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The Role of Sustainability in the Modern Supply Chain

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Last week this author attended Oracle’s Modern Supply Chain Experience conference held in San Jose California. This conference is hosted annually by Oracle, and provides a singular focus on broad supply chain related technology and business process topics.  Attendance this year was impressive, upwards of 2000 attendees from multiple industry settings.

I had the opportunity to participate in two different panel discussions.  One was the role of sustainability in the modern supply chain.  Our panel was moderated by Rich Kroes, Director, and Sustainability Strategy at Oracle and included two other panelists besides myself: Jon Chorley, Chief Sustainability Officer and Group Vice President, SCM Product Strategy at Oracle and James Ayoub, a student at Penn State University.    Oracle_MSCE_Jan_16

To its credit, Oracle sponsored the attendance of nearly 80 students from various supply chain management programs both in the local area and across the country. These students were afforded the opportunity to attend general sessions, a dedicated set of student focused session tracks as well as participate in a panel discussion, including our sustainability panel. Our sincere thanks and shout-out to Oracle for their generous outreach and support, was of the first that this author has witnessed from a specific technology company.

Our sustainability panel touched upon various topics regarding how sustainability is manifesting itself across industry supply chains.

On Supply Chain Matters, we have highlighted industry supply chain efforts dating back to at least our founding in 2008.  While some initiatives have stemmed from regulatory directives and requirements such as REACH across chemical focused supply chains, RoHS within high tech, or Conflict Materials, others have been spawned from aggressive and committed corporate sustainability goal setting. Many global corporations have declared carbon reduction and sustainability goals mapped to specific timelines and much of the facilitation or enablement of such goals originates specifically within supply chains because product value-chains are responsible for a considerable portion of carbon and greenhouse gas emissions. Consider the carbon emissions footprint of transportation and logistics, manufacturing or agricultural production for example.

Many Consumer Products and Food producers such as Procter & Gamble, Nestle and Unilever and others are recognized for their wide reaching efforts for incorporating sustainability in business strategy. Beverage companies such as Coca Cola, PepsiCo and SAB recognize that large consumption of water is a critical component of a sustainability strategy.  They have each appointed senior managers responsible for water conservation and sustainability initiatives that insure supplies of water are continuous.

High profile manufacturers in the high tech and consumer electronics sector such as Apple, Dell, Hewlett Packard and others have always been on the forefront of sustainability initiatives.  Across various other industries, innovators have been openly active and committed to sustainability efforts because it drives benefits.

Consumers and customers have in-turn, continued to actively support brands that demonstrate a commitment to sustainability and preserving our planet. James Ayoub was very articulate in expressing how consumers of his millennial generation care about their environment and factor buying and loyalty decisions based on the reputation of the brand in active sustainability efforts.  James further shared highlights of internship efforts in supporting corporate initiatives in this area as well as how Penn State’s supply chain management programs and academic instructors weave sustainability into the curriculum.

Jon Chorley noted the dual role of Oracle in the area of sustainability, first as a corporate citizen and in providing technology that supports the management and tracking of such efforts.  Having inherited a high tech manufacturing supply chain from the past acquisition of Sun Microsystems, Oracle inherited a high tech manufacturing value-chain with many opportunities for continued efforts in sustainability.  As Chorley exclaimed to the audience, it makes good business sense to have sustainability weaved into business strategy in four impactful dimensions:

  • Innovation- both product and process focused and in supply and value-chains that become self-sustainable
  • Enhancing the Brand– Consumers and customers making their buying decisions not only on product form and function but on the brand’s commitment to sustainability and combating climate change.
  • Strategy and Stockholder Value– Sustainability efforts insure strategic continuity of supply of commodities, raw materials and natural resources. They insure that a firm has plans and strategies that can support long-term competitiveness and industry leadership.
  • Cost– in carbon and missions reductions that save our planet and in the monetary costs of materials, processes, product packaging and movement of goods.

I also had the opportunity to share with our audience my perceptions of the potential industry supply chain impacts from the recent Paris climate agreement. In December, 195 nations became parties to the Paris Climate Agreement (COP21) that commits to holding the increase in global average temperature below 2 degrees Centigrade (3.6 degrees F) above pre-industrial levels and to pursue efforts to limit temperature increase to no more than 1.5 Celsius above pre-industrial levels.

