The Greening of the Supply Chain
By Kate Gavaghan, Rebecca Calahan Klein, James P. Olson, and Terry E. Pritchett -- Supply Chain Management Review, 6/1/1998
For the past two decades, leading companies have recognized that supply chain management and environmental management offer considerable potential for strategic advantage and cost containment. More recently, some of these leaders have sought to bring the two opportunity areas together by working with their suppliers on environmental issues. Few companies have achieved complete integration of strategic sourcing and environmental programs. But there is a growing base of experience about how supply chain environmental programs work—and the significant benefits they can bring.
In the fall of 1996, the Business for Social Responsibility Education Fund (BSREF) and General Motors Corporation began a project to benchmark the efforts of diverse companies to improve environmental performance throughout their supply chains. BSREF is a non-profit research, education, and advocacy organization that promotes more responsible practices in the business community and supports business participation in projects that create a more just and sustainable society. It is affiliated with Business for Social Responsibility, a national association of businesses with more than 1,200 members and affiliated members.
General Motors is the world's largest full-line vehicle manufacturer, with a global product line that includes cars, trucks, automotive systems, heavy-duty automatic transmissions, and locomotives. GM has worked extensively with its suppliers on efficiency and cost reductions through its trademarked PICOS program, established in 1989. GM began collaborating with BSREF in 1995 to address environmental issues in its supply chain.
Companies in every industry face similar challenges when working to improve supply chain performance, despite differences in products, supply base, size, corporate culture, and customers. Accordingly, we believe that the findings of this benchmarking study can provide value to any company seeking to improve environmental and economic performance throughout its supply chain.
The GM-BSREF benchmarking initiative identifies model business practices and common characteristics of well-developed supply chain environmental programs. It also provides insights into the expectations of the "stakeholders"—those organizations representing investors, business partners, customers, and the environment—regarding the environmental performance of leadership companies and their suppliers.
The information in this report comes from interviews with 20 companies and 19 stakeholder organizations as well as BSREF's review of publicly available information. The participating companies and the stakeholders are listed in the accompanying sidebar.
Key Company Findings: A Heightened Awareness of Environmental IssuesThe participating companies were interviewed to determine what supply chain-related environmental activities they were undertaking, how they implement these activities, and why they are undertaking these efforts. These interviews produced findings that should interest the broad business community. They indicate that many companies are incorporating environmental initiatives into their supply chain management strategies and plan to continue doing so in the future.
The study participants reported that their supply chain environmental management initiatives had yielded substantial benefits and afforded a potential source of competitive advantage. They identified specific cases, for example, where working with suppliers on environmental initiatives had improved product quality, reduced production times, heightened productivity, contributed to product innovation, reduced research and development costs, and increased market share. The interviews also provided insight into how to structure an effective supply chain environmental management program. The findings suggest three different models for incorporating environmental issues into supply chain management and identify common elements that characterize successful supply chain environmental management programs.
Nine key findings emerged from the company interviews.
Finding 1: The primary motivators of supply chain environmental management initiatives are internal corporate values, customer interest, and economic benefits. Many companies have taken steps to understand and reduce the environmental impacts created by business activities and relationships in adherence to corporate mission or values statements. In addition, a number of companies undertook the initiatives in response to customer interest in environmental issues. Finally, many companies found that improving the environmental performance of their suppliers led to reduced costs, greater innovation, and improved product quality and performance. Many of these gains resulted from increased collaboration with suppliers.
Finding 2: All of the participating companies are working to improve the environmental performance of their suppliers, although the initiatives vary in scope and scale. Study participants identified several key factors influencing the scope and scale of their efforts to work with their suppliers on supply chain environmental issues. One key influence is the emphasis placed on environmental goals in the corporate mission statement and core business activities. Another important influence is the level of involvement and type of relationship a company typically has with its suppliers. For instance, environmentally sound supply chain management can be fostered by collaborative relationships with strategic suppliers.
