CHAPTER 7

Sustainable Supply Chain Management—The End of the Beginning

Sustainability—Broadened, Integrated, Elevated

The Guardian (UK) noted that many of the world’s biggest car makers—companies such as Vauxhall (UK), BMW, Volkswagen, and Audi—had launched investigations into their paint supply chains.¹ The reason—an article published by the Guardian that linked many of their paint supply chains (and their demand for mica) to illegal mines in India where child labor and debt bondage was widespread. In fact, according to this article, children as young as 10 years old were being used to extract mica—the mineral that made car paint shimmer—from the ground and to sort it. This was dangerous, hard labor. In many cases, the children were working at the mines rather than going to school because their families needed the money.

Three Indian exporters—Mohan Mica, Pravin, and Mount Hill—seemed to be the major transgressor. These companies, in turn, sold their raw materials to customers such as Fujian Kancai, a company whose customers included cosmetics giant L‘Oreal, P&G, PPG, and Axalta (the last two customers are leading car paint suppliers in a 19 billion USD world car paint maker). As a result of this report, Vauxhall (part of the GM group), BMW, and Volkswagen have launched investigations into their paint supply chains in response to the Guardian article, since this finding, if supported, is against company policies that explicitly prohibits such practices.

This article is important for several reasons. First, it shows that the power of the media can identify problems involving sustainability and make these immediately apparent to a wide audience. Second, companies are now recognizing the linkages between sustainability and risk. Failure to be sustainable can be the source of supply chain risk; it can affect the ability of the firm to serve its key customers; it can adversely affect the firm from an operational, strategic, and reputation perspectives. Third, because of this linkage, firms are now increasingly integrating sustainability into their enterprise risk management systems (ERMS). As will be shown later on in this chapter, this integration is important as it sends a clear message to the rest of the organization and to its supply chain, namely:

• Sustainability is important!
• Problems in sustainability are a major form of supply chain risk since they can adversely affect the firm’s ability to serve the needs of its customer base.
• Sustainability can no longer be managed as a stand-alone activity; it must be integrated into the formal corporate management system.
• Given the importance of supply chain risk, issues involving supply chain risk are now being addressed at the top management level. By integrating sustainability into the ERMS, issues involving sustainability are becoming highly visible and conversely important to top management.
• This trend is not going away; if anything, it will increase in importance into the future.

This development was first observed by a research project entitled Strategic Supply Chain Management—Beyond the Horizon (BTH). This long-term project was aimed at identifying and exploring emerging issues in supply chain management both domestically and internationally. This project, jointly sponsored by Department of Supply Chain Management, the Eli Broad School of Business and APICs, has over a three-year span studied over 60 leading supply chain management organizations. The results and insights obtained from this project have been fine-tuned and tested in a series of focused workshops. One of the critical findings from this project was that (1) sustainability was identified as a major issue facing nearly every firm; and, (2) it was being integrated into the firm’s risk management strategy.

Consequently, to understand these developments, it is first important to understand the concepts of supply chain risk and resilience. These two issues have been major issues since firms became aware of joint importance and their linkages. To a large extent, they were the same reasons why top management first became aware of the strategic importance of the supply chain.

Risk and Resilience—the Current State

Since the lightning strike and the subsequent fire at the Philips plant in March 2000 in Albuquerque, New Mexico, managers and researchers have come to realize the hidden cost and danger of supply chain management—that of interdependency and supply chain risk. Thanks to academic researchers, it is now known that a supply chain disruption, irrespective of its source, can reduce the stock price of the firm experiencing the disruption by up to 40 percent and that it can take up to two years to recover. Such findings have caused upper management to take the notion of supply chain risk very seriously and to develop systems for managing such risks. Managers have also come to recognize the need to develop the capacity to deal with such issues—a capacity that we now recognize as resilience.

Supply chain resilience is “the ability of a supply chain to both resist disruptions and recover operational capability after disruptions occur.” When viewed from this perspective, resilience consists of two critical but complementary system components: the capacity for resistance and the capacity for recovery.

