From the October 2008 issue of Treasury & Risk magazine

What's Your Green Strategy?

Wal-Mart CEO Lee Scott stunned the business world three years ago when he told a meeting of more than 1,000 suppliers and other partners near the company's Bentonville, Ark., offices: Environmental sustainability must become a central part of the company's formidable supply chain operations. The goals included everything from doubling fuel efficiency over the next decade to eliminating 30% of energy use in stores. And, the company would start taking such steps as evaluating suppliers on the environmental acceptability of their packaging and using those assessments to make buying decisions.

"Sustainability Is here to stay . . . a part of what all of us are going to be doing with our businesses from here on out," he said. With that widely reported speech, Wal-Mart became perhaps the most visible company to make the greening of its supply chain a priority. But it's hardly the only one. Driven by everything from the escalating price of gas to consumer demands for change, more companies are beginning to address the issue, in many cases, also incorporating new labor policies and other socially responsible practices in the mix. And their efforts include a wide variety of ambitious strategies---decreasing the number of truck deliveries by packing more product on each vehicle, designing products with reusable components and pressuring manufacturers to reduce carbon emissions, to name a few examples.

Still, companies face a host of challenges, some of which may be insurmountable. How, for example, do you ensure that your suppliers are following your new policies for, say, cutting carbon emissions or using only a proscribed set of chemicals? How do you persuade them to accommodate your policies if you don't have the reach of a Wal-Mart? And, just how do you measure results--and prove to your stakeholders you're doing more than talking big? "There are a great many difficulties associated with these efforts," says Nicole Darnall, assistant professor of environmental science and policy at George Mason University. "It can get very sticky."

High oil prices, of course, are probably the most pressing reason behind the new interest in green supply chains. But, so is a growing scarcity of metals and other commodities, and the need to use them either more efficiently or less frequently. What's more, an escalating number of countries, including those in the European Union, have introduced rules regulating carbon emissions, the use of chemicals as well as other eco-friendly laws. In addition, shareholders and customers have been increasingly clamoring for companies to make their supply chains more eco-friendly. "Five years ago, boards were asking management, 'what's our China strategy?'" says Hau Lee Thoma, professor of operations, information and technology at the Stanford Graduate School of Business. "Today, they want to know about their green strategy."

Then, there's the matter of avoiding potential liability. Take Dow Chemical. One of the world's largest manufacturers of chlorine recently joined forces with Union Tank Car and Union Pacific to redesign rail tank cars transporting hazardous materials to increase their safety in case of a derailment. One key reason for the move, according to observers, was not only to mitigate against the risks posed by an accident, but also to win goodwill. "If a company can establish a reputation among critical stakeholders as being a good environmental citizen, then when a problem occurs, regulators may be willing to cut them some slack," says Darnall.

Generally, these activities focus on two levels. The first involves changes in internal operations, which often include steps aimed at saving energy. Consider moves to address transportation costs. One approach is optimizing truck deliveries where a company is responsible for some or all of its shipping, consolidating shipments into fewer and larger ones--filling trucks up as much as possible and sending them on shorter trips. Where customers require smaller, more frequent shipments , the company may use a hub that's closer to that location, expanding the capacity of existing facilities.

In other cases, companies are switching to more fuel-efficient vehicles. FedEx, for instance, is replacing existing aircraft with more than 90 new planes that are 36% more fuel efficient than the old fleet, according to Mitchell Jackson, director of environmental affairs and sustainability for the Memphis-based mail delivery company. FedEx also has 30 different programs aimed at creating more efficient use of energy--for example, a new system helps aircraft burn less fuel on landing and take off. "They're all what we'd call win-win--programs that create both environmental sustainability and economic savings," says Jackson.

Perhaps more significantly, some companies are rethinking the benefits of using far-flung manufacturers and seeking production closer to the customer. And they're doing more manufacturing on their own, instead of using third parties. According to Bonnie Gardiner, program manager of supply chain social and environmental responsibility at Hewlett-Packard, for example, over the past three years, the Menlo Park, Calif., computer company has reduced its use of manufacturers in Asia from 70% to about 50% to 60% and, at the same time, has started doing more of its own manufacturing Recently, for example, the company built a facility in Brazil to service South America. And it's constructing a plant in India for the Indian market.

