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SPOTLIGHT: RADICALLY REINVENT YOUR SUPPLY CHAIN Don’t Tweak Your Supply Chain—Rethink It End to End Included with this full-text Harvard Business Review article: This article is provided compliments of Tracey Wyatt.
S P O T L I G H T : R A D I C A L L Y R E I N V E N T Y O U R S U P P L Y C H A I N Don’t Tweak Your Supply Chain—Rethink It End to End Idea in Brief
Firms often take a piecemeal approach to sustainability. They demand that suppliers replace materials with greener ones, for in-stance, and they tweak their own opera-tions with recycling, energy-efficient equip-ment, and the like.
Although these changes often seem worth-while individually, they may in the grand scheme generate unintended conse-quences, such as higher financial, social, or environmental costs.
Companies should pursue broader struc-tural change instead, as the shirt manufac-turer Esquel, the steelmaker Posco, and oth-ers have done. This means identifying opportunities that span the supply chain, reinventing manufacturing processes, and even linking up with competitors to tackle challenges of scale. The result can be a greener supply chain that requires less cap-ital, has much lower operating costs, and provides a competitive advantage.
This article is provided compliments of Tracey Wyatt.
SPOTLIGHT: RADICALLY REINVENT YOUR SUPPLY CHAIN Don’t Tweak Your Supply Chain—Rethink It End to End Hong Kong–based Esquel, one of the world’s northwestern China that depends mainly on leading producers of premium cotton shirts, faced a quandary in the early 2000s. Apparel tional method of irrigation there was to peri- and retail customers such as Nike and Marks odically flood the fields—an inefficient ap- & Spencer had begun asking the company about its environmental and social perfor- ground for insects and diseases. Heavy pesti- mance. Its leaders anticipated scrutiny from other customers as well, since more of them Productivity was an issue, too: A switch to were demanding that a greater portion of the organic cotton could cause crop yields to drop cotton in their shirts be grown organically. But by as much as 50%. Even though the climbing the crop required a lot of water and pesticides, demand for organic cotton was likely to boost especially in poor and rapidly developing prices, Esquel couldn’t expect them to rise countries, where Esquel’s cotton was grown enough to compensate farmers for the lower yields. Indeed, apparel companies and retailers had made it abundantly clear that they would strengthen the company’s already serious not be willing to pay a big premium for clothes sustainability, they realized they couldn’t sim- cotton fiber is weaker than that of conven- extra-long-staple cotton just reduce their use tional cotton and has different physical charac- of water, fertilizer, and pesticides. A mandate teristics. It would need extra processing, leave a like that could be catastrophic for the farm- greater percentage of scrap during fabric man- ers and their villages. Most of Esquel’s cotton ufacturing, and require chemicals and dyes more environmentally harmful and more ex- This article is provided compliments of Tracey Wyatt.
Don’t Tweak Your Supply Chain—Rethink It End to End•••SPOTLIGHT: RADICALLY REINVENT YOUR SUPPLY CHAIN
pensive than those used on conventional cot- In addition to Esquel, we’ve looked at Adidas, ton. All this would add to costs and cancel out some of organic cotton’s green benefits.
Flextronics, Hewlett-Packard, Li & Fung, Ne- How could the shirtmaker provide the prod- tafim, Nike, Posco, Rio Tinto Iron Ore, Safe- ucts customers demanded, conduct environ- way, Smart Car, Starbucks, Toyota, Wal-Mart, mentally and socially responsible business in China, and protect its own profit margins? In particular, we have focused on environ- mental and social responsibility in developing numerous industries confront the same chal- markets. Such economies provide the biggest lenge: A well-intentioned individual action or opportunities for improving the environment, demand aimed at making a business greener but they also entail the biggest risks. The widely can create a long string of unanticipated conse- publicized recalls of tainted pet food and lead- quences that collectively dwarf the benefits.
laden toys and children’s belts made in China The mounting pressure to conduct business in and the suicides of workers at a contractor’s a sustainable fashion comes from various stake- electronics factory in Shenzhen have driven holders—customers, shareholders, boards, em- home the reality that stakeholders increasingly ployees, governments, and NGOs—and most cor- hold corporations accountable for their supply porations respond in a reactive, piecemeal way.