Finding 3: Three models of supply chain management emerged from the company interviews. One model represents a comprehensive, integrated approach to supply chain environmental management. Adopters of this model have extensive vendor-selection and performance-evaluation processes, and tend to leverage staff resources throughout the company to achieve environmental goals. They typically expect their suppliers to go beyond environmental compliance to implement the following types of environmental initiatives: (1) "eco-efficiency" projects to reduce energy and materials use and to prevent pollution; (2) "design for environment" projects to integrate environmental considerations into product design; and (3) life-cycle analysis activities to assess the environmental impacts of products throughout the product life cycle of production, distribution, use, and disposal.
A second model illustrates a targeted supplier effort that is less extensive and comprehensive than the first model. This approach relies primarily on the purchasing department staff. Companies fitting into this model usually develop standards aimed at ensuring that suppliers comply with existing environmental laws and regulations. A few also encourage suppliers to undertake eco-efficiency and/or "green" design activities.
A third model applies to companies that take an industry standard approach. By developing environmental codes of conduct for their industries, these companies have been able to define environmental expectations for a broad range of suppliers. Code conformance is used as a screen for new suppliers and often is a condition for continuing a business relationship. In general, the companies that follow this model neither communicate extensively with suppliers on environmental issues nor evaluate their environmental performance after selection. Rather, they rely on trade associations and other organizations to provide ongoing technical support to suppliers on environmental issues. Companies with a homogeneous supplier base typically adopt this approach.
Finding 4: Companies implementing extensive supplier-management efforts share similar characteristics. The interviews identified several companies that demonstrated leadership in supply chain environmental practices. These leaders appear to derive more significant and longer-lasting economic and environmental benefits from their initiatives. They share such characteristics as a high-level corporate commitment to environmental performance and a desire to lead industry efforts to improve supplier performance. Further, their supply chain environmental management programs are characterized by top-level support; cross-functional integration; effective communication internally and with suppliers; and effective processes for targeting, evaluating, selecting, and working with suppliers. (These characteristics of successful programs are discussed in greater detail below.)
Finding 5: Every company surveyed currently uses some set of environmental criteria to screen potential suppliers. The screening tools used to assess performance are simple but effective. They typically include supplier questionnaires, supplier self-assessments, and third-party certifications.
Most of the study participants said that the ability to find suppliers that shared their environmental values and risk-reduction goals was a critical determinant in achieving environmental and economic benefit.
Suppliers with good environmental practices were perceived as much less risky to work with than other companies. They were viewed as having lower current and future insurance and liability costs, being less likely to be shut down for environmental violations, and posing fewer potential risks to the company's reputation. Finally, participants said that choosing environmentally aware suppliers helped them reduce the costs associated with providing environmental education and technical assistance to suppliers.
Finding 6: All study participants consider environmental performance when deciding whether to continue a business relationship with a supplier. Although all of the participants consider environmental performance in making supplier-retention decisions, the criteria used and emphasis applied vary widely. Most companies believe they need to improve the assessment and monitoring tools for supplier evaluation. A majority expressed interest in finding more effective ways to measure the environmental and economic benefits of their supply chain environmental management efforts. This suggests opportunities for suppliers to gain market share by clearly demonstrating strong environmental performance and linking it to efficiency and cost performance.
Finding 7: Even without a large amount of quantitative data, most participants believe that their supply chain management efforts have benefited their companies. Some were able to quantify how their initiatives had reduced specific environmental impacts. Others provided anecdotal evidence showing how environmental efforts with suppliers provided business value. The companies identified specific cases where working with suppliers on environmental initiatives had improved product quality, reduced production times, heightened productivity, contributed to product innovation, reduced R&D costs, and increased market share.
