Archive

Author Archive

Sustainable monitoring in supply chains: it’s time for companies to reconnect with stakeholders

Here the link to a recent post hosted by EcoVadis (www.ecovadis.com):

http://blogspot.ecovadis.com/2014/05/guest-post-sustainable-monitoring-in.html

 

Categories: Uncategorized

When Sustainability means Accountability

May 20, 2013 1 comment

PREMISE: with this post we aim at raising attention around the relationship between Sustainability and AccountabilityAccording to literature (e.g., Sharma and Henriques, 2005), the development of sustainability-oriented strategies and practices is greatly driven/influenced by stakeholders’ demand.  Stakeholder groups (Governments, NGOs, Local communities, shareholders, customers, etc.), however, have different and contrasting goals, which results in a disparate number of sustainability requirements (Hall and Vredenburg, 2005).  Therefore, in practice, sustainability-oriented strategies and practices vary extensively in terms of focus (CO2, Water, Energy, Waste, Health and safety, Child labor and Workers Rights, etc.) and  extension (e.g., be developed inside a firm’s boundaries or, instead, cover several tiers of a supply chain).  The question, thus, becomes: What should companies account for? and, Why? Here, we approach the sustainability-accountability issue, concluding that future research should be developed to provide some more insights.

Few months ago we provided initial evidence of the growing trend characterizing  sustainability-oriented programs  in businesses.  Nowadays, this trend does not seem to slow down:  a recent  KPMG International CSR Survey found that 95% of the world’s 250 largest companies are strongly committed towards sustainability and are actually disclosing information around their environmental and social impacts.

By carefully observing the phenomenon of sustainability, one may also recognize an enlargement in the scale of sustainability-related strategies and practices: from a focus on the focal organization and on environmental issues, towards a more supply chain oriented perspective that covers both environmental and social dimensions of the triple bottom line. For instance, corporate initiatives are moving from Scope 1 (i.e., emissions I own and emit – direct emissions) required by regulation, towards Scope 2 (i.e., indirect emissions reporting due to electricity and district heating and cooling) and even Scope 3 (i.e., indirect emissions along the entire value chain, from sourcing to utilization of products and even recycling them). The Greenhouse Gas Protocol (GHCP) initiative is a SCOPE 3 remarkable example. On the social side, a recent important initiative is the “conflict minerals’’ provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act

Given this trend,  the question becomes: what should companies account for? and why? Trying to address this question, we looked at existing initiatives around this topic. The existing G3 guidelines (i.e., third version of the Global Reporting Initiative), for instance, state that:

The Sustainability Report Boundary should include the entities over which the reporting organization exercises control or significant influence both in and through its relationships with various entities upstream (e.g., supply chain) and downstream (e.g., distribution and customers).

The emphasis here is on what a firm can directly control for.

Conversely, the current G4 draft (e.g., last version of the GRI guidelines) includes substantially more indicators for supply chain performance than G3, and suggests that companies should account for all the material aspects of their business. Materiality, however, is something very broad: the G4 principle suggests that a firm’s report “should covers topics and indicators that substantively influence the assessments and decisions of stakeholders”. This recalls a general definition of materiality as what would be useful to stakeholders considering a “total mix” of information in their decision making (for further details, see a recent study by the Harvard University on “materiality and sustainability“).

The issue of materiality leads to the concept of accountability. Broadly speaking, accountability refers to the necessity for businesses (pertaining to any industry) to take cognizance of stakeholders’ perspectives  and manage any issue that may be salient to them, although out of their control. Stakeholders may indeed affect a firm’s performance by varying the provision of resources that are necessary to its survival and success. Nowadays, even stakeholders that find it hard to directly exert power on a firm (e.g., citizens) may take advantage from several initiatives managed by other stakeholders groups (e.g., NGOs) and indirectly influence the way companies conduct their business. An example is provided by the recent “End Ecocide” initiative or the “change.org” organization.

The broad definition of materiality used by G4 raises several concerns. For instance, a recent post by the UCLA university says:

e.g., for a bank, does “focus on materiality” mean that social aspects of lending practices should now be reported? For an auditor, how can they truly assure that a firm’s sustainability report is accurate, if that report now has to include many disclosures that fall well outside the firm’s boundaries? The process behind this more extended reporting can be valuable: firms have reported that mapping their value chain as part of their sustainability reporting efforts led to a better understanding of the structure of their supply chain. But it is a stretch from current practice to ask CEOs to sign statements that certain aspects are simultaneously material and effectively outside the firm’s control.

