Greening of Walmart 5

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Stanford Social Innovation Review

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Case Study

The Greening of Wal-MartFor much of its history, Wal-Marts corporate management team

toiled inside its Bentonville Bubble, narrowly focused on

operational efficiency, growth, and profits. But now the world'slargest retailer has widened its sights, building networks of

employees, nonprofits, government agencies, and suppliers to green

its supply chains. Here's how and why the worlds largest retailer is

using a network approach to decrease its environmental footprint

and to increase its profitability.

By Erica L. Plambeck and Lyn Denend

Stanford Social Innovation Review

Spring 2008

Copyright 2007 by Leland Stanford Jr. University

All Rights Reserved


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52 STANFORD SOCIAL INNOVATION REVIEW / spr ing 2008 www.ssireview.org

the greening of


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CASE STU DY

www.ssireview.org spring 2008 / STANFORD SOCIAL INNOVATION REVIEW 53

In 1989, Wal-Mart Stores Inc. launchedone of the first major retail campaignsto sell environmentally safe products inrecyclable or biodegradable packaging.The corporation promoted these eco-

friendly products by labeling them withgreen-colored shelf tags. Although thecompany boasted more than 300 greenproducts at its peak, it did not directly setor monitor the environmental standardsof its suppliers. This resulted in negativepublicity for Wal-Mart when the publiclearned that a green-labeled brand ofpaper towels had only a recycled tube the towels themselves were unrecycledpaper treated with chlorine bleach. Thegreen tag program began to wane, and

by the mid-1990s environmental issuesseemed to have slipped off the com-panys list of priorities.

Meanwhile, Wal-Marts reputationamong consumers was also slipping.Issues surrounding its competitive prac-tices and labor policies loomed large inthe public eye. The companys envi-ronmental record was nothing to boastabout, either, according to oneFortunearticle.1 Indeed, a 2005 McKinsey &

Company study found that between 2percent and 8 percent of consumers hadstopped shopping at Wal-Mart becauseof the companys practices.2

Against this backdrop, Wal-Mart

CEO H. Lee Scott Jr. unveiled a newplan to reduce the companys environ-mental footprint. In an October 2005speech broadcast to all 1.6 millionemployees in all 6,000-plus stores andshared with some 60,000 suppliers world-wide, he announced that Wal-Mart wasinitiating a sweeping business sustain-ability strategy. The idea was to reducethe companys impact on the environ-ment through a commitment to threeambitious goals: To be supplied 100

percent by renewable energy; to createzero waste; and to sell products that sus-tain our resources and the environ-ment.3

But these werent the plans onlygoals. Sustainability represents thebiggest business opportunity of the 21stcentury, says Jib Ellison, founder of BluSkye Sustainability Consulting, whichhelped Wal-Mart formulate its businesssustainability strategy.4 His firm pointed

Why is Wal-Mart

adopting eco-friendly

processes and products?

How does Wal-Marts

network approach help

it go green without

sacrificing profits or

increasing costs?

How does Wal-Mart

build networks with

formerly distant, even

adversarial stakeholders?

What practices help

Wal-Marts networks

work well?

For much of its history, Wal-Marts corporate management team toiled inside its

Bentonville Bubble, narrowly focused on operational efficiency, growth, and profits.

But now the worlds largest retailer has widened its sights, building networks of

employees, nonprofits, government agencies, and suppliers to green its supplychains. Heres how and why the worlds largest retailer is using a network

approach to decrease its environmental footprint and to increase its profitability.

b y E R I C A L . P L A M B E C K & L Y N D E N E N D

WALMART


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out that actively pursuing an environ-mental agenda would help Wal-Mart

differentiate itself from its competition,maintain a license to grow, and make itssupply chain dramatically more efficient.In other words, a good business sus-tainability plan would help Wal-Martget even better at what it does best: drivedown costs to generate profits.

To go green, Wal-Mart, with its head-quarters in Bentonville, Ark., wouldhave to think outside the BentonvilleBubble. For years, the company hadoperated in relative isolation from its

external stakeholders, including non-profits, government agencies, consul-tancies, and academic institutions. With-out much in-house expertise onsustainability and environmental per-formance, it would need to involve thesestakeholders in its new plan.

