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.

 

 

Why your clothes may cost more in the UK in 2017 – Will profits fall as prices rise?

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When you walk down the High Street if you were to look at labels inside many of the clothes you buy you will see China, Bangladesh and Turkey prominent among others. Between them these three countries supply about 50 per cent of your clothing on the UK High Street, if not more. Prices have been low for the past decade and many retail brands have made substantial profits by sourcing product from these countries. Wage costs have increased in China and put pressure to increase prices charged to European and US Retailers. China itself has sought ways to lower its own cost base by managing complex supply chains with other countries such as Myanmar, Cambodia and Vietnam where labour costs are lower.  Bangladesh too has pushed up wage rates although they remain very low. Turkey pays higher wage rates than either of these two countries already but its quality and proximity to Europe with faster supply times keeps it competitive.

However, now it is not just labour costs but worsening exchange rates on imports that will impact the cost and of course push up the prices you pay at the checkout together with inflationary pressure. In future as BREXIT becomes a reality new tariffs may kick in too. The inflation rate measured by the Consumer price Index (CPI) stood at 0.6 per cent in the year to August 2016. The inflation rate for clothing was negative at 1.2 per cent. Is this about to change too, as China, Bangladesh and Turkey seek higher prices for their goods and the exchange rate against world currencies falls?

Figure 1 Consumer Price Index (CPI)

figure-b-cpi-12-month-inflation-rate-for-the-last-10-years-august-2006-to-august-2016

Source: CSO, 2016

As for the GB Pound against the Chinese Yuan that has fallen to 8.21 from a high of 10 just over a year ago. The Bangladesh Taka has fallen from 120 to the pound to 95.5 in the year to September 2016. The Turkish Lira has also fallen from a high of 4.70 in September 2015 to 3.78 in September 2016. These shifts alone will push up UK cost of clothing from these supplier countries.