Natural capitalism makes supply chain sustainable

by CXOtoday Staff    Aug 13, 2010

Globalization, sourcing, outsourcing enabled by innovations in technology has transformed the global supply chain into a collaborative network. However, the rising pressure on natural resources has resulted in some critical challenges being faced by supply chain strategists and also led to investing in “nature capital”. This includes the need to address resource scarcity, the challenge to mitigate and adapt to climate change, take responsibility for labor practices of their suppliers and regulatory changes around environmental impact.

The following are the market drivers towards a sustainable supply chain

Regulations and Brand image: Environmental regulations around product, process and logistics and acknowledgment that one mistake can do lasting damage to a brand is making it necessary for companies to adopt enhanced safety methods. A lapse in safety has the potential to cause significant damage to brand image as Sony (Dutch officials banned sale of Sony’s PlayStation PS one console due to cadmium content in the accessory cables) or Mattel Toys (millions of toys had to be recalled due to high lead content) would have realized.

As a result, manufacturers now provide information about substances used in the product they build, recyclability of their products and re-usability of the substances used.

Business Continuity Risks: Supply chain resilience is the key for sustained profitability and there is a need to track environmental risks and opportunities, at a micro and macro level. Failure to adapt to extreme weather patterns or manage risks related to product safety, disposal of hazardous material, regulatory compliance can not only cause disruption to supply but also attract negative publicity.

Disruption of agricultural productivity or depletion of natural resources can pose significant risks to any company whose single biggest input is water. Coca-Cola recognized how trends in water supply and use could pose financial, operational and reputational risks.

Following pressures in countries like India, (where Coca-Cola faced high profile campaigns and lawsuits to close its bottled water plants due to alleged social and environmental misconduct) the company launched its Global Water Initiative in 2004, with the aim of making the company ‘water neutral’ within its manufacturing and bottling operations.

Importance of product traceability: The concept of ‘traceability’ (the ability to track products and their ingredients or components back to their original source) is enabling enhanced levels of transparency and accountability. In food processing industry, traceability from ‘farm to fork’ and regulations around it is emerging as the largest driver in shaping consumer demand.

Japan, among the large markets for beef, is adopting tighter traceability rules after a number of BSE (mad cow disease) scares. The law now requires each locally raised animal to have a 10-digit identification number which will be displayed on the beef labels in supermarkets. Information on the history of that individual animal can be checked through the identification number. Companies are developing traceability systems to trail back a batch within hours. Some processing plants also save DNA samples from each animal for two years!

Product Foot print: Product footprint or eco-labeling is gaining momentum as firms are beginning to assess the impact of carbon, water or scare resources across the life time use of its products. This requires companies to assess and measure the environmental impact of its product — from beginning of the supply chain (Suppliers) to those in the middle (manufacturers and logistics providers) and finally till the last mile beneficiaries (retailers and consumers).

Tools such as Enterprise Carbon Management, Life Cycle Assessment help to provide visibility to companies on the source of waste, energy consumed, carbon emissions in the supply chain enabling them to concentrate on those areas of in Supply Chain where they can bring the greatest benefits. P&G for example discovered that heating water for laundry cycles accounted for a significant percentage of its emissions leading to development of a cold water detergent. Progressive manufacturers and retailers are also beginning to voluntarily disclose information related to the environmental impact. For example. Pepsi through its subsidiaries Walker Crisps in UK and Tropicana in the US is calculating the carbon footprint of select products and in the case of Walkers publishing the information on the packaging.

Sustainable Procurement: Sustainable procurement refers to sourcing raw materials that minimize impact to environment, avoids risks associated with social concerns, still maintaining profitability. Today many global brand leaders have a sustainability supplier management program that includes supplier audits, codes of conduct, questionnaire processes, and validating information through certified third parties. As these large global brands push requests for more information out to their supply chain, it is causing suppliers within these ecosystems to develop their own approaches for sustainable sourcing and procurement - a true network effect. As an example: In response to the Wal-Mart initiative suppliers such as P&G, HP, Kraft, Clorox and many more have started their own internal initiatives to reduce their carbon footprint.

Innovation along the Supply Chain: Progressive and companies with higher footprints are spotting new Business opportunity as they begin to optimize the carbon foot print across their entire Supply Chain (Cradle to Grave). In an approach called for Design For Sustainability (or D4S), organizations like P&G are involving supplier experts to its planning teams to to reduce or eliminate environmental impacts implement in its products and packaging, thus minimizing the total costs and adverse impacts of a product throughout its life cycle.

Reverse Logistics: Converting Waste into Assets: Management of returns including recalls, repairs and exchange is an integral part of Supply Chain. An emerging trend is to Design for reverse logistics (recovery, recycling, re-use of obsolete products / components) thereby converting wastes into assets and thus generating shareholder value.

For instance, Nokia with its “Take back and recycling initiative” has launched a nationwide mobile phone recycling campaign in India encouraging mobile owners to handover their discarded mobiles to be recycled. To encourage consumers to do so, Nokia plans to gift music download vouchers and discount coupons for mobile accessories.

ITC’s WoW initiative is not only creating awareness among the public about the advantages of the “Reduce-Reuse-Recycle” process, protecting the environment, improving civic amenities, public health and hygiene but also generating cost-effective raw materials for the paper, plastics, metal and glass industry. As a part of this initiative that is now spread across schools, government offices, corporate and other institutions, ITC provides special bags to accumulate dry waste like paper, plastic and arranges for periodic collection through outsourced agencies. The waste paper is used by ITC for manufacture of paperboards and other materials are sold to the recycling industries.

Business Networks: Business coalitions spanning different industry sectors are also being formed to raise sustainability standards for shared resources. Examples include the Roundtable on Sustainable Palm Oil (includes food and personal care companies) and the Better Sugar Initiative (includes food and energy companies).

A number of global companies, including HP, Home Depot, IKEA, Mattel, Nike, and other shippers, have joined with ocean freight carriers to form a Clean Cargo Group, dedicated to sustainable product transportation by ocean. Working in collaboration with Business for Social Responsibility (BSR), a non-profit group, they have developed voluntary specifications and guidelines to elevate the environmental performance of their fleets or carriers.

The importance of capitalism has undergone many changes in the past from financial capital to human capital to consumer capitalism but “Natural capitalism” will be critical for companies in future as they seek ways to sustain natural capital by reducing their GHG emissions, better waste management and responsible use of scare resources.

The author, K Sanjai is VP - Solution Management for SAP in the Indian subcontinent