Moreover, as the paper towel incidentillustrated, most opportunities for envi-ronmental improvements resided withsuppliers. If we had focused on justour own operations, we would havelimited ourselves to 10 percent of our

effect on the environment and elimi-nated 90 percent of the opportunitythats out there, says Tyler Elm, whowas Wal-Marts senior director of cor-porate strategy and business sustain-ability at the time the initiative waslaunched.

And so Wal-Mart began to reach outto its external stakeholders. The corpo-ration first identified areas of maximumenvironmental impact and then invitedstakeholders to join 14 sustainable value

networks such as the seafood net-work and the packaging network to

work toward business and environ-mental sustainability in each area. (SeeWal-Marts Sustainable Value Net-works, above.) In return, network par-ticipants would gain information aboutand say in Wal-Marts operations.

Elm and Andrew Ruben, Wal-Martsvice president of corporate strategy andbusiness sustainability, directed Wal-Marts network leaders to derive eco-nomic benefits from improved envi-

ronmental and social outcomes, saysElm. Its not philanthropy, he adds.

By the end of the sustainability strat-egys first year, the network teams hadgenerated savings that were roughlyequal to the profits generated by severalWal-Mart Supercenters, Ruben and Elmreport.

After interviewing more than 40 rep-resentatives from Wal-Mart and its net-work partners, we have uncovered sevenpractices that help the networks work forthe environment, for stakeholders, and

for the companys bottom line. (SeeNetworking the Wal-Mart Way on p.58 for a summary of these practices.)Four of these practices extend Wal-Marts own managerial capabilitiesthrough the expertise and involvementof its network partners; the other threehelp motivate suppliers. To illustratethese practices, we explore three differ-ent networks in depth: seafood, textiles,and electronics. These examples also


ERICA L. PLAMBECK is an associate professor of operations, information, and technol-

ogy at the Stanford Graduate School of Business and a senior fellow at the Woods Insti-

tute for the Environment at Stanford University. She received the Presidential Early Career

Award for her research on relational contracting in supply chain management.

LYN DENEND is a research associate at the Stanford Graduate School of Business, where

she partners with faculty members to develop case studies in a variety of fields.

CASE STU DY

Wal-Marts Sustainable Value NetworksEach of the 14 networks serves at least one of Wal-Marts

three environmental goalsG

O

A

L

S

N

E

T

W

O

R

K

S

To be supplied To create zero waste To sell products that

by 100 percent sustain our resources

renewable energy and the environment

Global Greenhouse Operations & Internal Chemical Intensive

Gas Strategy Procurement Products

Alternative Fuels Packaging Seafood

Global Logistics Electronics

Energy, Design, Food & Agriculture

Construction, &

Maintenance Forest & Paper

Jewelry

China

Textiles


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highlight some possible shortcomings ofWal-Marts approach.5

Certified Seafood

In 2006, Science published a study pre-dicting that all species of wild seafoodwould collapse within 50 years.6 Thatsame year, Wal-Marts seafood busi-ness grew roughly 25 percent, toapproximately $750 million. I amalready having a hard time getting sup-ply, says Peter Redmond, vice presidentfor seafood and deli and captain of theWal-Mart seafood network. If we add

250 stores a year, imagine how hard itwill be in five years!Continuity of supply is the greatest

challenge for Wal-Marts seafood net-work, explains Redmond. One way Wal-Mart could prevent further depletion offish stocks while ensuring its continuityof supply is to buy fish that has beencaught and processed using sustainablefishing practices. Rather than definingnew standards for certifying sustainablepractices, Redmond understood theadvantages of tapping into a well-defined

third-party certification program.By partnering with the Marine Stew-

ardship Council (MSC), which managedthe leading program in the field, Wal-Mart would avoid criticism that its stan-dards were not stringent enough whileleveraging the established expertise ofthe MSC and its partners. Tapping intoa successful program would also help thecompany achieve results faster thanworking alone.

