CHAPTER 3

Integration

Supply Chain Management and Sustainability

• In a recent report, the McKinsey and Company (Bové & Swartz, 2016) observed that the next 10 to 15 years will represent major opportunities for consumer companies, with some 1.8 billion people expected to join the global consuming class by 2025. Yet, this report noted that one factor that can significantly and adversely impact the firm’s ability to take advantage of this unprecedented growth is poor sustainability performance—performance that begins in the supply chain. Failure to focus on the supply chain can affect financial performance, strategic objectives, and corporate reputations.¹
• In 2014, the Global RepTrak® 100 ranking of the world’s 100 most reputable companies included eight apparel companies. Of those, two were dropped from the 2015 rankings²—the reason—their supply chains had, at the second- or third-tier level, outsourced from suppliers located in the Rana Plaza factory in Bangladesh. This factor had collapsed on April 24, 2013—killing 1,137 out of 3,639 workers—workers who did not want to enter the plant but were forced to when the owner, Sohel Rana, brought in paid gang members to beat the workers and to force them to enter the plant. These companies were left off the list in 2016.³
• Working with a panel of executives and external experts, including BSR, Conservation International, Food Animal Initiatives, and World Wildlife Fund, McDonalds now publishes a Best of Sustainable Supply Chain report highlighting supply chain partners working to improve food sources, the environment, communities, and employee wellness around the world. The best suppliers are recognized based on their measureable results and innovation.⁴

So far, our focus has been on the firm in isolation. By focusing on the firm alone, we overlook the importance of the structure that supports the firm. That is like us going to a game and watching a very successful team, without realizing that the success seen on the field is due in large part to the support of the processes and systems the team created. This support takes many forms—training, scouting, and talent development, to name a few. In today’s business world, this support increasingly comes from the supply chain. That is, sustainability in the firm requires sustainability in the supply chain. This reality can be readily seen in the experiences of firms like McCormick & Company.

McCormick & Company Achieves Sustainability Through Their Supply Chains

McCormick & Company is a multinational manufacturer, marketer, and distributor of spices, herbs, seasonings, specialty foods, and flavors to the food industry. From field to fork, this company has a history of sustainability and integration. Headquartered in Maryland, McCormick consists of over 13 major brands including McCormick U.S. Consumer Products, McCormick for Chefs, Industrial Flavor Solutions, Zatarain’s, Simply Asia, McCormick Canada, Swartz, Ducros (France), Silvo (Netherlands), Margao (Spain and Portugal), and Vahine. Being an agriculture-based business, McCormick has long recognized that it is dependent on its suppliers for quality inputs into its business model and value creation process. More importantly, it is dependent on having a supply chain that is sustainable from both an environmental and a social perspective. To that end, McCormick has implemented a series of programs aimed at developing a growing, global supply chain that can support McCormick’s needs both now and into the future. Among the programs introduced are the following:

• McCormick’s Supplier Diversity Program—a program that seeks to develop relationships with qualified diverse businesses that are capable of meeting McCormick’s quality needs while McCormick also provides assistance to improve economic conditions to the communities that supply their raw materials.
• Aggressive Global Sourcing—The company’s Global Sourcing team works with local farmers to ensure that they follow best practices for growing crops at the local level. Since most spices can only be grown in certain specific areas and climates, McCormick works on building and maintaining a consistent and reliable supply of high-quality products. As an example, McCormick was an early and aggressive participant in Uganda’s vanilla industry. It worked with aid agencies and nongovernmental organizations to improve quality, increase yield, and secure fair prices for the local farmers. The result of this long-term process was an established demand for high-quality vanilla combined with jobs for local farmers that paid a living wage. Similar activities have been undertaken in India and Indonesia.
• Strict Adherence to a Companywide Supplier Code of Conduct—McCormick established a standardized internal compliance system to maintain strict high-quality standards worldwide.
• Transparency in the Supply Chain—A practice that enabled McCormick to meet and exceed the strict requirements of the recently introduced California Transparency in Supply Chain Act of 2010—an act that went into effect on January 1, 2012. This act aimed to increase the amount of information made available by manufacturers and retailers regarding their efforts to address the issue of slavery and human trafficking.

In short, in McCormick, we see a company that has had to rely on its supply chain for more than simply product—it is dependent upon its supply chain to provide consistently high-quality products grown in a sustainable manner and that are free of problems such as child labor, slavery, and human trafficking. To McCormick, the effective supply chain is the key to successful sustainability.

