As concerns about the environment, human rights, and social equality continue to move front and center in the global consciousness, more and more companies are taking steps to make sustainability a core part of their business strategy. And the impact on suppliers promises to be huge.
For example, since the biggest part of buying organizations’ environmental footprint often comes from their upstream supply chains,i many are mandating that their suppliers not only comply with specific sustainability guidelines, but also provide detailed data to back it up. If such requirements haven’t yet touched your business, they will soon. A recent PwC report names sustainability as one of the fastest-growing supply chain management trends, with more than two-thirds of supply chain executives surveyed saying it will play an important role in how they manage their supply chains in 2015, and 76% of operations professionals saying their company’s focus on creating a more sustainable supply chain would increase over the next three years.ii
Protecting the environment and human health is clearly a worthy goal. But aside from the obvious ethical implications, what are the key drivers of the sustainability movement in business? And as a supplier, what should you do to position your company on the right side of this sea change?
Leaning towards green: Why companies are embracing sustainability
While the need to comply with government regulations and cut costs definitely plays a role in the heightened focus on sustainability, new drivers have taken center stage in recent years, including:
- Self-imposed goals by industry thought leaders. A growing number of companies recognize that failure to take action could ultimately prove devastating to their business. In the coffee industry, for example, climate change is already inflating prices and reducing the availability of quality beans, motivating companies and nonprofits to collaborate on efforts that can stem or solve negative conditions. The palm oil industry offers another example, with giants like Cargill and Unilever pledging to produce, trade, or purchase only sustainable palm oil by 2020iii and participating in organizations like the Roundtable on Sustainable Palm Oil. “So while certainly it’s a good thing to buy sustainable palm oil to help stop deforestation, forward-thinking executives realize it’s also essential to their company’s future,” says Thomas Odenwald, senior vice president of sustainability strategies for SAP. “A recent scientific study showed that we have now crossed four of nine planetary boundaries, and we keep extracting 50% more natural resources than was the case only 30 years ago. We need to think seriously about radical transformation. Maximizing profits cannot be the only goal; we need an integrated sustainable business agenda across the value chain.”
- Escalating customer concern about how and where products are made. Attention to sustainable purchasing is escalating rapidly, particularly among younger millennial consumers. “The new generation of customers wants to have more information about what’s in the products they buy, what’s not in them, where they come from, and who made them under what conditions, and this is significantly affecting not just high-tech and apparel, but many other industries too,” says Thomas.
- Brand differentiation that goes beyond lip service. Though greenwashing is still alive and well, customer demand for transparency—combined with the need to truly engage customers to ensure business success—makes it increasingly imperative that companies walk their sustainability talk. And as the voice of the customer gains an ever-greater weight in how brands are perceived, establishing a legitimate sustainability presence can mean a big leg up. “We’re finding that the need to impact your brand positively in your customers’ view to differentiate yourself from competitors is a key reason to pursue sustainability,” says Aly Pinder, senior research analyst in service management for Aberdeen Group. “In today’s market, end customers get lots of opinions of you before they purchase, and the ability to show them you stand for more than just a product is driving a growing number of these initiatives.”
- Sustainability’s power to boost efficiency and service. By promoting more effective use of resources, sustainability can enhance operational efficiency and productivity while opening the door to better customer service. For example, a repair company with optimized vehicle routing not only reduces its emissions through lower fuel consumption, but lessens driving hours so technicians can spend more time with customers. And goals like these are central to many sustainability efforts. A recent Aberdeen survey found that the top three motives to build sustainable service operations were the need to increase productivity and resource utilization (69%), speed service delivery (47%), and eliminate service-related costs (33%).iv
Sustainability success strategies
As the sustainability tsunami builds momentum, a proactive approach will go a long way towards helping you ride the wave of change instead of having it crash down on your head. That likely means reshaping parts or all of the way you run your business—not just internally, but also in your interactions with customers and your own suppliers. The following guidelines can help.
The Pains of Sustainability: SAP Eases the Way
Sure, it’s great news for the planet that more companies are tracking supplier sustainability. But the myriad platforms and lack of standardization in these efforts can turn into a nightmare for many suppliers, with some receiving 100+ questionnaires in a single week—each with its own unique format and requirements.
The SAP Product Stewardship Network (SAP PSN) is helping to change all that. This online collaboration community lets buyers and suppliers exchange sustainability and compliance data easily and efficiently (watch this video for a quick overview). Features include:
SAP has also partnered with 100+ other companies in The Sustainability Consortium (TSC), a collaborative group working to help standardize and streamline sustainability measurement and reporting.
1. Get ready to give greater detail. Maybe you already know the exact amounts of particulate matter your factory expends or the kilowatt hours your solar panels save you every month. But when it comes to your own sources of supply, the picture can get murky fast. If a key customer started asking how much fertilizer is used to produce each apple you sell, or whether all your 3T materials are sourced from certified smelters, would you know the answer?
While many buyers already query suppliers about regulatory compliance or their general approach to sustainability, thought leaders are taking such questions to a whole new level. For example, Walmart is working with The Sustainability Consortium (TSC) and using the SAP Product Stewardship Network to create a Sustainability Index that requires its suppliers to answer detailed, scientifically based questions about their product contents and business practices. By 2017, 70% of the goods sold in US Walmarts and Sam’s Clubs will be sourced from suppliers using the Index. And other large buyers are headed in the same direction.
