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The reaction of supply chains to the crisis: the shifts of global trade flows

As a reaction to the global crisis, supply chains are changing their geography. The traditional western markets are not recovering from the crisis and seems that their economies are following a W or L-shape pattern rather than the expected V-shape. Because of that, global supply chains are shifting to other markets, and the so called South-South trades are increasing. If we look at the table (2010 WTO data of merchandise trade), we can see that the higher flows still occur from Asia to Europe and North America (about 1.6 trillion dollars) and vice versa (about 800 billion dollars). China accounts two thirds of these flows. However, looking at the difference between 2008 and 2010 (only two years) we can see that the  flows from Asia to Europe and North America have been quite stable. All the other flows directed to North America and Europe have decreased more than 5% (for instance from South and Central America or Africa). On the other side, all the flows directed to Asia increased more than 5%, except from Middle East that has intensified the exchanges with South and Central America. Also the exchanges from Asia to South and Central America and to Africa have increased more than 5%. It will be interesting to follow the trend as soon as 2011 data will be released. So far, looks like Asia represents the new market where flows from every continent are directed. On the other side, Asia which is a huge manufacturing country is seeking for new markets (for instance South and Central America or Asia) to reduce the dependence from the uncertain traditional European and North American markets.

2010 merchandise trade data (WTO) – The darker the color, the greater the flow

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Sustainable supply chain: a new business challenge

May 14, 2012 1 comment

Nowadays, companies are increasingly scrutinized by various audience (e.g., NGOs, Social Media) and are held responsible for environmental and social performance of their suppliers (e.g., Apple, 2006; Nike 2007; Mattel, 2007; Victoria’s Secret, 2011). This is the life cycle perspective: products (and the company that is manufacturing them) cannot be truly defined sustainable whether purchased components are not designed and produced in a sustainable way.

A recent post on software advice discusses the “conversations that must occur within supply chain … to become synonymous with … socially-responsible business”. The post focuses on three main points:

  • Measuring sustainability performance: as described by Wal-Mart, indexing environmental and social performance throughout the supply chain is essential to instill sustainability into suppliers, lead higher quality and lower costs, and to help customers in their buying decisions;
  • Developing trust and value-added relationships along the value chain: when a sustainable supply chain has to be developed, ensuring the quality of the product and the sustainability of the operational process might be as much of an issue as building partnerships and prescribe suppliers’ commitment;
  • Innovating toward sustainability: addressing sustainability further upstream – at the level of product and components design – can lead to an improved sustainability as well as costs savings. A good example for that is the case of Ikea: they are looking to replace wood pallets with cardboard ones. The company expects to reduce its carbon footprint and cut its transport bills by 140 million Euro a year (look at this recent post).

However, the above conversions are difficult to develop and “supply chain management” is actually the least area in which sustainability has been integrated  (i.e., McKinsey survey, Exhibit 2). First, measuring sustainability is not so straightforward: on one hand it increases upstream competition (e.g., look at the post “Indexing sustainability” by The Operation Room), and on the other new criteria and assessment procedures have to be developed (e.g., look at the post “Sustainability index hiccups” by The Operation Room). Then,  the evolution of sourcing strategies and the inclusion of sustainability requires a transitory period necessary for companies to change  the focus of their actions (e.g., from a focus on products and suppliers to a focus on relationships and supplier networks in a long-term perspective; from the procurement of standardized inputs to joint-value creation methodologies). For instance, according to a recent post by Harvard Business Review, “nowadays innovation partnerships with vendors don’t yet represent a procurement priority” and “business world  innovations occurs when we bypass or disintermediate  procurement … this is somewhat contrasting: vendor/partners — who are compensated by procurement — end up having to explain away or conceal the bootleg or graymarket innovation projects they’re billing for … This dynamic is unsustainable… procurement has to become a genuine facilitator, enabler and champion of the innovation ecosystem”.

Thus, to effectively pursue the above supply chain conversions, companies need a transitory period for developing new capabilities (note that, according to exhibit 5 of McKinsey survey, three of the barriers that prevent companies from capturing potential value from sustainability initiatives are: the lack of key performance indicators, insufficient resources and lack of right capabilities and/or skills).