• Resistance capacity is the ability of a system to minimize the impact of a disruption by evading it entirely (avoidance) or by minimizing the time between disruption onset and the start of recovery from that disruption (containment).
• Recovery capacity is the ability of a system to return to functionality once a disruption has occurred. The process of system recovery is characterized by a (hopefully brief) stabilization phase after which a return to a steady state of performance can be pursued. The final achieved steady-state performance may or may not reacquire original performance levels, and is dependent on many disruption and competitor factors.

As we continue to draw on supply chain management and its various capabilities to reduce costs, reduce lead time, facilitate innovation, and enhance quality, we must improve our understanding of the complexity of supply chain risk. We are starting to recognize that it is a broader concept that encompasses more dimensions than bankruptcy, earthquakes, strikes, and fires.

More specifically, this broadening includes the consideration of sustainability as a risk and strategic opportunity. Firms are now recognizing that failure to ensure a sustainable supply chain can create risks for the supply chain and for the firm. That was the point of the Guardian story. As can be seen, sustainability is becoming integrated into the firm and its activities. It is no longer something that we should consider after everything else has been done.

Trends to Watch

Evidence of changing customer expectations and sustainability moving up the corporate agenda confirmed by a KPMG global survey of 378 senior executives² which found:

• 62 percent of firms surveyed have a strategy for corporate sustainability with 23 percent of firms in the process of developing a plan.
• Primary drivers for sustainability are resource and energy efficiency, with brand enhancement, regulatory policy, and risk management still remaining key drivers.
• 44 percent of executives in the study see sustainability as a source of innovation, whereas 39 percent see sustainability as a source of new business opportunity.
• Firms are increasingly measuring and reporting their sustainability performance and businesses want a successor to the Kyoto Protocol.
• 67 percent of executives believe a new set of rules is “very important” or “critical” to having a clear road map for sustainability with corporate-lobbying efforts pushing for tighter rules.

With increasing scrutiny of corporate carbon emissions, freight and transportation providers now have every opportunity to strategically impact and realize sustainable value from their operations. Emissions from freight in the United States are projected to increase by 74 percent from 2005 to 2035 and China is expected to increase its use of freight transportation fuels by 4.5 percent a year from 2008 to 2035 with predictions of freight emissions increasing 40 percent globally.³ Given this growth, we paradoxically have significant control over the carbon footprint of supply chain operations. Decisions on how products are designed and packaged, along with where products are made, store locations, offsetting, and how much time is allotted for transit all have an impact on greenhouse gas (GHG) emissions and waste within business systems. We should all have a strategy for corporate sustainability, its measurement, and how we will report our progress. Shippers will find that there are cleaner and more cost-efficient freight practices and integrated systems with good returns on investment. Sustainability is a way to differentiate operations, improve brand loyalty, provide new services, and, a road map for long-term goals.

With sights set on achieving more sustainable supply chains by 2020, objectives for some companies (i.e., the Consumer Goods Forum, HP, Microsoft, and others) include optimizing shared supply chains, engaging technologically savvy consumers, while also improving consumer health and well-being. The ability to achieve these objectives is essential to the consumer goods industry. It was noted that the difference between success and failure in this industry will be the ability to adapt to rapid and significant change. The trends with the biggest impact on driving industry objectives for the next 10 years include the following:

1. Increased urbanization.
2. Aging population.
3. Increasing spread of wealth.
4. Increased impact of consumer technology adoption.
5. Increase in consumer service demands.
6. Increased importance of health and well-being.
7. Growing consumer concern about sustainability.
8. Shifting of economic power.
9. Scarcity of natural resources.
10. Increase in regulatory pressure.
11. Rapid adoption of supply chain technology capabilities.
12. Impact of next-generation information technologies.

