By Steven Swartz, McKinsey & Company
For most companies, direct operations represent only the tip of the iceberg in terms of sustainability impacts – at the base of the iceberg are the complex global supply chains that power most large companies today, and which are often responsible for well over half, and up to 90%, of the end-to-end sustainability impacts of an enterprise. While a majority of major corporations have made continuous sustainability improvements in their own operations, they are now turning to (or redoubling) efforts in their supply chains.
Traditionally, companies have used scorecards and audits to influence their supply chains. As our clients embark on this journey most are finding that scorecards can be an effective way to gather information about the their supply chains, but they are much less effective at actually changing supplier practices and improving supply chain performance. We find that a number of barriers limit progress in sustainable transformations of distributed supply chains, including:
1. Limited expertise at any one site, and an inability to physically visit sites enough to drive change
2. Difficulty identifying and prioritizing potential improvement initiatives
3. A lack of simple tools to manage and securely report progress
4. The challenge of quickly scaling across hundreds if not thousands of individual facilities
5. A lack of trust that collaboratively working on sustainability isn’t just a Trojan horse for future price reduction pressure
Working with both corporations and NGOs across a variety of industries on sustainable supply chains, we’ve consistently seen two clear drivers for success in achieving scalable sustainability gains with suppliers:
- A win-win proposition
Supply chain initiatives should have a clear value proposition for suppliers. Resource efficiency and associated operational cost reductions are ideal examples of how suppliers can immediately benefit from sustainability improvements. When our clients seek to influence practices with less direct financial benefits (e.g., initiatives that target supply resilience, reputational concerns, or worker conditions) we find a nearly universal need to better communicate these initiatives from the perspective of supplier benefits, not buyer requirements.
- A two-way communication model
Beyond leveraging suppliers’ self-interest, buyers need to support their suppliers’ sustainability improvements by both serving as the central “node” that connects their supplier network and leveraging their size and scale to disseminate expertise into their supply chain. Specifically, buyers should help develop targeted recommendations, provide tools to manage implementation and reporting, foster the sharing of information across suppliers, and recognize and reward the achievements of leaders.
A Novel Approach to Getting at the Base of the Iceberg
To help facilitate buyer-led supply chain sustainability transformations, we’ve recently started leveraging a number of well-known technological innovations to help clients make real progress in their supply chains:
1 – Big data and advanced analytics: We have co-created a large database of energy, water, and waste reduction levers based on over 100 McKinsey client engagements along with the experiences of our early clients, and developed a “lever engine” that suppliers can use to determine which projects are most relevant for their specific facilities (e.g., just like leading retail websites can say “people who liked X will also like Y”, we’ve worked with our clients to tell their suppliers “people with equipment & processes like yours have delivered value by doing X & Y). We’ve also leveraged this database to allow our clients’ suppliers to quickly and accurately estimate the cost savings, capital investments, and sustainability improvements associated with each project.
2 – Software as a Service: Working with several corporate and NGO clients, we’re deploying the data and analytics above through a web-based, self-service tool called RedE. RedE combines the “lever engine” described above with a visual workspace to manage implementation and a series of dashboards to monitor impact in near real-time (e.g., how many tons of CO2e came out of my supply chain this month).
3 – Social platforms and the sharing economy: RedE’s dashboards allow a company to easily monitor and benchmark supplier performance relative to peers, making it possible to performance manage a supplier network on resources that have historically been largely “invisible” in the supply chain. We setup RedE as an open ecosystem of buyers and suppliers, and since each “buyer” helps add to the “lever engine” that gets disseminated through RedE, this best-practice aggregation helps all users drive the performance of their supply chains. Further, buyers can “pile on” to requests to shared suppliers that are using RedE, driving adoption (built-in data protections ensure that suppliers’ resource and cost savings are fully disguised or aggregated before being shared).
Walmart has been a major first mover in this area, testing and refining RedE in a handful of categories and now committing to roll it out to 70% of its direct sourcing business. This scale up brings real potential to drive millions of tons of CO2 out of their Scope 3 emissions, sends a compelling message to both their suppliers and customers that they are serious about the impact of their operations, and potentially delivers even more impact in their “Scope 4” emissions (e.g., in the proportion of their suppliers’ business that’s not with Walmart, but that would benefit if the supplier becomes more resource efficient across its entire operation).
Our hope is that innovative tools and approaches, such as the collaborative, two-way ecosystem created by RedE, can help companies elevate supply chain resource efficiency from an emerging CSR KPI to an indispensable practice – putting those that actively lead on such programs at a competitive advantage over those that don’t.