Through this partnership, the MSC,

which Unilever and the World WildlifeFund (WWF) launched in 1997, main-tains the standards for sustainable fish-eries and certifies independent thirdparties to audit and accredit fisheriesand processors throughout the supplychain. An MSC eco-label signals toshoppers that the fish has been har-vested and processed in a sustainablemanner from boat to plate.7 By rais-ing consumer awareness, MSC hopes to

stimulate demand and thus motivatethe industry to shift to more sustainablefishing practices.8

Wal-Mart, in turn, commits to work-ing with MSC-certified suppliers, giv-ing suppliers an incentive to seek certi-fication a time-consuming andexpensive process. In 2006, Wal-Martannounced a highly ambitious goal tocarry 100 percent MSC-certified wild-caught fish in its stores within three to

five years. As the supply of MSC-certi-fied fish is currently far from adequateto meet Wal-Marts demand, this pub-lic announcement was effectively a com-mitment to buy from all fisheries thatbecome MSC-certified.

The WWF plays another integralrole in the partnership by helping boatoperators and processors prepare forcertification by identifying problemsthat need to be fixed (e.g., strengtheningmanagement practices, rebuilding stocks,

and reducing environmental impacts)before they can be certified. This activ-ity helps fisheries become certified morequickly to keep pace with the sharpincrease in demand for certified seafood.

Another benefit of certification isthat it establishes a clear view of eachfishs chain of custody. One of the prob-lems we had was how much of our fishwas coming to us third-, fourth-, or evenfifth-hand, says Redmond. Sometimes

our supplier turned out to benothing more than a packer

who was going out to a marketsaying, I need 50,000 lbs. ofsalmon no matter where itcomes from.

Greater transparency in theseafood supply chain allowsWal-Mart to select better sup-pliers, simplify the chain of cus-tody, minimize paperwork,reduce transaction and trans-portation costs, and improve thequality of the fish it receives all

while improving environmen-tal outcomes.The nonprofits in Wal-Marts seafood

network win, too: Both the MSC andWWF are attracting suppliers whomight otherwise have eschewed certifi-cation to capture or keep Wal-Marts business. And their programs havegained unprecedented levels of visibilitythrough Wal-Marts involvement. Thisvisibility helps them build clout withconsumers and get other retailers inter-ested in carrying more sustainable

seafood.

Trustworthy Textiles

Unlike seafood, cotton is not in shortsupply. Yet farming conventional cot-ton creates millions of tons of pollutionevery year. In contrast, organic cottonfarming is gentler on the environmentand on farmworkers health.

With labels that appeal to parents byemphasizing the softness and chemi-cal-free nature of organic cotton, Wal-

Mart has generated strong sales oforganic cotton baby clothes amongother products. Wal-Mart customersare typically unwilling to pay extra sim-ply because a product is better for theenvironment. When customers thinkthat a product is better for their own ortheir familys health, however, theyremore likely to dig deeper in their pock-ets to pay for it.

Both Wal-Mart and its customers

Organic broccoli, lettuce, and celery line the shelves

of a Wal-Mart store. Eco-friendly goods that directly

benefit consumers health, such as organic produce,

are low-hanging fruit for the retailer.

PHOTOGRAPHCOURTESYOFWAL-MART


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initially had to pay more for organic cot-ton. Beth Schommer, a former Wal-

Mart divisional merchandise manager forinfants and toddlers, describes the pric-ing strategy when the program firststarted: A little organic shorts set wasmaybe $10.94, whereas a similar nonor-ganic outfit would have been priced at$6.94. So, yes, there was a price pre-mium compared to other Wal-Martproducts. But when you consider a$10.94 organic shorts set out there in themarketplace, thats not expensive.

