CHAPTER 6

Implementing Successful Sustainable Supply Chains to Drive Value

• On a quarterly basis, managers at DHL assess the impact of future scenarios and evaluate the opportunities and risks in their departments. The management process is used to assess environmental management risk. DHL services include reports on the carbon emissions arising from products and services used by their customers, and assessment of a customer’s carbon footprint. Global Forwarding Freight also offers a “Carbon Dashboard.” In addition to reports on carbon emissions, the dashboard simulates alternative supply chains combined with a carbon efficiency analysis.
• Based on information from 2,415 companies, including 2,363 suppliers and 52 major purchasing organizations who are Carbon Disclosure Project (CDP) Supply Chain program members, 70 percent of companies believe that climate change has the potential to affect their revenue significantly, a risk which is intensified by a chasm between the sustainable business practices of multinational corporations and their suppliers. These members include Dell, L’Oréal, and Walmart and represent a combined spending power of around US$1 trillion. The research marks CDP’s most comprehensive annual update on the impact of climate change on corporate supply chains.¹

The vignettes above provides a snapshot of the size and number of organizations already involved in implementing sustainability into supply chain management. Leading firms and NGOs are already measuring and integrating sustainability into performance measurement and strategic planning activities. The CDP recognizes greenhouse gas (GHG) emissions and carbon as a measure of this waste and an opportunity for improvement that will have many benefits outside of reducing emissions. If we sit back and think about what thousands of firms are already starting to do, then it becomes even more apparent that we need to understand the foundations of supply chain management, how business models are changing, performance metrics, design and measures of success in place to keep driving value.

Objectives

1. Review the foundations of sustainable supply chain management (SSCM, a synthesis of Volumes 1 and 2).
2. Enable action learning and applied approach to using the information in this book.

Foundations of Successful SSCM and Change Management

Supply chain strategies and practices have evolved from a typically noncompetitive, overlooked element of strategy before the 1980s, to a synergistic and integral part of corporate competitive advantage today. For firms who are considered to be Innovators and Early Adopters, there are many challenges and hidden opportunities to recognizing and integrating SSCM. We know that suppliers are critical to the competitive success of firms. The fact that future supplier performance is expected to continuously improve and involve new attributes of performance adds to the complexity of the function and the importance of the supply chain management professional. These decision makers will need to understand several foundational elements of SSCM to then be able to leverage these elements internally and externally, when working with their supply chain.

Sustainability as a system’s approach is built on a number of premises (Table 6.1), as summarized in Volume 1, Chapter 1. Systems thinking is an important part of this approach while understanding that each element contributes to the creation of value and success of larger systems such as a supply chain. These foundational elements include the following:

Table 6.1 Foundations of Sustainable Supply Chain Management

Recognition of these elements is an important first step in seeing your business system as a whole. To do this, attention should next turn to integrative models.

Understand Your Business Model

The business model is highly integrative bringing together the three elements of the key customer, the value proposition, and capabilities. As we know, capabilities, while important, are not enough by themselves. As capabilities change due to technological innovation, new tools, capital investments, and process improvements, these changes have to be evaluated in terms of how they affect the other two dimensions. If the firm targets sustainability initiatives as a way to attract a new key customer, it must reevaluate the appropriateness of the current value proposition and capabilities. The highest level of value is delivered when key customer expectations (recognized as order winners, and order losers, order qualifiers) are addressed by the value proposition and delivered by the capabilities of the firm.

Transparency

This is most notable through the broad expansion of corporate reporting. Sustainability reporting is the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance toward the goal of sustainable development. Emerging companies like icix (www.icix.com) convene collaborative commerce networks allowing you to share information with your business partners and supply chain via the cloud.² They have 200 databases within their network and have plans to assess over 30,000 suppliers on sustainability and water use while also tracking dozens of interrelated performance indices.

Sustainability reporting describes the reporting of economic, environmental, and social impacts (e.g., an integrated bottom line, corporate responsibility reporting, and so on.).³ A sustainability report should provide a balanced and reasonable representation of the sustainability performance of a reporting organization—including both positive and negative outcomes. To this end, we see the need for decision makers to view value creation in a new way. In Volume 1, chapter 2, we proposed building on the concepts of economic value added and total cost of ownership to now start assessment of sustainable value added (SVA). This will not be easy, but is a trend in the movement toward corporate reporting of an integrated bottom line.

