For a glimpse of how challenging it can be to practice corporate responsibility, look no further than the clothing retailer known as The Gap.

Dan Henkle, Gap, Inc.’s senior vice president of social responsibility, told attendees at Stanford University’s recent annual socially and environmentally responsible (SER) supply chain conference just how far his company has progressed. In the early 1990s, the retailer’s SER initiatives were limited, as were those of all other apparel companies. The company had no formal sourcing guidelines and no corporate responsibility group.

Today, both are in place, along with a rigorous system for monitoring its SER compliance. The company goes to great lengths to ensure top-notch SER performance. Its teams monitor 2,000 garment factories in more than 50 countries, conducting more than 4,000 inspections a year.¹ They deny approvals to a fifth of new factory evaluation requests. And they revoke contracts with factories that fail to comply with Gap’s SER standards.²

Yet The Gap recently discovered that it was not as socially responsible as it wished to be. The company was faced with child labor allegations in India earlier this year when, without its knowledge or consent, a vendor subcontracted part of an order to an unauthorized facility in India that used child labor to produce one particular product for the GapKids label. The apparel industry often relies on informal workers at the tail end of the supply chain, for embroidery, for instance. But eliminating informal workers can hurt local economies; it’s a good source of income for them. There is no easy solution to such labor issues.

As The Gap story highlights, we’ve come a long way with SER—and yet we still have so far to go. Preliminary research from the Stanford Global Supply Chain Management Forum suggests that better measurement systems, new models, and greater emphasis on the social side of the equation can help to advance supply chain responsibility to the next level.

The Forum recently reviewed the SER practices found in the supply chains of 20 leading companies. (See accompanying sidebar on “About the Research.”) Looking across the entire value chain, we examined what social and environmental activities those companies have implemented within their product design and development (including end-of-life), sourcing, manufacturing/operations, and logistics areas.

One way to understand where we are today is to think of SER supply chain activities along a continuum that has three distinct stages, as depicted in Exhibit 1. We describe companies at the first stage as “Good Citizens”—they make an effort to comply with existing rules and regulations. Although vigilant in their efforts to follow the rules, most don’t attempt to move beyond the status quo. The hallmark of this stage is a strong emphasis on compliance. Over time, Good Citizens may expand and improve their responsibility activities to the point that they reach the second stage: what we label “Movers and Shakers.” At this stage, supply chain managers are focused on increasing the scope of their SER initiatives and modifying their existing practices. For example, they may expand the number of layers that they monitor within their supply chains or perhaps they are upgrading to more environmentally-friendly technologies. At the third stage are the “Trailblazers”—the companies that are implementing structural changes in order to improve their performance on social and environmental responsibility. Companies that reach this stage may introduce innovative products, processes, or technologies that transform their businesses—and even the communities around them—as they transform their supply chains.

A few of the companies we looked at are Good Citizens, following existing rules and social norms. A few, like POSCO and Toyota, discussed below, have trail-blazed their way to the third stage. But most of those with successful supply chains are currently at the second stage. These Movers and Shakers are beginning to do more than they are legally required to do; they are quite deliberately expanding the scope and scale of their SER activities. Those activities are worth a closer look.

For years now, Samsung has been expanding efforts to produce its electronic products in environmentally- friendly ways. As early as 1995, the electronics giant began applying a Life Cycle Assessment and Design for Disassembly/Recycle/Service methods to its products.³ And in response to tightening environmental regulations, the company decided to adopt what it calls its “Eco-design” process in 2004. Product environmental performance is divided into three general groupings: resource efficiency; energy efficiency; and level of environmental hazard. Each is classified into specific areas for assessment, and performance targets are established and applied in the new product development process. Eco-design began as a pilot program for some printer and refrigerator models and then was applied to all product lines in 2006.

Hewlett-Packard, another Mover and Shaker, initially obliged its top 50 suppliers (ranked by spend) to commit to its code of conduct; HP now requires all direct suppliers to adhere to the code and makes it explicit in all new supplier contracts. HP’s auditing efforts have focused on assessing suppliers’ conformance with its codes of conduct. Recently, the company has discussed expanding its assessments, taking a closer look at the network effect of its SER programs on suppliers.