Whereas the prior Doha Agreement among 37 nations, the new Paris Agreement addresses climate change challenges after 2020. The Paris Agreement further represents the first time that such a large portion of the global countries have explicitly declared that the existence of climate change and heighted greenhouse emissions provides global risk.

From the accounts that I have read, the implication of this Agreement  reflect clear messages that much of the globe’s remaining reserves of coal, oil and gas must stay in the ground.  Reduction of deforestation must become global-wide priority.

The implications of such goals are yet to be fully understood by industry and supply chain audiences. One European based research firm declared that supply chain mitigation initiatives will be the Number 2 most effective strategy for achieving COP21 commitments.

Our panel concluded with thoughts that under COP21, industry supply chain involvement in sustainability has little choice but to move into a mandatory stage. Think of all the ships, railways, trucks and equipment that make-up the global movement of goods. Think about current manufacturing, assembly and farming processes primarily powered by fossil fuels and you begin to get a sense of the seriousness of this next stage.  Businesses and their associated supply chains must take on a more implicit responsibility to act in ways never before, in with innovation of a large scale.

Thus, vision and leadership among both public and private sectors is now a must and critical for alignment of efforts in joint investment, in policy, in rewards and in penalties.  Because supply chains are intrinsically global in scope, there will be requirements for far broader collaboration within and across industries, suppliers and service provider communities to overcome these new challenges.

I very much enjoyed discussing such an important topic with my fellow panelists and I thank Oracle for the opportunity as well as the commitment to the topic of sustainability.

Bob Ferrari

© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Initial Supply Chain Focused Impressions of the Trans-Pacific Partnership- Part Two

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In this two-part commentary Supply Chain Matters shares some initial impressions of the Trans-Pacific Partnership (TPP) which has reached the stage of preliminary agreement pending the ratification by member nations. In early October, ministers of the 12 TPP countries announced conclusion of their negotiations regarding trade among what is estimated to represent 40 percent of current global GDP, which is rather significant, especially from a global supply chain context.

In our Part One posting, we shared perspectives on the defining features and summary descriptions of Sections 2, 3 and 4 of TPP.

We continue with pointing out some other important sections for the education of our cross-industry supply chain reading audience.

Section 14- Electronic Commerce

This chapter prohibits the imposition of customs duties on electronic transmissions and prevents TPP parties from favoring national producers of suppliers.  TPP members agree to adopt and maintain consumer protection laws related to fraudulent and deceptive online related commercial activities and ensure that consumer protections can be enforced in TPP electronic messaging. To promote more online focused trading network activity, the agreement calls for promoting paperless trading between businesses and governments including electronic customs forms, electronic authentication and signatures for commercial transactions. The parties agree not to require that TPP companies build separate data centers in store data as a condition for operating in a member country, and that source code of software is not required to be transferred or accessed.

This area will surely aide in measures to streamline B2C/B2B business process and customer fulfillment networks. We also view this as potentially removing barriers to facilitating electronic supply chain control tower capabilities spanning both planning and execution visibility and decision-making needs.

Section 18- Intellectual Property Protections

Consistently, one of the more important concerns for firms and their respective value-chains is IP protection. This chapter of TPP is described as making it easier for businesses to search, register and protect IP rights in new markets. It establishes standards based on WTO’s TRIPS Agreement and international best practices. For trademarks, it provides protections of brand names and other signs that businesses and individuals use to distinguish their products in the market.

This section further contains pharmaceutical-related IP provisions that address both innovative medicines and availability of generic medicines.

Section 19- Labor

All TPP parties are noted as International Labor Organization (ILO) members and thus recognize the importance of promoting internationally recognized labor rights.  Rights are noted as the right to collective bargaining, elimination of forced labor, abolition of child labor and elimination of discrimination in employment, among other tenets.

There are further acknowledgements to have common laws related to governing minimum wages, hours of work and occupational safety and health.  This section will have special meaning to high tech and consumer electronics, high direct labor focused, and general lower-cost focused contract manufacturing focused value-chains.

