Driving Hard Bargains in Sustainability

In July of 2011 the southeast Asian nation of Thailand was hit by an unusually severe monsoon season triggering widespread flooding that killed more than 800 people and affected the lives of 13.6 million. The World Bank estimated economic damages of $45.7 billion mostly to the country’s manufacturing sector. Seven designated industrial zones were inundated by as much as 10 feet of water and flooding in some areas persisted until January of 2012. Now cut to your house in December 2011 where the hard drive in your computer has spun its last disk. So you get on your mother’s laptop to check hard drive prices. When you last checked a couple of months ago you could get a Western Digital Green 2TB drive for $79. Imagine your surprise when you find that the same hard drive now goes for $230. Why had Western Digital pumped up its prices to nosebleed altitudes? Because 40 to 45 percent of worldwide hard drive production is located in Thailand where the flooding reduced production capacity by half. Needless to say supply chains are fraught with unpredictable dangers (perhaps especially when climate change is involved) and it may be only partly ironic to cite University of Arkansas logistics expert Matt Waller’s observation that “most of the skills and competencies needed to excel in logistics and SCM are the same skills and competencies needed to excel at disaster-relief operations.” SCM for example poses a number of critical challenges to companies that have committed themselves to sustainability as a factor in their corporate strategies. Sara A. Greenstein a senior VP at U.S. Steel and former head of Supply Chain and Sustainability at Underwriters Laboratories observes that “as much as 70 percent of product sustainability comes from suppliers who can lag significantly behind the curve.” Indeed Greenstein suggests that a sustainability strategy is hardly feasible unless it extends to a firm’s supply chain: “The road to creating user-friendly science-backed technology-enabled supply chains” she says “is paved with good sustainability intentions that get foiled by today’s dynamic global complexities. Achieving sustainability of scale requires involvement of the entire supply chain.” MIT’s Peter Senge agrees: “You can’t possibly source everything sustainably” he says “unless you engage thousands and thousands of people around the world. You’ll need technical innovations management innovations process innovations and cultural innovations.” Senge clearly believes that sustainability strategies must begin with a willingness to think differently about business priorities and possibilities. “When someone comes into an organization” he says he or she will ask “Why do we do it this way?” The answer is often “Just because.” Now 90 percent of those habits may be perfectly okay. But 10 percent are completely dysfunctional particularly when the world around you is changing. A cool part of sustainability work is uncovering the assumptions that lead people to do things in a way that’s out of touch with the company’s larger reality. Not only sustainability strategy argues Senge but all organizational strategy should be inherently forward looking. Sustainability issues are strategic matters for the simple reason that “they will shape the future of the business.” In short both sustainability and supply chain strategy should be formulated with a firmer sense of business continuity—of how an organization acts to ensure that it continues to function during and after a disaster or some other threat. Senge’s understanding of business continuity however is broader and reflects the definition of business continuity management (BCM) provided by the Business Continuity Institute (BCI): According to the BCI BCM also “provides a framework for building organizational resilience with the capability of an effective response that safeguards the interests of the organization’s key stakeholders reputation brand and value-creating activities.” How else for example is an organization’s BCM strategy supposed to deal with the consequences of global warming which threaten not only future generations but its own long-term survival? “This isn’t about trying to sell morality in the boardroom” says Jonathan Maxwell CEO of Sustainable Development Capital Ltd. “It’s about providing the ability for businesses to make better decisions to reduce costs improve productivity support growth and make longer-term decisions.” According to most proponents of corporate sustainability strategies the best way to get sustainability on the corporate-strategy (and SCM) agenda is to get it on the “resource-efficiency agenda”—that is to demonstrate the economic importance of the natural resources on which most organizations depend such as fuel water land and climate. “Once you have a system to value eco-system services” says Robert Spencer sustainability director at the engineering design firm AECOM “the business case for embedding sustainability will be easier.” As we’ve seen however an organization’s commitment to sustainability isn’t feasible unless its suppliers buy into its sustainability-oriented SCM strategy. This means that getting the organization’s board to implement such a strategy is only half the battle. Generally speaking says Maxwell “the guys in the factory in China have no interest whatsoever in sustainability outcomes.” For most organizations however getting suppliers to implement their sustainability policies is imperative. Neither buyers nor suppliers of course can prevent monsoons and floods but that’s why companies develop BCM strategies—to deal with such disruptions in business continuity. In effect then by building its