The bigger impact may come from the second front: mandating changes in suppliers' practices. That's partly because suppliers account for as much as 90% of many companies' greenhouse gas footprint, according to R. Paul Herman, CEO of HIPinvestor, a San Francisco-based consulting firm specializing in social and environmental responsibility issues for investors. Doing that means putting in place a series of new requirements for suppliers and other supply chain partners to follow. The larger the supply chain, of course, the greater the scope of the effort.

Four years ago, for example, Xerox launched an ambitious program to specify the chemicals allowed in 70,000 parts from 1,500 suppliers, as well as acceptable levels. Suppliers that couldn't make the grade would be allowed to work with the Norwalk, Conn.-based document management company to figure out how to introduce the needed changes. About five years ago, Xerox also adopted new requirements for paper suppliers, based on standards set by the Forest Stewardship Council, a Bonn, Germany-based nonprofit organization. In addition, two years ago it joined the Electronics Industry Citizenship Coalition, a 40-member group, formed in 2003, which sets standards for supplier compliance for everything from health and safety rules to environmental mandates. "These efforts involve a constant process of moving forward, trying something out, learning about what we've done, then pushing forward again," says Anne Stocum, manager of environmental market support at Xerox. "It requires being flexible and constantly open to new ideas."

Ideally, the process also involves working collaboratively with suppliers. IBM, for example, recently started meeting with 8,000 suppliers to determine ways to consolidate shipments, according to Karen Butner, global supply chain management lead for the IBM Institute for Business Value. And IBM is also getting together with manufacturers to determine targets for reducing carbon emissions.

Such efforts may at times involve not only hundreds, or perhaps thousands, of suppliers, but may require substantial adjustments to existing practices. In 2001, coffee retailer Starbucks decided to re-evaluate the methods used by the thousands of small- to medium-sized farms from which the Seattle company bought coffee beans, mostly in Central and South America, but also in East Africa and Southeast Asia, according to Dennis Macray, director of ethical sourcing at Starbucks. Turned out, the farmers tended to use fertilizers that increased their yield but depleted the land of important nutrients. As a result, farmers eventually had to abandon the land for another farm, often moving higher up in the mountains to more remote, harder-to-reach locations. The upshot was a highly inefficient system.

To address the situation, the company came up with a new goal: take steps to help farmers work on the land in a sustainable way, thereby creating enterprises able to survive for a longer time. The answer was a program called Coffee and Farmer Equity Practices (CAFE), which helped farmers put in new water treatment facilities, along with other steps, thereby creating farms that would last. It also meant forging longer-term relationships that, for the company, reduced susceptibility to price and supply volatility. About 65% of the company's coffee supply--about 228 million pounds of coffee--now comes from such farms, according to Macray. "It's a significant part of our business," he says.

Making these programs work requires overcoming a variety of obstacles. For one thing, "suppliers need to understand what they're being held accountable for," says Stanford's Lee. And that, of course, means providing a set of clear metrics. Trouble is, there's no one measure across all corporations for just what makes supply chains green and often no systematic metrics within individual companies.

Take Home Depot. Back in the '90s, according to Michael Block, CEO of Kinetix, a New York-based consulting firm that focuses on social and environmental performance, the company attempted to introduce a patchwork quilt of voluntary standards for suppliers in response to pressure from customers and other organizations. But it ended up using what Block calls "a hodgepodge approach," without tying its various efforts into an overall comprehensive program.

As a result, "it created a great deal of frustration and confusion among suppliers and customers," he says. More recently, the company redesigned its program with a more comprehensive classification system, categorizing its product lines into five groupings, such as sustainable forestry and clean air, and making its system a lot easier to understand.

The best approach, according to many experts, is for companies to start the process by first determining what their goals are and what they need to measure. For example, Starbucks' program includes over 200 requirements from using no child labor to making sure that native trees are removed only when they pose a hazard to health. "We have a quadruple bottom line approach: quality, social responsibility, environmental sustainability and profits," says Macray. In addition, many companies are including suppliers' performance in their supplier scorecards, along with the usual measurements of quality, price, on-time-delivery and the like. They're also making these metrics part of an annual performance review process.