Nevertheless, to bring prices closer

to those of conventional cotton, Wal-Mart is attempting to expand its organiccotton business. Nonprofits and gov-ernment agencies are playing a signifi-cant role in this effort. To select anduphold certification standards for organiccotton farming and manufacturing, Wal-Marts textile network partnered withthe Organic Trade Association andOrganic Exchange. These groups helpedconvince the company to adopt the U.S.Department of Agricultures standardsfor the growth of organic cotton

regardless of where the cotton is grown.They also advocated use of the GlobalOrganic Textiles Standard for processing.This is probably the toughest standardout there in the industry for organicprocessing and handling, and [now] itsthe only certification process that can befollowed for organic products coming toWal-Mart, says Kim Brandner, seniorbrand manager of sustainable textilesfor Wal-Mart.

By using external standards and

accredited third-party organizations tocertify practices at each link in the sup-ply chain, Wal-Mart can guarantee thatits products are, indeed, organic. Thecompany can also minimize criticismthat its involvement will dilute the strin-gent measures that organic productsmust meet (a concern raised by organicfarmers, retailers, and NGOs alike). Inaddition, relying on network partnersallows the company to accomplish its

objectives without major investment

because suppliers absorb most of thecosts of certification.

Like the seafood supply chain, thetextile network has become more effi-cient with the advent of certification.It used to be that if Wal-Mart wasbuying Champion T-shirts, [it] would-nt look past Sara Lee [which held thelicense for Champion products]. [It]didnt think about the spinner, or thedyer, the ginner, or the farmer, saysDiana Rothschild, a former Wal-Mart

employee and Blu Skye consultant tothe textiles network.But now Wal-Mart is forging ties

much further up the stream of its sup-ply chain to become more efficient andto reduce costs. We used to buy cottonfrom Turkey, ship it to China for spinningand knitting, and then ship it again toGuatemala to be cut and sewn, explainsBrandner. Now were finding oppor-tunities to do things like eliminate the

shipment to China and have all pro-

cessing done in Guatemala. Goingdirectly to Guatemala not only savestime and money for Wal-Mart, but alsofurther reduces the companys impact onthe environment by lessening theamount of fuel and other resources usedin shipping.

Wal-Mart is also cultivating closerrelationships with its suppliers. Previ-ously, textile buyers selected manufac-turers on the basis of the cost and qual-ity of their products. As a result,

relationships with suppliers tended to betransactional and short-lived. Now Wal-Mart employees interact with more sup-pliers, more often, more directly, andfor a greater duration than ever before.These closer relationships are necessaryto sustain initiatives like the organic cot-ton project.

A major transformation within Wal-Mart has made it easier to have closerrelationships with suppliers. In the past,


Workers at a gin near Blantyre, Malawi, take a break from processing organic cotton.

Organic Exchange, a nonprofit in Wal-Marts textile network, helped persuade the com-

pany to adopt stringent certification standards.


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CASE STU DY


textile buyers had been generalists, han-dling a variety of responsibilities. Now

the textiles network divides the buyerrole into four different job categories sothat some buyers are dedicated to main-taining long-term relationships with sup-pliers. These employees are encouragedto hold their positions for many years, asopposed to the 12- to 18-month rotationsthat Wal-Mart buyers typically com-plete. According to Brandner, these orga-nizational changes, backed by the com-panys focus on sustainability, have notonly supported the objectives of the tex-

tile network, but also led the team to askbetter questions. Its helping us becomesmarter merchants, he says.

Another way that Wal-Mart is usingits network is to build bridges betweensuppliers and environmental nonprofitorganizations. For instance, when theChinese government threatened to shutdown a number of textile dye houses inBeijing, including one of Wal-Martssuppliers, to reduce pollution in timefor the 2008 Olympics, Wal-Mart imme-diately took action. We put the dye

house in touch with one of the NGOsin our network, which helped it formu-late a more environmentally friendlyprocess that reduced its toxic outputvery quickly, says Brandner. Althoughother retailers were negatively affectedby the shutdown of their Chinese dyesuppliers, we did not have any of our pro-duction capacity cut with this vendor.

To boost supplies of organic cottonand help more farmers make the tran-sition from conventional to organic farm-

ing, Wal-Mart has begun making longer-term commitments. For example, ratherthan working season to season, as thecompany has done in the past, it madea five-year commitment to buy organiccotton from a group of farmers. It givesthem confidence and stability, says LucyCindric, senior vice president and gen-eral merchandise manager of Wal-Martsladies wear division and captain of thetextiles network.