Finding 8: All of the companies interviewed plan to continue their supply chain environmental management efforts. Recognizing the role that product design and specification plays in environmental and economic performance throughout the supply chain, several companies plan to collaborate with suppliers on "design for the environment" projects. Such initiatives seek to reduce environmentally hazardous inputs and lessen the environmental impacts of products throughout their life cycle, including production, distribution, use, and disposal. A number of companies also plan to expand their environmental initiatives to include additional suppliers.
Finding 9: All of the companies are interested in sharing information and tools with each other. Although many participants view their supply chain environmental performance as a potential source of competitive advantage, they also see value in collaborating to identify best practices in this area. Many of the companies expressed interest in creating an ongoing forum to share best practices and work on issues of common concern.
Common Traits of the Environmental LeadersThe companies emerging as leaders in this benchmarking study can serve as useful models for any enterprise seeking gains in efficiency, economy, and environmental performance through supply chain environmental management programs. These leaders share a number of common characteristics. Specifically, their well-developed and successful supply chain environmental management programs incorporate four key elements: (1) top-level leadership, (2) cross-functional integration, (3) effective communication within the organization and with suppliers, and (4) effective processes for targeting, evaluating, selecting, and working with suppliers.
Top-level leadership. Supply chain and environmental professionals in leadership companies noted that top management's understanding of and support for their efforts made a critical difference to the success of their supplier programs. In many cases, the upper management support reflects a strong, high-level corporate commitment to environmental stewardship. Companies with active supply chain environmental management programs typically have strong goals relating to resource conservation, waste minimization, pollution prevention, and green design. Further, they often take a leadership position within their industry to improve the environmental performance of suppliers. The leaders feel that their obligation to environmental improvement also means serving as a model for their industry. They believe they have a role in determining new standards for environmental management, sustainable production practices, and integration of sustainable materials into product design.
Cross-functional integration. Recognizing that many different divisions of an enterprise may interact with suppliers, leading companies often integrate environmental goals into core business functions involving suppliers. The innovators also are integrating environmental specialists with cross-disciplinary backgrounds into key business functions, such as strategic planning, product development, purchasing, and quality assurance. Many of these individuals serve multiple divisions or participate on cross-functional environmental teams. They often help train other staff members on environmental issues and provide technical assistance to suppliers. Importantly, the study participants noted that in a time of increasing workloads, supplier programs that were simple and build on existing efforts were more likely to achieve results.
Effective communication. Effective communication—both internally and externally with suppliers—plays a key role in fostering successful supply chain environmental management. Leadership companies regularly provide clear and consistent internal communication on environmental issues generally and on the value of good environmental performance to the company in particular. The leaders tend to use multiple communication channels to educate employees about these priorities. Some methods include incorporating environmental messages into daily company communications, establishing an intranet site as a resource for information, and training all employees on environmental issues.
Externally, leadership companies provide suppliers with clear, consistent, frequent, two-way communication about environmental issues. They communicate their environmental expectations to prospective and current suppliers through such vehicles as environmental mission statements and codes of conduct. Many also brief vendors on the role that environmental performance plays in supplier selection and evaluation. Some companies ask suppliers to complete a self-assessment or environmental questionnaire as a part of the qualification process. After selecting a vendor, the leaders communicate environmental expectations through contract conditions, supplier newsletters, periodic performance reviews, and ongoing communications with the supplier's R&D, purchasing, and quality-assurance staff.
Effective processes for targeting, evaluating, selecting, and working with suppliers. Although a few of the leaders work with all suppliers on environmental initiatives, the majority focus on first-tier vendors that have the most at stake in their relationship with the company. In addition, many companies work extensively with contract manufacturers and/or suppliers that handle significant quantities of hazardous materials as the actions of these vendors could most directly affect product quality and corporate reputation.
Leadership companies have incorporated environmental performance into the supplier solicitation, selection, and monitoring processes. Some signal their environmental values and expectations to all potential suppliers as a means of ensuring that few, if any, environmentally unaware vendors approach them for business. In several cases, suppliers cannot be selected unless they pass an environmental screening process.