SVA = Level of Financial, AND Environmental, AND Social Value Generated – Total Waste

Performance Metrics

Metrics are important to measure, monitor, and manage toward continuous improvement. Of the many types of metrics presented in Volume 1, Chapter 3, predictive metrics increase your chance of achieving a certain objective or goal in the future. Predictive metrics are associated with aspects of the process that are thought to affect the outcomes of interest. Predictive metrics are appropriate when the interest is in preventing the occurrence of problems, rather than correcting them.

Standards

Standards play an important role in a sustainable supply chain and can be used to achieve a number of important outcomes. These outcomes include financial, AND environmental, AND social performance. As such, standards should be leveraged for their alignment with a given business model and used carefully. There are a large (and ever growing) number of standards appropriate to sustainability along with a process for the appropriate usage and implementation of standards with over 30 of the most used standards outlined in Volume 1, Chapter 4.

A Management Toolkit

Tools enable decision makers to better assess processes and understand whole systems. The tools outlined in Chapter 4 focus on process flow analysis, major quality management tools, the plan-do-check-act (PDCA) cycle, and the opportunity to leverage multicriteria decision analysis to help assess new initiatives that do not have all the quantitative data you would like and can accommodate both qualitative and quantitative assessments of options involving more than one criterion of performance.

Designing Products and Processes

Design for Sustainability (DfS) and design thinking approach to any product or process refers to the methods and processes for investigating ill-defined problems, acquiring information, analyzing, and positing solutions early in the design and planning process. As described in Chapter 1, this design approach is a perfect fit for proactively minimizing waste and impacts of processes on larger systems. With this insight, managers can focus on the way that a system’s parts interrelate and how systems work within the context of larger systems (also called systems thinking). If we design products, processes, packaging, or service with the objective of eliminating waste within systems, we will be well on our way to SSCM.

Life Cycle Assessment (LCA)

This technique is used to assess the environmental aspects and potential impacts associated with a product, process, packaging, or service. LCA is also a tool enabling DfS. There are numerous software packages and LCA tools available to help get started. The overall approach will involve first developing the goal, scope, and bounds of the assessment. The steps involved include (a) compiling an inventory of relevant energy and material inputs and environmental releases; (b) evaluating the potential environmental impacts associated with identified inputs and releases; and finally, (c) interpreting the results to help you make a more informed decision as to product, process, or packaging modifications. The interpretation of results should inform the decision-making process to lesson environmental impacts and associated costs. If you do not take this type of information into account, someone else may end up providing an LCA of your product on a website such as Sourcemap.com where transparency is taken to a new level.

Supply Chain Integration

Integration is critical to the success of any sustainability initiative. Recent findings from MIT Sloan and the Boston Consulting group find “Sustainability-driven Innovators do not treat sustainability as a standalone function detached from the business. They integrate their efforts into operations and planning.”:⁴ Integration occurs at various levels: legal, processes, data, systems, information flows, and the extent to which the participants invest in each other’s systems. Integration ideally is found at the level of parties working closely together to ensure that their actions and flows are continuously synchronized. Integration is important because it influences visibility, the ease of information sharing, and the resulting supply chain relationship. This integration, visibility, and now its extension to traceability continue to grow in importance as organizations such as the United Nations Global Compact, with a task force of industry partners, are developing systems for tracing product and raw materials through complex global supply chains.

One example of how transportation firms are coping with supplier integration and performance can be found within DHL, where subcontracted transportation accounts for most of the DHL Group’s carbon emissions. Because of this, DHL has made managing subcontractors a key component of environmental protection programs. Determining the carbon performance of third-party transport providers is difficult and they have joined forces with Beiersdorf, Heineken, IKEA, La Poste, Procter & Gamble, TNT, UPS, as well as other international companies to found the Green Freight Europe initiative.⁵ The goal is to increase transparency in the road freight segment by setting up a standardized system for collecting and reporting CO₂ emissions from road freight transport. The aim is to get all companies along the supply chain involved in the green procurement of transport services by offering improved transparency and comparability for carbon efficiency.

As we review the foundations of SSCM, they provide a road map for both short-term and long-term implementation opportunities for any organization. Next, we review how you will know when efforts can be deemed successful?

Measures of Success

Field research involving sustainability professionals within several large multinational corporations can be found within Chapters 2, as we revealed insight as to how they operationalized sustainability and work with supply chain managers. Their primary focus was on performance measurement, external rankings, and sustainability reporting.⁶ When discussing the importance of measurement, 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. As was mentioned by these professionals numerous times, sustainability should be everyone’s responsibility and demonstration of this can be found in these organizations 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 environmental and social initiatives. The most frequently noted metrics discussed by those interviewed include:

1. Energy efficiency.
2. GHG emissions.
3. Water consumption.
4. Solid waste.
5. Product attributes.
6. Environmental exposure.
7. Benchmarking external indices annually.
8. Carbon indexed to products and revenue.