Similarly, Apple has broadened its supplier compliance activities. In 2005, the company implemented its first supplier code of conduct.⁴ A year later, concerned by reports alleging poor working conditions at a Chinese supplier handling final assembly of iPods, Apple’s leaders conducted an audit, correcting work practices that did not conform to the new supplier code of conduct. The audit report prompted Apple to expand its compliance activities to all Mac and iPod final assembly plants. Third-party auditors reviewed records, interviewed employees, and conducted rigorous physical inspections of 11 factories and supporting facilities.

We found only a few examples of SER activities located at the third stage of the continuum. The Trailblazers have developed technologies that add greatly to their overall responsibility profile. Interestingly, their activities are clustered in logistics, manufacturing, and product development; we have not yet found companies that are making big structural changes to their sourcing activities.

For example, POSCO—the third-largest steel company in South Korea—has developed an innovative steel-making process that dramatically improves its environmental footprint while reducing capital and production costs.⁵ For the last century, the blast furnace method has been used to produce molten iron. This method requires solid lumps of iron ore and soft coal, which must go through the preliminary processes of coking and sintering. These extra steps generate pollutants and compel steelmakers to bear greater facility investment costs. Driven by concern for the environment as well as by business concerns, POSCO partnered with Siemens VAI to develop an environmentally-friendly steel-making technology called FINEX. The new smelting reduction process produces hot metal using a direct charge of iron ore fines—small pellet-sized pieces—and non-coking coal. This eliminates the need for the sinter and coke plants required to process raw materials for the traditional blast-furnace process.

The environmental benefits related to the FINEX process have been enormous. By relying on cleaner coal, POSCO has reduced its emissions of sulfur and nitrogen oxides by 90 percent. Implementation of the FINEX process has also resulted in significant business benefits; the process costs 15 percent less than the conventional blast furnace method, and development of new plants is 20 percent less expensive.

And Toyota Industries has reconfigured its logistics operations in order to reduce its environmental footprint. In 2001, the company established a distribution center in Ichinomiya in Japan. This center has been reconfigured so that the parts procured from different suppliers are collected there and then trucked to the appropriate plants. As a result, the number of trucks used for procurement deliveries has dropped by close to half.

Most companies have expanded and improved their SER practices. A few have restructured their logistics, manufacturing, and/or product development processes in order to improve their social and environmental performance. That’s good, but it’s still not enough. The pace can and must be quicker if the supply chain leaders are to advance to the next level of social and environmental responsibility. The Stanford Global Supply Chain Management Forum believes that three key factors deserve attention:

1. Better Measurement Systems

As part of our review, the Forum assessed how the supply chain leaders are evaluating the impact of SER initiatives. We found that although they provided examples of SER-related cost savings, business and supply chain metrics were not systematically included in their evaluations. (Exhibit 2 gives an overview of the metrics in place.) The inclusion of these variables was sporadic.

For instance, at the time of our research, Apple was able to demonstrate how the incorporation of environmental variables into the design process significantly reduces product mass, packaging mass, power consumption, and the lead content in its iMac computers. But the company did not measure the impact its design might be having on logistics efficiencies—for example, the effect of product and packaging mass reductions on transport efficiency.

The story is similar at Procter & Gamble, whose fabric and home care plant in Amiens, France, formerly purchased its plastic bottles from an outside vendor and then started to blow its own plastic bottles. P&G reported that this reduced its environmental footprint and production costs. However, the company didn’t measure the impact on important supply chain efficiency metrics such as manufacturing cycle time.

There is also the question of measuring upstream SER performance. On the whole, the supply chain leaders have some knowledge of their suppliers’ SER practices, but the level of visibility varies greatly since metrics and data collection methods are not standardized.

For example, there is a big difference in the comprehensiveness and credibility of the SER information provided by suppliers. Clothing retailer H&M relies on supplier self-assessment data, makes regular site visits, and reviews factory records. But other successful supply chains rely primarily on information provided to them by their suppliers and do not confirm its accuracy. Although most companies focus their monitoring efforts on their first-tier suppliers, a few, like Hewlett-Packard and Motorola, are attempting to monitor the next layer by helping to train their first-tier suppliers to effectively monitor their suppliers.