Within the context of these trends, industry needs a fundamental change in the way consumer products companies and retailers business models integrate issues such as sustainability for better serving consumers. This means working collaboratively with industry, governments, NGOs (non-governmental organizations), and consumers. The four primary objectives coming out of the study are (1) making business more sustainable, (2) optimizing a shared supply chain, (3) engaging with technology-enabled consumers, and (4) serving the health and well-being of consumers. Like the information technology and quality megatrends of the past, sustainability will touch every function, every business line, and every employee. Companies that excel in sustainability make corresponding shifts in leadership, the systematized use of tools, strategic alignment, integration, reporting, and communication. These firms move from tactical, ad hoc, and siloed approaches to strategic, systematic, and integrated practices.

Add to these trends the following recent events: the signing of the Climate Accord in Paris, release of the UN’s 17 Sustainability Development Goals, toxic air in parts of China causing manufacturing to shut down or slow down, and the Pope’s Laudato Si, and we need to ask ourselves a few questions. One, what new business leaders will emerge in this changing environment? Two, how will these leaders reorganize business as a vehicle for system change?

The Emerging Supply Chain Leader—Strategic in Focus

The emerging supply chain leader—such as those we encountered in the Beyond the Horizon Project and the one hinted at in the Deloitte supply chain survey—has a very different set of skills and orientations, namely:

Excels at managing at the interfaces. The new supply chain leader recognizes that they must work with other functions within the firm. Specifically, they must be prepared to engage with groups such as engineering, marketing, finance, accounting, and top management. This engagement is bidirectional. On one hand, they need to understand the requirements of these other groups since their needs have to be translated into capabilities that the supply chain must provide. On the other hand, the new supply chain leader must be prepared to educate these other groups on the capabilities of the supply chain—what the supply chain can and cannot do. They must also be able to communicate how actions taken by these other groups affect the performance of the supply chain. This capability is critical to sustainability since decisions made by people working in marketing or engineering can significantly affect the ability of the supply chain to achieve its sustainability objectives. A promotion may look like a great idea. However, we have to consider what to do with the products that we pull off the shelves and whether the demands of the promotion cause inefficient transportation moves. In other words, the new supply chain leader must excel at educating, integrating, and coordinating.

Focus on asking the “right” question, rather than on the “right” solution. This is where critical thinking shines. As Charles F. Kettering, the brilliant designer and engineer at General Motors, once said, “a problem well stated is a problem half solved.” Here, the supply chain leader is more interested in ensuring that there is a clear and concise understanding of the desired outcome, rather than focusing on a specific solution. This means ensuring that everyone understands what the goal is, and then soliciting the input of the various members of the supply chain to identify how best to achieve this goal. The solution becomes secondary to the desired outcome because it is driven by this outcome. It is at this “right” question level that the new supply chain manager is able to ensure that everyone understands what is really critical. It is that this level that the discussions of sustainability must take place.

Strives for business excellence, rather than supply chain excellence. Here, the goal is to help the firm better compete at the business model rather than the supply chain level. This is important since our position in this book is that sustainability is a business issue rather than a supply chain issue.

Outside/In as compared to Inside/Out. A strategic supply chain manager views the capabilities of the supply chain through a different lens. The traditional lens is from the Inside/Out, where the leader understands what the supply chain can and cannot do and tries to convince key customers that this is what they really want. The new, strategic lens is from the Outside/In: It looks at what the key customers want and what type of outcomes they wish to achieve. These new leaders understand that it is these key customers who drive the firm, its strategy and ultimately the supply chain. This is critical since the new critical customer, in many cases, come from millennial. For this group, sustainability in its broadest form is critical. They are not interested in simply reducing pollution also in issues such as whether the workers operating in the supply chain were able to work in safe environments and whether or not they were paid a fair wage. It is this emphasis on the key customer, part of the outside/in approach, that explains the responses taken by car companies such as BMW, Volkswagen, and Vauxhall, to the presence of mica that was produced using child labor and debt bondage workers. This identification with key customers takes its most immediate form in terms of how communication is implemented—through measures and metrics.

