Doing the right thing for a sustainable future – 2020 vision is the new supply chain imperitive

sustainability

Poster courtesy Penn State 

Doing the Right Thing, Doing Things Right: Sustainability and Supply Chains

Effective organization requires a focus on doing the right thing. Supply chains are at the center of global trade. Efficiency has been a key focus to improve profitability across the supply chain. This requires organizations to do things right with a focus on lowering supply chain cost. This is of paramount concern to ensure that operations are as efficient as they can be. However, it is only one side of the coin. There is a corollary to this which is that organizations have to do the right things to manage their supply chain effectively. As I say in my Supply Chain Strategies book “Organizations need policies, procedures, and systems to deliver effectively. These three factors need to be sufficiently flexible to respond to the customer if they are to be effective.”[1] It is incumbent that organizations have 20:20 vision and not myopic vision when it comes to both doing things right and doing the right thing.

Those managing end to end global supply chains have an enormous responsibility to preserve and sustain natural resources for future generations. The scientific evidence informing global warming due to human intervention is convincing.

scm-book-cover“The concept of sustainable development has been debated since publication of the Brundtland Report (1987) and the Rio Declaration (1992) following on from the Earth Summit in the same city in 1989. The Brundtland Report noted that ‘critical global environmental problems were primarily the result of the enormous poverty of the South and the non- sustainable patterns of consumption and production in the North’ thus, making the distinction between the developed and developing world. It called for a strategy that united development and the environment, which is now described by the common term sustainable development (World Commission on Environment and Development, 1987).” Hines (2014:323)

Policy Measures

The Rio Declaration (1992) and the Kyoto Protocol (1998) called for action on production patterns that showed increasing toxic waste emphasising the need for renewable energy sources, recognising a growing shortage of water and calling for more sustainable public transport systems.

The largest emissions of greenhouse gasses (carbon dioxide, methane, nitrous oxide, sulphur hexafluoride) and two gases arising from these, hydrofuorocarbons and perfluorocarbons, come from emissions in the industrialised countries of the USA, EU, Russia, China, Japan and India.

The Stern Report (2007) noted that irreversible damage was being caused to the natural world and the ecosystem. It was estimated that there were 30,000 major dams preventing flooding of fertile land to sustain food production for an ever growing global population; in 1750 there were none of any consequence.  As indicated in my book:

 “Water usage has increased from around 1,000 km 3 per year in 1900 to nearly six times that quantity by 2000; fertilizer consumption has increased from a zero base to 300 million tonnes in the same time- period. There are now over 700 million motor vehicles where there were virtually none at the start of the twentieth century and CO 2 emissions have risen by 22 per cent between 1980 and 2000. Furthermore, since 2000 they have tripled over the average from 1990–99.” Hines (2014).

While governments can do much by setting a policy agenda the practice is part of everyone’s responsibility to do as much as we can by doing the right things. We do so in small ways in our domestic lives by recycling waste materials. However, if we manage organizations and especially large organizations we are able to do much more.

Practice

Interventions at every stage of the supply chain can contribute to a better world, one that is sustainable in the sense it is defined in this paper. Establishing and maintaining governance throughout each of the supply chains managed is the starting point. This ensures that partners in the network have a responsibility to be compliant in order to maintain their place in the organization supply chain. This has a dual function to educate and to raise supply chain standards that will achieve a sustainable future. The critical role of first tier suppliers has been identified as an agent of change to achieve this.[2] This may be limited by the resource availability of the lead organization, their abilities and commitment to the ‘triple bottom line’, the power they have to exert on the lower level suppliers and their alignment of the procurement and purchasing activities with sustainability.   Some have argued that it needs to go further than compliance to commitment. [3]

Sourcing strategies need to balance the twin aim of being efficient by lowering cost to ensure profitability but not at the expense of sacrificing sustainable futures if it requires doing the wrong thing. In our changing world customers and consumers are becoming more aware of the need to manage end to end supply chains effectively to be clean, green and sustainable.

Recent research has identified a supply chain position paradox [4]which effectively means that those organizations further down the supply chain that is those closer to the consumer are more likely to invest in supply chain sustainability. One important reason for this is that these organizations are more visible to consumers and are more likely to receive a backlash from them.