Rankings are currently leveraged by sustainability professionals to validate practices and demonstrate programs going beyond compliance. The three primary rankings or indices highlighted in order of frequency are: Newsweek, the CDP, and the Dow Jones Sustainability Index. If your firm is included in these rankings, you are already considered to be among the Innovators and Early Adopters of sustainability practices and you are already producing a corporate sustainability report.

The global reporting initiative (GRI) is highlighted as the leading approach to measuring and disclosing information within corporate reports. Other important highlights include the use of integration of financial, environmental, and social reporting of performance, and the ISO certification also demonstrating assurance of performance within known standards.

If you think reporting is not yet a big deal consider the following. The GRI, Global Initiative for Sustainability Ratings (GISR), and the International Integrated Reporting Council (IIRC) have combined efforts to create a collaborative framework for integrated reporting and the convergence of financial and Environmental Social and Governance (ESG) information. These organizations are now supported by B Lab’s, the Sustainability Accounting Standards Board (SASB) efforts, and Forum for the Futures Sustainable Business Model Group. Within the next few years, there will be a unified set of material criteria to rate and rank a firm’s progress toward being a sustainable organization relative to its peers.

The trends of integration and transparency are supported by surveys and empirical evidence.⁷ Consider what is already happening in other regions of the global marketplace: The Hong Kong stock exchange is now making ESG disclosure a best practice. Integrated reporting is now mandatory by the Johannesburg Stock Exchange and the King III Code of Corporate Governance in South Africa as they now have one of the highest reporting ratios of carbon accounting and integrated reporting.

Develop a Culture of Sustainability

Whether or not you are successful with developing and maintaining SSCM depends to large extent on whether the people in the organization accept and believe in sustainability initiatives. In many cases, this means making sustainability part of the corporate culture.

Organizations affect how their members see issues, deal with problems, and identify what is important. People are influenced by organizational goals, structure, training, coworker’s attitudes, successes and failures, and a host of other aspects of organizational life. Operational programs such as those we have discussed in this book can have large impacts on organizational culture, and different cultures may be more or less appropriate for a given set of goals. For example, the organizational culture that evolves over time in a lean system emphasizes waste and variance reduction, along with process standardization and discipline. Such an approach may seem stifling to employees that are rewarded for radical innovations. In this way, operational initiatives can greatly affect the culture and work life of employees. Managers must often address conflicts between changing organizational goals and existing cultural norms. In fact, preexisting cultural norms often form serious impediments to organizational change. This is why in environments of rapid change, operations managers have to be so attuned to the strengths and weaknesses of their organization’s culture. These strengths and weaknesses are often difficult to identify. As one manager put it, “organizational culture is what the employees do when the boss is not around.”

While culture can be difficult to change, it can also be a key source of competitive advantage. For example, consider the success of Apple. Many people believe that the reason that Apple has been successful is because it has developed a culture of innovation.

Organizational culture is an increasingly important issue as operations managers seek to integrate partners in the supply chain. Culture affects supply-chain-related issues like trust and compliance. In general, the people in an organization work most comfortably with others who they perceive to be like them. They tend to be less trusting when dealing with people who are perceived to have different goals or motivations. For this reason, managers have to carefully consider differences in the organizational cultures of potential partners, and reassess current partners before they enter into long-term collaborative agreements.

Organizational culture plays a critical role in achieving sustainability goals. People within the organization must embrace and support the organization’s view of sustainability in order for goals to be met. This is not always easy. There is disagreement and controversy surrounding some sustainability issues (global warming, for example). Leadership plays an important role in defining the culture and related sustainability goals. For example, Herman Miller of Zeeland, Michigan (a furniture company), has had extensive success with sustainability. One of the founders of Herman Miller believed strongly in corporate stewardship and responsibility. In large part, the company’s commitment to sustainability stems from the values and corporate culture created by this founding leader.

Consequently, to succeed with sustainability in the long term, sustainability must not be something that is discussed in annual reports or something that is pointed out to visiting governmental official. Rather, sustainability must become part of the organizational culture. It must become something that the employees do when the boss is not around.