sustainability strategy into its BCM strategy a company can take a proactive approach to supply chain disruptions. Says Richard Waterer head of Britain’s Marsh Risk Consulting: “You can. … reduce volatility in your business by saying ‘We will not walk consciously into a relationship where we know we’re taking on risks that prove to be damaging’” to our business continuity. How can companies avoid walking into potentially volatile supplier relationships—or better yet help suppliers to develop sustainability practices that are consistent with their own sustainability strategies? Simon Pringle head of sustainability at the accounting firm BDO suggests that companies move from “requesting” certain standards to “requiring” adherence to specific guidelines—telling suppliers that “we’ve just made a promise and now you’re all going to have to keep that promise.” Critics of this approach argue that typical “sustainable procurement guidelines” encourage nothing more than “basic compliance” with existing regulations. Moreover they contend once suppliers meet guidelines they have no incentive to improve their performance. Proponents of proactive SCM recommend that organizations build stronger measures and more practical activities into their SCM practices. Greenstein for example observes that “manufacturers on the leading edge” of sustainable SCM “are pushing their sustainable efforts upstream.” The key she says is the effective use of “incentives business leverage training programs and progress monitoring to improve suppliers’ performance.” Best practices involve the collection and analysis of reliable information to understand the business environment of suppliers and to set objectives consistent with environmental conditions; to collaborate with suppliers on meeting those objectives and improving future performance; and to track performance against those goals. Must include a summary of the above case. Requirements: 1-2 paragraphs per questions; answer all bullet points In addition to disruption in the supply of raw materials supply chain problems can result in damage to the reputation of the buying organization. Think of a hypothetical situation in which this situation could occur and explain how it could disrupt an organization’s business continuity. Finally provide some suggestions to show how the buying organization might avoid future problems by improving its approach to BCM. Select any two of the following companies and explain how its suppliers can affect the quality of its products. In each case provide two or three concrete examples. (You’ll probably want to check company websites in order to make sure that you have a solid idea of what each company does.)StarbucksFordGlaxoSmithKlineKellogg’sGEJohnson & JohnsonNikeL’OréalWalmartMen’s Wearhouse Starbucks Ford GlaxoSmithKline Kellogg’s GE Johnson & Johnson Nike L’Oréal Walmart Men’s Wearhouse Consider the following statement by Jonathan Maxwell CEO of Sustainable Development Capital Ltd.: “If it’s not commercial it’s not sustainable.” What does Maxwell mean? What for example is he saying about the relationship between business priorities and practices on the one hand and the feasibility of effective sustainability priorities and practices on the other? The most recent UN Global Compact-Accenture poll of 1000 CEOs of major companies was released in 2013. Forty-five percent of the CEOs said that they regarded sustainability as “very important” to future business success—down from 54 percent in 2010. Nearly 70 percent thought that business was not doing enough to address sustainability challenges and yet 76 percent felt that their companies were moving quickly and efficiently enough to handle those challenges.How would you account for these numbers—both the contradictions and perhaps more importantly the apparent drop off in concern for sustainability challenges? In addition to disruption in the supply of raw materials supply chain problems can result in damage to the reputation of the buying organization. Think of a hypothetical situation in which this situation could occur and explain how it could disrupt an organization’s business continuity. Finally provide some suggestions to show how the buying organization might avoid future problems by improving its approach to BCM.Select any two of the following companies and explain how its suppliers can affect the quality of its products. In each case provide two or three concrete examples. (You’ll probably want to check company websites in order to make sure that you have a solid idea of what each company does.)StarbucksFordGlaxoSmithKlineKellogg’sGEJohnson & JohnsonNikeL’OréalWalmartMen’s WearhouseConsider the following statement by Jonathan Maxwell CEO of Sustainable Development Capital Ltd.: “If it’s not commercial it’s not sustainable.” What does Maxwell mean? What for example is he saying about the relationship between business priorities and practices on the one hand and the feasibility of effective sustainability priorities and practices on the other?The most recent UN Global Compact-Accenture poll of 1000 CEOs of major companies was released in 2013. Forty-five percent of the CEOs said that they regarded sustainability as “very important” to future business success—down from 54 percent in 2010. Nearly 70 percent thought that business was not doing enough to address sustainability challenges and yet 76 percent felt that their companies were moving quickly and efficiently enough to handle those challenges.How would you account for these numbers—both the contradictions and perhaps more importantly the apparent drop off in concern for sustainability challenges?

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