Concluding, two questions need to be addressed by academics and practitioners: (1a) What does accountability mean in the context of sustainability? (1b) How does the definition of materiality influence the behavior of companies and the way they address sustainability issues? (2a) What about the mismatch between control and accountability? (2b) How does this impact a firm’s triple bottom line?

What’s your opinion concerning this issue???

References:

Hall, J., Vredenburg, H., 2005. Managing stakeholder ambiguity. MIT Sloan Management Review 47, 11-13.

Sharma, S., Henriques, I., 2005. Stakeholder influences on sustainability practices in the Canadian forest products industry. Strategic management journal 26, 159-180.

Managing risk in supply chains: here is the right way!

December 11, 2012 Leave a comment

In the last february, I posted an article that points out the importance to undertake supply chain risk management (SCRM) practices to deal with the fragility of upstream networks. However, one should be concern about the efficacy and the cost of these practices.

The question is … Are there drawbacks coming from their adoption? The answer is quite simple: YES, THERE ARE!

In this post we are going to shed some light on the dark side of SCRM.  On the base of our research findings (Gualandris and Kalchschmidt, 2012), we suggest that managers should bear in mind an acceptable cost-benefit trade-off when setting the adoption of SCRM practices.

Supply network stability can be achieved by employing different risk management levers:

  1. Two (or more) vendors for each supply, one of which may dominate the others in terms of business share and performance. In this way companies reduce vendors’ moral hazard risk and in case of chain disruptions can effectively react supporting minor switching costs;
  2. Vendor rating programs that employ both operational and financial criteria enable companies to avoid adverse selection, anticipate undesirable events (e.g., suppliers’ failure), and motivate suppliers to a parsimonious conduct;
  3. Supplier development programs that can produces tangible benefits such as greater quality and flexibility, and more reliable deliveries;
  4. Revenue sharing contracts that allow to share risk and prescribe suppliers commitment.

The same practices, anyway, can produce negative impact on performance, both at the company level and at the supply chain level. Some examples below:

  1. Dual or multiple sourcing: on one hand, focal firms face higher transaction costs due to the duplication of procurement processes and the higher potential for frictions. On the other, companies buy at higher purchase price (back-up suppliers have to support specific investments that increase prices and focal firms cannot obtain discounts due to small ordered quantities). Further, dual sourcing is can be less conducive to suppliers responsiveness than single sourcing strategies;
  2. developing vendor rating programs and increasing suppliers development and coordination require focal firms to allocate large amounts of resources. Moreover, as soon as managers engage in the selection and coordination, this immediately translates into the risk of opportunity costs associated to the unselected alternatives;
  3. SCRM practices could lead to an increased supply base complexity (e.g., high number of suppliers and high competitiveness among them) that in turn might negatively impact orizontal collaborations and thus suppliers innovativeness.

Now, the question becomes: How should I set up an effective SCRM strategy?

Immagine

Answer: to effectively approach SCRM, companies should first evaluate the criticality of the context in which they operate! Specifically they should evaluate the following sources of risk:

  1. supply market concentration and capacity constraints. Under such consitions, supply risk became more relevant because suppliers’ opportunism is more likely to occur and firm’s room for maneuver is also reduced (e.g., companies have less choices);
  2. High purchases’ complexity and specificity. In this case, companies strongly depend on suppliers and the occurrence of a supplier’s failure to delivery results in the firms’ temporarily inability to satisfy customers (e.g., companies cannot easily switch from a supplier to the other)
  3. Uncertainty related to technology and market changes. On the one hand, it requires a greater suppliers’ agility and so increases the likelihood of a supplier’s failure; on the other hand, it requires increased interaction between buyer and supplier and thus increase the negative impact of supply risk on organizations;
  4. Global sourcing. In comparison to local sourcing, it is usually associated with increased uncertainty (e.g., exposition to hazardous events such as hearthquake or tzunamy), poorer transparency and visibility, as well as higher communication and cultural barriers with foreign suppliers.

The adoption of SCRM practices  (e.g., the degree of investment in such practices) should be settled coherently with the risk conditions the company is facing, so to avoid unpleasant consequences (e.g., risk) and optimize trade-offs characterizing such practices. Indeed, our recent empirical investigation reveals that designing properly the adoption of SCRM practices is an important issue for companies:  business leaders are those that operate coherently with risk conditions characterizing the environment in which they are active! An improved undertanding on how to manage risk propoerly would allow you to improve the robustness of your operations and, at the same time, manage your internal resources (e.g., human and financial capital) efficiently, overcoming your competitors!

