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Should companies make supply chain sustainability a priority?

There are many compelling reasons to focus on supply chain sustainability. Here's a look at some of those and why sustainability is a key issue for every company.

To answer the question of whether companies should rank supply chain sustainability high on the priority list, first, let's look at the scope of and definition of the term sustainability. According to the United Nations, sustainability or sustainable development is "development that meets the needs of the present without compromising the ability of future generations to meet their own needs."

In the last 10 years, the breadth and depth of sustainability has expanded, as the issue has become important to a growing number of companies. Today, U.S. business managers and chief responsibility or chief sustainability officers use a variety of metrics that encompass environmental, or green, practices; human rights and community relations endeavors; fair labor practices; and corporate governance.

Moreover, there are a myriad of sustainability regulations overseen by various agencies -- for example, the U.S. Fish and Wildlife Service, the Consumer Product Safety Commission, the United States Environmental Protection Agency (EPA), the U.S. Department of Labor, and the Occupational Safety and Health Administration (OSHA). These U.S. organizations are critically important since U.S. companies are expected to comply with U.S. laws even when these companies operate overseas. In addition, foreign companies must comply with these laws if they want to trade with the U.S. companies. Internationally, the European Union and the United States are generally the leaders in guiding other governments on trade practices, so understanding U.S. law gives organizations a head start on the legal side of supply chain sustainability. The United States also has the Foreign Corrupt Practices Act, which mandates that companies -- and their supply chains -- should act ethically when operating internationally.

Consumers also expect supply chain sustainability and see it both as an ethical issue and a key ingredient of brand image. So hiding behind the supply chain excuses such as "We comply with local practices or regulations," or "We didn't know who the supplier's supplier was," won't cut it. Try telling that to consumers when they are boycotting or picketing your company due to deaths of consumers or factory workers.

Particular industries have unique issues, so there are specific regulations and mandates as well, such as The Waste and Electronic Equipment Directive and the Restriction of Hazardous Substances for electronics, and a myriad of fair trade organizations by industry that have emerged to define best practices and combine their needs to make compliance consistent across the supply base. The U.N., the World Trade Organization and other international organizations have helped to set standards for companies and communities. There are also many audit companies who can be your eyes and ears in remote locales to monitor and report on compliance to sustainable practices.

From a priority standpoint, compliance with the law is the first issue. Though fines and audits by government agencies are a nightmare when they occur, the fear of those most often does not motivate the thinking in corporations. Companies often hide behind their multi-tier supply chains. The lack of visibility, however, does not absolve a company from responsibility, legally and certainly not ethically. And consumers do take note.

Supply chain managers tend to have the best vantage point in terms of understanding the operations and environmental issues in sustainability. They have often been the ones who set up these chains in the first place. They often visit factories and communities where operations take place. Purchasing managers in manufacturing and buyers in retail are the ones who are working out the terms of agreements with source manufactures. So supply chain does hold a major key in making sustainability a priority.

Supply chain sustainability also has strong economic drivers. To that end, here are a few key areas that supply chain managers and their business partners can use to help raise the priority level of sustainability:

  • Design simplicity. A reduction in components and parts used not only saves cost of goods sold, but reduces maintenance costs over the life of the product. Design can also focus on limiting or reducing the use of toxic substances in product and the manufacturing process.
  • Manufacturing processes. Material intensity is a measure of quantity of materials needed to produce a given product. Reducing material intensity saves operating costs and lowers a company's environmental footprint.
  • Manufacturing green metrics. These include emissions, water and energy consumption, and lowering them is a clear-cut way for companies to lower costs.
  • Transportation -- emissions and miles reduction. Since on-the-road vehicles are one of the greatest contributors to greenhouse gases and pollution today, reducing mileage is a big win. Witness the pollution improvements in the EU and the U.S. as compared with increasing pollution from the explosion in motorization in developing nations such as India and China. The transportation component holds a real key to "clean and green" -- and it also reduces the cost of transportation.
  • Packaging and shipping materials. Using recyclable or reusable conveyances for shipping products is a key area. Cardboard and plastics consumption is huge in logistics, and not too much has been done to affect this area. There are many alternative approaches, but to date, it seems the consumption is on the rise, not decline.
  • Environmental health and safety. There are several metric categories here such as number of accidents and disruptions in facilities. These reduce output and increase operating costs. From a safety perspective there is an improvement in productivity and a reduction in work loss hours when workers are not injured in the workplace.
  • Unsafe labor practices. Companies can also pay hefty costs associated with these areas, and not just monetarily. Practices such as using child labor, using unsafe chemicals, generating pollutants, and creating factories with unsafe equipment and buildings have been responsible for some of the worst violations and deaths.
  • Fair labor practices. This is the single biggest factor in reducing theft and counterfeiting and improving product quality. When workers have a stake in the outcome and feel like they are being treated fairly, they are far less vulnerable to illicit operators who tempt them with bribes or extra money to steal or produce counterfeit goods. Establishing fair practices, along with "clean and green," facilities fosters goodwill in the communities in which companies operate. The two together allow brand manufacturers to establish sales in that region and a beneficial brand presence in that community.

In terms of financial value, supply chain managers who practice sustainability report that waste reduction and transportation optimization have a big impact the bottom on line as well as other business metrics such as productivity and time to market.

For the CEO, brand is the biggest priority. Though somewhat intangible, it has a huge impact on sales. Aware consumers like to feel good about their purchases, and they vote with their dollar. Both Pepsi and Coca-Cola have dealt with brand tarnish and other issues in India as a result of pollution, for example. On the positive side, corporations such as Wal-Mart, Unilever and HJ Heinz are putting greater emphasis on supply chain sustainability.

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