Supply and demand

The unsung heroes of globalisation are those working to help suppliers act effectively and sustainably, write John Elkington and Jodie Thorpe. Now nongovernmental groups are getting involved in the process.

Supply-chain managers are among today’s unsung heroes of globalisation. Their challenge is to help suppliers of components and services work as effectively, efficiently and economically as possible to meet customer demand. And now this hard task is becoming harder due to the accelerating convergence of demands for traceability and sustainability, says a new study, Unchaining Value, published by SustainAbility, the United Nations Environment Programme and the UN Global Compact.

Traceability, the ability to track products and their ingredients or components back to their original source, is being driven by many factors, from the need to ensure tighter security to concerns about the carbon footprints of entire supply chains. We now see heightened expectations in terms of business accountability. Take climate change: one response is the increasingly energetic debate in some developed countries about the advantages and disadvantages of locally sourced and produced goods relative to imports. Supermarket chains are beginning to flag up products as locally sourced, partly in response to the success of farmers’ markets, which make a major virtue of local sourcing.

Many supply-chain managers would argue that a considerable range of social and environmental considerations have already been incorporated into their management systems.  But sustainability, like total quality, is a moving target. The new study explores a number of key trends before focusing in on the food and beverage industry and the information and communication technology (ICT) sector. In the process, it spotlights five key trends.

First, there is a powerful shift towards more sophisticated strategies. AMR Research publishes an annual report called The Supply Chain Top 25, featuring companies that have, according to the Financial Times, “advanced supply chain management from its roots in logistics, material handling, and purchasing towards the modern demand-driven value network needed in our globalised, internet-enabled, 21st century business environment”.  Nokia was top of the latest list, with runners-up including Procter & Gamble, Coca-Cola, Nike, IBM, Cisco Systems, Wal-Mart and Toyota.

To earn its position, each company has succeeded in "integrating processes that allow them to operate as demand-driven value networks: orchestrating players up and down the supply chain with a combination of information, visibility, cross-cutting metrics and market discipline."  This sounds pretty complicated, and it is. But, strikingly, the top 25 companies have outperformed broader stock market indices by almost 100% in the year since publication of the previous report.

Competition can now be as intense between supply chains as between companies.  Today’s successful supply-chain managers have to focus on costs and benefits across an entire chain, and think beyond short-term financial considerations to ensure reliable supply in terms of quality, quantity, reliability and cost.  They achieve this by managing trade-offs, aligning incentives, sharing information and coordinating relationships across functions to achieve a lower "total cost of ownership".  

Second, there is a shift from top-down management to increasingly integrated approaches. A 2007 survey revealed that in a group of respondents where nearly 60% had corporate sustainability strategies, only half had written guidelines or policies around sustainability in the supply chain, and even fewer had a formal supply management sustainability strategy in place.  Although this suggests that business focus on sustainability in supply chains is not widespread, there is growing evidence drawn from a variety of sectors that the world’s leading businesses have evolved an array of strategies, tools, technologies and systems to help them better integrate sustainability aspects into supply chain management. And with companies like US retailing giant Wal-Mart joining the demand-side of the equation, the sustainability agenda is being forced onto the agendas of a growing number of supply-chain managers around the world.

Third, a key feature of modern supply-chain management is knowledge transfer and capacity building, with leading companies now working with suppliers to develop and implement effective sustainability standards.  Many companies in different industries engage with their suppliers to build capacity. In the ICT sector, for example, the Electronic Industries Code of Conduct (EICC) was developed between multinationals like Dell, HP and IBM and the electronics manufacturers Solectron, Sanmina-CSL, Flextronics, Celestica and Jabil.  The aim here is to improve conditions and foster a culture of social and environmental responsibility in the electronics supply chain.  

Fourth, there is evidence that these new demands are beginning to be seen not only as an additional burden for suppliers, but also as a potential source of inspiration and innovation.  But this positive outcome is not guaranteed. One survey found that over 90% of Asian companies show no evidence of supply-chain labour standards. And at a recent conference on labour rights, a representative from a US-based apparel company noted: “One of my Bangladeshi textiles’ suppliers told me that his sustainability strategy is to stop supplying to western markets. Instead, he plans to sell to Indian and Chinese companies – where the demand is growing, and where standards are less stringent.”

Fifth, we see a shift from a focus on controversial resource pinch-points to collaborative solutions. For example, silicon is a vital input to both ICT products and solar energy panels and the increased demand for both uses is leading to heightened competition in both sectors.

Nongovernmental groups, which once feared being outflanked by all of this activity, are now getting involved. Take WWF’s One Planet Business initiative, which convenes business leaders, policy-makers, investors, consumer groups and other NGOs in a multi-stakeholder process to understand and help facilitate the system changes needed to make market economies sustainable.  Key to the process is a framework that assesses resource consumption according to ecological footprint, carbon dioxide emissions and material flow analysis. The aim is to identify where interventions would have greatest positive impact across a supply chain. Recessionary pressures will dent demand to a degree, inevitably, but the long term trajectory seems clear.

John Elkington is co-founder of SustainAbility and of Volans. Jodie Thorpe is manager of SustainAbility’s Emerging Economies Program.