Unchaining ValueInnovative approaches tosustainable supply

About Unchaining Value

Unchaining Value aims to spur the pursuitof greater environmental and socialsustainability within corporate globalsupply chains.

The report seeks to begin a process ofuncovering the barriers and challenges todriving sustainability improvements throughglobal supply chains, as well as spotting theopportunities for achieving greater impactthrough partnerships and capacity-building.

The publication addresses the ambition of the United Nations EnvironmentProgramme (UNEP) and United NationsGlobal Compact (UNGC) to find ways toincrease practical know-how, develop skillsand capacity in developing countries, andraise levels of innovation and collaborationacross and between supply chains.

In future, options for further cooperation in a collective effort between sectors andstakeholders will be examined, mindful ofthe role that UN-business cooperation canplay in advancing learning, good practiceinnovation and the improved application of recognised standards.

Publication Details

Unchaining Value First Edition 2008

Copyright 2008 SustainAbility, UNEP andUNGC. All Rights Reserved. No part of thispublication may be reproduced, stored in aretrieval system or transmitted in any formor by any means, electronic, electrostatic,magnetic tape, photocopying, recording, orotherwise, without permission in writingfrom the copyright holders.

ISBN 978–1–903168–23–3

PublisherSustainAbility, UNEP and UNGC

DesignerRupert Bassett

PrinterPensord Press

PaperRobert Horne Revive 100 Offset

Disclaimer

Designations employed and thepresentation of material in this publicationdo not imply the expression of any opinionwhatsoever on the part of UNEP or theUnited Nations concerning the legal statusof any country, territory, city or area or ofits frontiers or boundaries. Moreover, theviews expressed do not necessarilyrepresent the decision or the stated policyof UNEP or the United Nations, nor doesciting of trade names or commercialprocesses constitute endorsement.

Contents

Foreword

Introduction

1 Meta-trendsMoving towards sustainable supply chains

2 Best PracticesMacro and micro approaches to sustainable supply

3 Conclusions and recommendationsSteps towards unchaining value

4 Next steps

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Unchaining Value 1

Foreword

Today’s global companies are increasinglyaware of the challenges and trade-offs thatface their evermore complex, competitiveand transparent supply chains. Supply chain strategies that focus narrowly on the cost- and time-efficient movement and coordination of goods and materialsfrom upstream suppliers to downstreamconsumers do so at their own peril. Smartbusiness strategists must equip themselvesto anticipate and manage an array ofdilemmas and trade-offs — such as thedegree to which their particular supplychain may deplete natural resources or the challenge of delivering accountabilityfor good labour practices, not just amongfirst tier suppliers in emerging economies,but among their suppliers’ suppliers and in tiers beyond that.

While such challenges undoubtedly presentunprecedented opportunities to create and add essential long-term value, many of the solutions require new forms ofcollaboration, engagement and innovationthat can — in the short-term — seemdisruptive to business as usual. However,these days ‘business as usual’ is tenableonly to a naïve few.

The need to address resource scarcity and development issues worldwide, thechallenge to mitigate and adapt to climatechange, and the demand for markets tooperate more openly and accountably allhave consequences for globalised supplychains. Increasingly, companies and theirsuppliers are being called upon to meetever-tighter international expectations forgood conduct and responsible performance,requiring new levels of capacity,collaboration and shared vision.

Capturing opportunities to create long-termsustainable value, shared across differenttiers of suppliers, customers, consumers andshareholders, through innovative thinkingand collaboration, remains significantlyunderdeveloped. A creative, proactive,empowered supply chain can help drivedown costs, mitigate risks and uncoverinnovative new approaches to developingproducts and services, sharing the risk —and indeed the rewards — across manydifferent players.

We are committed to playing a role in helping to drive supply chain trans-formation through partnerships and bestpractice. Your comments on this publication— and your participation going forward —will be vital to the success of this project.

“A defining element of our ever more global economy is the intricate web ofsupply chains being woven by multi-national business, stretching across theworld’s political, economic and culturalboundaries. In many instances they provetransformational — creating economicgrowth and fostering development andhelping to manage scarce resourcessustainably while creating business valueand contributing to long-term resilience.Together with UNEP and UNGC, we seesupply chain sustainability as an area of growing importance, and we urgecompanies and their suppliers everywhereto grasp the opportunity to transform theirapproach — to the great profit of all.”

Mark LeeCEO, SustainAbility

“I am delighted that UNEP is spearheading this new initiative, in partnership withSustainAbility and the UN Global Compact.Our aim is to help companies addresscomplex environmental and socialresponsibility challenges in their globalsupply chains. Unchaining Value seeks touncover emerging best practice and tostimulate partnering and capacity buildingin developing countries that will enablecompanies to meet their challenges. The environmental agenda today includescritical matters such as climate change,resource efficiency and responsiblechemicals management and presents arange of responsibility issues that crossborders between countries, producers and consumers. Today, it is essential andurgent for business to move beyondtraditional arms-length, ‘command-and-control’ supplier relations towards greatercollaboration and partnering with suppliers— to achieve collective gain for business and society alike.”

Achim SteinerUnder-Secretary-General and Executive Director, UNEP

“The United Nations Global Compact aims to make business part of the solution totoday’s most pressing global challenges. Ever since the initiative was launchednearly eight years ago, more than 4,000companies worldwide have pledged tomake the Compact’s ten universalprinciples part of their strategy, cultureand day-to-day operations. But the supplychain sustainability challenge will requirea whole new level of collaboration.Looking ahead, it will be vital to movebeyond the narrow self-interest of any onecompany and to advance the business casefor responsible practices along the entirecorporate supply chain. If this can beachieved, the benefits to business, to theenvironment and to societies everywherewill be enormous.”

Georg KellExecutive Director, UNGC

Unchaining Value 2

Today’s modern global supply chains have the delivery of value at their heart. The supply chain manager’s challenge is typically to make the suppliers ofcomponents and services work aseffectively, efficiently and economically as possible to meet customer demand.

Analysts and business writers encourage the pursuit of qualities such as ‘agility,adaptability and alignment’ 1 within supplychains, and warn against an overly lineartop-down approach, advising managers tomine and hone the horizontal and diagonalrelationships within their ‘value grid’. 2

Some raise worries that the pursuit ofsupply chain efficiency has left littleredundancy in the system and speculate on associated risks. Others emphasise theimportance of good ‘event management’ to ensure problems are anticipated andhandled with minimal interruption tobusiness as usual.

In tandem with this developing ‘bestpractice’, high profile scrutiny of businessbehaviour — particularly with regards tolabour practices and environmental impactsin emerging economies — has led to anexpectation that corporate responsibilityshould also extend to encouraging andimplementing responsible practices at every step in a supply chain, wherever it may be in the world.

The concept of ‘traceability’ — the capacityto track products and their ingredients orcomponents back to their original source —is enabling unprecedented levels oftransparency and, with it, heightenedexpectations of accountability. For example,pressures from climate change are spurringdebate over the pros and cons of locallysourced and produced goods versusimports. Related to this are the demandsbeing made of transnational logistics anddistribution systems to go beyondtraditional ‘greening of the supply chain’ to reconsider core business models.

To varying degrees, social and environ-mental considerations have already beenincorporated into many managementsystems for many supply chains around the world and a variety of best practiceshave proven to deliver a range of businessbenefits (see Box 2). However just back-engineering sustainability considerationsinto existing supply chain strategies willnot achieve much more than incrementalproblem solving. It may deliver someefficiency benefits, but will notsubstantially shift failing markets or business models.

Introduction

Box 1Terminology

Supply chains and value chains have clear definitions in business literature andoperational thinking. Where a supply chaintypically refers to the chain of suppliersinputting to a final product, value chainalso encompasses thinking about the value created by the chain, particularly for end-use customers.

In reflecting on how sustainability isincorporated into conventional supplychains, Unchaining Value essentially begins to consider the wider context of the value of that activity — to the suppliersthemselves, but also to the end-usecustomer and a range of other stakeholders,including communities and governments.This report, therefore, sits in the over-lapping zone between supply chain andvalue chain — it draws from both conceptsand hopefully also adds new dimensionsthat draw them closer together.

For the sake of simplicity, we use the term ‘supply chain’ in the report.

Unchaining Value 3

Tinkering with supply chain managementprocesses is less likely to yield substantialsustainability gains than looking moredeeply at supply chain inputs — both in terms of supplier and consumerrelationships and contributions — andtaking care to assess the broad strategiccontext of a supply chain’s position in anincreasingly resource constrained world.From such a perspective, the followingchallenges — and the opportunities toaddress them — are clear:

— Very few individual suppliers, particularly in emerging economies, fully experiencethe business benefits of the manystandards and codes of conduct that are required of their work, and so rarely realise or pursue the benefits ofcollaborating with partners to improvemutual sustainability performance.

