When implementing sustainability programs for their supply chains, companies don't have to go it alone. They also have the option of teaming up with other businesses as well as outside entities like environmental non-governmental organizations.
Such partnerships can go a long way toward getting a sustainability program off the ground and boosting its chances of success, according to a study by David Hyatt. Hyatt, a clinical assistant professor of supply chain management at the University of Arkansas' Sam M. Walton College of Business, specializes in research on sustainability in global supply chains—in particular, how non-profits and businesses can collaborate to solve issues related to the natural environment. Last October, the Council of Supply Chain Management Professionals presented Hyatt with the 2011 E. Grosvenor Plowman (Best Paper) Award for his report on that research, Proactive Environmental Strategies in the Supply Chain: An Exploration of the Effects of Cross-Sector Partnerships.
Hyatt spoke recently with DC Velocity Group Editorial Director Mitch Mac Donald about his research, the challenges that lie ahead, and the steps any company, large or small, can take right now to start down the path of sustainability.
Q: Current thinking holds that adopting sustainable practices is not just good for the planet but can also be good for a business's bottom line. Does your research support that view?
A: Yes. Businesses are starting to see that they are embedded within a social system and that the social system, in turn, is embedded within the environmental system, which has fixed limitations. The challenge for businesses is to get a sense of what the long-term environmental limitations are and start to work within that framework.
Q: When you say "fixed limitations," what do you mean?
A: Well, carbon emissions are becoming a serious issue for a number of businesses. They are taking climate change seriously because it affects what their markets are going to be and where those markets are going to be. Other issues are energy costs, which in recent years have increased dramatically. In the United States, energy is heavily subsidized for businesses, leading to prices that are quite low compared with many other areas of the world. That has not worked in our favor because the other areas of the world have been innovating around energy for a number of years.
Q: The subsidy has removed the free market motivation to look for ways to save energy?
A: Yes. The challenge is figuring out a way to internalize the externalities that businesses are creating so that we price goods to reflect their impact. That's where we're going to be heading within 20 years.
One big push we're seeing right now has to do with all these sustainability score cards and transparency across the supply chain. In 2009, the University of Arkansas and Arizona State University formed the Sustainability Consortium. There are now about 70 members of the consortium, most of which are private-sector companies. What the consortium membership seeks to create is some sort of standardized way to measure the sustainability of consumer products. Whether this particular effort is successful at that or not, it shows us the direction.
Q: What's prompting the focus on standards?
A: Before they can start down the sustainability road, companies need a full life-cycle analysis for their products, which they can then use to assess their performance and measure their progress. What they all want is life-cycle analysis based metrics, some sort of independent standards that are transparent.
They see that they've got to get a handle on what's happening in their supply chains, and that can open up new opportunities—if you can use your supply chain to generate innovation, that could give you a short-term competitive advantage around particular products. In our research, we just spent some time at Walmart talking with them about sustainability. We are thinking about this idea of a lens of sustainability. If you look at your operations through the lens of sustainability, you see opportunities that you didn't see before. At Walmart, for instance, when they were using the lens of sustainability to look at plastic bags, they realized that in one country, they were sourcing bags from five different vendors. They discovered it because they were using this lens of sustainability.
The other dimension is a systems view. I was interviewing one manager who said, "Well, for me it gets back to seeing a product within the system in which it lives." As you know, retailers generally have focused on their margin between cost and sale price, so this is causing some of them, including Walmart, to become more involved in the product design. This manager described to me the kind of product change he envisions. He wants to think of his product as something that is cast in a mold and is packaged in a particular way to be moved and transported in a particular way, stacked on the shelf in a particular way, and has a particular utility in its consumption. There's a strategy for its use, whether it is recycled or disposed of or repurposed back into the supply chain. That is very much a systems way of thinking—and a potential source of innovation for the company.
Q: If you're responsible for your company's logistics and supply chain operations and you see this coming, what steps can you take to start making your business practices more sustainable?
A: Clearly, one of the most important things is just figuring out where you are. Before you can really innovate, you have to know what's going on in your supply chain.
Initiatives like the consortium can help us better measure sustainability. Companies and government and non-governmental organizations (NGOs) can collaborate in this space without a lot of risk in general for companies around competition. There is a lot of concern about sharing too much. But at this stage, businesses can effectively collaborate with one another in a pre-competitive way. They can compete on it later once the standards are developed.
Q: You noted that some companies are concerned about the potential competitive risks with this program, but isn't there a greater risk if you don't start embracing green initiatives?
A: Yes. There's a lot of pressure on companies right now to reduce the environmental impact of their operations. There is also emerging legislation around that kind of thing. So, it does create a greater risk in the organization.
There's another perception around sustainability—that it doesn't reduce costs, it adds costs. Those might be compliance costs or extra costs associated with transparency, for instance. There is probably some truth to that, that in some cases it will add cost. But this is not the right lens to have on. If you think from the perspective that it is going to reduce your costs, then you begin to see all these opportunities.
Q: So what comes next?
A: It turns out that there's a lot of data collected by companies about these issues and there are even some large databases that contain life-cycle analysis information. The next step would be to pull this together. Can we establish baseline measurements for a particular kind of product, like a soup can? Once we have ways to measure the sustainability of a consumer product and achieve some consistency across the supply chain in measuring it, then companies will be competing on it.