives that create environmental and social benefit and that are aligned with the company’s financial strategies and business vision; and 3) identifying and developing value-added transparency and proactive collaboration throughout the supply chain.

     

    Who is up to pushing the supply chain envelope, be a sustainability leader and reap the benefits?

    NOTE: Portions of this piece originally appeared as a guest column in Sustainable Business Oregon


    badapple_1.jpgLast week, on the way to a business meeting in downtown Portland I  tuned into the local sports radio station.  Nationally syndicated sports  commentator Dan Patrick (“DP”) was providing his one minute Above the  Noise segment.  The focus was on if, how and when sports icons that have  fallen from grace (due to an off the field indiscretion) they could  ever redeem themselves in the public court of opinion.  And could they  ever regain public acceptance to be ‘marketable’ commodities again.   Think player product endorsements.  Think Tiger Woods, Michael Vick, Ben  Roethlisberger, Kobe Bryant, Ron Artest- well the list is WAY to  lengthy to cover here, but you get the idea.  Most that have regained  endorsement status (like Bryant) have either redeemed themselves through  community service and on field performance, but often the  public-at-large (er, consumers) just forget.  The past indiscretions  have faded from the tabloids.


    So I got to thinking that this sounded very familiar when it comes to  companies (manufacturers and service industries in particular), and the  ways in which they address sustainability matters.  I am thinking of  manufacturers who have made environmentally impactful products, and  willingly or knowingly conducted socially irresponsible or possibly  unethical business practices that have led to public backlash.  And I  thought about how some have been able to successfully “redeem”  themselves and regain a positive marketplace reputation, while others  never quite recovered.

     

    Since this past week Apple was in the news, I thought DP’s radio op-ed was a perfect parallel.  According to a report issued by anti-pollution activists in China, Apple is more secretive  about its supply chain than almost every other American company  operating in the country. Apple came up among the laggards among 29  major electronics and IT firms in a transparency study drawn up by a  coalition of China's leading environmental groups.  The reports focused  on “the openness of IT firms and their responsiveness to reports of  environmental violations at suppliers”.  Though Apple is known in the  industry for the secrecy it wraps around its newest product offerings,  the “mystery of its supply chain is more a matter of covering up than  preventing leaks”, the report stated. The report claimed that Apple's  suppliers have been involved in breaches of environmental regulation,  including major waste discharge violations in recent years at several  Chinese firms that are believed to be  part of Apple's supply chain.  To  be fair, Nokia, LG, SingTel, Sony and Ericsson also fared poorly in the  survey, but Apple stood out in how it did not address and respond to  the findings.


    Of  course this revelation was not the first time that Apple’s supply chain  management oversight (or lack thereof) has been ‘shaken to its core’.  Despite Apples Supplier Code of Conduct, it appears that they are not  fully conforming to their own internal commitment and policies.  An insightful post from back in mid 2009 highlighted the series of issues that Apple has had with its supply  chain, from human rights violations and pollution to lax supplier  oversight and unfortunate subcontractor worker suicides.  Apple itself  admitted its complacency in addressing social and environmental  sustainability issues in a pragmatic but resolved manner.

    apple_supplier_commitment.jpg


    Nikes Redemption Story- a Work in Progress


    Apples current predicament is not unlike another company that relies  on a deep contractor supply chain, whose headquarters in my backyard-  Nike.  In the late 1980’s reports were starting to circulate from  Indonesia and Asia concerning Nikes alleged “sweatshops”.  Over the  course of the 1990’s, continued exposure of unscrupulous labor and human  rights practices, combined with intensive public protests and campaigns  continued to hound Nike and dragged down its reputation.  By 2001, the issue erupted and Nike was stung by reports of children  as young as 10 making shoes, clothing and footballs in Pakistan and  Cambodia.  Phil Knight, Nikes CEO admitted the company “blew it”. Nike,  like many other companies (like Nestle, PepsiCo, Wal-Mart and other  consumer products manufacturers and retailers) learned the hard way that  taking liberties with “social license” to operate (especially in  foreign countries) has its negative financial and reputational  consequences.


    A+image.jpgThat’s  not to say of course that all is perfect in Niketown.  But with the  corporate and supply chain infrastructure now in place to monitor,  validate and continually improve supplier relations and accountability,  fewer violations have occurred. Nike has continued to push open  innovation and environmentally focused product design with social  accountability in mind.  The Ethisphere Institute named Nike as one of  the World’s Most Ethical Companies for 2010.  The Institute recognizes organizations annually that “promote ethical  business standards and practices by going beyond legal minimums,  introducing innovative ideas benefiting the public and forcing their  competitors to follow suit.”   Also, last October, Newsweek magazine took 500 of the largest publicly traded U.S. companies and produced a 2010 Green Rankings List.  Nike, was 10th on the list, and was noted for having a strong commitment to evaluating and improving the environmental footprint of its suppliers.  They also scored a 97 in the reputation category. (Apple by the way scored 65th, with a reputation score of 71.  I guess that low score represents that missing piece in Apples iconic logo.