Objectives

When it comes to sustainability, there is no way that any firm can escape one central truth—you are no stronger or better than your weakest link. In a world where supply chain management is a given, not an option, this means that you are no better than the weakest link in your supply chain. Therefore, sustainability must become a supply chain mandate, not simply an internal mandate. This issue forms the central core of this chapter.

By the end of this chapter, you will be able to:

1. Understand the integrated supply chain is and such tactics as supplier base management and interoperability.
2. Review the drivers, barriers, and enablers associated with integrating the supply chain into corporate sustainability initiatives.
3. Apply a systematic approach to making sustainability a day-to-day habit.

As we can see from McCormick, supply chains are critical to sustainability. However, this insight is not new nor is it limited to the food products industry. In Chapter 3, we began our journey into sustainability by describing the changes now taking place at Unilever, where Paul Polman was implementing a new direction for this very successful company. If you examine the key strategic initiatives, you find the supply chain playing a central role. Polman did not simply see the new key customers being drawn from developing countries; he also saw these same markets as being the suppliers—growing products in a sustainable fashion for Unilever. This strategy impacts Unilever in two ways. First, Unilever, like McCormick, now has a secure, sustainable supplier base that is able to support the strategic goals and aims of Unilever. Second, by developing this supplier base, and by paying them a living wage, Unilever, like McCormick, has helped create community infrastructure and a new set of customers—people who are now able and willing to buy the products offered by companies such as McCormick and Unilever.

This recognition of the importance of the supply chain to the success of sustainability is not limited to companies such as Unilever and McCormick. Others have also recognized the importance of the supply chain to sustainability—companies such as Walmart, McDonald’s, Nestlé, Intel, Novozymes (a producer and seller of industrial enzymes, microorganisms, and biopharmaceutical ingredients), Procter & Gamble, and Coca-Cola (to name a few) have also come to this same realization. That is, in today’s business environment, the supply chain is critical; to succeed with sustainability, the supply chain must play a major role. The rest of this chapter explores the role played by the integrated supply chain in sustainability.

Supply Chain Management—A Synopsis

Supply chain management can be viewed as the design and execution of relationships and flows that connect the parties and processes across a supply chain. Supply chains, as illustrated in Figure 3.1, consist of both upstream (from our firm back through our suppliers ultimately to the source of the raw materials) and downstream (from our firms through the various customers to the ultimate customer—the consumer). Understanding how these activities work together, the business models and performance measurement behind them, how information flows in both directions, and how they can be integrated is important to improving the supply chain. As indicated by the definition, supply chain management includes both relationships and flows.

Figure 3.1 The integrated supply chain

Relationships deal with the types of linkages that are built between partners in the supply chain. We could have close, collaborative relationships, characterized by frequent contact between partners and constant sharing of information and risk. Alternatively, we can have arm’s length relationships. In these relationships, we have limited sharing of information and our contacts are limited to the placing and receiving of orders and the resolution of any problems associated with these orders. Flows, as shown in Figure 3.1, consist of processes used to design, supply, produce and deliver valuable goods and services to customers.

Supply Chain Management—Benefits and Risks

Supply chain management has emerged as a major business paradigm for several reasons. Understanding this paradigm is critically important to finding where and how sustainability initiatives will fit within existing systems.

First, the supply chain enables the firm to respond quickly to customers whose needs are dynamically and continuously changing. With the old approach (i.e., pre-supply chain management), when demand changed, the firm would have to change its capacities. This, in turn, defined its capabilities, or what the firm could and could not do. To change capacities, it would have to build capacity and/or hire more people. All of these actions took time and exposed the firm to potential risk (e.g., of increasing capacity only to find that the demand was not sufficiently persistent). With supply chain management, firms now realize that they can rely on their suppliers when responding to changes in demand. This flexibility not only applies to capacity but also capabilities (specific skills that we need to meet the changing requirements of the business model). As the required capabilities change, we can turn to our supply chain to look for these new capabilities. This strategy reduces response time, costs, and potential risks.