— At the other end of the supply chain, public awareness of environmental and social challenges is rarely activelyengaged to help innovate sustainablesolutions early on in product or servicedevelopment cycles. This misses a crucialbusiness opportunity to explore andframe customer needs and so helpdevelop awareness and demand forsolutions that offer alternativesustainable market approaches.

— Globally, the recent controversy around first generation biofuels development,and the contention that it ‘snatches food from the mouths of the poor’,3 hasillustrated a profound lack of awarenessof how the needs of quite differentsupply chains may clash, quite fatally,over potentially limited resources. Thehead of the IMF described the challengeas ‘a moral problem’,4 with great careneeded to ensure ‘balanced’ priorities.

This report by SustainAbility, UNEP andUNGC explores how supply chains functionin order to identify new approaches tobuilding sustainability capacity at the local supplier level, as well as identifyinginitiatives that will encourage and enableconsumer demand for more sustainablesolutions. The analysis also considers thechallenges facing supply chains when it comes to making responsible choices in the face of competition for limitednatural resources.

The paper is organised to review macro-trends before drawing on a variety of illustrative case studies to exploreinnovative approaches and identify insights and opportunities for greatercapacity building and partnership.

The analysis draws on a range of sources,including first-hand research into differentsupply chain strategies in the Food &Beverage sector and in the Information andCommunication Technology (ICT) sector.

The recommendations outline a basicframework for companies seeking toappraise their approach to integratingsustainable value into supply chains, andoutline next steps for business and withregards to further research.

The paper has the following chapters:

1 Meta-trendsMoving towards sustainable supply chains

2 Best practicesMacro and micro approaches to sustainable supply

3 Conclusions & recommendationsSteps towards unchaining value

4 Next steps

“Chief executives own final accountability. Shareholders want strong profit growth andminimum volatility. Regulators and the pressexpect social and environmental responsibility.Customers demand someone deliver on promisesmade to them. Supply chain management has become the key to meeting all thesecommitments.” Kevin O’Marah‘Supply Chain Management’Financial Times10 December 2007

Unchaining Value 4

Meta-trendsMoving towardssustainable supplychains

From linear focus and narrow goalstoward networked resource strategies

Since 2004, AMR Research has publishedan annual report titled: ‘The Supply ChainTop 25’. The list features companies thathave, according to the Financial Times,“advanced supply chain management fromits roots in logistics, material handling, andpurchasing towards the modern demand-driven value network needed in ourglobalised, internet-enabled, 21st centurybusiness environment.” 5 Nokia was top of the most recent list, with runners-upincluding Procter & Gamble, Coca-Cola,Nike, IBM, Cisco Systems, Wal-Mart and Toyota.

To earn its position, the FT states: “. . . each company has succeeded forshareholders by integrating processes thatallow them to operate as demand-drivenvalue networks: orchestrating players upand down the supply chain with acombination of information, visibility,cross-cutting metrics and market discipline. . . The Top 25 has outperformed broaderstock market indices by almost 100 percentin the year since publication of the lastreport, indicating at least some linkbetween good supply chain managementand increasing shareholder value.” 6

As corporate supply chains grow in scaleand complexity globally, supply chainmanagement has evolved from having a company-centric emphasis on least-cost purchasing and efficient logistics to having a network-centric emphasis on collaboration with supply chain partnersto maximise value and minimise cost.Competition can sometimes be as intensebetween supply chains as betweencompanies. As one writer notes, “Perhaps one of the most significantbreakthroughs in management thinking in recent years has been the realisationthat individual businesses no longercompete as stand-alone entities, but rather as supply chains.” 7

Today’s successful supply chain managersmust focus on costs and benefits across an entire supply chain and think beyondshort-term financial considerations toensure reliable supply — in terms of quality,quantity, reliability and cost. They achievethis by managing trade-offs, aligningincentives, sharing information, andcoordinating relationships across functionsto achieve a lower ‘total cost of ownership’.

Sustainability is fast becoming a keyconsideration for supply chain managerswith the gamut of environmental and socialimpacts and (in)equities that it represents,and the risks and opportunities involved.

“In many parts of the world, the lack of government involvement in enforcing social and environmental standards makes it difficult for companies to ensure that good businesspractices prevail across their global supply chains. As a result, corporate buyers findthemselves having to address issues that lieoutside their core competencies and remit asprivate institutions, but which they have toshoulder to ensure business continuity andcompetitiveness.”ICC Guidance on Supply Chain ResponsibilityOctober 2007

Box 2Benefits of responsible supply chain management

1 Better working conditions reduceturnover and improve quality and reliability.

2 Environmental responsibility improvesefficiency and profitability.

3 Risks are anticipated and managed, costs reduced and productivity enhanced.

4 Corporate brand and consumerconfidence are protected and enhanced.

5 Communities, consumers andshareholders benefit.

6 Personal, community and corporatevalues of respect and equity areempowered.

Unchaining Value 5

— On the opportunity side, a strategic approach to sustainability enables thedevelopment of far stronger supplierrelationships to deliver added-value,ensure reliability, enable innovation and provide sustainable ‘stories’ forcommunication to consumers to helpbuild brand trust and loyalty. Beyondstrong supplier relationships, a strategicapproach can secure licence to operatewithin communities, legal systems andgovernments that might otherwise beantagonistic. It gives permission forexperimentation, exchange of ideas andthe essential ingredients for innovation.

— On the risk side lies the reputational challenges of underestimatingconsequences, of failing to anticipatelocal community and opinion-formerperceptions of environmental and socialimpacts, and of not realising thepotential for mass media to mobiliseglobal opposition and opprobrium withextreme speed. For instance, both Nestléand Coca-Cola have faced high profilecampaigns and lawsuits to close theirbottled water plants in the USA andIndia, respectively, due to alleged socialand environmental misconduct.

The lesson that companies can take from such experiences is an appreciation of the need to shift their supply chainmanagement goal from a narrow focus on creating more value at less cost for thecompany, to a broader focus of creatingmore value for all supply chain participantsat a lower cost to constrained globalresources. Such a shift is essential todeliver long-term, global sustainabilitygoals and to guarantee the shorter-termtraditional supply chain goals. Usingresources more efficiently can only result in cost savings, and building new sources of capacity can only help create resilienceand cut supply chain risk.

From top-down management to integrated solutions

A 2007 A. T. Kearney and Institute forSupply Management survey revealed that in a group of respondents where nearly60% had corporate sustainability strategies,just half had written guidelines or policiesaround sustainability in the supply chainand even fewer had a formal supplymanagement sustainability strategy in place.

Failure to manage resource depletion can of course also have hard operationalconsequences, such as disruption tosupply, increased cost and fundamentallack of key raw materials. For instance,Anheuser Busch has experiencedshortages in key production inputs,including grain and aluminium, as a result of water shortages affecting its suppliers.

Managing a sustainable supply chaininvolves all the established practices ofmanaging total costs and benefits acrossthe chain, but — crucially — over a longertime horizon than the typical quarter and across a broader ‘chain’ of participantsand considerations. In hindsight, it seemsobvious that Coca-Cola, Nestlé andAnheuser Busch should take carefulstrategic consideration of water scarcityissues and ramifications within thecommunities and countries where theirsuppliers operate — but, at the time, theirfocus was much narrower.

Figure 1Company influence on supply chain

Company

Competitors GovernmentsOther Industries

Finance, HR, IT, Logistics, Marketing,Operations, Procurement, Product Services,R&D, Strategy

Civil Society

Producers ConsumersDistributorsTransportersManufacturers

Unchaining Value 6

— Lifecycle analysis has helped make visible all aspects of a product or service‘lifecycle’ from raw material productionthrough to manufacture, distribution,use and disposal, including allintervening transport steps.

— Risk assessment has enabled the identification of key issues at each step of the supply chain.

— Proactive use of social and environmental reports has provided amechanism for communicating realities,problems and achievements.

In addition to these established tools andpractices, a variety of new managerial andtechnological solutions are also evolving.There is growing recognition that allfunctions of a company need to becoordinated to ensure the sufficientlystrategic and broad focus essential forintegrating sustainability considerationsinto the supply chain — not just logisticsmanagers and buyers, but also R&D andmarketing. Figure 1 and Table 1 illustratehow different functions within a businesscan influence the supply chain to be more sustainable.