    Stepping Up to the Plate on “Social License to Operate” and Accountability


    A great research study from 2002 (from the Center for the Study of law and Society at University of  California Berkeley)  highlights the steps that companies in the  apparel, forest products, consumer goods, oil and energy and other  highly capitalized industries have gone through to “redeem” themselves  and restore brand trust.  They've achieved this through rigid  compliance with local environmental rules, product  and environmental  stewardship, verification  and proactive social engagement.


    Apple needs to do the same thing and implement a proactive supplier sustainability and verification program.  As I have laid out in prior posts, Unilever and the apparel industry stepped up in a big way to address human  rights, fair labor and sustainable development in areas in which they  operate throughout the world.  So too have major electronics companies  like Hewlett Packard and IBM in leveraging their supply chains in  assuring that corporate sustainability performance objectives are met.    Further, in 2010 the International Organization for Standardization (ISO) unveiled its ISO 26000 Corporate Social Responsibility guidance document.   In addition, two prominent organizations, UL Environment and Green Seal  unveiled and vetted two sustainability focused product (GS-C1) and organization (ULE 880)  standards this past year, both of which may markedly affect supply  chain environmental and social behaviors in the future.  That’s not to  mention the issue of conflict minerals,  which strikes deep at the cell phone manufacturing sector.  Finally,  the age of openness and collaboration has arrived on the heels of  Wikileaks and numerous high profile reputational back breakers.

     

    Engaging and Leveraging the Supply Chain


    The most successful greening efforts in supply chains are based on  value creation through the sharing of intelligence and know-how about  environmental and emerging regulatory issues and emerging technologies.   Leading edge, sustainability –minded and innovative companies have  found “reciprocal value” through enhanced product differentiation,  reputation management and customer loyalty.  Suppliers and customers  must collaboratively strengthen each other’s performance and share cost  of ownership and social license to operate.  But supply chain  sustainability and corporate governance must be driven by the  originating manufacturers that rely on deep tiers of suppliers and  vendors for their products.


    praying%20hands.jpgSo  Apple should take a cue from Nikes playbook- “Just Do It!”  This issue  will not go away on a wing and a prayer.  Here’s how to get it done-  right:


    1)  As the 2009 post that I mentioned said, get your company on the ground and enforce your Supplier Code of Conduct – now.


    2)  Open Up and reach out to external stakeholders, not just your suppliers.   Engage non-governmental organizations early and often.   Find a  respected international organization or other third-party to facilitate  the engagement process.   Treat communities, NGO’s and suppliers with  respect.


    3) Work with your supply chain and with industry peers to standardize requirements.  Create or revisit the resources allocated in internal procurement  networks to collaborate on environmental and social sustainability  issues.


    4) Construct environmental and social accountability requirements at the purchasing phase.  Build environmental and social conformance criteria into supplier  contract specs and incorporate sustainability and environmental staff on  sourcing teams.


    5) Inform suppliers of corporate environmental concerns. Standardize supplier questionnaires and make sure that the Supplier  Code of Conduct lands in the right hands.  Promote exchange of  information and ideas by sponsoring charettes to facilitate discussions  between customers and suppliers on environmental and social license  issues.  Develop a supplier/vendor peer or mentoring program that  promotes co-innovation on sustainability issues.


    6) Build environmental considerations into product design with suppliers. Apple already considers Design for environment (DFE) product innovation  and life cycle analyses in its product design.  You’d be well served to  coordinate minimization of environmental impact in the extended supply  chain and work with suppliers to manage end-of-pipe environmental  issues.  Give your suppliers an incentive to reduce their environmental  loading associated with their products and improved worker conditions.


    7) Follow up! Without adequate on-the-ground  follow-through, on-going supplier engagement and long-term commitment of  human and financial capital, your sustainability problems will persist.


    So like sports stars, business stars can redeem themselves and their  reputations.  But it first takes admitting that you have a problem  before you can start down that path.  Apple has had a pretty rough year,  what with CEO Steve Jobs taking medical leave, its products having  persistent quality problems and its connection with negative  environmental and human rights issues.  I’m hopeful that Apple and  others will get the message that ol’ Ben Franklin stated so long ago but  holds true today:

    “It takes many good deeds to build a good reputation, and only one bad one to lose it." -Benjamin Franklin

    Until then, “I’m a PC”

     

     

    Note:  this is the final part of three-part series exploring “materiality” and  the intersection of supply chain management, sustainability and  corporate social responsibility.

     

    pre-emptive-reputation-management-dartboard.jpg

    Part One of this three part series  explored materiality as the “nexus” point that linked sustainability, corporate social responsibility (CSR) and supply chain management.  Conflict minerals were explored in detail and highlighted the key role that developing nations and commodity goods are playing in driving supply chain management and CSR.   The second post in this series highlighted the roots of materiality analysis in the sustainability space, case studies and highlights of interviews conducted with two key sustainability and corporate responsibility thought leaders, @Jefferyhogue and @ElaineCohen. 


     

    From a corporate social responsibility reporting point of view, a materiality analysis is an ordered, rigorous evaluation of the sustainability (environmental, social, financial) issues significant to the company and its stakeholders.  This type of analysis can provide an organization with critical, informed insight that can drive strategic direction as well as tactical change management.


