Following my previous discussion of collaboration, innovation and UK retailer J Sainsbury’s 20x20 plan, we've reached Step 8 - the all important reality check - Tracking Benefits
“How has the business benefited from your work?”
It’s the question sustainability professionals dread.
Faced with a hard-nosed board member, or during an unstable period of organisational change, you need to be able to marshal your facts and figures to stay in control of your sustainable supply chain program.
At a minimum, you need to be able to show progress against commitments like “100% sustainable components by 2015” or “30% reduction in carbon footprint compared with baseline year”.
But a commercially-savvy CSO must go one step further. In recent months, my discussions with 2degrees members have shown that sustainable supply chain program leaders are looking for benefits in multiple areas:
The suppliers engaged in our sustainability program presented us with fewer quality problems
I’ve had anecdotal suggestions that supplier companies who have used the supply chain ethics tracking system Sedex found it to be a gateway into wider management systems like ISO 9000, which should ultimately lead to fewer product quality issues.
We got exclusive access to new products, beating the competition to market
For example, Walmart co-promoted, with Unilever, a sustainable cleaning product, gaining an exclusive sales advantage over their competitors.
We got longer term commitments from key suppliers at a time when our competitors are facing supplier churn
For example, one consumer goods brand described losing a key agricultural commodity supplier in Central Asia when the supplier shifted farming to a higher margin product which was captured by one of the brand’s competitors.
Suppliers sustainably efforts cut costs in such a way that savings have been made permanently available to our buying team (and our customers)
For example, Walmart have been running a Supplier Energy Efficiency Program for a number of years. Through a simple change in light bulbs, tissue manufacturer Von Drehle Corp were able to realize $37,000 (£24,000, €28,000) annual savings, with a 4-year payback. These efficiencies will enable Von Drehle’s plant to stay competitive in the face of volatile energy prices.
Our resource efficiency efforts took the edge off escalating costs which would otherwise have been more serious For example, suppliers to the Imperial Tobacco Group know that they may be permitted to pass on rising energy costs if they can demonstrate a history of managing down energy and climate risk.
The engagement allowed our suppliers to challenge ‘sacred cows’ – legacy processes which our business was operating but which prevented the value chain from working in a long-term, resource-efficient manner
For example, before Plan A, UK retailer Marks & Spencer had multiple specifications for a raw material used in multiple product lines. Simplifying these generated classic win-win resource efficiency benefits.
There are many people and cultural attitudes in business stacked against the success of your program. So thinking broadly about the benefits, and then finding a cost-effective way to check they’re being delivered, is key.
"Show me the numbers"
By comparison with complex, compliance-focused supply chain ethics, environmental sustainability benefit tracking, linked to reducing inputs with known costs, can be relatively easily tracked. Companies tackling carbon in their supply chain have led the way. I’ve previously talked about Puma’s successful use of the Environmental P&L approach to measure, with Trucost’s help, changing environmental benefits in 2nd, 3rd and even 4th tier suppliers, led by (but not limited to) carbon.
But measuring change in multiple, small-scale instances is resource-intensive, to the point of where the cost of audit and verification swamps any early benefits.
So some companies with developing world suppliers are looking at the United Nations' Clean Development Mechanism and, in particular the new Programme of Activities (PoA) approach. The PoA sets up a standard project framework with expected carbon reduction benefits, as suppliers implement projects to that framework, the benefits are deemed to have been generated. A random audit of a sample of projects provides assurance that aggregate, program-wide benefits are being realised.
For example, Standard Bank in South Africa have a PoA which is being used to install low carbon lighting and tracking benefits in a retail environment. The cement company Cementos Bicentenario in Chile, have a PoA which provides carbon credits to logistics providers in their value chain which shift to low carbon rail freight. Or Johnson Controls India, which is behind a PoA for installation of energy efficient chillers. Or Dongsuh Corporation in Korea which has a PoA for energy efficiency retrofit in its coffee production facilities. All of these have a deemed carbon reduction benefit which is tracked and assured through the CDM system as a Scope 1 or 2 saving for the implementing company or a Scope 3 saving for the customer.
“What does the CFO think?”
As I’ve previously written, Marks & Spencer (M&S) have led the field in following up on the expected benefits of their Plan A program, with 5 years of data validating or refuting earlier business cases
For example, M&S’s 28% energy efficiency improvement is regularly revalidated by calculating “what we would have paid today had we not implemented these energy saving initiatives”. Because they launched Plan A in 2007, they use their financial year 2006/07 as a baseline.
This is an important consideration for supply chain sustainability investment. If supply chain costs continue to rise, background cost-drivers have to be separable from the cost-reduction benefits of the supply chain sustainability program, so that both can be separately evaluated. If this doesn’t happen there is a risk that because, for example, non-controllable macroeconomic conditions inflate input prices, say 10%, the fantastic 5% saving brought about by the resource efficiency programme will be hidden.
For M&S the benefits of supplier engagement could potentially dwarf the £185m ($287, €214) net benefit already delivered by their internal sustainability initiatives. Businesses in this situation know that whatever system they develop to track the financial benefits of supplier sustainability work, it needs to be cost-effective and stand up to scrutiny.
Let the market decide
It’s long been known that corporations’ appetite for backing risky change is lower than, say, NGOs or venture capitalists, and approval takes a long time to secure. But once corporate change has ‘political’ commitment, the business can continue to invest beyond the point when a nimbler organisation might have called it a day. Such programs may not have a real handle on their expected benefits and may only be halted by new leadership.
For benefit tracking to have value, it must be done objectively, and the business must be willing to change course or admit failure if the benefits do not arrive within an acceptable timescale.
M&S have taken an ‘Innovation Fund’ approach in order to allow projects to flourish or die at a higher speed and with less career reputational anxiety than attends a major corporate-wide program. With more than 70 projects funded, which were either too risky or too long term for business units to adopt,
Innovation Funds are able to accommodate some failures - indeed they expect them - but they should also generate some unexpectedly high returns on investment. In a 'corporate venturing' wrapper, the ability to follow the achievement of raw business benefits can be helpfully transparent.
Do you have any examples of trackable supplier sustainability benefits to your business?
There are many other off-the-shelf systems and industry programs which claim to provide benefit tracking. What are your experiences?
Do you have any examples of other corporate innovation funds being systematically used for rigour in projecting and tracking sustainable business benefits?
Now over to you! Please join the conversation below...
Conrad Young works within the Enterprise Services business at 2degrees. This blog post is the penultimate in the 9 Steps to Supply Chain Sustainability series. You can contact him direct at firstname.lastname@example.org