Knowledge transfer and capacity building

A key requirement for embedding sustain-ability within a supply chain is to workcollaboratively with suppliers to developand implement effective sustainabilitystandards.

Many companies in different industriesengage with their suppliers to buildcapacity. In the auto industry, for example,Ford developed and provided ISO 14001Awareness Training to allow its suppliers to benefit from Ford’s experience ofachieving certification at its own plants.Renault has also developed a process and tools to train suppliers on its ToxicsStandard that ensures processes to prohibit use of toxic substances.

At an international level, UNEP and the UN Industrial Development Organization(UNIDO) are coordinating National CleanerProduction Centres in 24 developingcountries to help small- and medium-sized enterprises (SMEs) improve resourceefficiency in their production processes.8

Although this would suggest that businessfocus on sustainability in supply chains is not widespread, there is a great deal ofevidence drawn from a variety of sectors —from electronics to apparel, food, furnitureand pharmaceuticals — that the world’sleading global businesses have evolved an array of strategies, tools, technologiesand systems to help them better integratesustainability aspects into their supplychain management. For instance:

— Codes of conduct have enabled clarity on the environmental and socialstandards expected of suppliers,articulating expectations of labourstandards, wages, working hours andenvironmental performance.

— Clear internal and third-party audit procedures have helped establish greatertransparency and accountability.

— Engagement with NGOs and other stakeholders on codes of conduct,particularly regarding controversialissues, has helped build mutualunderstanding of expectations and challenges.

Table 1 Corporate functions and related sustain-ability considerations for the supply chain

R&DProduct design and development

— Reduce material use.

— Substitute materials (to lower resource-intensiveness, cost or impact).

— Use more sustainable inputs (e.g. recycled, Fairtrade).

ProcurementPlanning and managing inventories, pricing and margins

— Include social and environmental criteria in procurement contracts.

— Provide advice and support on sustainability issues.

— Develop enforcement mechanisms (consider collaborative enforcementsolutions such as joint onsite evaluationsand training).

— Share information with supply chain partners and set up supplier networks (to increase efficiency, avoid unnecessarytransport or resource use and preventdiscontinuities of supply and demand).

— Provide incentives to avoid unnecessary competition (e.g. between dealers,between marketing and sales).

— Promote transparency in economic arrangements.

— Set prices and margins to promote efficiency and profitability across the chain.

LogisticsDesigning the chain network

— Choose lower-carbon transport modes.

— Consolidate distribution (e.g. batch sizing) to enable efficient economies of scale.

— Foster collaboration among suppliers.

— Plan distribution and delivery to improve efficiency.

Unchaining Value 7

In October 2005, the EICC Groupestablished a partnership with the Global e-Sustainability Initiative (GeSI), represent-ing information and communicationstechnology companies in Europe, NorthAmerica and Asia and, with the support of UNEP, dealing with matters such as e-waste. The EICC–GeSI partnership aims to develop common implementation toolsfor supply chain management and broadenthe impact of the collaborative effort.The EICC and GeSI are driving discussionand progress on buyer codes of conductwithin the Supply Chain Working Group(SCWG) and through the so-called E-TASC(Electronics — Tool for Accountable SupplyChains), which is based on the followingelements:

— A supplier risk assessment tool, consisting of ten high-level questions for companies to evaluate the level ofrisk of a particular supplier in the area of corporate responsibility.

— A self-assessment questionnaire, available in multiple languages includingChinese and Spanish.

— A common audit methodology, whichsuppliers, participant companies andapproved third-party auditors can use to obtain the benefits of a common audit approach.

The methodology toolkit includescommunication templates, supplierpreparation guidelines, a facility auditquestion set, audit report templates, andauditor guidelines and training modules.

Food & Beverage sector

In the agricultural sector, many industryand multi-stakeholder initiatives havesprung up that work directly with farmers to build capacity and to enablemanufacturers to share best practices.Commodity-specific initiatives have beendeveloped to help farmers meet industry-wide standards that include: the CommonCode for the Coffee Community, the EthicalTea Partnership, and the Roundtable onSustainable Palm Oil, which convenes arange of industrial actors from the food,consumer goods, cosmetics and energysectors who all use palm oil.

General agricultural initiatives include theSustainable Agriculture Initiative, a foodmanufacturer’s group that has producedprinciples and practices for five commoditygroups, and the Sustainable Food Lab, amulti-stakeholder group that designs andsupports pilot projects around sustainablelivelihoods in food supply chains and hasalso created a Commodity StandardsBenchmarking Tool.

UNEP and its Wuppertal CollaboratingCentre on Sustainable Consumption andProduction (CSCP) are also developing atraining package for SMEs — Life CycleManagement Navigator — to help smallsuppliers apply lifecycle thinking toenhance business performance. This followsthe Efficient Entrepreneur programme with its guidance for SMEs in introducingenvironmental performance management.9

As well as initiatives by individualcompanies, certain industry sectors areworking together to coordinate standardsand share best practices. For example, there are a number of initiatives within the ICT and Food & Beverage sector thataim to deliver sustainability through thesupply chain.

ICT sector

The Electronic Industries Code of Conduct(EICC) was developed between Dell, HP, IBM and the electronics manufacturersSolectron, Sanmina-CSL, Flextronics,Celestica and Jabil to improve conditionsand foster a culture of social responsibilityin the electronics supply chain. Since itsrelease in 2004, Intel, Microsoft, Sony andCisco have joined the effort and taken onboard input from a range of stakeholders.

ManufacturingLocating activities and selecting suppliers

— Analyse social and environmental standards prevalent in suppliers’ locale(to improve likelihood that supply willmeet social and environmentalexpectations).

— When making consolidation decisions,consider a broader range of environ-mental and social issues, such asincreased fuel usage and carbonemissions and impact on localemployment.

— When selecting suppliers and developingmanagement systems, consider theincreasing importance of traceability for managing and communicatingsustainability performance.

MarketingProducts, services and post-sale service

— Influence consumer choice by providing consumers with information on productsustainability impacts.

— Strengthen information on sustainable consumption to users (productinformation, labels, online forums,events).

— Consider product service systems to improve resource efficiency and reduceimpact.

— Establish product take-back schemes.

— Provide maintenance services to encourage customers to repair ratherthan discard.

Public affairsExternal engagement

— Collaborate with competitors to develop common approaches tomonitoring suppliers.

— Work with government to drive regulation.

— Engage with civil society organisation to develop best practice solutions.

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Unchaining Value

Table 2Selected sustainability initiatives in the Food & Beverage sector

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Commodity-specific initiatives

Common Code for the Coffee Community

Sustainable Coffee Partnership

International Cocoa Initiative

Better Cotton Initiative

Marine Stewardship Council

Forest Stewardship Council

Roundtable on Sustainable Palm Oil

Roundtable on Responsible Soy

Better Sugarcane Initiative

Ethical Tea Partnership

Multi-commodity certifications

Fairtrade Labelling Organizations International

GlobalGAP

Rainforest Alliance

Utz Certified

Other agriculture-related initiatives

Ecoagriculture Partners

IIED Race to the Top (UK)

Keystone Future Generation Agriculture

Sustainable Agriculture Initiative Platform

Sustainable Commodity Initiative

Sustainable Food Lab

Unchaining Value 9

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CIES Food Business Forum (originally Comité International d’Entreprises à Succursales)DCED Donor Committee for Enterprise DevelopmentIIED International Institute for Environment and Development INFASA International Forum on Assessing Sustainability in AgricultureRTI Royal Tropical InstituteSETAC Society of Environmental Toxicology and ChemistrySNV Netherlands Development OrganisationUNEP United Nations Environment ProgrammeWBCSD World Business Council on Sustainable Development

Manufacturing-related initiatives

Business Social Compliance Initiative

CIES Global Social Compliance Programme

Ethical Trading Initiative

International Standards Organization

Other supply-chain-related initiatives

Responsible Purchasing Initiative

Responsible Purchasing Network

Social Accountability International

WBCSD/SNV Inclusive Business Alliance

UN Global Compact

UN Global Reporting Initiative

UNEP/SETAC Lifecycle Initiative

Research

INFASA

Global Value Chains (Duke University)

Regoverning Markets (IIED)

Value Chains for Development (RTI)

Value Chains Portal (DCED)

Unchaining Value 10

From Suppliers’ Burden to Inspiration

In spite of the many corporate and sectoralefforts to integrate sustainability intosupply chains, the experiences and benefitsfor many suppliers and their workers stillremain unclear, particularly in emergingeconomies.

