Last September, facing the pressure many companies are experiencing to reduce costs and improve efficiency, Kraft Foods announced that it would halve its number of strategic suppliers from 70,000 to 35,000 worldwide in order to save an estimated US$300 million. In a similar effort to reduce costs in its supply chain, Wal-Mart recently shared long-term plans to shift to direct sourcing for 80 percent of its purchases. By doing so, the company expects to reduce costs by 5 to 15 percent across its supply chain within five years and hopes to save between US$4 billion and US$12 billion.
These decisions illustrate the ripple effect of the global economic crisis, which originated in late 2008 after the fall of Lehman Brothers in the United States and has severely impacted employment in the manufacturing sector worldwide. But they also highlight an opportunity to integrate sustainability into procurement strategies and satisfy the increasing consumer demand for affordable products that are made responsibly.
Since the early 1990s, widespread concerns about labor and environmental conditions in supply chains have driven companies to pursue sustainability strategies. In response to NGO and consumer pressure about issues in suppliers’ factories, many brands developed supplier codes of conduct and monitoring programs to enforce social and environmental standards. This approach, however, failed to integrate these policies and programs into core sourcing strategies and processes, causing companies to trade lower costs for increased risks. As a result, their code of conduct programs only serve as a stopgap measure to address problems after they occur.
While supplier policies and monitoring programs are important first steps, true integration requires that brands manage supply chain risks, meet increased demand for sustainable products, and focus on efficiency. In our view, responsible sourcing will continue to grow in importance for global business, particularly as consumers and policymakers become more aware of ongoing challenges, and these steps will help companies make the most progress.
Managing Supply Chain Risks
Responsible sourcing has long been associated with reputation protection. However, most company programs address the impacts of risks—for instance, by ensuring that steps are taken when a supplier facility encounters problems such as labor disputes—rather than the likelihood of risks. In the latter approach, companies would, for example, help build suppliers’ skills and worker-management communication systems to prevent the labor disputes and other problems from happening in the first place.
We see a need for supply chain programs that:
- Comprehensively evaluate risk across the full spectrum of spend, not just production-related spend.
- Identify risks that are currently hidden, such as those present throughout sub-tiers of suppliers or related to raw materials extraction.
- Tailor effective risk-mitigation strategies to address both the likelihood and the impact of risks. This can be done by helping suppliers manage risk themselves.
Meeting the Demand for Sustainable Products
Responsible sourcing is also critical for meeting new market demands for sustainable products. According to a 2009 Havas Media study, 48 percent of consumers surveyed across nine countries expressed a willingness to pay a 10 percent premium for goods or services produced in an environmentally and socially responsible way. Although consumers remain wary of greenwashing and false claims, the increase in Fair Trade-certified products, organic foods, and other “sustainable” products clearly point to a burgeoning demand for products that are good for people and good for the planet.
BSR has worked with a number of companies who are pioneering approaches to improve the sustainability of their products:
Improving Supply Chain Efficiency
As described in the Kraft example, the economic crisis has forced companies to think about how to increase efficiency throughout their operations, particularly in their supply chains. According to a recent survey by McKinsey & Company, senior operations executives are primarily focused on reducing costs in their supply chains, and more buyers are now looking for ways to help suppliers manage their costs to reduce prices. They are also seeking opportunities to reduce costs by improving sustainability performance.
BSR members have approached supply chain efficiency from a number of angles:
- In August 2009, Gap Inc. launched a “Clean Water Wash” label to assure consumers that the water used to wash and dye the jeans was treated to meet safety and quality standards before being discharged. The standards, developed through Gap’s Clean Water Program, used BSR’s Sustainable Water working group standards as a starting point.
- Sprint’s new Samsung Reclaim phone is a great example of innovating to improve sustainable design and product recyclability. According to Sprint, the Reclaim, which is made from 80 percent recyclable materials, is the first phone in the United States constructed from bio-plastic materials. Sprint has also established a set of environmental design criteria for future devices and accessories.
- The members of BSR’s Clean Cargo Working Group are seeking opportunities to manage the convergence of cost and environmental pressures. By increasing logistics and shipping efficiency in their supply chains, these companies are reducing the costs and environmental impacts associated with the transportation of goods globally.
- BSR has supported Wal-Mart’s efforts to address climate change and rising energy costs by improving the energy efficiency at 200 of the company's Chinese suppliers by 20 percent by 2012.
- BSR’s HERproject—which links global companies, factories, and local NGOs in partnerships to improve women factory workers’ health—has improved supplier efficiency by increasing worker productivity. By investing in better health outcomes for women, suppliers can reduce absenteeism and employee turnover.
Trends in 2010: Growing Support for Responsible Sourcing
Several new developments in responsible sourcing will help drive attention to supply chain sustainability this year. To begin, interest from governments and investors is growing considerably: Potential environmental and social impacts are now a regular part of trade agreement discussions, and governments are increasingly keen to minimize negative impacts within companies’ supply chains.
Similarly, investors are increasingly interested in how labor and environmental issues in company supply chains affect long-term business performance. A number of studies, such Harvard Law School’s recent paper on quantifying labor and human rights portfolio risk, are arming investors with the knowledge to integrate supply chain sustainability indicators into their analyses.
Finally, the Global Reporting Initiative (GRI) is expected to begin consultation with companies, NGOs, and others on setting voluntary guidelines for reporting on supply chain sustainability. Given the broad acceptance of the GRI reporting guidelines, the establishment of supply chain sustainability reporting expectations will likely increase pressure on companies to implement standards and communicate transparently on their efforts.
The bottom line: Companies should consider the opportunities available to align their supply chains with their sustainability goals. With the primary goals of managing risks, expanding sustainable product offerings, and achieving cost savings, a supply chain sustainability program will help companies position themselves for success in 2010 and beyond.