“As a supplier, you have two options,” Thomas says. “You can prepare up front by proactively creating the transparency and differentiation now, or you can be reactive by following regulations to simply secure your license to work. But at the end of the day it’s a complete end-to-end relationship, and you need to be both reactive and proactive to stay in business—not only to respond to your customers, but to make your own supply chain more efficient and sustainable.”
2. Secure leadership and funding first. As Aberdeen research shows, effective implementation depends on executive leadership, since that sets the tone for your sustainability efforts across the organization. Sustainability winners also put their money where their mouth is: best-in-class companies were 70% more likely to allocate budget to green initiatives than laggards (9% vs. 5.3%, respectively).v
3. Build a culture of sustainability. “Whether you have seven employees or 7,000, it’s all about building the culture you want in your company and putting sustainability at the center,” Aly says. Use the lens of sustainability for everything you do. “It’s not a one-off, once-a-year thing, but something your organization is built around on a day-to-day basis. And that trickles down from your leaders to all employees, showing them this is how we want to move forward, this is integral to the way we see the future of our business.” How can you get there?
- Align sustainability with strategic goals. “Sustainability shouldn’t aim at just one thing like ‘we want to be more green’ or recycling all your laptops,” Aly says. "Instead, approach it as, ‘if we do this right it will have a positive impact on our business and drive at our end business goals,’ whether it’s increased revenue or to bolster margins or deliver better services for the end customer.” You can employ business analytics tools or your ERP system to integrate sustainability information with internal data on your own processes, a best practice successfully used by companies like Danone and Stonyfield Farm Inc. to optimize both sustainability and financial performance.vi
- Engage, empower, and educate. Participation and results soar when resources align with rhetoric, so give workers training, tools, and information to satisfy not just operational needs, but sustainability ones too. “It has to be something the entire organization lives and breathes,” Aly says. “So whether it’s hiring a consultant or buying fuel-efficient vehicles, you engage and empower your employees to support the right culture for your business.” Establishing a “green guru” to lead your initiative—perhaps an employee with Six Sigma or LEAN credentials and a passion for sustainability—is also key here; 41% of companies in the Aberdeen survey listed this as a top action.vii
- Incentivize your workforce to put sustainability first. “We’re finding companies are doing really well when they communicate to employees not just the tasks they have to do, but the value their work has to customers and the organization,” Aly says. And be sure incentives drive the outcomes you really want. “So it’s not just coming up with this creative yet very costly green initiative, but one that also satisfies customer needs and margin growth.”
- Evangelize and publicize. “Top-performing companies are very innovative in communicating sustainability practices and goals across the organization, even in a global business with thousands of employees,” Aly says. “We’re seeing powerful stuff around video, and there’s also all sorts of movement around gamification.” Keep workers and customers inspired and informed via newsletters, your website, press and social media, and monthly/annual checkpoints. “Have dashboards or some type of visibility tool to show progress metrics, and make it available to customers and the broader teams,” Aly recommends. And be sure to publicly recognize and reward employees who contribute the most to sustainability goals.
4. Think circular, not linear. Rather than focusing sustainability on pieces of your production process or specific “end-of-pipe” results, look at the entire lifecycle in a given process. For example, a cradle-to-grave approach to OEM design considers the environmental impact of not only how a product is produced, distributed, used, and repaired, but also how it’s disposed of or recycled. “If you think up front about the end outcome when you’re purchasing or putting something on a shop floor, it should all positively impact your sustainability initiative,” Aly says.
5. Dream big with decoupling. Sustainability leaders aim high by joining aggressive expansion and sustainability targets. “You want to decouple your growth aspirations as a business from further negative environmental or social impacts; that’s the ultimate goal,” says Thomas, noting that Unilever has committed to double its size while halving its environmental impact by 2020. “That’s very, very aspirational, and it includes their complete supply chain as well.”
Leading for the long term
In today’s hypercompetitive market, it’s all too easy for sustainability to fall by the wayside as you focus on short-term “business as usual”—with projects that promise a fast payoff grabbing the greatest attention and resources. Yet industry visionaries are beginning to take a longer-term view. “There’s a clear business case for sustainability and a definite ROI, just not always in the short time frames we’re used to,” Thomas points out.viii Aware of the dangers posed by looming threats to environmental and human health, leading companies are adopting innovative strategies that prioritize sustainability while driving financial and sales success.
Will your business be one of them?
i See, for example, “A New Perspective on Enterprise Resource Management,” MITSloan Management Review, 3 September 2014, page 4: “Currently, most companies directly control only about 10% to 20% of the environmental footprints of the products they sell; the rest is linked to upstream suppliers or downstream activities.”
ii “Sustainable Supply Chains: Making Value the Priority,” Pricewaterhouse Coopers (PwC) and the APICS Foundation, 2014; data taken from PwC’s Global Supply Chain Survey 2013, PwC, September 2013.
iii “Unilever, Cargill Push to Green Their Palm Oil Chain,” Fortune.com, 17 December 2014.
iv “Sustainability Initiatives in Service: Find the Green,” Aberdeen Group, May 2014, page 3.
viii For example, carbon reduction activities can have a very positive return on investment, delivering an average return of 33%, as noted in “Carbon Reductions Generate Positive ROI,” Carbon Disclosure Project, 2012, page 6. “Companies that have yet to invest in carbon reductions are missing high return opportunities to create financial value for their investors—irrespective of the environmental benefits,” the report says.