A seminal 2003 World Bank studyestimated that at least 1000 differentcodes of conduct exist in the businessenvironment. Some suppliers in the WorldBank study reported being subjected toover 50 audits per year — some beingmonitored by the same audit company onbehalf of a range of suppliers, where eachCode of Conduct can specify differentimplementation and audit requirements —some focused on management systems,others on performance data, some on both.Randomly interviewed workers, in certaincases, showed a total lack of awareness ofany efforts to achieve better labour andenvironmental practices in their workplace,and indeed western media and NGOsregularly highlight such breaches betweengrassroots working practices and corporateclaims. A recent EIRIS 12 report found thatover 90% of Asian companies demonstrateno evidence of supply chain labourstandards.

Box 3Transparency and traceability

In its 2004 Corporate Responsibility report (published in 2005), Nike disclosed a complete listing of the names andlocations of the contract factoriesmanufacturing its primary product line. It was the first company in the globalfootwear and apparel industry to do so. The initiative followed years ofcampaigning against the company for its use of ‘sweatshops’ and a US lawsuit(Kasky v Nike) that alleged the company’sclaims of corporate responsibility weremisleading.

Gap similarly experienced criticisms forlabour conditions in their supply chain and took steps to implement and assurenew codes of conduct. Last May, Fortunemagazine10 reported how Gap hasdeveloped “one of the most extensive and transparent factory monitoring effortsof any U.S. brand”. The company workedwith the non-profit group Verité to assessits system of factory monitoring, including92 full-time employees dedicated to factory compliance.

Beyond the clear brand protection andenhancement benefits, Dan Henkle, seniorvice-president for social responsibility at Gap, said: “If people are treated withdignity and respect, they are going to behappier and more productive and less likelyto leave the factory. If you can reduceturnover, you can also impact quality.”

GRI (the Global Reporting Initiative) has led the field of sustainability reporting bysetting standards and raising awareness of sustainability impacts through corporatepractice. Since December 2006, the GRI and Germany’s Gesellschaft für TechnischeZusammenarbeit (GTZ) have collaborated on GRI’s Transparency in the Supply Chainproject. The project brings togetherDaimlerChrysler, Otto Group and Telefónicato explore the possibilities of coachedreporting by SME suppliers.

The involved multinationals are eachworking with three or four of theirsuppliers in emerging economies to helpthem start a reporting process based on theGRI’s G3 Sustainability Reporting Guidelinesand its SME Handbook, which providesSMEs with practical guidance on sustain-ability reporting. By February 2008, ten outof 12 participating SME suppliers hadcompleted their first sustainability reportsthrough the project.11

Technological advances and internationalagreements between sectors have seenstep-changes in the traceability of productsback to their point of origin. Consumers, in some circumstances, are now able totrack the farm that grew the tomatoes they buy in their local supermarket. Retailbuyers can find out where a shipment offish was landed, and even dealers in jewelscan ascertain whether a diamond camefrom a mine in a conflict area or not. Asthe technology advances further, increasesin transparency and accountability will beboth powerful and empowering.

A pass-fail mentality to auditing tends to encourage supplier behaviour that meetsthe so-called letter but not the spirit of the law. And relying purely on buyerdemand to drive sustainability is not alwaysa sufficiently compelling business case. At a recent conference on labour rights, a representative from a US-based apparelcompany noted: “One of my Bangladeshitextiles’ suppliers told me that hissustainability strategy is to stop supplyingto Western markets. Instead, he plans tosell to Indian and Chinese companies —where the demand is growing, and wherestandards are less stringent.”

It should be troubling when the apparentstrength, cohesiveness and efficiency of supply chains from a multinationalperspective is at odds with the confusionand inefficiency apparently experienced at the suppliers’ end of the chain. While it is clear that multinational companiesmay well be tapping and managing theirsuppliers effectively as far as their ownbusiness-as-usual needs are concerned,they may not always be giving sufficientthought either to other burdens placed on those suppliers by other sectors, or tothe possibility that certain disillusionedsuppliers can choose to take their businessto the competition elsewhere.

Multinationals can work with suppliers in their supply chain to:

— Prove the business case and help suppliers see and experience the benefitsto their own business of social andenvironmental improvements.

— Tackle issues around compliance and certification in a way that ensuresrequirements are mutually effective and reasonable.

— Partner with suppliers, distributors and retailers to coordinate training and information that will help improvestandards, quality and performance.

— Implement effective collective action and partnering, while avoiding free-riderproblems, whereby all companies in asector benefit from the leading practicesand investments of a few.

— Be responsive to consumer perceptions and priorities, without depending onconsumers to determine the social andenvironmental practices that are appliedin the marketplace and the supply chain.

Unchaining Value 11

From resource pinch-points tocollaborative solutions

In the MIT Sloan Management Reviewarticle: ‘Evolving from Value Chain to ValueGrid’,13 authors Frits K. Pil and MatthiasHolweg advocate ‘pinch-point mapping’ 14

— or the identification of potentialbottlenecks and threats to key upstreaminputs — to anticipate potential supplierproblems and enable the negotiation orinnovation of alternative services orcomponents.

The writers concede that: “pinch-pointsthat span different industries areparticularly tricky to monitor, because it isdifficult to anticipate demand or use for acomponent or service in another industry”.For example, silicon is a vital input to bothICT products and solar energy panels andthe increased demand for both uses isleading to heightened competition in bothsectors. Competition between communitiesand companies over limited resources iseven trickier.

While some companies and consumers may increasingly benefit from tightlyorchestrated supply chains, and while somesuppliers and workers may benefit fromimproved standards, there is room forimprovement when it comes to ensuringmore sophisticated anticipation of globalresource needs to enable collaboration in the development of just, sustainablesolutions. In particular, companies need tounderstand and account for cross-sectoralcompetition for limited resources.

Some approaches are already used toidentify various pinch-points of conflict —or sweet spots of potential opportunity —at a micro and macro level. Most draw ongenuinely collaborative engagement todevelop new ways of thinking and devisingsustainable solutions. For instance:

— Working with suppliersDesign For Sustainability (or D4S) is an approach that integrates supplierexpertise at the product design phase,when 70% of cost is effectively pre-determined. In the USA, successfulefforts are shown to have decreasedcosts by one-fifth, improved quality by a third, and halved time to market.15

— Working with consumersProduct service systems (PSS) thinking is helping to reframe how businessesthink about societal and consumer needs.The approach seeks to dematerialiseconsumption patterns by moving awayfrom a focus on the sale of specificproducts and services towards theprovision of more integrated andfunctional solutions.16 For example,Italian utility AMG charges its customersfor hot water rather than for themethane used to heat that water —incentivising AMG to maximise energyefficiency rather than unit volume sale.17

— Working with other industriesBusiness coalitions spanning differentindustry sectors are being formed to raise sustainability standards forshared resources. Examples include the Roundtable on Sustainable Palm Oil (includes food and personal carecompanies) and the Better SugarInitiative (includes food and energycompanies). UNEP has also been involvedin the launch of cross-sector initiativesfocused on issues such as sustainablemobility and sustainable building and construction.

— Working with multi-stakeholdersOne Planet Business is a WWF initiativeto convene business leaders, policy-makers, investors, consumer groups and other NGOs in a multi-stakeholderprocess to understand and help facilitatethe system changes needed to makemarket economies sustainable. Theapproach has ten guiding principlesranging from zero carbon and waste toequity and happiness. It draws on a four-level framework that assesses resourceconsumption according to ecologicalfootprint, carbon dioxide emissions andmaterial flow analysis. The process seeksto identify where interventions wouldhave greatest positive impact across asupply chain.18

The following section looks at some of theapproaches and strategic partnerships beingdeveloped by selected multinationals tobuild sustainability into their supply chainsand business models.

Unchaining Value 12

Case studyCoca-Cola 19

ProjectWater resource strategy

IllustrationRisk avoidance

This section explores a variety of bestpractices, drawn from different sectors, to explore how multinationals like IKEA,Unilever and Hewlett-Packard are workingwith suppliers towards a shared under-standing of the role of sustainability insupply chain management and the mutualvalue to be achieved.

It also considers the text book example of Nokia’s approach to supply chain eventmanagement, with a view to assessing if there are lessons for pinch-pointmapping when it comes to natural resourcemanagement in supply chains, and looks at how Coca-Cola is tackling this challengefrom a water resource perspective.

These case studies and others illustrate a range of benefits that companies — and their supply chain partners — canrealise from a collaborative, proactive and sustainability-minded approach tomanagement across the chain, such as:

— Improved engagement & communication.