The company is also helping farm-ers manage some of organic farmingschallenges. Organic farmers cant growcotton in the same field for an extended

time because it depletes the soil of nutri-ents, explains Rothschild. This forcesfarmers to alternate cotton withlegumes, vegetables, and other crops torejuvenate the soil. To meet organicstandards, however, farmers must growtheir alternate crops organically. Becausealternate crops are not as lucrative asorganic cotton, this creates the temp-tation for farmers to turn to nonorganicfarming, she says. To help solve thisproblem, Wal-Mart agreed to purchasesome of the organic cotton farmers

alternate crops an initiative that wassynergistic with the efforts of the com-panys sustainable value network focusedon food and agriculture.

Eco-Friendly Electronics

In 2004, the United States exported 80percent of its electronic waste to devel-oping countries, where the waste led topollution levels hundreds of thousandsof times higher than those allowed indeveloped countries.9 Despite this off-

shoring of pollution, computers andother electronics still account for some40 percent of the lead in U.S. landfills.10

One of the objectives of Wal-Martselectronics network is to reduce theseenvironmental impacts by recycling ordisposing of e-waste more safely, as wellas by designing electronics that dontcontain hazardous materials in the firstplace. Another objective is to increase theenergy efficiency of its electronics. The

network has encountered more chal-lenges in managing e-waste because ofthe complexity of electronics design andsourcing, the difficulty of measuring

the hazardous content of electronics,and the necessity of consumer behaviorchange to accomplish recycling and safedisposal of used electronics. In contrast,the network has more readily increasedenergy efficiency because this outcomeis easier to measure and to market toconsumers.

The sheer complexity of electronicproducts and the electronics supplychain makes certifying that they arefree of hazardous materials costly anddifficult. Most electronic products are

made up of sophisticated componentsthat are sourced through complicated,multilevel supply chains. In these sup-ply chains, one set of suppliers sourcesraw materials, another set assemblesthose materials into components, yetanother set aggregates these compo-nents into more complex parts, and soon. At each link in the supply chain, sup-pliers have technical expertise and pro-prietary information that Wal-Martcannot access. When Wal-Mart cannot

ensure that all components in a prod-uct are free of hazardous materials, thecompany cannot promote the productas eco-friendly to consumers.

For example, Wal-Mart wanted to bethe first retailer in the United States tosell personal computers that compliedwith the European Unions Restrictionon Hazardous Substances (RoHS). Andso the retailer negotiated a deal withToshiba to supply RoHS-compliant com-

More than anything else, Wal-Marts network

approach must remain profitable if it is to be

sustainable in the long run and if it is to

achieve CEO Lee Scotts environmental goals.{ }


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www.ssireview.org spr ing 2008 / STANFORD SOCIAL INNOVATION REVIEW 59

ing start, the company must proceedcarefully as it seeks to sustain and expand

its network approach. First, Wal-Martmust carefully manage its partnershipsto avoid increasing its costs. The com-panys reputation is on the line as itmakes ambitious promises for exam-ple, to sell only MSC-certified wild-caught fish. Because Wal-Mart is depen-dent on suppliers in its networks to fulfillthose promises, suppliers may try toleverage their improved position ofpower to negotiate higher prices, par-ticularly in times of scarcity. More depen-

dent on longer-term relationships withfewer suppliers, Wal-Mart might alsolose its ability to buy products fromlower-cost sources. In addition, as itsties with nonprofit organizations deepen,Wal-Mart may face pressure to reduce itsenvironmental impacts in ways thatincrease production costs.

To resist upward pressure on costs,Wal-Mart can become still more effi-cient. It can also continue to partnerwith nonprofits to develop and imple-ment innovations. And in its relations

with suppliers, it can keep prices forgreen products low by committing topurchase greater quantities on the frontend, rather than paying price premiumson the open market.