Benefits of SSCM Practices

The benefits of sustainable supply management form the fundamental reason for undertaking the sustainability challenge and the next industrial revolution. It is not surprising that benefits include both direct and indirect financial benefits. The most commonly found benefits include: (a) a reduction of costs, including a product’s whole life costs and the organization’s overall operating costs; (b) increased competitive advantage; (c) increased profits; (d) decreased damage to the environment and human health, (e) increased levels of innovation, (f) the potential to gain new customer market segments, and (g) risk mitigation.

Understand that sustainability is an issue of managing perceptions of trade-offs. We know from Volume 1, Chapter 1, and Accenture that firms can simultaneously improve sustainability, AND cost effectiveness, AND service quality.⁸ Once we leave the low-hanging fruit, we have to identify and deal with progressively more difficult decisions. The nice thing about low-hanging fruit is that due to changes in technology and innovation, it keeps growing back.⁹

Transforming the supply chain business model is the corporate strategy of the future. Because much of your firm’s impacts are likely to be in your supply chain, it makes sense to integrate the supply chain as early as possible. Today, large companies, including more than 85 percent of the global 250, have or are developing sustainability reports with specific goals and targets. Many even have holistic “plans” with ambitious 2020 and 2050 targets across their business. Some are even combining annual financial and sustainability reporting. Making these plans happen, and capturing their impact internationally, is going to be about sustainable change in how supply chains operate. To make sustainability a reality, “technology providers, businesses, citizens and government will need to collaborate to develop the right policies and infrastructure that drive economic growth, and motivates sound behavior change and ensures the sustainability of our communities.¹⁰

If you need further evidence of what is happening, consider the efforts of one large multinational, MillerCoors.

Sustainability in Action: MillerCoors Makes Making Brew Sustainable

To understand how all of these elements fit together, consider the experiences of MillerCoors. MillerCoors is a major American-based alcoholic beverage brewing and marketing company. It is a company with a long history in the making and marketing of beer. Its products are known and respected within the market. Yet, for MillerCoors, the last 15 years have been a period of extreme turbulence and change. These changes fall into one of three categories:

• Ownership: It has moved from being an independent company to being part of the Molson family and now it is part of SAB Miller.;
• Marketing: MillerCoors has traditionally seen itself as a company selling a “blue collar” beer—that is, a beer that is drunk primarily by working people. However, these are being increasingly replaced by millennials. The common definition of a millennial is any person born between 1982 and 2002. These consumers began arriving into the marketplace in 2003. What MillerCoors quickly found was that these consumers saw things differently as compared to its traditional consumer base. Specifically, these consumers brought with them a new set of attitudes. It was not enough to offer these buyers a good product. What these consumers wanted were products to be responsibly produced. In the case of beer, this meant that they were concerned about the sustainability of the process used in making the product. They were concerned about the amount of water used in making the beer; they were concerned about the impact of the company of the communities, either directly (through the disposal of waste water) or indirectly (through drunkenness). They were also concerned about whether the company offered real opportunities for advancement and promotion in the management for women and minorities.
• Competition: MillerCoors found itself faced by flat sales in its mainline beer products. There were main reasons. First, there was the advent of micro and craft brewers that were able to offer new and different drinking experiences. Second, competition with its traditional competitors had increased due in part to consolidation within the traditional brewing industry. Third, MillerCoors was seeing competition from new forms of alcoholic beverages. In addition to hard liquors and malt beverages, MillerCoors was experiencing competition from new forms such as flavored ciders and meads (honey-based wines).

These forces were sufficient to get the management at MillerCoors to reconsider their current strategies and reporting. Initially, they focused on a strategy of sustainability as waste management. This made a great deal of sense. After all, making beer was a very water-intensive process. Craft brewers found that for every gallon of beer that they produced, they used between 6 and 10 gallons of water. In addition, some of MillerCoors’ breweries were located in the arid Southwest of the United States—areas where water was scarce.

Consequently, MillerCoors focused on reducing waste. It would use less water per gallon of beer; the water that it returned to the local watersheds would be of better quality than the water that it had used. It would reduce packaging. Audits were carried out, measures developed and posted, extensive efforts were made to recruit and maintain top management support.

Yet, it quickly became evident that there was more to sustainability. It was quickly evolving into a broad-based strategic initiative that involved more than the making of beer; it involved the communities in which MillerCoors products were being consumed; it also involved the supply chain.

Community Outreach: MillerCoors recognized the irresponsible usage of its products could hurt people, families, and communities. This usage took two forms: underage drinking and excessive drinking. Regarding the first form, MillerCoors has worked with local communities to stamp out underage drinking through numerous campaigns. On the second form, MillerCoors has encouraged responsible drinking through its Drink Responsibly program. It also introduced a program for the destined drivers—one that rewards them with free beverages and in some communities a chance to enter a drawing where they can win a new truck.