Then there's the matter of muscle. Companies without the market heft of Wal-Mart or IBM are less likely to be able to persuade suppliers to make the often costly adjustments to their operations required by new green policies. Instead, these companies employ other techniques.

To convince farmers to participate in its CAFE program, for example, Starbucks offered an incentive: paying a premium for participation. Any farmer that scored more than 60% in a third-party audit would become a preferred supplier and would be guaranteed a minimum purchase amount. A supplier scoring over 80% would be named a Strategic Supplier and would earn an extra five cents per pound of coffee for one year. The company also provided loans to farmers as well as training and other support to those unable to meet those scores. In addition, the incentives were offered to coffee processors to encourage them to invest in more fuel-efficient equipment.

Similarly, several years ago Interface, an Atlanta-based carpet manufacturer, started allowing companies that followed its requirements for recycled content in their materials and other steps to become preferred suppliers for particular carpet styles, giving them the right to provide the material for the life of a product line. What's more, Interface began highlighting preferred suppliers in product material. At the same time, over the past few years, the company has also ended relationships with a handful of suppliers that wouldn't comply. It's a combination of financial incentives, a willingness to walk away from business and free publicity that Jim Hartzfeld, CEO of InterfaceRAISE, a consulting arm of Interface, calls "a carrot, stick, and tambourine approach."

The other tool that companies can use is to rely on voluntary codes of conduct from industry associations. That includes everything from the ISO 14000, a set of environmental standards from the International Organization for Standardization, to the Leadership in Energy and Environmental Design (LEED) rating system from the U.S. Green Building Council.

These standards also make it easier for suppliers to comply with demands from multiple companies to meet new green policies. "If you have 50 customers asking a supplier to become green in 50 different ways, it creates a house of cards," says Ted Reichelt, principal environmental engineer with Intel's global environmental group. "You need a broader-based approach."

Standards also help with another major problem: making sure that suppliers are indeed in compliance. Doing so requires a system of certification. For major suppliers, companies often send in their own auditors. But it's not always practical, even for big players. That's why HP introduced a three-pronged approach several years ago. It trains its sourcing managers to conduct audits of significant partners. In cases where there's an allegation of a violation, it hires a third party. But with less-important suppliers the company takes another tack: It will find out whether the supplier has other customers that like HP subscribe to the electronic industry code, and see whether the company can gather everyone together to do a joint assessment, as well as provide necessary training.

Fact is, however, to be completely successful, supply chain policies need to be adopted all the way down the food chain, in second- and third-tier suppliers--something that's virtually impossible to arrange.

"The verification process often breaks down as you go into different parts of the world," says Rakesh Kumar, a vice president with Gartner Group, a Stamford, Conn.-based research consultancy. Many of these enterprises, for example, can't afford to make the changes that may be required. And, companies may have to depend on their first- or even second-tier suppliers to conduct the audits. Kumar points to a consumer goods manufacturer that recently was forced to water down its claims to shareholders when the company realized it couldn't verify that all 50 of its suppliers were in compliance with new policies. "They had to say that to the best of their endeavors they are creating an environmentally friendly supply chain," says Kumar.

In some cases, especially for more important suppliers, companies may foot part or most of the bill. According to HP's Gardiner, for example, the company recently received a series of complaints from employees of one important Chinese supplier about its labor practices. Representatives of HP and its supplier met and decided to take a series of steps--putting in a hot line for workers to call, for example, and sending workers and managers to labor practices training. HP is helping fund the effort.

Ultimately, companies may find that there simply are too many pieces to the green supply chain puzzle to make it all work right away. Herman Miller is a case in point. Five years ago, the Zeeland, Mich.-based furniture designer and manufacturer, introduced its Mirra chair, using a "life cycle" approach. That means creating a product that, among other attributes, has components that can be recycled or reused. But the company is now meeting with the Business and Institutional Furniture Manufacturers Association to figure out just where to store all those components once the chairs have been disassembled. According to Scott Charon, program manager for new product development, the chair has a life cycle of more than 12 years and the company should have the problem figured out by the time customers start to look for replacements.

The lesson is clear: There are many pressing reasons why companies need to look at ways to green their supply chains. And it just won't happen overnight.


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