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Engaging Suppliers

Key Findings

  • Thirty-three percent (205 companies) engage suppliers on sustainability performance issues, up from 27 percent in 2012.
  • The 14 percent (83 companies) in Tiers 1 and 2 have formal sustainable supply chain management programs, up from 9 percent in 2012.

 

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Integrating sustainability into procurement and sourcing decisions is an effective tool for putting some “muscle” behind supplier codes of conduct. But in addition to the procurement “stick,” companies should also be using “carrots” such as dialogue and collaborative training and capacity building programs.

Traditionally, supplier engagement programs have taken a narrow, compliance-focused approach. Companies set forth expectations in a supply chain code or policy and then monitor performance through audits, conducted either internally or through third-party organizations. This approach has shortcomings. Suppliers doing business with multiple customers often find themselves bogged down with multiple, duplicative compliance surveys, spending more time reporting than on improving actual performance. Similarly, companies with multiple suppliers find themselves spending more time and effort policing supplier performance than on collaborative efforts to raise social and environmental performance. Auditing supplier performance is an integral part of supply chain management, but education, training, capacity building and incentives are also critical. We refer to these efforts broadly as “engagement.”

Generally, company performance in this regard is improving modestly. Thirty-three percent (205 companies) have established some form of program to engage with suppliers on sustainability performance issues, up from 27 percent in 2012. The 14 percent (83 companies) in Tiers 1 and 2 have formal sustainable supply chain engagement programs, up from nine percent in 2012.

However, 67 percent (408 companies) do not disclose if they have efforts in place to engage suppliers on environmental and social sustainability issues. Those companies that don’t engage suppliers as partners and innovators are missing a huge opportunity to increase competitiveness and build resiliency into their supply chains.

Companies concerned about weak supplier performance should start by engaging those suppliers to develop improvement plans rather than severing relationships. Hewlett Packard, for example, has implemented a five-tier supplier rating system that draws on the results of third-party audits and remediation efforts. The company also provides incentives, such as more business, to encourage suppliers to achieve higher ratings.

Many companies are utilizing scorecards to evaluate supplier performance and use the results as the basis for engagement. Scorecards can be useful for influencing purchasing decisions and as a stepping-stone towards helping suppliers establish measureable, time bound goals to improve performance. For very large companies with extensive supply chains, such as Proctor & Gamble and Wal-Mart, the ripple effects of their scorecard programs could be significant. But unless companies collect and publicly disclose data about such engagement programs, it’s impossible for anyone outside the company to evaluate their impact.

Many large companies have extensive and complex supply chains and, given limited resources, even those most devoted to ensuring sustainability within those supply chains tend to focus their engagement efforts on their “priority,” or top tier suppliers. Yet, often it’s lower tier suppliers that pose the greatest sustainability risks, which is why leading companies are encouraging better sustainability performance throughout their supply chains. For example:

    • Ford Motor Company has more than 1,300 first tier suppliers and describes its supply chain as having six to ten levels between the automaker and the source of raw materials. To extend its efforts to create a sustainable supply chain, Ford has established requirements for first tier suppliers that require them to drive Ford’s environmental and social expectations down the supply chain. Ford has prioritized efforts to gather qualitative and quantitative information on suppliers’ climate risks and GHG emissions. The company disclosed the results of this information gathering in its 2012-2013 sustainability report and is using it to work directly with suppliers to establish GHG emission reduction and energy efficiency targets.
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Increasingly companies are recognizing that collaborating with one another is a more effective way to change supplier behavior than going it alone. This has led to the creation of industry groups such as the Sustainable Apparel Coalition (SAC), the Electronics Industry Citizenship Coalition (EICC), and the Auto Industry Action Group (AIAG), among others, that are working to increase efficiencies, create clarity in sustainability expectations for shared suppliers and collectively raise industry standards with respect to supplier sustainability performance.

The complex issue of conflict mineral sourcing, which affects a broad range of sectors from Semiconductors to Autos to Healthcare, has also prompted cross-industry collaboration. Led by prominent advocacy organizations, such as the Responsible Sourcing Network and the Enough Project, industry organizations including the EICC, AIAG and the Global e-Sustainability Initiative (GeSI), and their member companies, are joining with regulators to find solutions for improving traceability.

       

Download the full report here.