Effective at communicating with others in terms of performance measurement. To effectively communicate within the firm, the new supply chain leader must recognize the importance of measures and metrics as communication. Measures and metrics, as noted by management experts Joan Magretta and Nan Stone, restate the business strategy and the business model into what each group or person must do to achieve this strategy. Increasingly, we are recognizing that effective communication within the firm occurs at this level, not in terms of measures such as capacity, throughput, utilization, and ppm. The new supply chain leader uses these measures to show how the actions of the supply chain can affect how others perform. Furthermore, in many cases, the new supply chain leader takes this emphasis on performance to a new level by adopting the customers’ own measures as their own. When this occurs, communication is immediately enhanced between the supply chain and the customer since both are using the same set of measures. More importantly, supply chain impact can be seen immediately since these actions can be translated into how they affect the performance of the customer. Since both parties are using the same numbers (so to speak), the opportunity for conflict is minimized. We communicate through metrics and measure the totality of dimensions that we see as being part of sustainability—that sustainability is more than pollution reduction; it also embraces social sustainability. Finally, it is good to remember a point that was raised in Volume 1 regarding metrics and measures—if you measure something such as sustainability, you are telling everyone that it is important; if you do not measure it, then it is unimportant and it can be ignored.

Recognizes the need for complexity but still strives to identify and eliminate complication. Since the new supply chain leader closely knows and identifies with the key customer, there is an acceptance of the need for complexity. Complexity is a trait that comes from the key customer and is something that the supply chain must be able to accommodate. Sustainability is inherently embedded in this complexity. The leader does try to communicate the downside risks of complexity through a cost of complexity approach (see Figure 7.1). However, the leader is able to differentiate between complexity, which comes from the customer, and a complication, which occurs because of the actions of people within the supply chain.

Figure 7.1 Cost of complexity—A total cost approach

As an example of a complication, consider the following situation. A firm has a short-term quality problem with a component supplier. To address the immediate issue, it modifies its manufacturing process to include an inspection activity. The problem is eventually addressed but the inspection is not removed. This inspection is an example of a complication—something that plagues most supply chain systems. The new supply chain leader may have a purpose to add complications, such as increasing the number of backup suppliers, but these actions are often driven by the need to protect the system from disruptions and to improve resilience.

Recognizes and accepts the presence of uncertainty and change. Uncertainty is viewed as the natural state of things when it comes to making a decision. After all, you never have enough time; the information is never complete or sufficiently accurate; and something is always changing before you make your decision.

Strives for robust rather than optimal systems. Optimality is nice. However, in many cases, optimality results in fragile systems. That is, as long as things have not changed from the conditions that were used to derive the optimal solution, all is well. However, as soon as something changes in the environment, the optimal system sputters. Instead, the goal should be a robust system, one that may not generate optimal performance but is able to respond to changes without extracting a severe penalty in performance. Robust systems are the natural complement to the preceding trait.

The focus is on the future. In this new environment of change and uncertainty, the past is viewed as a lesson to be learned, and not as the basis for punishment. As one manager in the Beyond the Horizon project put it, “The past is something you cannot do anything about. Learn from it; get over it; focus rather on the future.” That is the attitude assumed by the new supply chain leader. This focus and concern about the past is also reflected in planning. The new supply chain leader recognizes the importance of that basic supply chain dictum—today’s supply chain is the result of investments made in the past; tomorrow’s supply chain will be the result of investments made today!

Fast decision making is the key. In this environment, you do not have the time to wait until changes shake out. Rather, you have to make decisions quickly and be willing to live with the fact that you will be wrong on occasion. This is becoming the natural state of affairs. As one manager put it, “you make decisions quickly, you fail fast, you learn quickly, you move on.” This was best illustrated by one interview that took place at a fast fashion goods operation located in the Midwest during the Beyond the Horizon project. The manager who was leading research team members on a plant tour stopped to point out a new $1.7 million line. He asked the research team to guess how long it took to go from problem awareness to the time that this line was up and running. The team members answered with numbers ranging from two to three years. The response—7 months. When questioned, he brought out the key lesson—if the company had waited to make sure that the issue driving the need for the investment was real, it would have been too late. A new, faster method of decision making is demanded. In today’s environment, fast decision making also means considering multiple factors such as sustainability as part of the decision-making process.