Second, by turning to our suppliers, we can rationalize investments and focus. No firm can do everything well. Furthermore, some skills are important to our strategies and to our customers while others are not. These critical skills are referred to as core capabilities. For example, Honda’s core capabilities lie in its ability to design and manufacture an efficient, low-vibration engine. Every product or business line that Honda enters is characterized by its demand for such an engine—cars, motorcycles, lawn mowers, snow blowers, generators, marine engines, and now jet engines. Consequently, it makes sense for the firm to focus on its core capabilities and to outsource everything else (ideally to those having the appropriate core capabilities in these outsourced products). Furthermore, by identifying the core capabilities, any organization can develop a firm rule for what is never outsourced—your core capability. By involving the supply chain, firms can focus on becoming better on their core capabilities. Third, by involving our suppliers and customers directly through supply chain management, the firm can draw on their insights, expertise, and problem-solving skills. This means that better solutions can be identified much more quickly and at lower costs.

Finally, we must recognize that products and information flow both ways in the supply chain. The same supply chain that brings goods and services to the market can also be used to manage the collection, disposal, and recycling of products that have reached the end of their useful life. This reverse flow goes under several different names, for example, reverse logistics or product take back (this development will be discussed in greater detail later on in this chapter). This is what we see being done by McDonald’s UK, where the company uses the same trucks that deliver new goods to their restaurants to also collect cardboard for recycling. This practice has significantly reduced the amount of waste going to landfill as well as lessening emissions from transport. In 2010, McDonald’s UK diverted 12,000 tons of cardboard from landfill sites to recycling facilities.⁵

Yet, against these important advantages, supply chain management does expose the firm to certain problems. First, with supply chain management, there is the issue of lack of control. Since you are now working with suppliers who are not owned by your firm, this means that you are dependent on them to work in a manner that is consistent with the dictates of your business model. This is a critical issue for firms where sustainability is core to their business model.

For example, the supply chains in some industries (including electronics, textiles, cocoa, and coffee), which involve developing countries, are plagued by human rights and health and safety violations. Human rights issues include excessive overtime, low wages, unsafe working conditions, and even forced and child labor. Unless addressed, the responsibility for these problems will be laid at the feet of the firm in whose supply chain these problems occur. Not knowing that these problems are taking place does not protect the firm from being blamed. For instance, in 2012, an audit supported by Nestlé found violations of its labor code of conduct, including the use of child labor by suppliers in the Ivory Coast, which is the world’s largest producer of cocoa. Stating that eliminating child labor in its supply chain is its number one priority, Nestlé is collaborating with the Fair Labor Association to train and certify suppliers, increase monitoring, and work with the Ivory Coast government.

Closely associated with the preceding point, there is the issue of lack of visibility. As we proceed further and further away into the supply chain (into lower and lower tiers—from tier 1 to tier 2 to tier 3), we begin to lose visibility into what is happening at these lower levels. Consequently, like Nestlé, we may find ourselves faced by problems created at lower levels that can adversely affect our performance. This lesson has been painfully driven home to Mattel Toys. In August 2007, Mattel, America’s largest toy manufacturer, announced the first of five recalls involving 21 million toys (most of which were made in China), with the recalls taking place from August to November. The source of these recalls is problems created within the third tier of Mattel’s supply chain.

In many cases, the problems created at one level are often hidden as the products move through the various levels until they reach the final stage. Once they get there, the problems become evident—often too late for the firm to do anything about them.

It was noted earlier that the problems of visibility and control are essentially important when dealing with sustainability. The reason is that once a firm decides to compete on sustainability as its primary core value, then the marketplace holds the firm accountable not only for its performance but also for the performance its supply chain partners. The responsibility for problems in the supply chain is often directly assigned to that party that is most visible in the supply chain. This lesson has been painfully learned by companies such as the Body Shop, Apple (with its supplier—Foxconn and that supplier’s history of labor management problems and violations of child labor laws), and Nestlé.

Finally, by relying on the supply chain, we create the possibilities that we may be adversely affected by problems within the supply chain. That is, a disruption at the supplier level for whatever reason (e.g., bankruptcy, labor strike, or natural disaster such as tsunami, earthquake, or fire) combined with a lack of adequate protection (in the form of excess inventory, excess capacity, or excess lead time) can result in stockouts and production problems at the firm.

As can be seen from this discussion, supply chain management is a dual-edged sword. It is becoming a necessary fact of life; it brings with it certain critical advantages; it also brings with it certain risks and potential problems. Yet, for sustainability, integrated supply chain management is a necessity for success.