— Capacity building.

— Efficiency improvement.

— Resilience.

— Risk avoidance.

For the purpose of identifying ‘bestpractice’, we have looked for examples of companies that have gone beyondtraditional risk management strategies to proactively innovate and incentivisecontinuous improvement in buildingsustainable value into their supply chains.

Best PracticesMacro and microapproaches tosustainable supply

Water scarcity poses significant risks to a company whose single biggest input iswater. Following pressures in countries like India, Coca-Cola recognised how trends in water supply and use could posefinancial, operational and reputational risks. The company launched its Global WaterInitiative in 2004, with the aim of makingthe company ‘water neutral’ within itsmanufacturing and bottling operations.

The project began as an investigation intothe state of global freshwater resources.Partnerships were established with anumber of organisations, including the UN Development Programme (UNDP),United States Agency for InternationalDevelopment (USAID), CARE, World WildlifeFund and many others. At the heart of thechallenge was the need to develop a globalapproach that would also meet the uniqueneeds of local situations and communities.The solutions proved to be a combination of risk management and value creation.

Coca-Cola initially conducted an in-depth survey of each of their plants in 20 regions and used the results to developan innovative risk assessment framework. Six primary categories of risk wereidentified, for which monetary values were assigned. These values were built into a scenario planning tool that could be used by strategic planners at all levels of the company to drive investmentdecisions.

Cola-Cola then developed local water stewardship initiatives, engagingcommunities across its regions ofoperation. These were based on anassessment of local water dynamics and ranged from addressing water access and contamination to watershedprotection and post-disaster water systemrehabilitation. The company took aninclusive approach to engagement andinvited both friends and critics to helpexplore the opportunities for improvingsustainability practices across its entiresupply chain.

Insights:

— Natural resources, however plentiful they may seem today, are excluded from supply chain management at anycompany’s peril.

— Understanding the implications ofnatural resource inputs to a supply chain,be it grain or water, requires strategicknowledge and insight of that resourceat a multitude of levels from global tolocal.

— Anticipating natural resource pinch-points requires considerable strategicforesight, possibly mapping trends andscenarios over decades and not just yearsor quarters.

— Constraints on resources will come frommore than one sector or company, andcollaboration across sectors,communities, experts and governmentsmay be needed.

Authors Daniel Esty and Andrew Winstondescribe IKEA as “a true environmentalpacesetter” in their recent book Green toGold. 20 Much as Nike and Disney suffered in the early 1990s, Esty and Winstondescribe how IKEA was attacked on a range of fronts for supply chain issues such as child labour, the use of woods from endangered forests and the presenceof formaldehyde in one of its products.

In response, the IKEA Management Teamdeveloped a supply chain managementsystem known as ‘The IKEA Way onPurchasing Home Furnishing Products’ — or IWAY. The initiative is resourced by some80 employees, who work around the world,visiting suppliers and rating them on theirsocial and environmental performance. A further 18 employees are foresters by training and work exclusively onunderstanding the sourcing for all wood in IKEA’s products.

Central to IKEA’s approach is ‘the StaircaseModel’, which encourages continuousimprovement from its suppliers byestablishing four levels of progressiveachievement. Every new supplier must beaudited against the Staircase Model beforedelivering its first shipment. Level 1 of thestaircase is basically unacceptable andmeans the supplier must have an actionplan for reaching Level 2, IKEA’s minimumstandard. Level 3 is a progressively higherstandard, and Level 4 suppliers must meetstrictest third party standards, such asthose of the Forest Stewardship Council.

IKEA audits are not limited to ‘tick-box’exercises, but — as their ‘Notes to auditor’set out — each auditor must take care to“check that procedures work in reality”.Auditors are required to “explain the IKEAphilosophy and check that the supplierunderstands the key environmental impactsand has started to measure and follow-up”.If necessary, IKEA will step in to raisestandards. Esty and Winston give theexample of a loan made by IKEA to aRomanian furniture supplier so that it couldinvest in modern ventilation and air filters,and a machine to turn briquettes fromwaste to energy and profit.

The auditors are subject both to internalaudits by IKEA and third party audits. The IWAY Council, which oversees theoperation, is chaired by IKEA’s CEO.

Insights:

— A staircase approach to standards drives continuous improvement.

— Good auditors are also coaches, enabling understanding of mutual benefits.

— Good relationships enable investments to help raise supplier standards.

— Suppliers can experience progress, benefits and long-term stability.

— All of the above helps to anticipate and solve potential problems.

— Leadership from the top is a powerful calling card and enabler.

As well as capacity building with smallsuppliers, the CESR project also developedskills within HP’s top tier of direct suppliers,with regard to how to manage second-tiersuppliers and encourage the cascade ofsocial and environmental good practicedown the supply chain. HP plans to startsimilar capacity building projects inThailand, India and Mexico, and is currentlyengaged in CSR Europe’s ‘Responsible SupplyChain Management’ laboratory where it issharing lessons learned.

Insights:

— Capacity-building with first tier suppliers is important, but appropriate interventionand training at the second tier is alsopowerful in encouraging a cascade ofgood practice.

— Partnerships are essential to a credible training process.

— Lessons learned can help shape best practice across the sector and beyond.

Unchaining Value

Case studyHewlett-Packard

ProjectFocused supplier improvement in China and central Europe

IllustrationEfficiency improvement

Case studyIKEA

Project‘The Staircase Model’ for continuous improvement

IllustrationImproved engagement and communication

13

Hewlett-Packard (HP) co-launched theElectronic Industry Code of Conduct (EICC)in 2004 and is working to extend social andenvironmental standards to its suppliers,which number around 600 across 1,000different sites. Although the company hasmade good progress, it still faces non-compliance in areas such as working hours,emergency preparedness, and wages andbenefits. Capacity building programs havebeen central to HP’s approach to thischallenge. In 2006, it initiated the FocusedImprovement Supplier Initiative (FISI) inChina and the Central Europe Supplier(CESR) Project. In China, the project was a joint initiative with expert organisationslike Business for Social Responsibility’sChina Training Institute. In Central Europe,the project was similarly devised inpartnership with the Copenhagen Centre for Corporate Responsibility (now part of the Danish Commerce and CompaniesAgency; DCCA) and the CopenhagenBusiness School. In China, the FISI programprovided monthly social and environmentalmanagement training sessions to 30 of HP’s key suppliers in China, who employedapproximately 100,000 people.

Factory managers, as well as managers inquality, human resources, and environment,health & safety received two to four days ofmandatory training for a year. The trainingsessions covered increasing productivity,working hours, wages and benefits, workercommunications, management systems, rootcause analysis, Chinese laws and regulations,the environment, and health and safety.Suppliers provided HP with monthly progressreports of corrective actions, improvementsand metrics.

In Central Europe, HP worked with a groupof first- and second-tier suppliers in an 18-month initiative to help develop theirexpertise in social and environmentalresponsibility. As in China, the goal was tohelp suppliers understand the connectionbetween improved standards and businessefficiency. At the beginning of the project20 suppliers in the Czech Republic, Hungaryand Poland were assessed and, based on theevaluation, received focused trainings on the EICC and its requirements, managementsystems and best practices on labour, andenvironment, health & safety provisions. The project report was published in January 2008.

Case studyNokia

ProjectEvent management and lessons for scarce resource

IllustrationResilience

Unchaining Value 14

This is a textbook example of supply chain event management, included here for its potential lessons with regard toanticipating and managing scarce naturalresources. The example is drawn fromMartin Christopher’s book, Logistics andSupply Chain Management. 21

In March 2000, lightning caused a fire in a semi-conductor plant owned by PhillipsElectronics NV, in New Mexico, USA. Thefire was brought under control, but siliconwafers for thousands of mobile phoneswere destroyed, and smoke contaminatedthe factory’s entire stock of chips. Two ofthe factory’s main customers were Nokiaand Ericsson, who accounted for 40% of its sales.

Almost immediately, Nokia supply chainmanagers detected a problem and, withintwo days of the fire, knew something was badly amiss. Nokia contacted Phillips,learned of the incident, and immediatelyput key components on a ‘special monitor’ list.

It was soon clear that supply could bedisrupted for months, and Nokia putpressure on Phillips at the highest level tofind and use additional capacity in its otherplants. Nokia also sent representatives toother suppliers in Japan and the USA tosecure priority status for all availablesupplies of chips and to persuade them tospeed up production. Nokia also set aboutreconfiguring its products to take slightlydifferent chips from other sources.

