Management at Work
Driving Hard Bargains in Sustainability
In July of 2011, the southeast Asian nation of Thailand was hit by an unusually severe monsoon season, triggering widespread flooding that killed more than 800 people and affected the lives of 13.6 million. The World Bank estimated economic damages of $45.7 billion, mostly to the countryÃ¢â‚¬â„¢s manufacturing sector. Seven designated industrial zones were inundated by as much as 10 feet of water, and flooding in some areas persisted until January of 2012.
Now cut to your house in December 2011, where the hard drive in your computer has spun its last disk. So you get on your motherÃ¢â‚¬â„¢s laptop to check hard drive prices. When you last checked a couple of months ago, you could get a Western Digital Green 2TB drive for $79. Imagine your surprise when you find that the same hard drive now goes for $230. Why had Western Digital pumped up its prices to nosebleed altitudes? Because 40 to 45 percent of worldwide hard drive production is located in Thailand, where the flooding reduced production capacity by half.
Needless to say, supply chains are fraught with unpredictable dangers (perhaps especially when climate change is involved), and it may be only partly ironic to cite University of Arkansas logistics expert Matt WallerÃ¢â‚¬â„¢s observation that Ã¢â‚¬Å“most of the skills and competencies needed to excel in logistics and SCM are the same skills and competencies needed to excel at disaster-relief operations.Ã¢â‚¬Â
SCM, for example, poses a number of critical challenges to companies that have committed themselves to sustainability as a factor in their corporate strategies. Sara A. Greenstein, a senior VP at U.S. Steel and former head of Supply Chain and Sustainability at Underwriters Laboratories, observes that Ã¢â‚¬Å“as much as 70 percent of product sustainability comes from suppliers, who can lag significantly behind the curve.Ã¢â‚¬Â Indeed, Greenstein suggests that a sustainability strategy is hardly feasible unless it extends to a firmÃ¢â‚¬â„¢s supply chain: Ã¢â‚¬Å“The road to creating user-friendly, science-backed, technology-enabled supply chains,Ã¢â‚¬Â she says, Ã¢â‚¬Å“is paved with good sustainability intentions that get foiled by todayÃ¢â‚¬â„¢s dynamic, global complexities. Achieving sustainability of scale requires involvement of the entire supply chain.Ã¢â‚¬Â
MITÃ¢â‚¬â„¢s Peter Senge agrees: Ã¢â‚¬Å“You canÃ¢â‚¬â„¢t possibly source everything sustainably,Ã¢â‚¬Â he says, Ã¢â‚¬Å“unless you engage thousands and thousands of people around the world. YouÃ¢â‚¬â„¢ll need technical innovations, management innovations, process innovations, and cultural innovations.Ã¢â‚¬Â Senge clearly believes that sustainability strategies must begin with a willingness to think differently about business priorities and possibilities. Ã¢â‚¬Å“When someone comes into an organization,Ã¢â‚¬Â he says,
he or she will ask, Ã¢â‚¬Å“Why do we do it this way?Ã¢â‚¬Â The answer is often Ã¢â‚¬Å“Just because.Ã¢â‚¬Â Now, 90 percent of those habits may be perfectly okay. But 10 percent are completely dysfunctional, particularly when the world around you is changing. A cool part of sustainability work is uncovering the assumptions that lead people to do things in a way thatÃ¢â‚¬â„¢s out of touch with the companyÃ¢â‚¬â„¢s larger reality.
Not only sustainability strategy, argues Senge, but all organizational strategy, should be inherently forward looking. Sustainability issues are strategic matters for the simple reason that Ã¢â‚¬Å“they will shape the future of the business.Ã¢â‚¬Â In short, both sustainability and supply chain strategy should be formulated with a firmer sense of
Ã¢â‚¬â€of how an organization acts to ensure that it continues to function during and after a disaster or some other threat. SengeÃ¢â‚¬â„¢s understanding of business continuity, however, is broader and reflects the definition of
business continuity management
) provided by the Business Continuity Institute (BCI): According to the BCI, BCM also Ã¢â‚¬Å“provides a framework for building organizational resilience with the capability of an effective response that safeguards the interests of the organizationÃ¢â‚¬â„¢s key stakeholders, reputation, brand, and value-creating activities.Ã¢â‚¬Â How else, for example, is an organizationÃ¢â‚¬â„¢s BCM strategy supposed to deal with the consequences of global warming, which threaten not only future generations but its own long-term survival?