The Rise and Current State of Sustainable Supply Management

Our own research based on interviews with sustainability executives from large multinational corporations (including 3M, Alcoa, Baxter, Dow, DuPont, EMC, FedEx Ground, Ford, Johnson & Johnson, H.J. Heinz, Herman Miller, IBM, and P&G to name a few) provides insight as to how they operationalized sustainability internally and work with supply chain managers to integrate supply chains.⁶ When asked how management knows if they are successful in meeting objectives for sustainability and its integration, we find the following top three primary areas of focus for these executives involves: performance measurement; the importance of rankings; and the development of sustainability reports.

As we know from Volume 1 and our own insights, performance measurement is a key enabler of sustainability. When discussing the importance of measurement, the majority of participants highlighted setting goals and key performance indicators (KPIs) as the most important enablers of understanding if operations and processes are progressing toward sustainability goals. It was noted that “compliance” is something applied to regulation and known standards. Instead of looking at environmental regulations, sustainability should be everyone’s responsibility and demonstration of this can be found in meeting and exceeding goals while tracking KPIs. What makes new initiatives successful is a combination of leadership, short-term and long-term projects, a road map, and compensation tied to performance of natural AND social capital initiatives. While there are many different metrics discussed by MNCs we worked with, the most frequently noted include the following:

1. Energy efficiency.
2. Greenhouse gas (GHG) emissions.
3. Water consumption.
4. Solid waste.
5. Product attributes.
6. Environmental exposure.
7. Benchmarking up to multiple environmental and sustainability indices.
8. Carbon indexed to products and revenue.

The importance of rankings cannot be overlooked. Something on the minds of managers everywhere includes the following, “how is success/compliance with sustainability measured?” The response to this question by executives and managers from the companies we have worked with demonstrates the importance of the external evaluation of a company as a measure of the integration of sustainability within a firm and within its supply chain. Some approaches to external scanning captures and looks for competitors or their own firm’s inclusion within upwards of 15 separate environmental and sustainability rankings annually. Inclusion within a ranking is leveraged by sustainability professionals to validate practices and demonstrate programs going beyond compliance. The three primary rankings or indices highlighted in this study, in order of frequency are Newsweek’s Green Rankings, the Carbon Disclosure Project (CDP), and the Dow Jones Sustainability Index with the Davos rankings also garnering attention. Managers expressed frustration with the difficulties in understanding the meaning of sustainability as there are different ranking methodologies used across industries. There is a need for commonly accepted methodologies for measuring and assessing sustainability indices and rankings. One commonly recognized approach is with the use of the global reporting initiative (GRI) outlined in Volume 1, Chapter 3.

The GRI is highlighted as the leading approach to measuring and disclosing information. Other important highlights include the use of integrated financial, environmental, AND social reporting, and the ISO certification also demonstrating assurance of performance within known standards. To this end, environmental management systems (ISO 14001) continue to be important enablers of measuring and managing performance. These management systems are a formal system and database that integrate procedures and processes for the training of personnel, monitoring, summarizing, and reporting of specialized environmental performance information to internal and external stakeholders of the firm. The documentation of this information is internally focused on practices such as design, recycling, pollution control and waste minimization, training, reporting to top management, and the setting of goals. The use of this information for external stakeholders is primarily found in annual reports, focuses on the outputs of the firm, and is used to enhance firm image.⁷ There is a growing recognition of opportunities for integrated financial and sustainability reporting. This trend of integration and transparency has caught the attention of many through recent surveys and published empirical evidence.⁸

Other notable areas of importance in the integration of sustainability include viewing this paradigm through the eyes of multiple stakeholders. One way of assessing the ability to meet objectives is to measure the extent to which sustainability is integrated and understood across all areas of a company. The use of employee surveys, stakeholder feedback, and engaging communities are all important measures of this extent of integration. With the importance of measurement, rankings, annual reports, and stakeholder engagement to understanding the extent to which organizations are sustainable, managers are now better able to understand this paradigm. This understanding is due to the scrutiny of sustainability in measuring and managing processes and its application into formerly uncharted territory. To take this stakeholder perspective across functions, supply chain transparency provides a complex and global perspective to sustainability.⁹ To what extent companies can measure supply chain impacts is fundamental. The scale of this issue grows exponentially if you imagine trying to assess performance and impact of up to 25,000 suppliers to a company within the constraint of not being able to audit each supplier. Given the dynamic and complex environment of global supply chains, we need to leverage financial, operational, and predictive metrics awaiting sustainability professionals when pursuing integration and collaboration in the name of sustainability.

