Developing a sustainable supply chain based on the triple bottom line of economic, environmental and social elements can mean different things to different people. I recently presented a briefing on sustainable reporting to a group of certified public accountants. According to my unscientific survey, more than 90% of the audience members had never participated in a review of sustainable reporting, nor had they been involved in reviewing their clients’sustainability practices. How then do you convey sustainability to suppliers in a way that is both meaningful to the manufacturer and clear to the suppliers?
From green manufacturing policies to codes of conduct
Without question, knowing what is important to the organization -- in terms of promoting its strategy and what is meaningful, or material, to enabling that strategy -- is the first step. From these strategic areas can come policies and procedures that govern how employees work internally and engage externally with suppliers. Such policies and procedures are often summarized in two forms of communication that manufacturers can use to provide direction to employees and to external stakeholders and value chain members and set the tone of the relationship.
The first form of communication is a statement of direction, a nonbinding letter or statement from management indicating the areas of sustainability that are important to the organization and giving examples of programs or efforts it plans to undertake. A statement of direction is perhaps the least formal sustainability document because it may suggest certain policies or industry guidelines the company supports, but stops short of naming specific goals, targets or outcomes.
For example, the United Nations Global Compact lists 10 principles for companies and government organizations to follow. A statement of direction may refer to the compact and the company’s support of its provisions or of similar guidelines in its vertical industry. Water conservation is an example from the food and beverage industry. Large coffee shop chains and bottled beverage companies treat water strategically in their supply chains.
The second form of communication is the code of conduct. It differs from a statement of direction by naming required or expected activities. Going beyond mere intent, a code is prescriptive and sets policy for employees and suppliers.
While codes of conduct can vary between industry segments, common themes in manufacturing include restrictions on the use of child labor, materials from countries or regions perceived as having significant human rights issues, or substances that are deemed dangerous in regulations such as Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). These elements are binding, which means there are consequences if the code is not adhered to or activities are misrepresented in light of its provisions.
Often a code of conduct can be a formal element in the manufacturer’s employee handbook and the contractual agreements it has with suppliers. This provides the manufacturer with recourse against its own employees and those of suppliers.
Some suppliers might elect not to participate in a newly formed sustainability program or may use it as leverage in negotiations to ask for higher prices or relaxed delivery standards. Resistance to change is a fact of human nature that companies should not be surprised to encounter.
Overcoming resistance to green supply chain management
Implementing supply chain sustainability policies in such functions as logistics, purchasing and finance often requires a change in behavior.
Finance may object if a preferred supplier of a sustainable commodity is not the lowest-priced provider. Purchasing might be using a triple-bottom-line (3BL) evaluation to work with local providers to reduce transportation distances, and thereby cut greenhouse gas (GHG) emissions. Or perhaps the historical supplier maintains production in countries with poor human rights records and is no longer the best choice when it comes time to let new contracts. Personal relationships and politics lead to habits that can be difficult to change.
As with most change management efforts, the real support for the change -- and communication on why it is important -- must come from executive management. William Bridges, in his classic book Managing Transitions, notes the existence of early adopters and resistors to any form of change in an organization. Therefore, it is important for management to set clear expectations for the new supply chain policies and specify the consequences for employees and suppliers of noncompliance.
Identifying and managing performance metrics
One of the best ways to ensure compliance with sustainable supply chain activities is to identify performance metrics and targets for when and how performance levels should be achieved. Manufacturers should avoid committing to broad goals in their statements to shareholders and other public disclosures without first having a thorough understanding of how the goals will be achieved.
For example, it may be laudable and even financially advantageous to declare that an organization will reduce GHG emissions by 20% in the next two years. Unfortunately, such binding statements have come under more scrutiny in the past few years. Binding statements in formal disclosures -- even with the best of intentions -- can be deemed akin to fraud if their promises are not met or at least explained, similar to the legal risks of financial disclosures.
Another complication in developing sustainability performance metrics is the increasingly common practice of commercial organizations declaring sustainability goals in a dedicated section of their annual or quarterly financial reports. The Federal Accounting Standards Board (FASB) has undertaken several projects to learn more about how the two distinct reports -- financial and sustainability -- can be packaged together.
On a more tactical level, performance metrics can be a great way to set targets and monitor progress against key sustainability goals. In the case of the beverage manufacturer, monitoring water use, packaging materials and other components satisfies the 3BL approach to sustainability, which calls for cutting costs, reducing impact on the environment and increasing societal engagement. Passing along these goals to suppliers is key to success.
Manufacturers can track supply chain sustainability goals, objectives, and performance targets in a number of ways. A common practice is to develop 3BL scorecards, which provide a strategic view of the organization’s performance that executives can review weekly or monthly. Tactical dashboards can then be created from the scorecards. As the saying goes, “Nothing that can’t be tracked can be proven to have been achieved.”
ABOUT THE AUTHOR
William Newman is managing principal of Newport Consulting Group, an independent management and technology consulting firm based in Clarkston, Mich. Contact him via email at email@example.com or follow him on Twitter (william_newman).