Ericsson was oblivious to the fire untilthree days after the event, when a Phillipstechnician called to notify them about thefire and reassure that it was a minor event.Ericsson did not recognise the need to actuntil early April, by which time Nokia hadsecured all its supplies. Because Ericssonhad made a strategic decision to singlesource key components in order to simplifyits supply chain, it had no alternativesources and lost an estimated USD400million as a result. Nokia was able tomaintain production levels and secure itsposition as European market leader.

Insights:

— Supply chains can be extremelyvulnerable to disruption anddiscontinuity.

— Vigilance and proactive management are essential to anticipate and manageproblems.

— Vigilance requires foreknowledge of thekey variables or components to track.

— Natural resource components and/or‘moral’ conflicts that may constrainaccess to natural resources should beseen as key variables, warranting greatvigilance and strategic managementwithin any supply chain.

Insights:

— Clear standards enable continuous improvement.

— Technical and financial support isessential to support small scale suppliersto meet sustainability standards.

— There needs to be a trickle down effect of standards and support.

— Suppliers enjoy enhanced security of contract and a right to access to newmarkets.

McDonald’s buys most of its agriculturalproducts on the spot market, other thanpotatoes and chicken, which it buys fromcontract processors. So to influenceagricultural practices in its supply chain,McDonald’s focuses on providing long-termtechnical assistance to its direct processorsand convenes supplier working groups. In turn, these first-tier supplierscommunicate good practices to growersfurther down the chain.

To demonstrate to its suppliers what itconsiders best practice in food safety andquality, traceability and ethically acceptableagricultural practices in its supply chain,McDonald’s Europe has established a set of voluntary minimum agriculturalstandards known as the McDonald’sAgricultural Assurance Program (MAAP). In order to allow suppliers to build onexisting work, the MAAP standards arebenchmarked against over 100 Europeanfarm assurance schemes.

The MAAP standards have two levels —‘best practice’ and ‘aspirational’ — whichare annually reviewed and updated,allowing McDonald’s to set continuallyrising standards while giving its supplierstime to make improvements.

One of the more widely used European farm assurance schemes is EurepGAP (now GlobalGAP), developed in the late1990s by a group of European foodretailers. It is a relatively complicatedscheme and can be difficult to achieve forsmall farmers, but achieving it has becomea requirement for entry to European retailsupermarket supply chains. Beginning in2002, McDonald’s worked with one of itsEuropean potato processors, Farm FritesPoland (FFP), to establish a simplifiedversion of EurepGAP known as FARMAAP.FFP’s four dozen small family farmers wererequired to comply with the requirements.In turn FFP made financing and consultingservices available and conducted audits. As of 2007, all FFP growers had reachedFARMAAP requirements, while 14 hadachieved EurepGAP certification. FFP isseeking to achieve EurepGAP certificationfor all of its growers.

Case studyMcDonald’s

ProjectThe McDonald’s Agricultural Assurance Program

IllustrationHow to help suppliers to meet standards

Case studyUnilever

ProjectFarmer field schools and Lipton tea

IllustrationCapacity building

Unchaining Value 15

Unilever is the world’s largest buyer ofblack tea and purchases 12% of the globalsupply each year. It sources from a varietyof growers: independently owned estates,smallholder farms and its own estates. In 2002, Unilever published sustainableagriculture guidelines for tea cultivationand has been working to roll these out, butfaced difficulties in reaching geographicallywidespread smallholder farmers,particularly in Kenya, the world’s largestexporter of black tea.

Some 60% of Kenyan tea is grown bysmallholders, whose output is almost 40% lower than large estate yields, largelythought to be due to the high cost of farminputs, poor husbandry practices and lowfarmer morale. Adoption of good practicesto improve yield was slow as the maincommunication route to farmers was viathe Kenyan Tea Development Agency(KTDA), where each ‘field officer’ dealt with at least 1,000 farmers.

Unilever developed a program to work with KTDA to transform its outreach tosmallholders by developing farmer fieldschools, which would serve to roll-outUnilever’s tea sustainability guidelines andhelp smallholders achieve better financialreturns as a result. The program is managedand funded in collaboration betweenUnilever, KTDA and the UK Department for International Development (DFID).

Before launching the three-year program in March 2006, Unilever spent five yearsbuilding the relationship with KTDA andseeking a public sector funding partner,which was not easy given the scale of theinitiative. Part of DFID’s contribution hasbeen funding for a baseline study andexperienced trainers to enable Unilever to expand the scope of the initiative to a far wider audience.

The first farmer field school was started in August 2006, with another 20 launchedover 2007, with sites chosen for theirgeographic reach and accessibility. Over the next three years, Unilever will assessthe impact of the farmer field schoolsagainst the DFID funded baseline study. So far, three of the four established farmerfield schools have shown substantialpotential for generating higher income,with the fourth being fairly successful fromthe start. Unilever also believes theinitiative has helped imbue a sustainableagriculture philosophy throughout itsoperations.

On the back of the success of the farmerfield schools, the Unilever black teasustainability program added anothercommitment in the summer of 2007: to achieve Rainforest Alliance certificationof its Lipton brand tea globally by 2015.Believing that consumers now seesustainability as a brand enhancement,Unilever’s Lipton marketing team decided to find a way to communicate credibly toconsumers the work that the organisationwas already engaged in.

It chose Rainforest Alliance for itscomprehensive approach to social andenvironmental issues, its ability to work on an international scale with both largeplantations and small farmers, and itsmarket-based approach.

The existing relationship between Liptonand KTDA helped to facilitate discussionson Rainforest Alliance certification, as KTDA did not initially trust the certificationprocess. Rainforest Alliance auditors havebegun making site visits to Kenyan growers,and other tea farms in Kenya, Tanzania,Malawi, Indonesia, India and Sri Lanka will follow.

Insights:

— Indigenous expertise can be greatlyenhanced with the right type ofthoughtful corporate intervention.

— Effective capacity building needs tocombine locally relevant initiatives and partners with the benefits of scaleand reach.

— Successful supply chain sustainabilityinitiatives can lay essential ground fordeveloping brand-enhancing partnershipsthat will help drive consumer loyalty.

Unchaining Value 16

The case studies in the previous sectioneffectively span a spectrum of approachesto the integration of sustainability intosupply chains — from approaches that still, fundamentally, serve to enhancebusiness-as-usual (such as IKEA’s StaircaseModel) through to business models built on the idea of sustainable supply andmarket solutions (such as Lipton tea). In each instance, however, the pursuit of sustainability involves a combination ofattention to the small and local (such asUnilever’s farmer field schools in Kenya)along with attention to the large andglobal (such as Coca-Cola’s Global WaterStrategy).

This skill of thinking as broadly andstrategically as possible, as well as focusingon accurate, real-time local detail, is at the heart of success for most leadingglobal businesses. People with this skill are sometimes described as having a‘helicopter quality’ — the ability to bothpull back and see the big picture as well as focus to examine the detail.

Successful supply chain management, to some extent, already does just this —connecting the large corporate valueproposition with the many small anddispersed components that mustsynchronise smoothly to make it happen. As such, conventional supply chainmanagement arguably doesn’t need a new tool or framework to improve itssustainability performance. The tools for gathering information and ensuringadaptability, agility and alignment — from supplier to customer — already exist in many instances.

Rather than creating new systems, the challenge seems more to be one ofenabling a type of mindset and intelligencethat works to cascade sustainabilityinsights, learnings and opportunities to create new value.22

— In the same way that supply chainmanagers are equipped to track productquality and delivery lead times, they alsoneed to be equipped to track sustain-ability risks and opportunities, at a microand macro level. This typically involveslinking up big-picture thinking, oftenundertaken at a corporate level, with the supply chain and procurementmanagement divisions and suppliersthemselves to ensure that the correctcriteria and triggers for discussion andinnovation are in place. It often requirescollaborative efforts to partner withsuppliers in building capacity, driven by a collective or ‘chain business case’.

— Corporate functions themselves, such as public affairs and business planning,also need to be exposed to thesustainability pressures within supplychains to ensure that their own activities— such as lobbying, financial planning,CSR, scenarios development and riskmapping and so on — are aware of keypressures and supportive of proactiveinitiatives and engagements.

— Similarly, marketers who focusexclusively on the consumer valueproposition need to be exposed to thepossible consumer benefits of buildinggreater sustainability into supplyprocesses, such as opportunities forproduct or service development, newtypes of third party endorsement andbrand building. Further, marketers canthemselves contribute research and —through communication and engagementactivities — help to name and frame and so shape trends in consumerexpectations regarding alternativemarket solutions.