We see sustainability professionals from leading companies have translated this management paradigm into a diverse set of actionable practices. A conceptual model (Figure 3.2) of our work with MNCs highlights the primary drivers of sustainability from Volume 1, Chapters 1 and 2 while linking drivers to performance Volume 1, (Chapter 3), and the need for design and collaboration (highlighted in Volume 2, Chapter 1).

Figure 3.2 Integration of sustainability

It is worth noting management’s responsibility (especially at the top) in providing clarity and attention to sustainability initiatives. Through defining and aligning sustainability with company mission and performance metrics, supply chain managers and the growing ranks of sustainability professionals will better organize teams to enable new initiatives and to better integrate social and natural capital measurement across functions. This measurement drives success with voluntary initiatives and improved performance with internal and external opportunities to report results for recognition and enhanced brand image. Compliance is not the best label for companywide integration of a voluntary paradigm; instead, a focus on “performance” and the ability to meet and exceed goals is a better approach. To ensure improved performance, supply chain and sustainability professionals must work across their organization and into their supply chains to also measure and manage the contributions of a supply chain to a company’s natural capital, full life cycle impacts, social capital, and performance.

There is little doubt that both the significance and prevalence of instituting sustainability practices, within the organization overall as well as in the supply management group, is on the rise as is evident in the following.

• The 2011 MIT Sloan Management Review Research Report based on their Sustainability & Innovation Global Executive Study found that despite difficult financial times, 68 percent of organizations increased their overall sustainability commitments during the course of 2010, up from 59 percent in 2009, and only 25 percent in 2008.
• According to a series of surveys and interviews of large European corporations carried out by HEC and EcoVadis, 90 percent of supply management directors consider sustainable supply management to be an important or critical priority in 2009, versus 60 percent in 2005 and only 40 percent in 2003.
• The CDP’s 2011 supply chain report, created by A.T. Kearney, found that the time period between 2009 and 2010 saw at 40 percent jump, from 46 percent to 86 percent, in the number of supply organizations who worked with their suppliers on carbon-related activities, and that 45 percent of the surveyed companies are tracking and reporting on their supply chain emissions, double those in 2009.

Supply Chain Implications for Sustainability

For the preceding findings to become viable, then managers have to recognize the need to take a more active role in developing suppliers that can support the objectives of sustainability. Specifically, this means that firms must develop and implement the following:

• An active supplier base management system.
• A system for managing system interoperability.
• A system for ensuring that we manage for more than pollution.
• A system that provides complete visibility and transparency.

Supplier Base Management

Supplier base management, as proposed by Melnyk, Griffis, Macdonald, and Phillips (2010),¹⁰ is a proactive strategy developed by firms for developing and managing its supplier base (i.e., the upstream portion of the supply chain) so that this base is supportive of the firm’s business strategy and business model. Supplier base management refers to a new, emerging view of the supplier base. These differences between this new view of the supplier base and the old view are summarized in Table 3.1.

Table 3.1 The Supplier Base—Old and New Views

Key issues	Old view	New view
Which suppliers to focus on	Current major suppliers (those that we do the most business with or who are important to our business)	Current major suppliers Minor suppliers Potential suppliers “Past” suppliers Go beyond first tier
Relationships	Current	Current AND Future
Attention spent on past suppliers	Minimal (since they are past, they are no longer important)	Great (knowledge transfer, discussion/decision on technical support)
View of the supplier base	Static (change not considered)	Dynamic (supplier base constantly changing)
How supplier base Performance is measured?	Cost Quality	Multiple dimensions including sustainability (depending on desired outcomes)
Awareness of other supply chains	Low	High

As this table suggests, the new view underlying supplier base management takes a more holistic approach. It focuses on a larger set of suppliers (current and potential), recognizes that the supplier base and supplier relationships are dynamic, and that the desired outcomes from the supplier base may include multiple competitive dimensions. Supplier-based management consists of four major activities: (a) managing the majors; (b) developing the minor suppliers; (c) scouting; and (d) transition management.