Sustainability is now an integral element of the decision-making process. Finally, sustainability in its broadest sense is no longer a separate issue—an issue that can be addressed after everything else has been looked at. It is no longer a constraint—something that must be satisfied as another objective. It is now a business requirement and part of the strategy by which the firm competes in the marketplace. It is a factor influencing how the supply chain is structured and determining who is qualified to be a supply chain supplier and who is not (as shown by the decision of Disney not to source products supplied from countries such as Pakistan and Bangladesh). It is also an opportunity for the firm to re-examine its processes and its supply chain for ways of doing things differently (think back to experiences of McCormick’s and how it was able to develop suppliers in Uganda who could supply vanilla beans with the exact qualities needed by McCormick’s).

The Challenge

The evidence, as summarized in Table 7.1 is clear. While there will always be a demand for tacticians and fire fighters, the new strategic supply chain needs a different type of leader, perhaps a Chief Supply Chain Office (CSCO), who is well prepared by skills, temperament, and preparation to sit at the same table as the CEO, CIO, the CFO and the other similar leaders. What we are seeing from Table 7.1 is the emergence not of a supply chain manager but rather of the supply chain leader—someone who can think broadly and who can think critically.

Table 7.1 Comparing Traditional Supply Chain Managers to the Leaders of the Future

The new supply chain leader must be one who is not simply willing to tolerate sustainability but who embraces it—recognizing it for what it truly is—part of the new skill set and requirements that the new supply chain leader is able to manager.

As can be seen from this chapter, sustainability is changing. It is now part of the present and the future for the supply chain manager. It is now helping to redefine the supply chain manager from being simply a manager to being a strategic leader. It is part of the changing landscape that is affecting not only the supply chain but also the firm and competition. As it changes, the result is that we are faced with three unresolved question—“Are you ready? Is your firm ready? Is your supply chain ready?” That is the challenge that this chapter will end with. It is also the challenge that authors wish to give you, the reader—ARE YOU READY?

In Conclusion, sustainable supply chain management is changing rapidly, faster than the rate at which global freight is moving, and every day, new developments shape our future in exciting ways. One of the objectives of this two book volume is to create a community of informed business professionals engaged in action learning, performance measurement, and the continuous improvement of sustainable business systems. We want to help you stay current with new developments. To this end, we hope you and your colleagues will discuss and revisit this book on a regular basis to engage and learn while working through chapter Action Items (AIs). Stay in touch with us to share your success stories’ regarding what is, and is not working; to review benchmarking and audit information; and get access to current research. Together, we can shape the future of business, take action, and improve supply chain performance.

This book is just the first step toward action. To get the benefit of SSCM, join professional associations that engage in the development of sustainability in your profession. Talk to and work with sustainability professionals within and outside your organization. SSCM will be in continuous development, yet we need to break down the walls between functions and between practitioners and scholars. This is the beginning of the journey for all of us with the goal of sustainable business systems enabled by supply chain management that drives value. The journey is all part of a paradigm shift toward Integrated Bottom Line measurement and reporting with a better understanding of the value sustainability brings to any organization.

This is not the end of the beginning, but the beginning of the end of our time with you in the context of this book. We invite you to stay connected to this evolving paradigm and to participate in the journey that comes next.

¹P. Bengtsen & A. Kelly, (2016). Vauxhall and BMW among car firms linked to child labor over glittery mica paint. The Guardian. (July 28, 2016). file:///E:/SMR%20-%20Risk/Vauxhall%20and%20BMW%20among%20car%20firms%20linked%20to%20child%20labour%20over%20glittery%20mica%20paint%20_%20Global%20development%20_%20The%20Guardian.pdf. Last viewed August 1, 2016.

²KPMG (2011).

³KPMG (2011).