Sustainability Management and Risk Management in the consumer electronics industry

by Ruggero Golini, Greta Facoetti, Jury Gualandris

This post raises and briefly addresses the following questions: can companies in the consumer electronics industry benefit from the integration of sustainability and risk management in their supply chains?

The consumer electronic industry has a highly innovative rate, provides a wide range of devices and equipment and its global value chain is very complex. In the time of one generation, the high-tech revolution has spread worldwide, with tremendous impacts on the environment and society.

In the recent years, several scandals have hit some of the industry’s leading companies, such as Apple, because of issues occurred in their supply chains.

However, despite the increasing concerns, the heterogeneity of social and environmental regulations and policies around the world is working as a barrier to the development of more sustainable supply chains. In this context, developing countries are particularly vulnerable because they perform most of the assembly operations, but they retain a low share of the value added and there is little visibility on the final markets of what happens there. Moreover, governments in question are often focused on industrial growth at the expense of environmental and social aspects.

Because of that, leading firms are trying to address environmental and social issues at different stages of their supply chain.

In our analysis, we wanted to check whether the effort put by these companies to solve an issue is related to the risks potentially occurring because of that issue.

First of all, according to the Greenpeace sustainability ranking, we have identified a set of practices electronics companies can undertake to address sustainability issues along their supply chains. Next, we have selected a cluster composed by the 10 most profitable companies in the industry (Samsung, HP, Sony, LG, Toshiba, Nokia, Panasonic, Apple, Dell and Acer). After that, we have associated a score from 0 (low level of action) to 3 (high level of action) to each company for each one of the considered practices on the basis of the same Greenpeace report. Finally, we have calculated the average level of effort for each practice in the electronic industry (Figure 1).

Figure 1 – Average level of effort put into different sustainability practices by top 10 lead firms in the electronic industry

Interestingly, energy efficiency of products is the practice that receives most effort. On the other hand, the policies on clean energy, recycling and recovery of plastic products seem to be least developed.

Next, we have calculated the risks for the leading companies associated to each issue previously identified. The global risk level, measured on a scale from 0 (no risk ongoing) to 3 (highly relevant risk), is built on considerations that concern:

• environmental risks (pollution, relaxation / lack environmental standards)
• social risks (workers’ exploitation, workers’ rights, health and life)
• risks of supply (shortage, supply disruption, conflict zones)

The scores were given on the basis of information got from multiple sources (the complete list is indicated in the references.

Finally, a comparison between “level of effort” and the “level of risk” for each specific environmental issue has been performed (Figure 2). This analysis allows to reconnect potential sustainability risks with what the companies are actually doing.

Figure 2 – Comparison between the level of effort and the level of risk

The resulting picture shows that for the energy efficiency issues (the first 5) the level of effort matches the risk. However, the other risks, especially the last four related to the supply chain are associated to the highest level of risk but the effort is not apportioned.

This result can be dependent on the fact that working on the supply chain is more difficult than other areas. However, another reason could be that the effort of the companies is driven by the pressures of the stakeholders rather than by a critical analysis of the issues in the global value chain.

References

• “Carbon EmissionsMeasuring the risk. An S&P 500 NFS International Sector Report” authored by Trucost
• “Sustainable Water Management for Electronics Industry”, authored by Siemens
  “Green Management Activities and Performance” authored by Samsung, Electronics Sustainability Report 2012
• “Responding to Climate Change Risk: Basic of GHG Emission Inventories”, authored by E Source Companies LLC 2006
• “Managing Supply Chain GHG Emissions, lesson learned for the road ahead”, authored by EPA, 2010
  “COOL IT, Leaderboar December 2010”, authored by Greenpeace
• “The Hidden Consequences, The cost of industrial water pollution on people, planet and profit”, authored by Greenpeace
• “Effective action on global warming prevention by the electrical and electronics industries” authored by Liason Japanese Group
• “Water Scarcity &Climate Change: Growing risk for business & investors”, authored by The Pacific Institute, 2009
• ” Conflict minerals: What you need to know about the new disclosure and reporting requirements and how Ernst & Young can help”by Ernst&Young
• “I costi umani di un Ipad”, authored by Internazionale n°934, February 2012
• “Il disastro giapponese mette a rischio la fornitura di batterie e memorie cellulari”, Il Sole 24 Ore, 14 March 2011
• “Building Resilience in Supply Chains”, authored by Accenture World Economics Forum, 2013
  ” Sustanaibility: A risk Management perspective”, authored by David Singleton www.sustdev.org SDI 1616/5
• ” The case for integrating sustainability and risk management: why sustainability must be a priority for corporate risk managers”, authored by Aon Corporation, 2009
• “Knowing your risk: managing the value at risk from sustainability issues”, authored by PWC
  eventuali report aziendali

Sustainable supply chain: a new business challenge

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).

Santa is coming…I can see his footprints…

Just five days are left before Santa comes. So it is time to make a final count of what Santa is doing for us. Besides all the presents he is going to delivery, the funny old man is going to win the prize for the largest carbon footprint in history. Ethicalocean decided to make a few estimations of Santa’s Carbon Footprint. Due to his very long trip, in one night Santa releases almost 69.4 million metric tons CO2 (similar to what Qatar does in one year). Most of this is due to the life cycle of toys, but also the manufacturing of all cookies he is going to eat, all  the wrapping paper he is going to use, etc. have a significant account. So what can Santa do in year 2011? Sustainable innovation is the buzzword: change the old fashioned sleigh with a new one more efficient and (why not?) electricity powered, avoid leaving coal to naughty children but some other alternative form of energy, use recycled paper for wrapping presents. And what can you do to help Santa? Maybe leave only local milk and cookies for the old man?

By the way… Merry Xmas!

Sustainability, vendor management and communication

Some months ago a short movie was published providing support to Ken (yeah, Ken…Barbie’s friend) to leave Barbie. No treason was involved in the case but deforestation. The video in fact was published by Greenpeace to sustain their campaign against Mattle policy on buying paper for packaging from suppliers that were purchasing basic materials from sub-suppliers involved in rainforest deforestation.

Rainforest deforestation

The case is an interesting example of vendor management problem: how can you be sure from where your components come? You may claim you are adopting a sustainable policy, but what is happening in your supply chain? this issue makes ir rather complex for companies to be sure about what they are communicating outside: are you sure about your behavior? The Mattel case is rather well known and in general the entire toy industry has been under deep investigation on this issues, but this is rather general problem. Another well know case appeared on HBR and focused on the same issue faced by Timberland.  The issue was due to Brazilian cattle farmers that were illegally clear-cutting Amazon rain forests to create pastures, and the leather from their cows might be winding up in shoes—including Timberland’s. The issue is again: how can you trust your supply chain?

More recently Mattel announced the definition of Sustainable Sourcing Principles. In these principles Mattel explicitly avoids to source virgin fiber from controversial sources. Similar actions have been undertaken also from other producers; for example Golden Agri Resources has committed itself to source palm oil only from reliable countries (i.e. where deforestation is not a critical concern). LEGO has similarly decided to close any relationship with APP (Asian Pulp and Paper) as long as the multinational company of paper production will not guarantee the protection of Indonesian forests.