Managing the Majors: For most firms, this forms the major focal point. Major suppliers are the current set of suppliers with which the firm is working. While we assume that this set of suppliers is fixed and stable, we must recognize that these assumptions are neither appropriate nor desired. A stable supplier base at this level is attractive because we know the suppliers that we are working with. Yet, without some degree of turnover in suppliers, there is the ever-present danger that this supplier base will become complacent, generate less innovation, or be more likely to take advantage of us. Furthermore, there is also the danger that the skills present in our existing supplier base may not be consistent with our new emphasis on sustainability. In addition, a stable supplier base may not be able to respond quickly enough to changes in demand. Finally, we must recognize that suppliers can and do drop out. They do so for a number of valid reasons—bankruptcy, changes in strategic direction, or acquisition by other firms (to name a few). Consequently, we need a system for “feeding” this set of suppliers—this system is the process of minor supplier development.

Developing Minor Suppliers: Minor suppliers can be viewed as potential replacements for current major suppliers. Supplier base management fulfills a number of critical functions for the buying firm regarding its suppliers: (a) it facilitates evaluation of these suppliers by identifying capabilities, strengths, and weaknesses; (b) it allows the buying firm to shepherd these suppliers along in their development, thereby providing the buying firm a chance to encourage those good suppliers to either fill currently unmet needs, or to challenge current active suppliers for their place in the supply chain; (c) it creates an environment for supplier education, to teach the supplier about how the buying firm’s system operates, how suppliers are evaluated, and the goals and core values of the buying organization; (d) it facilitates supplier integration, to smooth the process of integrating the supplier and its systems into the buying organization’s system; and (e) it allows the firm to develop suppliers with capabilities different from those currently offered by major suppliers and which may be demanded in the future.

Changes in the desired outcomes (as captured in the business model) can result in the firm requiring capabilities different from those found within its current system. Critical to assessing these capabilities are the capabilities offered by its existing suppliers. That is, our capabilities are determined by both our internal factories and external factories (the suppliers). When new or changed supplier capabilities are required, managers must realize that these new capabilities may not exist in the current supply base; and that new suppliers may be needed to provide the necessary capabilities. Thus, we need to understand the difference between supplier capabilities and our own, then adjust our planning and execution systems to maximize sustainability?

Scouting: Scouting does more than simply help the firm identify potential suppliers that the buying organization can work at recruiting for itself. Scouting includes two other critical activities. First, it seeks to enhance the attractiveness of the firm as a potential partner and buyer to these desirable potential suppliers. Furthermore, scouting carries out a competitive intelligence function regarding the supply chains of major competitors. Scouting can identify potential trends, developments, and changes taking place at competitors, better positioning a firm to assess the implications of these changes. Scouting can help the firm identify what its competitors are doing with sustainability in their supply chains. Such practices and approaches may be ones that we can also use in our supply chains. More importantly, these practices and approaches may shape the expectations of our customers, when it comes to judging and understanding sustainability in our supply chain. It is ironic that while marketing encourages such activities (in the guise of marketing intelligence), such activities have received almost no notice in the supply chain management literature.

Transition Management: The last element, transition management, focuses on moving suppliers into and out of the various levels of the supplier base. The objective is to limit problems created during transition. Too often firms depend on their major suppliers for innovation, developing and maintaining drawings and material, and/or product specifications with no existing plan for transferring knowledge. When a major supplier moves out of the supplier base, the buying organization may have to address such issues as the management of intellectual property or any other knowledge that is critical to the buying organization but that resides with the supplier. Ensuring that intellectual property is protected, as well as uncovering invisible factories the buying firm may be unaware of can lead to significant challenges during supplier transition. Suppliers take with them detailed knowledge that the buying organization relies upon, knowingly or unknowingly, to ensure product quality. Exiting suppliers may not always be willing to provide this information to the buying firm or the replacement supplier, depending upon the reason for their exiting a supply chain. In other cases, departing suppliers may even hold firm assets “hostage.”

A System for Managing System Interoperability

Interoperability refers to the extent to which different organizations can interface with each other. This concept exists at three levels:

• Data (can we share and use the same data).
• Processes (can we interface key processes with supply chain partners).
• Expectations (are the expectations of partners sufficiently consistent with each).

Past research has focused on the first two dimensions. Developments such as electronic data interchange (EDI) and the Supply Chain Operational Reference (SCOR) Model developed by the Supply Chain Council (http://supply-chain.org/) and discussed in Volume 1, Chapter 3 have played an important role in addressing the concerns raised by the first two levels. Consequently, this leaves us with the last form of interoperability—alignment of expectations.

The alignment of expectations is a new and increasingly critical dimension. What this dimension recognizes is that the parties entering into any relationship such as a supply chain relationship bring with them different expectations. If these expectations are sufficiently different between the parties are sufficiently different, then the relationship will not likely start.