Although the supply chain leaders have made progress toward understanding the current SER practices of their suppliers, it seems that less attention has been paid to measuring the network effects of their own activities on suppliers’ business operations, supply chain performance, and adoption of SER practices. It’s rare to find a corporate report or collateral that describes the impact of responsibility initiatives on suppliers. At least from an external vantage point, it’s like looking into a black box.

Recently, the Stanford Global Supply Chain Management Forum co-hosted two research meetings with a few of our corporate partners to discuss SER metrics. Although we did not delve into specific measures, we did identify important elements of a good measurement system. (See sidebar on “Proposed Elements of a Robust SER Measurement System.”)

The point about broad acceptance is particularly important. Standardized measurement systems are key to wider use. Forum participants have discussed the value of using a neutral party to develop a standardized system, on the assumption that anything developed internally may be viewed as biased. A non-governmental organization may be the best choice to coordinate such efforts. For example, the Business for Social Responsibility organization has done a good job of helping the electronics industry develop and implement standard metrics. In particular, the group has developed a self-assessment instrument that is being utilized by several leading electronics companies to help assess supplier SER performance.

The neutral party can actively engage industry participants in the development process. It’s an obvious point, but corporations are more likely to use a SER measurement system that they have helped create. One important role that the neutral party would play is to bring together key industry representatives. A good choice of neutral party might be a research center or program with strong industry ties, such as Stanford’s Global Supply Chain Management Forum or the Massachusetts Institute of Technology’s Center for Transportation and Logistics.

2. More Holistic, Dynamic and Flexible Supply Chain Models

The SER case studies developed so far by the Stanford Global Supply Chain Management Forum suggest that more holistic, dynamic, and flexible supply chain models can improve business performance and advance SER. This is especially true in emerging economies.

In traditional supply chain models, social and environmental variables are generally considered external factors. The supply network is often perceived as bounded; first- and second-tier suppliers are key parts of the network on which companies primarily focus.

The leaders we studied made these assumptions about their supply chains:

• Holistic. Social and environmental factors are strongly tied to supply chain and SER performance, and hence should be strategically incorporated.

• Flexible. The extended supply network is fluid. It may include NGOs, government organizations, local community organizations, and academic institutions. The “membership” of a network is likely to change over time in response to changes in business and social and environmental conditions. Also, relationships within the extended network are collaborative. There is regular engagement between the different nodes within the network. Communications are interactive.

• Dynamic. This is a journey, not a sprint; it may take a while to get it right. It’s important to take a long-term perspective, engaging in a continual process of learning and change.

Mexican cement giant CEMEX offers a good example of the new flexible thinking required. In partnership with local community members and non-governmental organizations—very different partners for such a business—the company has implemented targeted social programs that help it to develop a world-class supply chain.₆ The company’s Patrimonio Hoy program provides poor families with loans to purchase construction materials along with professional advice, eventually creating a new market for CEMEX’s product. The company has also implemented a production distribution network called Construrama that allows Mexican distributors to participate in a retail network with strong brand recognition. The distributors get seed capital, training opportunities, and marketing support. The program has strengthened CEMEX’s sales network by standardizing IT systems and storefronts. Further, it has helped to increase CEMEX’s supply chain operation efficiencies and reduce costs, according to a report by the World Bank.

And coffee chain Starbucks, working closely with coffee farmers and their communities, has used its market clout as a way to implement social change through its Coffee and Farm Equity (C.A.F.É) practices initiative.⁷ The effort outlines a set of global social and environmental guidelines for suppliers that fall under categories such as product quality, economic accountability, social responsibility, and environmental leadership. Suppliers—that is, the farmers—are graded on these criteria by independent verifiers. They qualify as preferred suppliers if their scores are above 60 percent, and they are paid premium prices if they score higher than 80 percent. By business standards, the C.A.F.É practices program was not an immediate success; it reduced the company’s margins because Starbucks paid more for premium coffee. However, over time, the program created a competitive advantage. Starbucks now has a stable supply base of quality coffee and a strong brand image as a socially responsible leader. The program has also improved the economic and social conditions of farmers.