chain partners’ actions. Given the tremendous They demand that suppliers change their materi- environmental damage that the explosion in als to environmentally friendly ones. They ask manufacturing is inflicting on China, compa- suppliers to move manufacturing operations nies that source from China should expect their closer to end markets to reduce transportation- suppliers’ greenness—or lack thereof—to come related carbon footprints. And they tweak their own operations by replacing ordinary lightbulbs Clearly, sustainability issues are adding com- with compact fluorescent lamps, recycling more plexity and risks to the already daunting chal- of their materials, refurbishing and reusing prod- lenge of managing global supply chains. This ucts, using more energy-efficient equipment, and suggests that companies need to pursue struc- tural change much earlier than most currently I call these actions substitutions: swapping do. Actions taken by Esquel and Posco, the one material, vendor, location, production South Korean steelmaker, are good examples step, or mode of transportation for another. Al- of what I mean by structural change.
though each change might seem worthwhile, Esquel. To manage the trade-offs among en-
such actions can, when you factor in the unin- vironmental sustainability, social responsibil- tended consequences, end up raising financial, ity, and business performance, Esquel helped social, or environmental costs and lead to sup- independent farms and those it owned in Xin- ply chains that are not, well, sustainable.
jiang try sustainable-farming techniques. For Instead, companies—throughout the supply example, it assisted them in adopting drip irri- chain, not just at the end—should take a holis- gation to decrease their water use and in es- tic approach to sustainability and pursue tablishing natural pest- and disease-control broader structural changes than they typically programs, such as breeding disease-resistant do. These may include sweeping innovations in strains of cotton, to reduce reliance on pesti- production processes, the development of fun- cides. (The new variety of cotton plants also damentally different relationships with busi- produced stronger fiber, resulting in less scrap ness partners that can evolve into new service models, and even collaboration with multiple companies to create new industry structures.
Esquel also introduced different harvesting This is one of the most important conclu- techniques. Previously, farmers used chemical Hau L. Lee () is
defoliants to induce leaves to drop to the project I’ve been leading at Stanford Graduate ground so that machines could easily collect School of Business. During the past seven the crop. The shirtmaker suggested handpick- years, my colleagues and I have studied supply ing instead. Even though that would be more chains in seven industries: agriculture, apparel, laborious up front, it would make for a cleaner automobiles, electronics, high tech, retail, and harvest, saving the need to remove dirt and im- resources (such as mining, steel, and cement).
This article is provided compliments of Tracey Wyatt.
Don’t Tweak Your Supply Chain—Rethink It End to End•••SPOTLIGHT: RADICALLY REINVENT YOUR SUPPLY CHAIN
In addition, Esquel changed its supplier- energy consumption, and control pollution.
For example, it introduced continuous casters farmers to be more like partnerships. For ex- that allowed newly made steel to be rolled ample, to enable farmers to invest in the new into products before it had completely cooled, techniques, it teamed up with Standard Char- which cut energy consumption by about 10%.
tered Bank to provide microfinancing. And to decrease their risks, it started to place orders techniques that enabled the company to pro- for cotton when it was planted and guaranteed duce a ton of steel with just 3.8 cubic meters of payment of whichever price turned out to be water. And it recycled nonferrous slag—a by- higher at harvest—a company-set minimum or product of steelmaking—by selling it to com- panies that used it to make cement and other As a result of these efforts, the yields of the organic farms in Xinjiang that serve Esquel Posco’s managers thought they were doing more than doubled from 2005 to 2007; today all they possibly could to be green. Then a chal- they are the highest of any kind of cotton farm lenge arose that made them think otherwise.
in China. Farmers’ income has increased by China’s voracious demand for steel caused glo- 30% since 2005. And at a time when demand bal prices of high-grade iron ore to rise sharply for organic cotton around the world is soaring, in the 1990s and the early 2000s. Making mat- Esquel has secured a dependable, major supply.
ters worse, oil prices also shot up, significantly increasing the cost of shipping the ore from dis- ing, as well. It developed new processes for tant mines. These trends prompted Posco to washing, ginning, and spinning organic cotton join forces with its equipment supplier, Sie- fiber; created dyes that employed greener mens VAI: The companies set out to create a chemicals than those used to color conven- radically new technology that would cut costs tional cotton fiber; and reduced the use of and carbon emissions by using cheaper, lower- other chemicals in fabric manufacturing.