Yet, the differences in expectations can occur in several different ways:

• We enter the relationship with different expectations and they remain different;
• We enter the relationship with different expectations and these change over time;
• We enter the relationship with similar expectations and these change over time; or,
• We enter the relationship with different expectations and they converge over time.

All of these instances, except for the last case, can create problems with any business model that is built around sustainability. The reason is that the parties may take actions that are consistent with their expectations but not with systems thinking and the expectations of the other parties involved.

To deal with these differences in expectations, firms can draw on a number of tools:

• Frequent communication, visibility, and transparency within the supply chain.
• On site visits with the aim of seeing if the actions being taken are consistent with the goals/expectations of the other party.
• Metrics and performance measurement. As pointed out in Volume 1, Chapter 3, metrics and performance measurement communicate what is important in a relationship and what is not important. It also facilitates the identification of potential problems and development of corrective actions.
• Standards that the other parties are expected to conform to it. As we have shown earlier in Volume 1, Chapter 4, these standards identify minimum levels of acceptable practices and processes that the parties are expected to implement and conform to.

By implementing these and other tools, we seek to develop a situation where the actions taken by our supply chain partners support our sustainability-based business model and they do not reflect negatively on this goal.

A System for Ensuring That We Manage for More Than Pollution

In the past, sustainability has been primarily about managing pollution. But this view is now changing. Companies now understand that sustainability is broader—it must deal with the triple bottom line. It must deal with both pollution and people. This is the lesson that we can see when we study the decisions and actions of companies such as Disney, MillerCoors, Starbucks, and Unilever.

Disney, in May 2013, announced that it would stop production of branded merchandise in five high-risk countries: Bangladesh, Ecuador, Venezuela, Belarus, and Pakistan by April 2014. The reason—these countries represented environments inconsistent with Disney’s core values. These were countries that were ranked lowest by the World Bank on metrics such as accountability, corruption, and violence. In the case of Pakistan and Bangladesh, the factories there represented unsafe work environments and environments in which the workers were badly treated and poorly paid. Disney is not alone in this concern. Other companies such as J.C. Penney, Benetton, and Sears have emphatically stated their concern for worker safety and monitoring conditions. The British retailer Primark announced that it will compensate victims who worked for its suppliers—support in the form of long-term financial aid for children who lost parents, financial aid for those injured, and payments to the families of the deceased.

MillerCoors, a major American manufacturer and distributor of alcoholic beverages, has now recognized that its products can adversely affect the communities that use its products. Consequently, it is now actively working with the local communities to crack down on underage driving and to encourage and promote a designated driver program. It knows that its customers, many of whom are millennials – people born after 1977—want to consume from companies that they regard as sustainable.

Finally, Starbucks, the world’s largest coffee retailer, announced on April 2015 that 99 percent of its coffee was ethically sourced. That is, the products were grown without forest canopy loss and with fair employment conditions. Over 440,000 workers on coffee farms supplying Starbucks earned better than the local minimum wage, 89 percent of the workers received sick leave, and all children living on coffee estates attended school.

As can be seen from this brief discussion, customers expect more of the sustainable supply chain than simply pollution reduction; they want supply chains that help to elevate and protect the workers that these chains employ both directly and indirectly. They want supply chains that really do make life better for everyone.

Understand that the customers now have the power to make their views and feelings known. When a company fails, consumers can react quickly by posting angry statements on Twitter or on the company’s own Facebook pages. The letters to the editors have been replaced by the social media twitter.

A System That Provides Complete Visibility and Transparency

To understand this final point, consider the next generation of Supply stores—Starbucks Reserve (see https://www.youtube.com/watch?v=pBatO5_-h08). The first of these chains was opened late in 2015 in Seattle Washington—only nine blocks from the original Starbucks store. What makes this new generation so different is that it makes the coffee supply chain highly visible to the customer. When you walk into this store, you are not only greeted by the stations where coffee is brewed; you are also greeted by a fully functional coffee processing system. To the people at Starbucks, this store represents the future of Starbucks. It represents a store where the supply chain is highly visible and transparent. It is also a response to the changing demands of the consumer. As one senior Starbucks market executive put it—“Increasingly, today’s consumer wants to know of the provenance of the products that they consume.” That is, today’s customers want to know where their products are coming from; they want—NO—demand—supply chain visibility and transparency.