Innovative companies also review environmental performance as a key element of the decision to renew a business relationship. Performance is typically assessed through a combination of site visits and formal environmental assessments. Most companies recognize that no vendor is environmentally perfect. When a problem is discovered, they will work with suppliers to upgrade performance over time. Nonetheless, leadership companies do not shy away from ending relationships with suppliers who repeatedly fail to meet environmental expectations.
Exhibits 1 through 4 detail the key evaluation metrics leadership companies use to review suppliers' environmental performance. The criteria in Exhibit 1, which relate to regulatory compliance, are designed to ensure that suppliers follow applicable environmental laws and regulations. The criteria in Exhibit 2 aim at assessing suppliers' environmental management systems (EMS), which indicate how well companies are meeting their environmental performance goals. Exhibit 3 lists "eco-efficiency" criteria that indicate how efficiently suppliers are using energy and material inputs and designing processes that prevent pollution from being generated. Exhibit 4 lists criteria related to green design initiatives. This means designing products in ways that reduce environmental impacts throughout the life cycle of production, distribution, use, and disposal.
Finally, innovative companies have included feedback mechanisms in their supply chain environmental management programs to help them understand where and how improvements can be made. One company, for example, changed its supplier survey after receiving feedback from the buyers that it was too complicated and presupposed background information that the buyers did not have.
Key Stakeholder Findings: Great ExpectationsIn addition to benchmarking company performance, we asked organizations representing the interests of investors, business partners, consumers, and the environment about their supply chain environmental management expectations of leadership companies and their suppliers. The results reveal that many stakeholders already have high expectations in this area—expectations that will only intensify in the future.
These expectations are important to companies for a number of reasons. For one thing, stakeholder views often shape upcoming government activity. Furthermore, their expectations may help forecast future trends in environmental legislation and regulation. Perhaps even more importantly, our findings represent the expectations of a significant number of the benchmarked companies' customers and investors—constituencies that few businesses can afford to ignore.
Five major findings emerged from discussions with these stakeholder groups.
Finding 1: At a minimum, all of the stakeholders expect leadership companies to comply with environmental laws and regulations. Although not all organizations measure corporate environmental performance, most research a company's compliance history. To some extent, they also evaluate the environmental management system in place.
Exhibits 5 through 9 summarize the criteria stakeholders use to assess corporate environmental performance. Many of these criteria are similar to those companies use to evaluate supplier performance in this area. Exhibit 5 lists those criteria that stakeholder groups apply to determine a company's compliance with applicable environmental laws and regulations. Criteria in Exhibit 6 are designed to assess the strength of companies' environmental management systems. Exhibit 7 indicates "eco-efficiency" criteria some proactive stakeholder groups are using to evaluate company efforts to use energy and material inputs more efficiently and to design processes in ways that prevent pollution. Exhibit 8 lists criteria related to green design initiatives that reduce environmental impacts throughout the products' life cycle. Finally, Exhibit 9 shows the extent to which stakeholders consider a company's supply chain environmental management programs and the environmental performance of suppliers in their evaluation process.
Finding 2: The most progressive stakeholder groups are looking for leadership companies to go beyond compliance. Certain investor and environmental stakeholder groups expect companies to undertake voluntary programs to improve their environmental performance. Evaluations conducted by these organizations center on eco-efficiency, green design, and supply chain environmental management. Most of these stakeholders conduct detailed assessments of corporate environmental performance. Though many look only at compliance, a few progressive stakeholders have developed additional criteria to measure companies' environmental performance. They rate the sustainability or eco-efficiency of the businesses they evaluate, an approach not generally seen among the company self-evaluations.