quality iron ore from mines much closer to Posco. In a bid to make its steelmaking pro-
cess more environmentally friendly, Posco had The Finex steelmaking process is the solu- for years undertaken a host of discrete initia- tion they came up with. It can use cheaper bi- tives to conserve and recycle water, reduce its tuminous coal and common iron ore powder,eliminates the need for coking and for sinter-ing, and, compared with conventional steel-making, requires substantially less energy andproduces much lower levels of greenhouse Rethinking Your Supply Chain End to End
gases and other pollutants. It has reduced thecosts of building a new steel mill by 6% to 17% Connect the Dots Between Your
Work with Your Suppliers’
and slashed the operating cost by 15%. Posco Own Operations
Suppliers
has used the technology successfully in Korea fabric and shirt production, the Chinese and has reached an agreement with the In- cided to forge direct relationships with tion by 33.7% in the past five years.
change and manage the trade-offs may sound Reinvent Your Manufacturing
daunting, but it doesn’t have to be. It can be Processes
tackled in a systematic fashion. In the rest of Companies often don’t think about radi- Link Up with Competitors
this article, I offer some guidelines and best If you can’t achieve scale on your own, think about joining forces with rivals, as that’s what Posco and its supplier Sie- Manage Sustainability as a Core
Operational Issue
way of making steel that not only cut en- ergy use and pollutants but also slashed navigate trade-offs or conflicts in their supply chains is to treat sustainability as integral to op- erations. They should consider it alongside is- This article is provided compliments of Tracey Wyatt.
Don’t Tweak Your Supply Chain—Rethink It End to End•••SPOTLIGHT: RADICALLY REINVENT YOUR SUPPLY CHAIN
sues such as inventory, cycle time, quality, and limited sustainability improvements on its the costs of materials, production, and logistics.
own. Its adoption of a new material, compo- Recognizing this, Nike has made its supply nent, or technology may require changes in chain managers—rather than a separate cor- adjacent units. Conversely, customers’ opera- porate social responsibility group—account- tions often constrain the extent to which you able for identifying possible sustainability im- can modify your own. For example, if a cus- tomer requires you to deliver once a day, you tracking their performance. For example, in may not be able to fill up a truck, even though China, where the company has about 150 con- tract factories, its supply chain managers reg- Start coordinating efforts by identifying all ularly evaluate existing and potential contract the overlapping activities. Then, working manufacturers on operational, environmen- with the other parties, explore improvements tal, and social-compliance measures. As part of this exercise, the managers consult a data- scend what any of you could achieve on your base of polluters maintained by the nonprofit own. Since your priorities may differ, the met- Institute of Public and Environmental Affairs rics to track progress will have to be compre- (IPE)—something many multinational corpo- hensive enough to cover the interests of all rations fail to do, according to Ma Jun, IPE’s founder. When working with suppliers to im- prove their operational performance, Nike found that its individual operating units typi- also trains them to boost their environmental cally didn’t work together to become greener and, as a result, had missed opportunities. For To do all this at your company, start by map- example, in fabric production, a softener and ping internal supply chain operations. Identify chemicals used to improve seam strength and where environmental and social-responsibility prevent threads from slipping were added to problems or opportunities lie. Evaluate alter- give the fabric a standard feel. But some of native ways to make improvements that may these chemicals were going down the drain require trade-offs between the two types of during the garment-washing process. In re- performance. As you weigh your options, con- sponse, Esquel developed a new recipe that re- sider their potential social impact. After you choose and implement initiatives, continually slippage agents but achieved the same feel.
The company saved more than 1 million RMB you’ve achieved the right balance of environ- annually, and it significantly decreased the mental, social, and conventional operational waste discharged during garment washing.
Supply chain partners need to collaborate With this kind of approach, Esquel greatly even on seemingly mundane sustainability ini- improved both its sustainability and its overall tiatives, as the U.S. supermarket chain Safeway operational performance in its vertically inte- discovered when it set out to reduce the car- grated business, which includes cotton farms, bon footprint of packaging materials for prod- spinning mills, weaving and knitting opera- ucts it received from manufacturers. The com- tions, and final assembly. Each area has re- (boxes, pallets, wrappings, and such) and as- improvements, recycling, and the construction sessed several alternatives, including different of thermal power plants; increased use of or- kinds of pallets and slip sheets. Quantifying the ganic cotton; and decreased use of chemicals in environmental impact of each with a widely dyeing. These environmental initiatives have used life cycle assessment tool, Safeway discov- also led to operational improvements: less ered that the delivery frequency, the routing to scrap, lower cost, more-stable production, and different distribution centers, and the mix of fewer production stoppages and late deliveries products on a truck had to be modified for each conveyance. The company then workedwith key manufacturers such as Procter & Coordinate with Adjacent
Gamble, Kimberly-Clark, and General Mills to Operations
implement changes. Safeway and its partners Often, an internal operation can achieve only had to agree on a comprehensive set of envi- This article is provided compliments of Tracey Wyatt.