Sustainable supply chain management (SSCM) is also increasingly debated by academicians: more than three hundred papers were published on such issues during the last decade (e.g., Seuring and Müller, 2008). During the conference organized by the International purchasing and supply Education and Research Association (i.e., 2012 IPSERA conference), 17 papers (out of 124) were presented that deal with supply chain sustainability, witnessing that the academic community is greatly interested to the topic. Among the others, the empirical research that has won the 2012 IPSERA best paper award (i.e., Golini et al., 2012) offers relevant contributions on supply chain conversions and the role of companies’ supply management capabilities. Specifically, the paper points out that, although internal investments (e.g., initiatives to improve social reputation as well as initiatives to reduce energy consumption and waste of internal operations) represent the first step toward sustainability, industrial firms should then focus on supply chain management investments (e.g., restructuring the supply base, improving suppliers’ selection, development and coordination) and sustainable supply chain management initiatives (e.g., monitoring CSR of upstream partners, developing life cycle analysis involving suppliers) since they significantly contribute to firms’ sustainability performance. On one hand, SCM investments help in (1) improving companies’ ability to manage strategic supply relationships for sustainability and innovation (2) increasing visibility and reducing moral hazard within supply chain, as well as (3) improving cooperation and inter-organizational learning among partners. On the other, SSCM initiatives entail problem-solving routine involving suppliers and can instill additional capabilities in the company’s organization.

Concluding, supply chain sustainability seems to be the new business challenge: it represents a big opportunity for companies to improve their footprint and to increase their competitive advantage. Nevertheless, firms should wonder whether they hold the right level of resources and capabilities before to rely on SSCM investments.

 

References:

Seuring, S. and M. Müller (2008). From a literature review to a conceptual framework for sustainable supply chain management. Journal of Cleaner Production 16, 1699-1710.

Golini, R., Gualandris, J., Kalchschmidt, M., 2012. Sustainable supply chain management: the role of supply chain management investments and of Global sourcing. IPSERA proceedings ISBN 978-88-495-2346-1, April 2012 Naples (I).

Sustainability: what about companies’ agendas?

A recent post by the University of Nevada points out that on the top fortune 500 firms in America, almost all are committed towards sustainability. Replicating such analysis within the Italian context, we found similar results. We focused on the 10 Italian companies that rank on the top fortune 500 global firms. As shown in table 1, 9 of them maintain webpages on sustainability and have published CSR reports during the last decade. Furthermore, 6 of them were found on the last Dow Jones Sustainability Index (DJSI). Additionally, by looking at CSR management network, Soliditas Foundation, Ethics footprint and Accountability rating (i.e., Italian networks of companies that are pushing forward sustainability campaigns), we’ve discovered that almost 180 big and well-known Italian firms are engaged in environmental programs and social initiatives (see table 2).

Apparently, we can provide a positive response to our question: nowadays sustainability represents an hot topic for the business community. Accordingly, a recent McKinsey survey points out that “many companies are actively integrating sustainability principles into their businesses and they are doing so by pursuing goals that go far beyond earlier concern for reputation management”. Specifically, saving energy and reducing waste of operations help companies capture value through return on capital and represent the main motivators for companies investments toward sustainability”. Managing corporate reputation and responding to regulatory constraints appears to be respectively the third and the fourth motivators (see Exhibit 1)

A second interesting finding of the McKinsey survey regards the economic returns of sustainability initiatives. In the report it is clearly stated that: “In our sixth survey of executives on how companies understand and manage issues related to sustainability, this year’s results show that, since last year, larger shares of executives say sustainability programs make a positive contribution to their companies’ short- and long-term value. Specifically, they expect operational and growth-oriented benefits in the area of cutting costs and pursuing opportunities in new markets and products”. Such McKinsey’ findings are aligned with what discovered by the 2011 Accenture survey. The focal points of the Accenture’s report are: (1) sustainability motivators and (2) sustainability benefits. First, “top motivations for sustainability are a genuine concern for the environment and society (cited by 53% of respondents),  reducing energy and material costs (50% of cases) and responding to customer expectations (47%)”. Second, “the benefits resulting from firms’ sustainability initiatives have exceeded executives’ expectation in the 72% of cases”. As stated by Bruno Berthon (Managing Director of Accenture) “the irony is that … who don’t enjoy these benefits are likely the ones who think sustainability is peripheral to their business”.

Hence, it seems that companies are increasingly paying attention to sustainability. The reason for this relates first to the executives’ personal committment to transact a business in a manner expected and viewed by society as being fair and responsible, even though not legally required. However, a large part of investments are undertaken in order to increase operations’ efficiency and achieve cost benefits. A relevant role is also played by market forces: firm reputation is still at the center and the customers concerns of sustainability exerts a significant effect on firms behaviors. Finally, regulatory pressures appears to be less critical in explaining companies posture towards environmental and social issues: many business leaders would like more government incentives to encourage them to act (e.g., 2011 Accenture survey).

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