Table 3, below, proposes a ladder ofbusiness approaches to the integration of sustainability value within supply chain thinking and identifies three main ‘steps’: Incremental, Strategic andTransformational. For each step, we identifythe mindset that is likely to be guidingorganisational thinking, the drivingpriorities and types of activities that arelikely being undertaken, including capacity-building and partnership activities.

The ladder suggests that a business’sapproach to integrating sustainable value is likely to be incremental, but this isn’tnecessarily so. It is perfectly possible for an initiative to leapfrog straight to theTransformational step. That said, theambition is for all corporates to realise the value of pursuing the highest rung and — as an essential part of that — to enable their suppliers, and others, to collaborate with them in the pursuit of its achievement.

Conclusions andrecommendationsSteps towardsunchaining value

Table 3Supply chain management and sustainability value — steps to integration

Unchaining Value 17

1 IncrementalOur suppliers provide essentialcomponents to products and services andneed close, efficient management.

2 StrategicCollaboration within the supply chainand beyond can help drive efficiencyimprovements and add value.

3 TransformationalThe supply chain is a global network of relationships and opportunities forshared learning, technology transfer, risk and opportunity identification,innovation of solutions and creation of value.

— Business value: Short-term viability,reliability and quality of supply; riskmanagement related to product safety,regulatory compliance and reputation.

— Business value: cost savings (e.g. energyor material use reduction); improvedproductivity; strengthened demand fromcustomers or consumers for ethically orenvironmentally sourced products; buildbrand name and image.

— Business value: New market creation;brand enhancement; long-term viabilityof supply; premium quality supply. In addition, creating value andinnovation throughout the supply chain,e.g. developing sustainable livelihoods;shaping consumer demand.

DriversPhase and Philosophy Characteristic

— Heavy focus on supplier standards.

— Cost minimisation and ‘policing’approach to auditing.

— Limited knowledge of various demandsmade of suppliers and any associatedsustainability consequences.

— Capacity-building at the individual /community level: training programs,technical assistance.

— Supplier engagement in developingstandards and approaches.

— Guidelines and learning.

— Philanthropy.

— Active marketing and branding of more‘sustainable’ products and services.

— Re-engineering the supply chain around innovative partnerships or chain networks that create value for all participants (shared profit and risk;shared planning, decision making andinformation management; leveragingcomplementary abilities or scale; product service systems).

— Multi-stakeholder collaboration to raise the level of the entire industry(leveraging complementary abilities or scale, creating shared pull).

— Institutional capacity building (industry-wide or national guidelines, assessmenttools, approaches to competitiveness).

— Efforts to measure outcomes (rather than inputs).

Unchaining Value 18

Next steps for business

While this paper does not seek or claim tobe exhaustive, we hope businesses use it asan input or provocation to inspire reflectionon their current approach to building valueinto their supply chains and the role thatsustainability thinking may (or may not)currently play and the potentialopportunities to be tapped.

Businesses may wish to undertake thefollowing activities to this end:

Assess the current situation and efforts

1 Assess the current approach to supplychains within your business againstthe framework set out in Table 3.Appraise instances where an‘incremental’ approach currentlyexists, as well as identify anyinitiatives which may be ‘strategic’ or ‘transformational’. Bring differentparts of the business together for thisexercise — possibly as a task force —so that diverse viewpoints can feedthe appraisal. Also bring key suppliersinto this exercise, so as to give youaccess to a diverse range of externalperspectives.

2 Identify the critical natural resourcesthat input to your supply chain andunderstand where there may becompetitive ‘pinch points’.

3 Benchmark your current approachboth against competitors in yoursector and those who may be from a different sector, but draw on similarkey resources.

4 Appraise the strengths andweaknesses, risks and opportunities of your current strategy andcompetitor positioning — are you aleader or laggard — and develop avision for moving forward, guided by a roadmap of clear priorities. Considera pilot initiative where collaborativepartnerships are central to shapingsolutions.

5 Research internal and externalstakeholders — from suppliercommunities through to consumergroups, NGOs, governmentdepartments, specialists and others —who could help form an innovative,collaborative partnership to bringinsight and address priorities. If you’renot involved, find out about OnePlanet Business.

6 Appraise the levels of investmentneeded to build supplier capacity to a standard that allows innovativecollaboration and risk and benefitsharing. Consider the risk of failing to make such an investment.

7 Assess consumer knowledge of yoursustainable value proposition and thedegree to which marketing activitiescan help build awareness and insightto possible innovations, as wellcreating appetite and demand.

8 Tap into your own and yourcolleagues’ personal values andinspiration to challenge a corporatestatus quo that may be resistant tothinking about opportunities to createnew markets around sustainable value.

9 Evaluate the scale of opportunity and value to be created by tacklingsome of the world’s most pressingsustainability challenges and considerif it is really sustainable — for marketsor society — to pursue business-as-usual (see Table 4).

Work directly with suppliers andcollaborate with other companies

10 Collaborate with competitors andsuppliers to develop commonstandards and monitoring efforts in order to minimise the burden ofcompliance and monitoring on bothsuppliers and buyers — especially for issues that are pre-competitiveand can raise the bar for the entireindustry. Examples include theElectronics Industry Code of Conduct,Global e-Sustainability Initiative, the Progress food manufacturers’forum or the Publishers Resolution for Ethical InternationalManufacturing Standards.

11 Develop standards and monitoringapproaches that foster continuousimprovement rather than a pass–failtick-box approach to compliance.Examples include IKEA’s StaircaseModel and McDonald’s and Starbucks’agricultural standards.

12 Build the capacity of suppliers tomanage social and environmentalimpacts — and, if appropriate, tomanage their own suppliers. Examplesinclude Unilever’s work with Kenyantea plantations and HP’s supplierprograms (see case studies).

13 Collaborate with other buyers togenerate demand for the moresustainable supply item; e.g. the WorldResources Institute’s Green PowerMarket Development Group aims toconvene a group of companies to raisedemand for renewable energy.

14 Make use of databases anddashboards such as UK’s SEDEX 23 orFrance-based Ecovadis 24 that collectand disseminate supplier audit dataand (in the case of Ecovadis) providebuyers with a one-stop tool forevaluating suppliers against a set of sustainability criteria.

15 Partner other organisations to reachmore effectively suppliers such as NGOs, trade associations, localauthorities and financial institutions,or intermediaries such as UK-basedAchilles that pre-screen suppliers.Examples include Marks & Spencer’spartnership with the Shell Foundationand the UN’s work to build SMEcapacity.

16 Report to drive transparency andaccountability.

Unchaining Value 19

Demographic

Financial

Nutritional

Resources

Environmental

Health

Gender

Educational

Digital

Security

The world is heading to a population of 9 billion by 2050, with 95% of growthexpected in emerging economies.

40% of the world’s wealth is owned by 1% of the population, while the poorest50% can claim just 1% of the wealth.

The world produces enough food foreveryone, but over 850 million people stillface chronic hunger every day.

60% of ecosystem services, such asfreshwater and climate regulation, arebeing degraded or used unsustainably.

The loss of biodiversity, droughts and thedestruction of coral reefs are just somechallenges facing the globe.

Millions of people have no access toaffordable medicine or healthcare.

Two-thirds of the world’s 1 billion illiteratepeople are women.

About 100 million children in emergingeconomies are not enrolled in primaryeducation.

Only 4% of Africans and 11% of Asianshave internet access.

Inequity and exclusion fuel prejudice, angerand conflict in many parts of the world.

Meet the needs of billions of peopleaffected by market failures in developedand developing countries.

Help the have-nots become bankable,insurable and entrepreneurial.

Address the needs of those with too littlefood, or too much.

Enable development that uses the earth’sresources in a sustainable way.

Create markets that protect and enhancethe environment.

Create markets that encourage healthylifestyles and enable equal access tohealthcare.

Enable and empower women to participateequally and fairly in society and theeconomy.

Provide mechanisms to transfer and shareknowledge and learning that empowers alllevels of societies.

Develop inclusive approaches to technologythat allow much greater shared benefits.

Work to promote security and reduceconflict based on inequity and exclusion.

Table 4Ten global sustainability divides and opportunities 25

RealitiesDivides Opportunities

Unchaining Value 20

Notes

1 Hau L. Lee, ‘The Triple-A Supply Chain’,Harvard Business Review, October 2004.

2 Frits K. Pil and Matthias Holweg,‘Evolving from Value Chain to ValueGrid’, MIT Sloan Management Review,Summer 2006.

3 AFP, ‘Biofuels Under Attack as WorldFood Prices Soar’, 20 April 2008.

4 Ibid.5 ‘Supply Chain Management’ special

report, Financial Times, 10 December2007.