Don’t Tweak Your Supply Chain—Rethink It End to End•••SPOTLIGHT: RADICALLY REINVENT YOUR SUPPLY CHAIN
ronmental measures and goals for tracking members meet agreed-upon standards and tar- progress in reducing emissions, energy con- gets. For instance, it’s clear that Mattel needs sumption, and solid waste produced, along to fully see the detailed specifications of the with parameters for standard operating costs.
materials in its toys (including the lead contentof the paint), the level of quality control ef- Examine the Extended Supply Chain
forts, and the results of inspections throughout After you’ve sought opportunities with adja- its extended supply chain. Augment your own cent internal operations and direct customers audits by consulting government agencies and and suppliers, don’t stop. Turn your attention NGOs that keep tabs on companies’ social and to your suppliers’ suppliers and your custom- ers’ customers—the extended supply chain.
Once you have identified the vulnerabilities It’s a critical step, not just to identify more- in your extended supply chain, you can collab- ambitious structural changes that could gen- orate with members to make improvements.
erate even greater payoffs but also to better To prevent a recurrence of the lead paint fi- asco, Mattel may have to work with its first- Mattel learned this the hard way in 2007, and second-tier suppliers to detect issues early when the discovery of lead paint on its toys and train third-tier suppliers to keep problems to conduct an expensive recall. A Chinese gov- ernmental agency traced the paint’s source to broader supply network in this manner can a third-tier supplier, which had sold a batch of be extremely challenging—especially if they are several tiers below you, located far away, and had provided fake certification that it did and based in developing economies, where se- crecy is often the norm. Many companies hes- then sold the paint to Lee Der Industrial Com- itate to share information about their operat- pany, one of Mattel’s longtime contract man- ufacturers. Ignorance about the extended sup- other members of the extended supply chain ply chain had left Mattel vulnerable to a out of fear that it might be used against them in contract negotiations or get leaked to com- To avoid Mattel’s travails, map out the mem- petitors or regulators. So, you typically will bers of your broader supply network and zero in on sustainability-related risks and opportu- parency is needed and how the information nities. Figure out which performance indica- tors must be monitored to ensure that all To make major structural changes, parties must align their incentives. This may involvealtering payment schemes or using othertypes of incentives—for example, providingdirect aid in the form of training or subsi- Winning the Trust of Communities in
dies—so that all partners believe they will Emerging Economies
benefit from the collaboration. Such align- ment is the key to the sustainability of the sus- tainability initiatives, as Wal-Mart discovered.
companies, they may resist businesses’ In 2005, when Wal-Mart initially mobilized its efforts to get them to adopt sustainable tutoring, workbooks, and other basics.
massive supplier network to join the com- pany on its journey to become more environ- make it clear how the public will benefit tion, Esquel created the Eco-mobile Lab, mentally responsible, it set aggressive goals for its suppliers to reduce energy consump- on activities such as tree planting to re- tion and the negative environmental impacts of their production processes. Concerned that these measures would increase their costs Through the Esquel–Y.L. Yang Education without necessarily improving their revenues from Wal-Mart, many small and midsize sup- tion of decrepit schools in the province of pliers in China did little or nothing. So Wal- Mart tried to mitigate their risks and increase This article is provided compliments of Tracey Wyatt.
Don’t Tweak Your Supply Chain—Rethink It End to End•••SPOTLIGHT: RADICALLY REINVENT YOUR SUPPLY CHAIN
the benefits of participating: It invested in helped the company lock in high-quality sup- training, codeveloped delivery processes that pliers that are environmentally and socially re- would cut suppliers’ costs and its own, and sponsible. With less supplier churn, it has man- aged to lower its long-term procurement costs and reduce its supply chain risk. For the coffee dium term. The carrot approach worked. In a farmers, CAFE ensures a steady market for 2009 audit of more than 100 Chinese factories beans that can be sold at premium prices. So serving Wal-Mart, the nonprofit Business for growers in poor and developing countries are Social Responsibility found that they had be- given a chance to earn more-stable incomes come 5% more energy efficient in the pro- and to protect themselves from volatility in (CAFE) program is another good example.