Refer to Gualandris and Kalchschmidt (2012) for further guidance on how to set up your SCRM strategy.

Reference

Gualandris, J., Kalchschmidt, M., 2012. Supply chain risk management and companies competitive advantage: a contingency perspective. Working paper. Università degli studi di Bergamo.

Categories: Research in practice

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).

Global supply chain vulnerability

February 20, 2012 1 comment

Since globalization has boosted markets competitiveness, industrial companies have  relied on offshoring and outsourcing initiatives. Such initiatives have led to high network complexity and high inter-dependency among supply chain organizations, thus fostering supply chain vulnerability.

CNN  recently reports that global supply chains seem to be very fragile.  Natural events have shown how multinational networks are greatly exposed to different disturbances that can lead to material flows obstructions and to the breakdown of supply chain operations. Natural hazard (i.e. the unpredictable occurrence of an adverse events such as earthquake, tsunami, blazes) is one of the most relevant supply chain risk whose consequences result in the inability to continuously satisfy final markets. Scientific literature (Hendricks and Singhal, 2005) demonstrates that when such kinds of risks occur, supply chain partners will experience production and/or shipment delays, an increased in their equity risk, an increased in their asset risk and an increased in their financial leverage, thus reducing supply chain overall performance.

Natural hazard risks do not exclusively affect supply chain companies, the entire country economical system can be seriously impacted by the breakdown of supply chain operations. Bloomberg reports that the U.S.A President Barack Obama is directing the Departments of State and Homeland Security to come up with a plan to protect the $14.6 trillion U.S. economy from interruptions in the supply chain.

The article reports meaningful examples of how the occurrence of natural hazard risks can disrupt supply chain operations and negatively affects countries’ economy:

“Hurricane Katrina in 2005 threatened or disrupted the U.S. oil and refining industry. The 2010 eruption of the Eyjafjallajokull volcano in Iceland led to airline cancellations on almost a global scale. The Japan earthquake and tsunami last year 2011 interrupted imports and exports, hurt the U.S. auto and other industries and was blamed in part for worsening the U.S. unemployment rate.”

In this vein, recent posts by The Operations Room (i.e., Toyota gets ready for the next earthquakeHow the Japanese earthquake is shaking up an auto supplierProtecting customers from supply chain disruptions) discuss natural hazard negative effect on supply chain operations in the automotive industry.

Natural hazards risks have thus attracted business community attention, nevertheless one should highlight that these risks represent only one category of supply chain risks. As summarized by one of our works (Gualandris and Kalchschmidt, 2010), at the first level, supply chain vulnerabilities can be distinguished between two classes of risk considering their likelihood (i.e., the probability a risk have to occurs) and their impact (i.e., the negative effects on organization exerted by the risk occurrence): operational risks (high likelihood, low impact) and disruption risks (low likelihood, high-impact). According to what above, natural hazard risk can be classified as disruptional. Operational risk is related to the uncertainty that characterizes processes and material/information flows in the supply chain. This kind of risk arises more frequently and causes inefficiency, reductions in the network’s operative and economic performance, and (in the worst case scenario) the breakdown of supply chain operations. Within operational risk, it is possible to distinguish three classes of risk:

  1. Supply risk relates to the uncertainty that characterises suppliers’ delivery performance, vendors reliability as well as intellectual property losses and the extra costs of supply due to the fluctuations in exchange rates and raw material prices;
  2. Downstream risks  that arise from final demand unpredictability, from distorted information flows (i.e., from downstream partners), and problems related to the distribution network.
  3. Network risks that have to do with the increasing supply chain complexity, that reduces network visibility and generates a lack of coherence between strategies adopted by supply chain partners. Limited visibility reduces the confidence of each supply chain partner, the overall alignment among them and thus influece performance

According to survey analyses performed by McKinsey and by academicians (Thun and Hoenig, 2009) supply risk among the others represents the most relevant form of risk for supply chain companies.