Section 20- Environment

TPP parties are to share a strong commitment to protecting and conserving the environment and to effectively enforce their environmental protection laws. There is specific language related to the protection of fisheries, endangered species, water and wetlands and marine environment.  The parties are to commit to cooperate to address matters of joint or common interest, including areas of conservation and sustainable use of biodiversity along with transition to lower emissions and resilient economies.

Section 24- Small and Medium-Sized Businesses

A special chapter promoting a shared interest for small-and-medium-sized businesses sharing in the benefits of TPP. It includes commitments from TPP members to create user-friendly business practices, provide assistance in accessing new markets and in overall training.

Section 26- Transparency and Anti-Corruption

A rather important section for strengthening good governance and addressing the effects of bribery and corruption practices. It calls for laws, regulations and administrative rulings be publicly available along with consistent enforcement of anticorruption laws and regulations. The section covers areas for both corporate and public officials.

Obviously there is much more to TPP, more than we can cover in a couple of blog posts. Ratification is expected to occur in 2016 as legislators of individual member countries vote approval. We can’t help to speculate that this effort may take-up most of 2016, given the far reaching aspects of TPP.

As we noted in our initial commentary, certain influential nations such as China are not a current member of TPP. That country, instead, is now actively promoting the Free Trade Area of Asia Pacific (FTAAP) as a further alternative. This week, Chinese President Xi Jinping stated: “With various new regional free-trade arrangements cropping-up, there have been worries about the potential of fragmentation. We therefore need to accelerate the realization of FTAAP and take regional integration forward.”

With a significant global and supply chain influencer such as China, representing the other significant portion of global growth, promoting yet another or alternative trans-Pacific focused trade pact, TPP can either be ratified, compelling other nations to join in its tenets, or could be fragmented by conflicting standards.

Industry supply chains are obviously important stakeholders in these major trade pacts and it will be important to keep up to date on these trade developments along with their implications on easier access to new markets, more leveraged use of technology and impacts to existing business practices.

Supply Chain Matters will do our part to keep readers informed of important developments.

Bob Ferrari

 


Supply Chain Matters Book Review: The Power of Resilience- How the Best Companies Manage the Unexpected

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From time to time Supply Chain Matters will feature book reviews which we believe would be of value and a learning asset to our extended global supply chain management community of readers.

In this particular posting, we share our review of: The Power of Resilience, How the Best Companies Manage the Unexpected. The author, Yossi Sheffi, is a well-known thought leader among the global supply chain management community serving as the Elisha Pwr_Resilence_Sheffi_350Gray II Professor of Engineering Systems at the Massachusetts Institute of Technology (MIT) and Director of the MIT Center for Transportation and Logistics. He has authored a number of previous books including: The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage and Logistics Clusters: Delivering Value and Driving Growth. Professor Sheffi was gracious to this blog by previously contributing a guest commentary related to his Logistics Clusters book.

If you have been a long time reader of this blog, you have undoubtedly read of the many disruptive events that have impacted industry and global supply chains, along with some of the consequences.  Events would include Hurricane Katrina that devastated New Orleans and the U.S. Gulf Region in 2005, the 2011 devastating earthquake and tsunami that impacted Japan and the severe floods that impacted Thailand that same year. Other events we have noted, such as additional earthquakes, major factory or warehouse fires, natural disasters and product recalls continue to uncover the vulnerabilities and dependencies among today’s globally based supply chains.  In this new book, Sheffi provides with in-depth case studies that illustrate how companies have prepared for, coped with, and demonstrated resilience following such disruption, along with important learning related to the encroaching threats facing today’s supply chains. Further included are the business processes, corporate culture and technology tools utilized to prepare and learn from disruption. Indeed, the interconnectedness of global economies, the lean aspects of multi-industry supply chains today, and the implications of vast arrays of information amplified by all forms of media imply that unexpected events in any corner of the globe can ripple through the supply chain and affect customers and shareholders.