Look Beyond Your Enterprise’s
Given consumers’ interest in environmentally Networks
friendly food products, Starbucks pursued the Sometimes sustainability challenges are too goal of making coffee greener by persuading great for the supply chain of any one enterprise growers to farm more sustainably. But the to tackle on its own. Take recycling. A single company had no direct interactions with farm- company may not have the scale to support effi- ers; it had traditionally purchased coffee from cient collection and processing. If that’s the case, intermediaries such as farm cooperatives, food the best solution is working with others’ supply processors, exporters, and importers. There- chains—even those of competitors. When mul- fore, it needed to involve the players through- tiple supply chains use the same materials, con- out its extended supply chain, including the sume the same resources, or face the same threats, collaboration may bring cost-efficient, The CAFE program spells out guidelines to promote environmental and social responsibil- Of course, it requires careful planning and ity throughout the coffee supply chain: farm- ing and processing practices that protect soil chains should have some objectives and inter- and biological diversity and conserve water ests in common. They must be able to share and energy; worker pay that meets or exceeds resources (processing capacity, labor, or mate- minimum wage levels where the farms are lo- rials) to gain economies of scale. They will cated; adequate health, safety, and living condi- have to work out the business model—includ- tions for workers; prohibitions on child labor; ing whether to establish a new independent and limits on agricultural chemicals. It also fos- entity or a joint venture, or whether to out- ters transparency by requiring suppliers to doc- source the work to a third party. Finally, the ument how much of the money Starbucks pays results of the collaboration must be transpar- for coffee actually reaches the grower, often a ent to the participants, who in turn must be small family farmer in Latin America, Africa, willing to share the knowledge and experi- Suppliers are graded by independent certifi- In the early 1990s, many European countries ers who largely come from NGOs such as Rain- set up inefficient systems for collecting dis- forest Alliance and who follow Starbucks’s cri- teria. A supplier must score above a certain household appliances, and other electronic threshold to be CAFE certified. Starbucks buys products; recycling as much as they could; and first from certified farmers and suppliers and safely disposing of the rest. In each country, a pays premium prices to top scorers and those state-owned company took care of everything who show continual improvement. (In 2009, and charged manufacturers for its costs.
beans from such suppliers accounted for 81% of Starbucks’s coffee purchases, up from 77% in rations—Hewlett-Packard, Electrolux, Sony, and Braun—to come up with a better alterna- tive. They formed a joint venture: the Euro- fers loans to farmers trying to achieve high pean Recycling Platform (ERP). Set up as an scores and provides training and support to independent business in December 2002, ERP ones failing to do so. Those incentives have has collected and recycled electronic waste for This article is provided compliments of Tracey Wyatt.
Don’t Tweak Your Supply Chain—Rethink It End to End•••SPOTLIGHT: RADICALLY REINVENT YOUR SUPPLY CHAIN
34 companies in 11 countries. Its pan-European bers now include Apple, Dell, Microsoft, Nike, reach allows it to achieve much greater econo- mies of scale than individual state-owned com- panies can, and the competition has sparked Sustainability is no longer a secondary issue. It ERP to implement lean processes and become has become a competitive concern and should be handled accordingly. The core managers For example, HP’s cost of recycling a digital overseeing the supply chain, not a peripheral camera is just 1 or 2 euro cents in Austria, Ger- CSR group, must own and tackle it as aggres- many, and Spain, where ERP operates, and 7 sively as they do cost, quality, speed, and de- euro cents to €1.24 in five countries where pendability. They must engage the entire sup- state-owned companies still enjoy monopolies.
ply chain as they seek breakthroughs and try Recycling a laptop computer costs HP 7 to 39 to minimize risks. Companies that take such a euro cents in the three competitive countries holistic approach will steal a march on reac- and 88 euro cents to €6 in the other five.
tive competitors. They will be sustained.
In places where ERP operates, manufactur- ers’ recycling and disposal costs have fallen by 10% to 35%. ERP has steadily expanded the To order, call 800-988-0886 or 617-783-7500 scope of the products it handles, and its mem- This article is provided compliments of Tracey Wyatt.

Source: http://ebiz.bm.nsysu.edu.tw/2012/frederic/1008%20%E8%AB%96%E6%96%87%E9%A1%8C%E7%9B%AE%E7%AC%AC%E4%B8%89%E6%AC%A1%E6%8F%90%E6%A1%88/HBRDont%20tweak%20your%20supply%20chain-rethink%20it%20end%20to%20end.pdf