Sourcing and procurement strategies have a central role to play in establishing criteria for sustainability. These strategies are closely linked to ethical trading arrangements. If supplies are to be procured from countries where their governments are less concerned with environmental standards and working conditions it cannot be right for global firms to exploit this situation in pursuit of profit alone.  There is a moral obligation to do the right thing. A point made over 250 years ago by Adam Smith. [5]

  1. Hines, T., Supply Chain Strategies: Demand Driven and Customer Focused2014, New York: Routledge.
  2. Wilhelm, M.M., et al., Sustainability in multi-tier supply chains: Understanding the double agency role of the first tier supplier. Journal of Operations Management, 2016. 41: p. 42-60.
  3. Foerstl, K., et al., Drivers of supplier sustainability: Moving beyond compliance to commitment. Journal of Supply Chain Management, 2015. 51(1): p. 67-92.
  4. Schmidt, C., G., K. Foerstl, and B. Schaltenbrand, The supply chain position paradox: green practices and firm performance. Journal of Supply Chain Management, 2017. 53(1): p. 3-25.
  5. Smith, A., The theory of moral sentiments2007 [1759], New York: Cosimo.

 

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UK Inflation rises rapidly as the Consumer Price Index published today shows. CPI moved upward to 1% year on year from the August year on year figure of 0.6%. There are two main reasons underlying the upward trend. First, clothing prices have increased significantly after a period of flat-lining or decline. Second, transport costs are moving up owing to a decline in the GB pound against the US dollar impacting oil prices. Transport is the more worrying trend as this feeds into all consumer goods. Suppliers and retailers will want to pass on these costs to maintain their own profit margins.

Inflationary pressure

These inflationary pressures are likely to remain as the UK economy enters 2017. There is likely to be a call for increases in wage rates particularly by those in sectors where wages have been stagnant since the financial crash in 2008. Christmas may be more expensive for consumers this year. It might be time to reach for those personal flotation devices like the money you keep under the mattress to get those presents this year.

outerwear
Photograph by Joe Parks

Women’s outerwear contributed price rises of 6.0% between August and September 2016, compared with a rise of just 3.3% a year ago. This is much higher than usual and it is not known how much is directly attributable to Brexit and the depreciation of sterling. What is clearer is that the depreciation in sterling is likely to increase the cost of importing goods. It is also now more expensive than a year ago to outsource production which may have a positive effect on UK manufacturing.

Figure 1 Year on Year Change in Consumer price Index by Category

figure-1-contributions-to-the-cpi-12-month-rate-september-2015-and-september-2016

Source: CSO

Conclusions

It will be interesting to observe the interplay between inflation and exchange rates in the coming months. This will determine the impact on industry cost structures in the year ahead. The balancing act of how these changes impact on the economy as a whole will become clearer. Claims that the lower exchange rate will help exports have to be balanced against claims that input costs rise as imported goods become more expensive. A critical marker will be the impact on consumer spending. If consumer confidence declines then so too will economic growth fueled by that spending. Higher inflation will influence delayed expenditure on higher priced goods and less disposable income for discretionary goods such as restaurants, hotels, recreation and culture as well as some clothing categories.

 

 

Fracking mess or sustainable success?

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Fracking is a hydraulic process of extracting energy from geological stores underground particularly gas and oil. The arguments for, suggest that it will add to cheaper sources of energy, is relatively efficient and is sited close to where it is consumed in most cases. Short supply chains and a quick fix to the energy shortages are driving interest. The downside is it requires large quantities of water and chemicals that replace the extracted gas. It is claimed that the process has produced earthquakes and concerns over this aspect remain. The technique has been developed since 1947 and it continues to develop whether it will provide enough energy to keep the lights on is debatable. Many people believe that a return to older sources of extraction and energy generation will be necessary to do that. Germany has invested in coal fired power to keep their lights on. So who’s right?

Most energy produced in developed and developing economies alike still relies mainly on coal. Oil is only number two. So what is the problem with Fracking?

Fracking it has been suggested risks tremors and quakes. However, more importantly it is expensive, not ecologically friendly, non-renewable and warms the planet rather than slow it down. The benefit suggested by proponents of Fracking suggests burning gas emits roughly half of the CO2 that coal would. Research suggests this is not so and the benefits illusory. Pumping water into shale to release trapped gas in the earth releases methane into the atmosphere and this is the problem. Burning coal although releasing sulphur dioxide and black carbon actually cools the planet and offsets the warming effect of the gas it generates by 40 per cent. Fracking would increase warming immediately and take about 100 years to be equivalent to coal.

So is fracking the way to go? The science might suggest not. The potential environmental cost is high while the potential benefits as a solution to medium and longer term energy demand suggest it will make a small contribution to the total energy requirements.