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Sustainability & Social Responsibility

Social and Environmental Responsibility in the Supply Chain Gets a Seat at the Table

Author(s):

RaeAnn Slaybaugh


January/February 2013, eSide Supply Management Vol. 6, No. 1

A recent SCM World report shows corporate executives are more concerned than ever with their supply chains' social and environmental responsibility (SER) performance.

According to The Chief Supply Chain Officer Report 2012 — issued by SCM World — corporate executives, from the board level down, are more concerned than ever with their supply chains' performance across social and environmental dimensions.

The report is co-written by Hau Lee, Ph.D., chair of SCM World and Thoma Professor of Operations, Information and Technology at Stanford Graduate School of Business; head of faculty at SCM World Kevin O'Marah; and senior vice president, research, Geraint John.

According to Lee, O'Marah and John, the initial attention on environmental responsibility was on a company's own internal operations — but, that has rapidly shifted to the extended supply chain.

"Whether a company is legally liable or not, the negative publicity and the resulting scrutiny by the general public of violations that occur in its extended supply chain are significant," they write. To this end, 71 percent of survey respondents for 2012 said their biggest SER motivations were a positive customer image and enhanced brand equity. This predilection is strongest in the chemicals industry, where more than three-quarters of respondents (77 percent) say this is the case.

Other prominent SER drivers include satisfying government regulations (49 percent), as well as cost reduction and greater efficiency in the use of energy and materials, at 43 percent. The authors contend this latter driver is particularly telling because "at the same time, the proportion who believe their board's reason for investing in SER is to boost sales has fallen sharply. This is a major change."

According to Lee, O'Marah and John, as more companies mature in their SER journeys, they might be starting to see that the benefits come not so much from sales revenue (customers being generally unwilling to pay more for socially or environmentally friendly products), but from reducing the cost of manufacturing and distributing their products.

Of course, all this takes time — switching to new materials, improving the energy efficiency of production processes and increasing the amount of recycling and reuse of materials. But, Lee, O'Marah and John say their research findings and conversations with supply chain leaders suggest that companies are beginning to move more in this direction. "And, we expect to see further evidence of this shift in the next couple of years," they add.

What About Supplier SER Incentives?

Of course, in pursuit of supply chain SER efforts, suppliers are a major component. "They need to be committed and motivated to help their customers make progress in SER in a way that enhances their public image and brand equity," according to the authors. "Many studies have found that the best way to ensure this is not more compliance audits, but to collaborate with suppliers so that they benefit from SER improvements and are willing to invest time, money and resources in a way that supports their customers' objectives."

Image of a green colored chain link.

For the second consecutive year, the CSCO survey shows that the most widely used incentives are preferred supplier status (giving priority for future business) at 58 percent, and increased business engagements (48 percent).

However, the proportion of respondents who say their companies use preferred supplier status fell from two-thirds in 2011 to 58 percent in 2012.

While increased business engagements show no change year-on-year at slightly under half of the sample, the numbers willing to grant price premiums and better terms and conditions to suppliers in exchange for SER commitments and improvements has risen slightly, according to Lee, O'Marah and John. "This suggests that the mix of incentives may be changing somewhat as companies gain more experience about the most effective ways to incentivize suppliers," they explain. "Granting preferred supplier status is a positive incentive, but it's not as concrete a benefit as better terms and conditions and price premiums. As companies began to realize the positive cost savings and benefits of SER efforts, they're willing to give more explicit benefits to their suppliers."

In general, Lee, O'Marah and John also found that companies in the high-tech and CPG sectors tend to be more likely to use the incentives described, while those in the logistics and distribution industry are least likely. (More than 20 percent of logistics firms offer no incentives, for example, compared with 12 percent across all sectors.) And, among those respondents who indicated that their companies used other means, the most common are supplier assessment programs to identify capability and performance gaps, knowledge sharing with suppliers, and participation in industry forums or industrywide SER programs.

The Big Winners: Legal Compliance, Supplier Relationships

What about the benefits companies are getting from their SER efforts? In 2012, according to the authors, reduced violations of government regulations and laws are the most significant, with 60 percent of survey respondents claiming good or substantial results. More than half also say the same about supplier relationship and customer satisfaction improvements. And, 41 percent have seen at least as good results in terms of operating cost reduction — almost the same percentage who say this is a driver of their SER investments. A small number of respondents indicated some other benefits — among them, better brand image, public relations, employee morale and working environment, community contributions, and image as an industry leader.

Sector analysis of the data suggests that high-tech, logistics and CPG seem to be industries that have derived greater benefits from their SER efforts, according to Lee, O'Marah and John.

"Although the scale used for this question varied slightly from the one in 2011, we can still make some year-on-year comparisons," they state. "In 2012, the top benefit (combining the ratings of 4 and 5 on a 1-5 scale) was customer satisfaction improvement (47 percent), followed by reduced violations of government regulations and laws (44 percent), supplier relationship improvements (35 percent), new or improved sales opportunities (32 percent) and operating cost reduction (31 percent). Across the board, these are better than 2011 figures.

The authors call the 16-point jump in benefits from reduced violations of government regulations and laws in 2012 "interesting," citing tightened government scrutiny and enforcement of such regulations as a possible explanation. "And, the 19-point jump in supplier relationship improvements indicates that companies are finding beneficial ways to collaborate on SER initiatives," they add. "Overall, our evidence shows that such initiatives are maturing and more of the investments in SER are beginning to pay off."

"This is indeed a very encouraging trend," the authors conclude.



RaeAnn Slaybaugh is a writer for the Institute for Supply Management™. To contact this author, please send an e-mail to author@ism.ws.

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