The Supply Chain: The supplier base presented MillerCoors with some of its most interesting challenges. Here, the focus was on the suppliers of the grains and various ingredients used in making beer. When MillerCoors explored its supply chain, it found that many of its suppliers were small, family-owned operations. As MillerCoors began to work with these farmers, certain lessons emerged.

First, since these suppliers were small, they often lacked the resources needed to achieve the objectives of reducing waste. This forced MillerCoors to recognize that it had to change its role and responsibility. It could not simply mandate the outcomes and have the suppliers be held responsible for achieving them. Rather, it had to act as an advisor, coach, and as a source of information. It had to work with its suppliers, educating them on what was and was not possible. It had to do a great deal of research and then be willing to share its findings and insights with its suppliers. It had to be patient and wait until its suppliers began to understand what is sustainability, how to achieve and then began to see the results.

In the process of working with its suppliers, MillerCoors began to realize the importance of organizational culture. It found that its efforts with sustainability were most successful when the suppliers that they were working with also valued and embraced sustainability as part of the organization’s core values. This awareness also helped to make MillerCoors sensitive to the need to embed sustainability within the organization culture at MillerCoors. That is, it would be wrong to establish a sustainability department and then have that department manage all of the sustainability activities. That approach would effectively isolate sustainability and create a “that’s not my job mentality.” Rather, sustainability had to become part of the day-to-day life of everyone at MillerCoors; it had to become integral to the core values of MillerCoors. If successful, culture would act as a multiplier for sustainability efforts. As a result, the team responsible for implementing sustainability began the long process of starting to embed sustainability within the core value of MillerCoors. This process was greatly simplified by top management’s decision to embrace sustainability and to transform it from a waste reduction program to a strategic business model initiative.

MillerCoors is expanding its work on sustainability to include its management ranks. One of its goals is to ensure that by 2020, at least 43 percent of its management workforce consists of minorities and women.

What is interesting about this story is that it really embodies many of the lessons and guidelines presented in this chapter. In a move to better inform stakeholders, MillerCoors also produces a GRI sustainability report using G4 guidelines. It shows how a company can quickly turn itself around and become more sustainable not only within the organization but also within the supply chain.

Summary

Understanding sustainability is only the first step in integrating this paradigm into your own organization. We have tried to concisely provide guidelines, tools, examples, and frameworks for integration and implementation. The experiences of MillerCoors as they progressed with its sustainability journey highlight what only a few years ago some have said could not be done, making operations and supply chains more sustainable. This book can be considered a synthesis of information providing a go-to resource for managers struggling with the overwhelming amount of information about sustainable business practices. It can also be used as evidence of change, proof to counter those who say it cannot be done, and examples showing the ability of some to cross the sustainability chasm into the development of more sustainable supply chains.

Our approach in developing this book has been to help decision makers in their search for answers to questions concerning sustainability, business models, drivers of value creation, and implementation of sustainable business practices within operations and supply chain management. We hope you find our approach useful and engaging as in the next chapter we conclude Volume 2 by looking at the future of SSCM and important trends.

Further Readings

Lovins, A., & The Rocky Mountain Institute (2011). Reinventing Fire-Bold Business Solutions for The New Energy Era. Chelsea Green Publishing, White River Junction Vermont.

United Nations Global Compact and Business for Social Responsibility (2015). Supply Chain Sustainability: A Practical Guide for Continuous Improvement.(2^nd edition): https://www.unglobalcompact.org/docs/issues_doc/supply_chain/SupplyChainRep_spread.pdf-accessed February 23, 2017.

Schein, E. H. (2010). Organizational Culture and Leadership. San Francisco: Jossey-Bass

Hahn, T., Preuss, L., Pinkse, J., & Figge, F. (2014). Cognitive Frames in Corporate Sustainability: Managerial Sensemaking With Paradoxical and Business Case Frames. Academy of Management Review, 39(4), 463–487.

¹Carbon Disclosure Project and Accenture (2012).

²Touw (2012).

³Global Reporting Initiative (2013b).

⁴MIT Sloan Management Review and Boston Consulting Group (2013).

⁵DHL (2011).

⁶Sroufe et al. (2012).

⁷KPMG (2011).

⁸Accenture (2009).

⁹Lovins and Cohen (2011).

¹⁰Henretig (2012). Also see Reinventing Fire by Lovins A. and the Rocky Mountain Institute for examples of how this is already being done.