6 Ibid.7 Martin Christopher, Logistics and Supply

Chain Management: Creating Value-adding Networks, Prentice Hall, 2005.

8 The network is described online atwww.unep.fr/scp/cp/network

9 See www.efficient-entrepreneur.net forthe guidance in English and French.

10 Marc Gunther, ‘How Companies FightSweatshops’, Fortune, 3 May 2006.

11 www.globalreporting.org/currentpriorities/supplychain/project+news/transparencynews.htm#reportsready

12 www.eiris.org/files/research%20publications/stateofespbusinessexecsumsep07.pdf

13 Frits K. Pil and Matthias Holweg,‘Evolving from Value Chain to ValueGrid’, MIT Sloan Management Review,Summer 2006.

14 A pinch-point is the level of inventoriesof a commodity or product below which consumers of that commodity orproduct become concerned aboutsecurity of supply. When inventories arebelow the pinch-point, small changes inthe balance of supply and demand cancause large changes in the price of thecommodity or product.http://en.wikipedia.org/wiki/pinch_point

15 See UNEP, ‘Design for Sustainability: A Practical Approach for DevelopingEconomies’, 2006, at www.unep.fr/scp/design/publications

16 On product service systems andsustainability opportunities seewww.unep.fr/scp/design/pss.htm

17 Ibid.18 www.wwflearning.org.uk/

one-planet-business 19 Case study drawn from SustainAbility,

The Social Intrapreneur: A Field Guide forCorporate Changemakers, April 2008.

20 Daniel Esty and Andrew Winston, Green to Gold: How Smart Companies Use Environmental Strategy to Innovate,Create Value and Build CompetitiveAdvantage, Yale University Press, 2006.

21 Martin Christopher, Logistics and SupplyChain Management: Creating Value-Adding Networks, FT Prentice Hall, 3rd ed., 2005.

22 On mindsets to achieve change, seeSustainAbility, The Social Intrapreneur: A Field Guide for CorporateChangemakers, April 2008.

23 www.sedex.org.uk 24 www.ecovadis.com 25 See SustainAbility’s recent work,

Raising Our Game: Can We SustainGlobalization?, 2007, for more in-depthcoverage of the ten divides, available atwww.sustainability.com

Next stepsSustainAbility, UNEP and UNGC regard this publication as a stepping stone in the discussion of best practices and howsustainability can be successfully integratedinto supply chains to deliver value toconsumers and suppliers, as well as tosociety as a whole when it comes tomanaging constrained natural resources.

There are many areas that could be further researched — such as methods for influencing sustainable consumptionand the use phase, how branding andlabelling could help generate greaterconsumer pull, how other organisationalfunctions might be involved in developingsustainable solutions, how stakeholdercollaboration could be made more effective, and how incentives could bebetter aligned, to name but a few.

UNEP will be exploring creation of anindustry cluster initiative that could help to address challenges explored in thispaper, working in close collaboration withcommitted companies from around theworld. Such an initiative would build onUNEP and UNGC’s extensive experienceworking with various sectors to conveneand coordinate learning and practicedevelopment.

As always, the challenge is to create theconditions that will put the potential ofmore sustainable business into practice.Visionary sector leadership, good tools and experienced partners can help make it happen.

We look forward to continuing thisconversation. Feedback on the content of this paper and advice on other bestpractices would be welcome, and can beshared with us at the contact details below.

SustainAbility

Email unchainingvalue@sustainability.com

Web www.sustainability.com/unchainingvalue

UNEP

Email cornis.lugt@unep.fr

Web www.unep.fr/scp/unchaining

Workshop participants

Jeanne BlochSenior Manager, Business for SocialResponsibility (BSR) Europe

Michael KuhndtHead, UNEP/Wuppertal InstituteCollaborating Centre on SustainableConsumption and Production (CSCP)

Kenza Le MentecConsultant, UNEP

Nicolas LorneCARE Coordinator, Nestlé

Andreas ManhartResearch Associate, Sustainable Productsand Material Flows, Öko-Institut e.V.

Anja MeineckeSenior Consultant, Sustainable BusinessSolutions, PricewaterhouseCoopers

Heinz-Gerd PetersCorporate Procurement, Global Commodity& Supplier Coordination, Deutsche Telekom

Leontien PluggeSME and Supply Chain Program Manager,Global Reporting Initiative

Paul RowsomeSustainable Development Manager,Carrefour

Carsten Schmitz-HoffmanDirector Support Services, Common Codefor the Coffee Community

Christoph TamandlManager, Environmental Affairs,Confederation of the Food and DrinkIndustries in the EU (CIAA)

Markus TerhoDirector of Environmental Affairs, Nokia

Antonio da Luz VelosoSupply Chain Expert, CorporateSustainability & Citizenship, DeutscheTelekom

Christof WalterResearch Manager Sustainable Agriculture,Unilever

Annemieke WijnBoard Member, Rainforest Alliance

Emeline FellusDeputy Manager, Sustainable AgricultureInitiative (SAI) Platform

David GrantSustainable Development Project Manager,SAB Miller

Bill GuytonPresident, World Cocoa Foundation

Keith KennySenior Director, Supply Chain, McDonald’s Europe

Monika LempersCoordinator, Good Electronics

Brendan MayUK Representative, Rainforest Alliance and International Head of Corporate Social Responsibility, Weber Shandwick

Sue MecklenburgVice President Sustainable ProcurementPractices, Starbucks

Deepak MishraPartner, McKinsey & Co.

Luis NevesSenior Manager, Deutsche Telekom

Abigail Oxley-GreenSupply Chain Corporate ResponsibilitySpecialist, Nokia

David PendlingtonSustainable Agriculture Co-ordinator,Unilever

Monica RameshCorporate Social Accountability Program Unit, ASK

Ang-Ting ShihDelta Electronics

Sebastian SiegeleFounder, Sustainability Agents

Peter SkyteNational Officer, Unite

Gail SmithSustainable Agriculture Research Manager,Unilever Supply Chain Technology Unit

Dell ThornleyEuropean Quality Director, McDonald’s Europe

Dan ViedermanExecutive Director, Verité

Bill VorleyHead of Sustainable Markets Group,International Institute for Environment and Development

Interviewees

Vidhi AggarwalCorporate Social Accountability Program Unit, ASK

Mike BarryHead of Corporate Social Responsibility,Marks & Spencer

Arnie BawdenSupply Chain Corporate ResponsibilityManager, O2

Karin BogaersCoordinator Primary Production, Business Social Compliance Initiative (BSCI) Food Module

Laura CommikeDirector, Advisory Services, Business for Social Responsibility

Karl DaumüllerProgram Manager, Global ProcurementServices, Hewlett-Packard

Chris DavidHead of Policy & Producer Relations,Fairtrade Foundation

Dan EstyHillhouse Professor of Environmental Law and Policy, Yale University

Acknowledgements

This report would not have been possiblewithout the contribution of a number of people and we are thankful to them all for making their time and knowledgeavailable to us. Many people at Sustain-Ability contributed to this report. We wouldlike to recognise Frances Buckingham,Philip Gounev, Judy Kuszewski, AlexanderNick, Kavita Prakash-Mani and PatrinWatanatada. Our special thanks to YasminCrowther for her coherent writing and toRupert Bassett for his design input.

We would like to acknowledge UNEP’sDivision of Technology, Industry andEconomics for its key contribution, and inparticular Cornis van der Lugt for his visionand determination — the report would nothave happened without him! — as well asthe UN Global Compact for its support.Michael Kuhndt and the UNEP/WuppertalInstitute Collaborating Centre onSustainable Consumption and Productionprovided invaluable insights that made the report more robust — we thank themfor sharing their research. Many peopleenriched this report by sharing theirexperience and expertise. We would like to acknowledge their contribution not justto this report but to the evolving field ofsustainable supply chains.

SustainAbility Ltd

20-22 Bedford RowLondon WC1R 4EBUnited KingdomT +44 (0)20 7269 6900F +44 (0)20 7269 6901

www.sustainability.comlondon@sustainability.com

United Nations Environment Programme Division of Technology, Industry and Economics

15 Rue de Milan75441 Paris Cedex 09FranceT +33 1 44 37 14 50F +33 1 44 37 14 74

www.unep.frunep.tie@unep.fr

United Nations Global Compact

United Nations DC2-622 New York NY 10017United States of America

www.unglobalcompact.orgglobalcompact@un.org