Similarly, ITC Limited, one of India’s largest private sector conglomerates, reengineered its supply chain in a way that would improve the economic conditions of local soybean farmers. In the traditional soybean supply chain, farmers don’t know what price they will be paid until they arrive at the main market (often as much as a 25-mile trip one way) and the visual inspection of their beans is arbitrary and unscientific. This places the farmers at a disadvantage since they have to incur travel costs before knowing if and what they will be paid.⁸

To create a more just and efficient supply chain, ITC established Internet kiosks in local villages that allow farmers to inquire about prices and sell their soybeans directly to ITC. The company also implemented a more scientific inspection program. Unless there is substantial variation in the quality of the sample shown and the actual goods delivered, the conditional price is the final price. The reengineered supply chain has reduced travel and transaction costs and increased supply chain efficiency (transactions can be completed the same day), thereby increasing the income of these small farmers.

At first glance, this new model may seem harder to utilize than traditional models. Collaboration with multiple parties is always a challenge, and introduction of new technologies and new processes adds complexity. However, what we learned from SER-savvy companies is that potential challenges can be mitigated by using a strategic approach, carefully aligning responsibility initiatives and business activities.

In part, Starbucks focused on improving farmers’ working and environmental conditions because of the link to their sourcing of quality coffee. And, CEMEX implemented social programs that were likely to help create a new market. These SER leaders were also strategic about their partnerships, building trust and engaging with the nodes in their networks that are most strongly tied to supply chain performance. In other words, SER and business initiatives can be markedly more successful when they are integrated.

3. Emphasis on the “S” in SER

The cases noted above highlight the need to put the “S” back into SER. The social programs that these leaders have implemented are critical to both their supply chain and their SER performance.

However, the goal of most companies’ supply chain SER programs is to improve environmental conditions, as a quick glance through social responsibility reports will show. Although companies have implemented a myriad of social responsibility programs—from efforts to end human trafficking to others to fight AIDS—few of those programs are directly focused on key supply chain areas.

With the exception of specific sourcing initiatives, most SER product development efforts have focused on integrating environmental variables into the design process and creating products that have lower environmental impact.

Most successful supply chain leaders contribute significant resources to expand their green purchases and product lines. SER manufacturing efforts are aimed at reducing waste, energy and hazardous emissions. And the goal of almost all SER logistics programs is to reduce transport-related CO2 emissions. When we consider the value chain—designing, buying, making, and moving products—the glare of environmental issues is bright. So it’s natural that companies would focus their efforts on these areas first. But if we can shift some weight over to the social side of the scale, we find significant opportunities to improve business and societal conditions.

Nokia shows how. In addition to its strong commitment to designing for the environment, the mobile phone giant has devoted considerable resources to developing new products tailored specifically to the needs of users in emerging economies. This has helped the company achieve greater market share and improve local economic conditions.

In 1996 Nokia established its first regional office in Singapore as a platform for beginning to understand Asia Pacific cultures. The company also developed research cooperatives with universities such as the Beijing University of Post and Telecommunications and the Indian Institute of Science to increase its interaction with Asian markets. And it built production facilities in Brazil, Hungary, and China. A recent article in IndustryWeek reported, “Not only does Nokia devote years of research to understand both the people and the cultures in which its product will be distributed, but more specifically it also has within its design organization a staff focused on how people live, work, and play in many cultures.”

Nokia’s early decision to focus on design for emerging economies has resulted in significant business benefits. In 2006, 40 percent of its handsets sales, by volume, came from the Middle East, Africa, China, and Latin America. Nokia is the world’s largest maker of mobile phones and has retained its lead over fierce competitors such as Motorola and Samsung.

Dan Henkle, Gap’s SER leader, has expressed sorrow about his company’s infringements of its own child labor principles. But he is glad that the company has been quick to halt the practice, to make long-term reparations to those affected, and to tighten up on its own SER practices across the board. Like many other business leaders, he is eager to move socially and environmentally responsible practices to the next level.

The Stanford Global Supply Chain Management Forum’s early research suggests that better measurement systems, new holistic approaches, and greater emphasis on the social side of the equation can help companies progress to the next plane of social and environmental responsibility. A common thread is the integration of SER and business goals. The tighter a company can weave those two strands together, the greater the value it will derive.