As our researches have demonstrated (Gualandris and Kalchschmidt, 2011a), companies’ exposition to supply risk can be roughly evaluated according to three main risk conditions or antecedents of risks: product criticality, supply market difficulty, technological turbulence. The higher the presence of these antecedents, the higher the supply risk relevance. For instance, when purchases’ complexity and specificity are high, companies strongly depend on suppliers and the occurrence of a supplier’s failure to delivery results in the firms’ temporarily inability to continuously satisfy customers. Then, in case of high supply market concentration and capacity constraints supply risk became more relevant because suppliers’ opportunism is more likely to occur and firm’s room for maneuver is reduced. Third, literature relates the endogenous uncertainty coming from both technology and market changes to both supply risks’ probability and detrimental effects on companies’ costs and competitiveness: on one hand, by causing changes in the market and by requiring a greater companies’ agility, exogenous uncertainty increases the likelihood of a supply delay or failure; on the other, because of turbulence requires increased interaction between buyer and supplier, problems in supply cannot be easily managed (e.g., by turning to another vendor) thus increasing their negative impact on organizations.

Companies that feel to be vulnerable to supply risk can leverage on four main supply chain risk management (SCRM) approaches:

  • Be proactive. Firms can increase the reliability of their upstream network by employing two suppliers, one of which may dominate the others in terms of business share, performance and price. By leveraging on dual sourcing, companies reduce vendors’ moral hazard risk and, in case of chain disruptions or operational problems, can effectively react supporting minor switching costs;
  • Be selective. By developing vendor rating programs, companies become able to identify reliable suppliers with superior capabilities and to preventively assess negative trends in their performance. Specifically, by leveraging on both operational and financial criteria companies can avoid adverse selection, anticipate undesirable events (e.g., suppliers’ failure or delays), and motivate suppliers to a parsimonious conduct;
  • Be collaborative. Companies should increase coordination with suppliers and build the basis for the implementation of robust and value-added relationships. Supplier development and other mechanism of alignment (i.e., revenue sharing contracts) can have profound positive impact on supply chain performance by creating a win-win situation and by accruing tangible benefits such as reduced costs, greater quality, and more reliable deliveries.
  • Be flexible. Flexible enterprises are those that can easily make significant shifts in their configuration and re-align their business to serve a particular purpose rapidly (i.e., substitute a failed supplier). For example, according to our empirical investigation (Gualandris and Kalchschmidt, 2011b), the implementation of manufacturing postponement (i.e., it refers to situations where assembly or manufacturing activities may be delayed to the end of the production process by adopting product modularity and process re-sequencing practices) allows firms to manage decoupling points along their productions lines, demonstrate high flexibility to external uncertainty and properly react when a supply chain risk occurs. Furthermore, we were able to evaluate that  such investments exert a positive mitigation effect on risk conditions: manufacturing postponement adoption allows companies to properly manage technological turbulence and proactively reduce negative effects coming from it (Gualandris and Kalchschmidt, 2011a).

Well…how about you? What’s the potential exposition of your company to such risks? Are your companies adopting such SCRM approaches to manage them? And… Should President Barack Obama sustain or support  SCRM investments to his purpose?

References

Hendricks, K. B. and V. R. Singhal (2005). “An Empirical Analysis of the Effect of Supply Chain Disruptions on Long Run Stock Price Performance and Equity Risk of the Firm.” Production and Operations Management 14(1): 35-52

Thun, J. H. and D. Hoenig (2009). “An empirical analysis of supply chain risk management in the German automotive industry.” International Journal of Production Economics.

Gualandris, J.,  Kalchschmidt, M., (2010). An assessment model to evaluate supply chain resiliency: application in the assembly industry. (Quaderni del Dipartimento di Ingegneria gestionale 3(2010)). Bergamo: Università degli studi di Bergamo. Retrieved from http://hdl.handle.net/10446/621

Gualandris, J. and Kalchschmidt, M., (2011a). The impact of risk conditions and postponement on upstream supply chain vulnerability. IPSERA proceedings ISBN 978-94-6178-001-0, 04/2011, Maastricht (NL). POMS Proceedings ISBN 978-0-615-46993-5, 05/2011, Reno (U.S.A).

Gualandris, J.,  Kalchschmidt, M., (2011b). Manufacturing Postponement: reducing upstream vulnerability by means of an improved flexibility (Quaderni del Dipartimento di Ingegneria gestionale 6) Dalmine: Università degli studi di Bergamo, Dipartimento di Ingegneria gestionale, retrieved from http://hdl.handle.net/10446/25238

Categories: Research in practice
%d bloggers like this: