Today’s sustainability landscape looks more like a sprawling, unplanned metropolis than a well-designed framework of regulations threaded together to provide transparency and visibility to consumers, governments and investors. And it only gets more complex when supply chain sustainability is the goal.
The University of Oregon Sustainability Leadership Program, where I have received training, tracks nearly 50 standards, methods, regulations and approaches that an organization may be obliged to follow and report on.
In every case, manufacturers must document the impact on at least one of the “Triple Bottom Line” economic, environmental and social measures to demonstrate that they use sustainable business practices.
Maintaining compliance across brands and manufacturing lines can be daunting. But because of “flow-down” provisions in many of the standards and regulations, suppliers, too, are often required to maintain levels of compliance or even certifications in key areas as part of the manufacturer’s portfolio.
Green manufacturing impacts on supplier relationship management
Several impacts are immediate from both the manufacturer and supplier point of view.
For brands and manufacturers, the accuracy of the compliance level must be ensured and made auditable when required. To achieve these, the manufacturer might use standardized supplier questionnaires, surveys, or even phone (“desk”) audits to ensure that the proper information is being collected and risks in the supplier base can be assessed. Brands generally pay close attention to the “top 10/bottom 10” percent of suppliers.
In procurement, top-10 suppliers often have privileged status and flexible contract terms. To make sure these suppliers maintain the appropriate status and level of compliance, manufacturers can make clear their willingness to reassign this favored status to an organization that does a better job. Bottom-10 suppliers are often “at-risk” and require intervention and remediation to preserve a key component or hard-to-find material in the manufacturer’s supply chain.
The issue is equally challenging from the point of view of suppliers, who often have multiple customers across industry segments who make similar requests for information -- but not at the same time or in precise form. Suppliers may get important requests from one brand customer, while receiving a more detailed request from another brand customer in a different part of the same organization. The increased paperwork, internal data collection and potential remediation can eat into suppliers’ profit margins.
Compliance means solid data management for a sustainable supply chain
In my work with commercial organizations, I have learned that a solid data management plan is a key to success in managing a sustainable supply chain.
This can be intimidating, as supply chain sustainability requirements call for many kinds of information that don’t usually reside in one organization inside the enterprise. Product compliance and environmental standards, particularly those governing take-back and end-of-life standards -- which began to emerge from the European Union (EU) more than a decade ago -- demand that engineering, purchasing and finance all come together to address particular needs.
Take-back standards affect many product categories, ranging from automotive to computer equipment to the chemicals in cell phone batteries. Companies in the high-tech and consumer products industries are leading the way with consumer-friendly take-back policies such as toner cartridge reclamation and cell phone and computer disposal. These components fall under the guidance of the Waste Electrical and Electronic Equipment standards set by the EU and promoted for the past 30 years by the Organisation for Economic Co-Operation and Development (OECD).
The standards are meant to reduce the amount of elements such as the lead in solid-state circuits that find their way into incinerators and landfills. Other standards include the End-of-Life Vehicle initiative in automotive and transportation, Reduction of Hazardous Substances (RoHS) in many industries, and Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) in the chemical, substance, component and up-value chain industries. REACH and RoHS compliance get particularly tricky because manufacturers are required to report on the components and substances in their products without revealing the intellectual property (IP) and trade secrets that were used to create and assemble them.
From a financial perspective, the gorilla in the room is the Global Reporting Initiative (GRI) and the GRI G3.1 Guidelines standard of reporting. There is growing pressure for publicly traded companies to following the G3.1 Guidelines in their annual reporting practices. Meeting additional requirements can get companies listed in the Dow Jones Sustainability Index (DJSI), which historically has provided them a 5%-7% financial boost compared with peers in the regular Dow Jones indices.
New reporting requirements keep coming.
With the advent of cap-and-trade regulations in the EU and some form of carbon offsets likely coming to North America at some point, corporate reporting on emissions has already begun. Earlier this year, the Mandatory Reporting Rule for the U.S. Environmental Protection Agency went into effect for designated “all in” industry segments, such as companies that forge and smelt aluminum. States such as California have state and local reporting requirements that often require advance systems tracking, data ownership rules and help from environmental engineering firms to generate the necessary reports. Additional manufacturing standards and guidelines such as ULE 880 (the Sustainability for Manufacturing Organizations standard from Underwriters Laboratories) provide specific protocols and methods for companies to follow when they report.
Three ways to prepare your partners for supply chain sustainability
Supply chain sustainability initiatives require up-front conversations about data ownership and data hygiene issues that aren't a priority for most organizations. Without good planning and coordination with suppliers, such housekeeping problems can grow until they seem insurmountable.
Here are basic rules that have served me well over the years and apply even more today with the emerging pressures for sustainability reporting and purchasing.
1. Talk to each other. This is basic advice, but lack of communication is the No. 1 reason a supplier gets in trouble with a customer. Regular interaction is vital. Advance notice of upcoming surveys and questionnaires, as opposed to knee-jerk requests, will go a long way toward obtaining accurate and reliable information that can stand up to audits.
2. Understand the rules of the value chain. This extends from not only understanding the policies and “house rules” of customers, but also the behavior patterns of the industry and value chain. Does your customer equally assign contracts to various members of the supplier base, or are there personal or governance reasons, such as joint ventures or preferred supplier status programs, that can impact reporting frequencies and contract terms?
3. Remember that suppliers aren’t part of the customer, and vice versa. I have heard plenty of suppliers claim to be a Dell shop or a GM house. Certainly there are benefits to good supplier relations, but IP is a growing asset base that must be protected and strictly monitored despite the trend toward more IP being developed outside the four walls of the enterprise.
ABOUT THE AUTHOR
William Newman is managing principal of Newport Consulting Group, an independent management and technology consulting firm based in Clarkston, Mich. Contact him via email at email@example.com or follow him on Twitter (william_newman).