This change in consumer demand is, fortunately, being met by the recent changes in technology in the form of the Internet of Things (IoT) and social media. IoT refers to the network of physical objects that are embedded with software, sensors, and network connectivity that enable the IoT to collect, communicate, exchange, and analyze data. Included in IoT are smartphones, sensors in cars and trucks, equipment, shipping containers, appliances, fitness monitors, smart watches and product tags. It is estimated that by 2020, there will be over 200 billion devices. The importance of these changes is the technology is enabling supply chain managers to track quickly and cost effectively the status and movement of products. This tracking enables and enhances the visibility and transparency of the supply chain.

Summary

In today’s business environment, we must recognize the need and importance of supply chains and supply chain management. The advantages that they bring are too important to be ignored. This observation applies to sustainability. We need to incorporate the supply chain into the sustainable business model since the supply chain significantly influences the capabilities component of the business model. It offers the firm access to critical resources; it enables the firm to draw on the problem-solving and skill capabilities of its suppliers. By recognizing the supply chain, we also recognize the fact that any problems created by a supplier may become attributed to the firm (especially if these problems affect the firm’s goal of competing on sustainability).

To be successful with sustainability requires that management become involved in the supply chain. This involvement takes several different forms:

• The introduction of an active supplier base management strategy.
• The alignment of expectations through frequent communication, appropriate metrics and measures, and the introduction of suitable standards.
• The firm must work to integrate the supply chain into its business model.
• The firm must focus on the broadest implementation of sustainability—a sustainable supply chain, as discussed in Volume 1, Chapter 1, incorporating financial, natural, and social forms of capital.

For any organization to be truly sustainable, it must ultimately have a sustainable supply chain.

Applied Learning: Action Items (AIs)—Steps you can take to apply the learning from this chapter

After reviewing this chapter, you should be prepared to assess internal and external supply chain integration opportunities. To aid you in this assessment, please consider the following questions:

AI: How many tiers of suppliers do you have in your supply chain, and do you know where all of your materials and components come from?

AI: What management systems are already in place that will enable sustainability as a collaborative part of how you operate your business rather than having sustainability as a peripheral activity?

AI: Does your supply chain sustainability strategy include the following dimensions:

Labor wages relative to the average in the area?

Working conditions within the supply chain?

Labor treatment within the supply chain?

Sick leave policies within the supply chain?

Education opportunities for the children of employees within the supply chain?

Do you rely primarily on international standards for assessing labor conditions within the supply chain or do you supplement these by other means of verification and validation?

AI: To what extent are supply chain professionals included in sustainability initiatives?

AI: What plans do you have in place to introduce IoT as a method for building supply chain visibility?

Further Readings

Bove´, A.-T., Swartz, S. (2016). Starting at the Source: Sustainability in Supply Chains. McKinsey & Company. http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/starting-at-the-source-sustainability-in-supply-chains?cid=sustainability-eml-alt-mip-mck-oth-1611. Accessed December 3, 2016.

KPMG (2011). Sustainability reporting-what you should know. http://docplayer.net/236571-Sustainability-reporting-what-you-should-know-kpmg-com.html (accessed February 22, 2017).

Christensen, J., Park, C., Sun, E., Goralnick, M., Iyengar, J. (2008). A Practical Guide to Green Sourcing. Supply Chain Management Review. 12(8).

¹ McKinsey and Company (Bové & Swartz, 2016), Starting at the source: Sustainability in supply chains.

²2015 Global RepTrak® 100; https://www.reputationinstitute.com/CMSPages/GetAzureFile.aspx?path=~%5Cmedia%5Cmedia%5Cdocuments%5C2015-global-csr-reptrak-results.pdf&hash=f375854351576541ae88db1e043e7417e9f057f83955bb3768454dd8e0417353&ext=.pdf

³2016 Global RepTrak® 100; https://www.rankingthebrands.com/PDF/Global%20RepTrak%20100%20Report%202016,%20Reputation%20Institute.pdf

⁴McDonalds Corp. (2012).

⁵King (2012).

⁶Sroufe et al. (2012).

⁷Sroufe (2003), pp. 416–431.

⁸KPMG (2011).

⁹Accenture (2008).

¹⁰Melnyk, S.A., Cooper, M.B., Griffis, S.E., Macdonald, J.R., Phillips, C.L.M. (2010). Supplier base management: a new competitive edge. Supply Chain Management Review. 14 (4). pp. 35–41.