Wal-Mart must also pay careful atten-tion to the balance of green and con-ventional products in its stores. In the past,Wal-Mart narrowly focused on its cus-tomers immediate desires when plan-ning product assortments. Now the com-pany is taking on the additional

responsibility of offering eco-friendlyproducts, as well as of educating cus-tomers about these green alternatives. Atthe same time that green products helpattract new customers, they also canni-balize sales of conventional products.

Moreover, with fewer suppliers fromwhich to choose and more nonprofitsoffering their input, Wal-Mart mightoverlook opportunities to stock innova-tive or desirable products that are not nec-

essarily green. For example, many non-profit partners advocate against the useof polyvinyl chloride (PVC) plastics,which may have negative effects onhuman health. Yet some suppliers arguethat the negative effects of PVC areunproven. They also say that customersdemand the strength and flexibility thatonly PVC can provide.

Wal-Marts job is to manage thesetensions, weighing the demands of cus-tomers against the concerns of net-work partners. To offer a profitable mixthat includes more green products, Wal-Mart can retire conventional productsin favor of green alternatives, work withgovernments to test materials and pro-vide toxicity data to consumers, andseek government incentives for greenproducts.

A final risk that Wal-Marts sustain-

able value networks must proactivelymanage is losing its nonprofit partners.Because of the high numbers of non-profits participating in the networks,individual groups may be unable to claimcredit for a specific, measurable reductionin environmental impact.

Over time, groups inability to provetheir impact may cause problems withfundraising, as donors increasinglydemand performance data.11And despite

the current optimism about Wal-Martsefforts, donors might gradually balk at

paying for environmental programs thatare profitable for Wal-Mart especiallybecause Wal-Mart pays some of its sus-tainability consultants but others work fornothing. And although unpaid nonprofitpartners presumably retain more lever-age to criticize and influence Wal-Mart,their donors may worry that this lever-age will erode as the nonprofits rela-tionships with Wal-Mart deepen.

Eventually, problems with fundrais-ing could cause environmental nonprofit

organizations to withdraw from the net-works. Wal-Mart might avoid this issue by relying less on paid environmentalconsultants and ensuring that each non-profit partner can point to its own mea-surable contributions to sustainability.

More than anything else, Wal-Martsnetwork approach must remain prof-itable if it is to be sustainable in thelong run and achieve Scotts environ-mental goals.

1 Marc Gunther, The Green Machine,Fortune,July 31, 2006.

2 Pallavi Gogoi, Whats With Wal-Marts SalesWoes? BusinessWeek, Nov. 29, 2006.3 Lee Scott, Twentieth Century Leadership, Wal-Mart, Oct. 24, 2005.http://www.walmartstores.com/Files/21st%20Century%20Leadership.pdf4 Much of the material for this article, as well as allquotations unless otherwise cited, is drawn fromthe Stanford University Graduate School of Busi-ness case study titled Wal-Marts SustainabilityStrategy (GSB No. OIT-71) and associated teach-ing notes by Erica L. Plambeck and Lyn Denend.5 For more information on supply chain manage-ment practices, see Erica L. Plambeck, The Green-ing of Wal-Marts Supply Chain,Supply Chain Man-agement Review, May/June 2007.6 Science Study Predicts Collapse of All Seafood

Fisheries by 2050, Stanford Report, Nov. 2, 2006.7 Erica Duecy, Darden, Wal-Mart Ride SeafoodSustainability Wave, Buoy Advocates,Nations

Restaurant News, Feb. 13, 2006, p. 8.8 Ibid.9 Seeraj Mohamed, Dumping Electronic Waste inDeveloping Countries, The Society for Conserva-tion and Protection of the Environment, April 24,2002.10 Matthew Brodsky, The RoHS Revolution,Laptopical.com, March 3, 2006.11 Conservation: Peering at the Future,The Economist, June 19, 2004.

Wal-Mart customers usually wont pay

extra for products just because they are

better for the environment. But they will

dig deeper for products that they believeare better for their families such as

organic cotton baby clothes.

PHOTOGRAPHCOURTESYOFWAL-MART

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Greening of Walmart 5