Finding 3: Most stakeholders recognize the important role that supply chain management can play in a company's overall environmental performance. A few, in fact, actually have begun to formally incorporate criteria related to this activity into their assessments of companies' environmental performance. Exhibit 9 details the types of evaluation criteria being used to evaluate companies' supply chain environmental management efforts. Most of the groups interviewed want to learn more about supplier performance but noted that little information was publicly available on this topic. In addition, most stakeholders said that few, if any, metrics existed to measure company performance in this area. In fact, only the financial stakeholders currently are looking at this issue in their assessments.
Although other stakeholder groups are not yet explicitly asking about green supply chain efforts, many plan to move in this direction. Several groups pointed out that this represented a natural evolution in the thinking of both stakeholder groups and companies about the importance of environmental impacts throughout the products' life cycle. Life-cycle thinking has focused attention on the environmental impacts of material inputs not only on the products themselves, but also throughout the supply chain.
Finding 4: Stakeholders are interested in collaborating with companies. All of the stakeholder groups expressed an interest in working more closely with the companies they evaluated and with the business community in general. Many expressed strong interest in fostering green supply chain programs and other efforts to improve corporate environmental performance.
Finding 5: Stakeholder groups have frequent and influential communication with their customers or audience. Through various communication vehicles (newsletters, publications, direct consultation, and so forth), all of the stakeholders regularly provide information to their customers. This communication frequently includes recommendations on which companies to buy goods and services from, whom to invest with, and whom to work for. These stakeholder groups provide an important source of information and influence for key business constituencies—including employees, customers, and investors. Thus, their emerging interest in environmental issues related to supply chains warrants careful attention.
Challenges and Opportunities AheadOur benchmarking study results suggest that a diverse set of companies have launched initiatives to address environmental issues with their suppliers. Importantly, they already are benefiting from these efforts—or soon expect to do so. Our study also indicates that stakeholder groups, including those representing customers and investors, expect companies to proactively address environmental performance throughout their supply chain. These findings strongly suggest that many supply chain professionals will be tasked to address environmental issues in the near future—if they are not already doing so.
To supply chain managers who have focused on more traditional areas such as price, quality, service, and delivery time, incorporating environmental issues into their jobs represents both a challenge and an opportunity. For many companies, improving environmental performance throughout the supply chain can provide a significant opportunity for creating business value and gaining competitive advantage. Suppliers, too, may find that they can gain a competitive edge and increase market share by working collaboratively with their customers to reduce environmental impacts. In short, we believe that environmental management represents an opportunity for companies—and the managers in those companies—to improve both economic and environmental performance throughout their supply chain.
The most successful programs display a fairly basic set of common characteristics. Some of these, such as top-level leadership and strong internal communication, are central to effective management of any program. Others are more specific to supply chain management. These characteristics include effective channels for communicating and collaborating with suppliers, cross-functional teams that include environmental and supply chain management experts, and effective processes for collaborating with suppliers. We believe as increased attention is paid to the relationship between the environment and supply chain management, even more innovative practices will emerge.
Authors' note: This article represents a collaborative effort that included valuable contributions from David Aldorfer, director of GM Audit Services-Environmental; Sandra S. Brewer, staff environmental engineer at GM's Worldwide Facilities Group; Leah Haygood, interim director of BSREF's Business and the Environment (BATE) Program; Steve Lippman, BATE program associate; and Rebecca Wieghart, director, technical services, BATE Program.
The Supply Chain Working Group's efforts are supported by a grant from the Merck Family Fund, the Heinz Endowments, and by contributions from participating companies. To obtain more information from BSREF on these supply chain environmental management initiatives, contact Kate Gavaghan at (919) 510-9492 or Steve Lippman at (415) 537-0888.
| Author Information |
| Kate Gavaghan is regional manager and Rebecca Calahan Klein is vice president of the Business for Social Responsibility's Business and the Environment Program. James P. Olson is manager of supplier development-worldwide purchasing at General Motors. Terry E. Pritchett is manager of the Global Climate Issue Team in GM's Public Policy Center. |
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