This blogger, analyst and consultant thoroughly enjoyed reading this book which I managed to read cover-to-cover on a recent roundtrip coast-to-coast plane ride. The book immediately captures interest, flows from chapter to chapter and compels one to read more. I highly recommend this text to current or aspiring senior executives and supply chain leaders as a must-read regarding the mitigation and response to supply chain risk. I especially applaud Professor Sheffi for incorporating supply chain social responsibility strategies under the umbrella of risk, which it should be.

The first five chapters of this book provides various insightful case studies of companies that experienced and responded to risk events including Cisco, General Motors, Intel, Medtronic, Procter & Gamble, Western Digital and others. These case studies bring out the importance differences among business continuity planning (BCP) and business continuity response (BCR).  There are examples of risk metrics such as Value-at-Risk (VaR), Time-to-Impact and Time-to-Recovery, very similar to those defined in the latest releases of the APICS Supply Chain Council’s Supply Chain Operations Process Framework model (SCOR).

Chapters 6 through 11 address the strategy, preparation, communication and supply implications of supply chain risk and resiliency. Sheffi observes: Building a resilient enterprise involves two broad categories of options: building redundancy and building flexibility of supply chain assets and processes.” Chapter 8, Detecting Disruption, explores methods for incident monitoring, mapping the supply chain for vulnerabilities, monitoring suppliers, and a rather important section related to leveraging social media in risk detection and response. Chapter 9 is a rather important read since it explores means for securing the information supply chain and the tendencies of cyber criminals to exploit supply chain partners as targets of information security vulnerability, as was the case of the Target credit-card hack where penetration vulnerability came from the stolen login credentials of a regional store refrigeration maintenance services vendor.

Chapter 12 addresses today’s “new normal” of disruption and risk along with methods to benefit from longer-term implications. In the final two chapters, Professor Sheffi explores the growing dependency on all levels of suppliers, including those in the lower-tier of industry supply chains. Sheffi notes: Supply chain risk management is in a race between the fragility of complex supply chains and the resilience created by better risk management.” In Chapter 13, an argument is made that systemic supply chain risk, one that can bring an entire industry to a halt, has not occurred because of the combined efforts of today’s more responsive supply chains. Sheffi opines:

Thus, it’s hard to conclude that modern global supply chains show evidence of true systemic risks. Companies have developed efficient response mechanisms, and the same globalization trends that could create disruption risks for specific companies that use suppliers from faraway lands may also contribute to the prevention of systemic risk by spreading manufacturing capacity around the globe. Most important, global capacity for manufacturing and distribution is large, and while it is crucial for any company to prepare and respond effectively to disasters, there are always others ready to take its place if it fumbles.”

We quoted that entire passage because upon reading and contemplating the book’s case studies, we were not as sure regarding this conclusion.  While many firms have been able to eventually overcome supply and services risk, the open question is scale and timing of supply continuity. Customers, consumers and activist investors are far more impatient and unforgiving today, and the clock speed of business and industry change may not tolerate forms of extended supply chain disruption.  However the one conclusion that is clear is that speed, resilience and flexibility are indeed the most important capabilities of any supply chain.

This book is an obvious must-read and we highly recommend it to our Supply Chain Matters audience. The book is available through MIT Press and Amazon.

Bob Ferrari


The Building Realities of Transforming to More Organic and Sustainable Food Supply Chains

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In January, Supply Chain Matters called reader attention to Chipotle Mexican Grill’s bold adherence to staunch standards for high quality, ethically based food ingredients served at its various restaurants. Chipotle boldly suspended the use of pork sourced from an unnamed regionally based pork supplier evoking broad media headlines.  According to Chipotle, a routine audit discovered that the supplier violated declared humane-based standards for the housing of pigs with access to the outdoors.  The restaurant chain, which was decisive in its decision to stop supply, indicated that this was the first time it had suspended supplies because of a violation of standards.

This week, the restaurant provider reported financial results for its third quarter that somewhat disappointed the investment community by indicating that future growth would be modest through next year, as opposed to the double-digit growth rates of quarters past. For its latest quarter, Chipotle’s same stores sales growth was a modest 2.6 percent, far below the nearly 20 percent growth rate of a year ago. The recent number further reflects across-the-board price increases on menu items.

