Building Sustainable Global Value Chains

Siemens is a leading supplier of technologies like wind turbines that help its customers reduce their environmental impact. (Photo: Wind Power Monthly)

As companies around the world strive to create sustainable value chains, they are paying increased attention to the operations and management practices of their suppliers, distributors, and partners. A recent joint research project of the American Society for Quality, the Corporate Responsibility Officers Association, and the Institute for Supply Management with Deloitte Consulting LLP took a closer look at what improves the effectiveness of sustainable value chains. The project gathered almost 1,000 responses from sustainable supply chain executives.

The responses measured how much a given management practice can increase an organization’s sustainable value chain effectiveness, as compared to respondents not adopting the practice. Not surprisingly, among the top 10 such management practices, the top five have to do with engagement, organizational culture, and incentives (percentages represent an increase in sustainable value chain effectiveness):

  • Engages with suppliers (any tier) – 38% increase
  • Sustainability is embedded in the culture – 24% increase
  • Has worked with suppliers and others (e.g., distributors) as part of quality programs in the past – 22% increase
  • Engages with or talks about sustainability with value chain members – 21% increase
  • Rewards suppliers for sharing expertise and knowledge around sustainability – 17% increase
  • Publishes and enforces supplier codes of conduct for all tiers – 17% increase
  • Provides tools, policies, or processes to suppliers and value chain partners – 15% increase
  • Provides suppliers with increased chance to be selected for future works for sharing expertise and knowledge around sustainability – 15% increase
  • Has a specific functional area responsible for sustainability efforts related to the value chain – 14% increase
  • Works to highlight organization’s sustainability efforts to attract and retain employees – 13% increase

What’s interesting is the level of overlap in responses that identified top five management practices that reduce operating cost (percentages represent a reducation in operating costs compared to respondents not adopting this management practice). Engagement, awareness/culture, incentives, and tools are again the leading themes:

  • Engages with suppliers (any tier) – 46% reduction
  • Provides suppliers with monetary rewards for sharing expertise and knowledge around sustainability – 45% reduction
  • Provides tools, policies, or processes to suppliers and value chain partners – 41% reduction
  • Educates and creates awareness about sustainability among suppliers and others in the value chain by hosting or promoting sustainability-related events – 32% reduction
  • Engaged a third party with specialists in value chain sustainability for assistance in improving the sustainability of the value chain – 27% reduction

These results point to a correlation between greater sustainability and decreased value chain costs, challenging the view that sustainability adds to the cost of business operations. Firms with large value chains stretching around the globe are especially aware that it is not enough to make their internal operations sustainable: the value chain is where sustainability matters most.

At the recent Rio+20 Corporate Sustainability Forum, Barbara Kux, Chief Sustainability Officer of Siemens, noted that “sustainability is about a company’s DNA, it’s not an added-on project. It is a business opportunity.” She also shared some data on how Siemens is capitalizing on that opportunity. Last year the company’s “green revenue” amounted to 30 billion euros, 40 percent of its total revenue. With the technology Siemens sold in 2011 its customers can reduce CO2 emissions by over 300 megatons on an annual basis, which is roughly one third of Germany’s yearly CO2 output.

At the same time, Siemens’s own CO2 output was only 4 megatons on 70 billion euros in revenue a year. This means that most of its environmental impact happens in the supply chain and at the customer level.

Jochen Zeitz, Chief Sustainability Officer of PPR, a group of luxury goods brands including Gucci and Puma, similarly emphasized that his company’s biggest environmental impacts happen the furthest away in the supply chain. For PPR, raw materials account for 80 percent of the company’s total environmental footprint – and 94 percent of that impact occurs outside its direct operations.

Building sustainable global value chains is not always easy, but it pays off. As Forbes put it, “if sustainability costs you more, you’re doing it wrong.” And there are many examples of companies doing it right.