Ã¢â‚¬Å“This isnÃ¢â‚¬â„¢t about trying to sell morality in the boardroom,Ã¢â‚¬Â says Jonathan Maxwell, CEO of Sustainable Development Capital Ltd. Ã¢â‚¬Å“ItÃ¢â‚¬â„¢s about providing the ability for businesses to make better decisions to reduce costs, improve productivity, support growth, and make longer-term decisions.Ã¢â‚¬Â According to most proponents of corporate sustainability strategies, the best way to get sustainability on the corporate-strategy (and SCM) agenda is to get it on the Ã¢â‚¬Å“resource-efficiency agendaÃ¢â‚¬ÂÃ¢â‚¬â€that is, to demonstrate the economic importance of the natural resources on which most organizations depend, such as fuel, water, land, and climate. Ã¢â‚¬Å“Once you have a system to value eco-system services,Ã¢â‚¬Â says Robert Spencer, sustainability director at the engineering design firm AECOM, Ã¢â‚¬Å“the business case for embedding sustainability will be easier.Ã¢â‚¬Â
As weÃ¢â‚¬â„¢ve seen, however, an organizationÃ¢â‚¬â„¢s commitment to sustainability isnÃ¢â‚¬â„¢t feasible unless its suppliers buy into its sustainability-oriented SCM strategy. This means that getting the organizationÃ¢â‚¬â„¢s board to implement such a strategy is only half the battle. Generally speaking, says Maxwell, Ã¢â‚¬Å“the guys in the factory in China have no interest whatsoever in sustainability outcomes.Ã¢â‚¬Â For most organizations, however, getting suppliers to implement their sustainability policies is imperative. Neither buyers nor suppliers, of course, can prevent monsoons and floods, but thatÃ¢â‚¬â„¢s why companies develop
BCM strategiesÃ¢â‚¬â€to deal with such disruptions in business continuity. In effect, then, by building its sustainability strategy into its BCM strategy, a company can take a proactive approach to supply chain disruptions. Says Richard Waterer, head of BritainÃ¢â‚¬â„¢s Marsh Risk Consulting: Ã¢â‚¬Å“You can. Ã¢â‚¬Â¦ reduce volatility in your business by saying, Ã¢â‚¬ËœWe will not walk consciously into a relationship where we know weÃ¢â‚¬â„¢re taking on risks that prove to be damagingÃ¢â‚¬â„¢Ã¢â‚¬Â to our business continuity.
How can companies avoid walking into potentially volatile supplier relationshipsÃ¢â‚¬â€or, better yet, help suppliers to develop sustainability practices that are consistent with their own sustainability strategies? Simon Pringle, head of sustainability at the accounting firm BDO, suggests that companies move from Ã¢â‚¬Å“requestingÃ¢â‚¬Â certain standards to Ã¢â‚¬Å“requiringÃ¢â‚¬Â adherence to specific guidelinesÃ¢â‚¬â€telling suppliers that Ã¢â‚¬Å“weÃ¢â‚¬â„¢ve just made a promise, and now youÃ¢â‚¬â„¢re all going to have to keep that promise.Ã¢â‚¬Â Critics of this approach argue that typical Ã¢â‚¬Å“sustainable procurement guidelinesÃ¢â‚¬Â encourage nothing more than Ã¢â‚¬Å“basic complianceÃ¢â‚¬Â with existing regulations. Moreover, they contend, once suppliers meet guidelines, they have no incentive to improve their performance.
Proponents of proactive SCM recommend that organizations build stronger measures and more practical activities into their SCM practices. Greenstein, for example, observes that Ã¢â‚¬Å“manufacturers on the leading edgeÃ¢â‚¬Â of sustainable SCM Ã¢â‚¬Å“are pushing their sustainable efforts upstream.Ã¢â‚¬Â The key, she says, is the effective use of Ã¢â‚¬Å“incentives, business leverage, training programs, and progress monitoring to improve suppliersÃ¢â‚¬â„¢ performance.Ã¢â‚¬Â Best practices involve the collection and analysis of reliable information to understand the business environment of suppliers and to set objectives consistent with environmental conditions; to collaborate with suppliers on meeting those objectives and improving future performance; and to track performance against those goals.
Must include a summary of the above case.
In addition to disruption in the supply of raw materials, supply chain problems can result in damage to the reputation of the buying organization. Think of a hypothetical situation in which this situation could occur, and explain how it could disrupt an organizationÃ¢â‚¬â„¢s
. Finally, provide some suggestions to show how the buying organization might avoid future problems by improving its approach to
Select any two of the following companies and explain how its suppliers can affect the
of its products. In each case, provide two or three concrete examples. (YouÃ¢â‚¬â„¢ll probably want to check company websites in order to make sure that you have a solid idea of what each company does.)
Johnson & Johnson
Consider the following statement by Jonathan Maxwell, CEO of Sustainable Development Capital Ltd.: Ã¢â‚¬Å“If itÃ¢â‚¬â„¢s not commercial, itÃ¢â‚¬â„¢s not sustainable.Ã¢â‚¬Â What does Maxwell mean? What, for example, is he saying about the relationship between business priorities and practices on the one hand and the feasibility of effective sustainability priorities and practices on the other?
The most recent UN Global Compact-Accenture poll of 1,000 CEOs of major companies was released in 2013. Forty-five percent of the CEOs said that they regarded sustainability as Ã¢â‚¬Å“very importantÃ¢â‚¬Â to future business successÃ¢â‚¬â€down from 54 percent in 2010. Nearly 70 percent thought that business was not doing enough to address sustainability challenges, and yet 76 percent felt that their companies were moving quickly and efficiently enough to handle those challenges.
How would you account for these numbersÃ¢â‚¬â€both the contradictions and, perhaps more importantly, the apparent drop off in concern for sustainability challenges?