Wall Street attributes this declining sales trend as a reflection of growing competition from competing outlets, the need for more workers, and problems securing inbound ingredients that meet the high standards of an ethically based supply chain.

In a prior April blog commentary, we observed that consumers are now, more than ever, interested in knowing where their food originated, the ingredients within food and how food is produced with sustainable methods. Well known producers, food service providers and suppliers such as Hershey, Nestle, MacDonald’s, Tyson Foods, Costco, Yum Brands and others have all embarked on initiatives directed at curbing the use of antibiotics in animals, artificial food coloring within food, and higher quality standards for suppliers. This week, sandwich chain Subway, the largest U.S. restaurant chain by number of outlets, joined this chorus, announcing plans to eliminate antibiotics use in all U.S. meat supplies over the next several years. In 2016, the chain will introduce turkey and chicken raised without antibiotics with plans to address antibiotic free pork and beef supplies down the road.

That commentary in April was triggered by a Wall Street Journal report indicating the increasing need among consumers for more organic foods is literally: “hampering the growth of one of the hottest categories of the U.S. food industry.” Farmers, dairies and ranchers face significant costs and risks in attempting to convert from conventional to organic farming or animal production techniques. “While organic produce or livestock can command prices as high as three to four times that of conventional food, farmers generally have to sell their food at conventional prices during the transition.”

Supply Chain Matters increasingly believes that as more food producers and restaurant chains require and transition to the use of such ethically sourced and organically grown foods, the time to transition the entire food supply chain will be a perplexing problem. Chains such as Chipotle who were pioneers in the sourcing of healthy food could well have their near-term growth plans constrained by the reality of constrained supply. There is a classic excess demand and restricted supply condition occurring as the supply chains attempt to transition from conventional to more organic and sustainable food supplies.

This condition will present added challenges for food sourcing and purchasing teams and buying cooperatives.  Ranchers, farmers, poultry and meat producers require adequate time to transition to a more healthy food supply, and that comes with the need for the financial flexibility to fund such a transition. Providers who have practiced organic food standards since their inception understand this need, and took the time to work collaboratively and financially with food suppliers to build-up adequate supply through long-term buying commitments.  With more and larger global players now demanding organic and antibiotic-free supply in far larger volumes, the demand and supply equation likely becomes chaotic without added collaboration, training, financial and buying incentives. Buying scale could cloud needs for stronger and more responsive supplier relationships.

The takeaway is that food purveyors cannot just buy or dictate their way into organic, more-healthy supply contracts. This will take time and it is rather important that providers, consumers and investors understand such realities, and develop the patience and understanding that the global food supply chain does not transform itself overnight.

We would appreciate hearing from readers residing in various tiers of existing food supply chains.

What are reasonable expectations for transition?

What added financial incentives are required?

Whom do you consider to be a leader in these efforts?

Bob Ferrari

 


Report of Sustainable Method to Mine Rare Earths

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Our readers among high-tech and consumer electronics supply chains are well aware that the supply and costs of rare earth minerals continues to be a supply chain.  China has positioned itself to the primary global supplier of such strategic materials and has in the past exercised export quotas to favor its own domestic high tech industry needs. Supply Chain Matters touched upon this challenge in a 2011 commentary related to Phillips Electronics.

Bloomberg recently reported that a closely held miner from the country of Chile, Mineria Activa,  has come up with a far different, green-mining and perhaps more sustainable approach for the mining of rare earths. The report indicates that elements such as neodymium and dysprosium are contained in clay soils near the city of Concepcion in concentrations similar to China.  The difference, however, is rather than pumping chemicals into the ground for extracting these minerals, methods have been derived to dig out the clay, place it in a tank-leaching process with biodegradable chemicals and return the clean clay to the ground, while replanting displaced vegetation and trees.

The bet here is that certain manufacturers and OEM’s such as Apple, ThyssenKrupp or Raytheon are willing to pay a premium knowing that the supply is not destroying the planet.

Bloomberg points out that given the current recent capacity glut resulting in declines in the prices of certain rare earth materials, the timing of this development may not be ideal. The again, companies such as Apple with strong commitments to sustainability and green supply chain practices may be willing to consider a strategic supply alternative.


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