     

    Typical elements of the materiality analysis process include:


     


    1. Identification of a universe of relevant economic, social, environmental, and policy/governance issues for consideration,
    2. Evaluation and ranking of the level of internal and external stakeholder concerns regarding each issue,
    3. Evaluation and ranking of the potential impact on the company of each issue
    4. Development of a matrix-based prioritization of the issues, and
    5. Execution of a structured, collaborative strategy planning, implementation and reporting process.


     


    Materiality Assessment Templates


     

    The CERES 21st Century Roadmap for Sustainability 2010 provides a high level overview of materiality analysis.  The first step is to identify which stakeholders there are that interact with an organization. In this first phase, CERES recommends that organizations “engage with stakeholders to obtain feedback on the relevance of existing and proposed policies and to identify gaps. These policies should guide the company’s activities across its operations, the supply chain, logistics, the design and delivery of products and the management of its employees.  


    CERES Graphic.gif

    When engaging stakeholders, organizations should identify key business and operational issues of concern to the company and share this analysis with external stakeholders. CERES recommends that “stakeholder dialogue can be to identify additional issues, prioritize efforts, and recognize emerging risks that could become increasingly important to the business over the long term. The company should then explore the links between identified material issues [that are considered significant to stakeholders] and the leadership team’s vision and strategy…and provide an explicit response to that feedback”.


     


    AA1100 Assurance standard creator and international institute AccountAbility has established what they refer to as a “Five-Part Materiality Test” .  Like the CERES approach, this robust test is designed to help organizations 1) identify what issues are most material, or relevant, to their business and its stakeholders and 2) what information should be disclosed or reported in corporate social responsibility reports. The five different materiality tests (shown in the graphic below) are:


    AccountAbility5phase.gif


     


    Test 1: Direct short-term financial impacts: Evaluate short-term financial impacts resulting from aspects of social and environmental performance    


    Test 2: Policy-based performance: Consider policies that are core to a business rather than add-ons


    Test 3: Business peer-based norms: Issues that company peers deem to be important      


    Test 4: Stakeholder behavior and concerns: Identify issues relevance to stakeholders in terms of reasonable evidence of likely impact on their own decisions and behavior; and         


    Test 5: Societal norms:  Considerations taken from both a regulatory and non-regulatory point of view.          


     

     

    The issues of most significant concern would be vetted with stakeholders and validated by an external party and set the framework for ongoing action and demonstrated continual improvement. 



    8-Phase Supply Chain Focused Materiality Assessment


     

    Taking a cue from CERES, AccountAbility, the ISO 14001 based environmental aspects and impacts process, and basic principles of risk management, I offer my eight point plan to effectively engage internal and external stakeholders in querying, assessing and prioritizing supply chain materiality.


     

    1. ID Key Supply Chain Products re: Environmental Loading Characteristics and Operational Practices
    2. Identify Governance, Operational and Regulatory Constraints versus Supply Chain Practices/Policies
    3. Risk Management Evaluation-Screen internal  & external supply chain issues against current  business objectives & strategy, policies, current processes  & programs
    4. Materiality Risk Ranking Matrix and Determination of Threshold Action Levels (Internal and External Stakeholder Specific & Aggregated)
    5. Development of Materiality Mitigation Action Plans- Prioritize, Assign Resources, Timeframes & Measurement Metrics
    6. Stakeholder Engagement and Issues Identification (against major supply chain variables)
    7. Management Review including Strategy Performance and Reporting, and
    8. Internal/ External Stakeholder Alignment; CSR Reporting

     



     

    An Eight Phased Approach to Conducting a Supply Chain Focused Materiality Assessment

    1.


    8Phase Supply Chain.png

    As a general rule when evaluating the ‘materiality’ of any issue (supply chain driven or not) , significance must consider a company’s short and long term business objectives and strategy, policies, risks, and current processes and programs. Also, in order to factor into account resource management variables, it’s advised that companies consider the levels of control or influence they have over an existing or future issue to determine its significance, and ultimately management strategies and tactics.


     

    Likely outcomes of using a structured continual improvement approach in addressing and documenting supply chain materiality are:


     


    ·     Targeting and prioritizing the most significant supply chain issues to manage in the short term, at a scale that matches existing labor, financial and capital resources


    ·     Proactive planning to budget future resource allocations to address capital or resource intensive activities for long term management


    ·     Acknowledging and integrating a wide variety of interested party concerns and perspectives into strategic business planning at an early stage.


    ·     Providing a foundation for continual improvement through structure risk assessment, action planning, communication and reporting.


     


    Materiality Assessments- The Sustainable Value Proposition


     

    Materiality analysis can help organizations to clarify issues driving long term business value; identify, prioritize and address risks; and capture new market opportunities.  Through structured efforts to align sustainability and business strategies with supply chain management, materiality assessments that account for financial and non-financial issues will not only strengthen business relationships with suppliers but forge collaborative bonds with external stakeholders.  This targeted focus on collaborative innovation, adaptive management, performance measurement and reporting has the potential to drive stronger brand reputation and competitive advantage over time.