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Sustainability: You’re (Still) Missing the Point

June 12th, 2008 · by Tim Minahan · 5 Comments · enviro/social sustainability, supplier management, supply management

When I read Jason Busch’s latest tirade against Wal-Mart’s sustainable supply strategy, I tried to refrain from comment. Unfortunately, restraint is not one of my better qualities.

The Spend Matters’ blogmaster chalked up the news of Wal-Mart’s ongoing effort to reduce the carbon footprint, packaging, and waste in its supply chain to just another example of the retail giant beating up suppliers on price. (For the record, Wal-Mart wasn’t asking for price cuts. Instead, the article quotes Wal-Mart purchasing execs saying they won’t accept price increases from suppliers.) Jason likened Wal-Mart’s supply approach to the “whack-a-mole” game. “If a supplier complains [about Wal-Mart’s request], threaten to move elsewhere.”

Jason went on to chastise the retailer for driving suppliers to embrace sustainable practices to reduce costs further, “even in the inflationary environment that many food producers are facing.”

My thoughts: Good for Wal-Mart.

An inflationary economy is exactly the time for spend management organizations to pump up the volume of their cost-reduction efforts. (I would have thought that a free market capitalist like Jason would have been giving Wal-Mart props; not criticism. Next thing you know he’ll be backing Senator Hillary’s call to repeal NAFTA.) In fact, the CPOs I’ve been speaking with in U.S. and Europe over the past month report that their bosses and boards are demanding greater cost reductions – not less.

Wal-Mart is no different. Just because it is among the world’s largest companies doesn’t mean it is immune to the effects of rising energy, commodity, and food prices. Nor does it mean that Wal-Mart should subsidize mediocrity in its supply chain.

On the contrary, Wal-Mart’s competitive advantage has always been having the most efficient and effective supply chain. Accepting anything less than continuous improvement in cost and performance from its suppliers would shake the very foundation upon which the retailer’s business is built.

Wal-Mart’s refusal to blindly accept price increases in these inflationary times forces its suppliers to find ways to operate more efficiently. In fact, Wal-Mart’s sustainability strategy is less about the environment than it is about cutting inefficiency, waste, and costs within its stores and across its supply chain.

Wal-Mart’s call for all suppliers to trim packaging by 5% over the next five years actually reduces material and shipping costs both for the retailer and for suppliers. (Improving the environment is merely a positive by product.) Smaller packaging reduces waste and lowers overall transportation costs, allowing trucks to use less fuel and enabling suppliers to fit more product into a single truckload. It also cuts material costs for suppliers. Quite simply, smaller packaging means suppliers can buy less material for every unit sold. That can add up to big savings.

By Wal-Mart’s estimates, this package reduction initiative alone is equal to removing 213,000 trucks from the road, saving about 324,000 tons of coal, and 67 million gallons of diesel fuel per year. It also curbs the emission of 667,000 metric tons of carbon dioxide.

It should also be noted that Wal-Mart is not shoving the full onus of sustainability and cost reduction on suppliers. The retailer has partnered with suppliers to uncover ways to remove waste and costs from the entire supply chain. It has also rewarded suppliers for their efforts – and not solely with additional business (although it has done that too.) For example, under the package reduction initiative, the retailer wisely promised to keep suppliers whole by reserving them the same amount of store shelf. With slimmer packaging, suppliers can get more product onto every shelf, increasing their profitability per store.

For evidence of the positive impact slimmer packaging requirements can have for Wal-Mart suppliers, look no further than Nestle. The chocolate giant recently reported that it has saved £500 million by reducing slimming the packaging for the chocolates, beverages, and other food products it produces.

Facts like these suggest that Wal-Mart’s sustainable supply strategies will be more boon than burden for its suppliers.

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5 responses so far ↓

  • 1 anon // Jun 12, 2008 at 3:42 pm

    Wait…

    Wal Mart is shoving what up its onus?

    What…?

  • 2 Tim Minahan // Jun 12, 2008 at 4:16 pm

    Okay. Poor choice of words. “Wal-Mart is not placing the full onus…upon suppliers.”

    Hopefully you got the gist.

  • 3 Bob Ferrari // Jun 13, 2008 at 10:21 am

    Tim,

    In late February, I commented on Wal-Mart’s Sustainability efforts on my own blog. My comments related to the fact that while Wal-Mart should be applauded for its proactive efforts in driving sustanability across it’s supply chain, the fact that they incorporated these initiatives as supplier mandates, reinforces what occured with the previous RFID mandates. Was there not any learning gained from the RFID mandates from Wal-Mart?

    Supplier collaboration, in my view, is a arrangement for supplier and customer to work together on joint win-win buisness goals. Wal-Mart mandates conversely place suppliers in a far different relationship. In defense of Jason Busch- is this not a “whack-a-mole game” that favors the mandator?

    In my view, Wal-Mart can achieve quicker and more permanent benefits in green and sustainability programs by collaboration vs. mandates with its suppliers.

    Bob Ferrari

  • 4 Torbjörn Thorsen // Jun 13, 2008 at 10:41 am

    While doing a retake on packaging might be the obvious choice for supply chains looking to decrease their carbon footprint; there is often more that meets the eye at first if you have the ability to really scrutinize your supply chain to find alternatives which might lower your carbon emissions.

    Take a lesson from this research that the UK Carbon Trust performed on Walker Crisps (http://www.carbontrust.co.uk/publications/publicationdetail.htm?productid=CTC616).

    The key finding was that the price of raw materials (the spuds) was decided on weight. So what did the potato growers do; they humidified their potatoes (using energy) and those extra grams of water increased the profit on their potatos. Walkers on the other hand had to use more energy to burn off the excessive water when turning the potatoes into chips (or crisps as the brits like to call them).

    After the study was conducted, Walkers started to reward contract to growers who provided “dryer” potatoes. Win-win; growers needn’t use energy to humidify potatoes (to jack up their prices) and Walkers needn’t use as much energy when burning out the humidity in the chips making process.

    Walkers made a 1,2 million pound saving on this piece of supply chain re-engineering.

  • 5 Tim Minahan // Jun 16, 2008 at 8:26 am

    You bring up an excellent point, Bob. But Wal-Mart’s sustainability strategy is not incongruent with collaborative and fair supply management.

    As former Chrysler CPO-turned-President Tom Stallkamp once told me, “In order to fully reap the benefits of a world-class supplier, we must become a world-class customer.”

    Being a world-class customer means you can’t be a bully. It also prohibits you from constantly changing the rules of the game.

    However, it doesn’t stop you from pressing your suppliers to continuously improve their performance, quality, and cost. On the contrary, it is your duty as a world-class customer to function as mentor and coach, constantly teaching your suppliers new techniques and pushing them beyond their comfort zones. You must be consistent. You must be firm. And you must ensure that your workout routines yield suppliers that are better performing, more competitive, and healthier for the long haul.

    This is exactly what Wal-Mart is doing with its sustainability initiatives. It is prompting suppliers to rethink their old, costly and wasteful habits. It is coaching suppliers on areas where they can cut waste, reuse and recycle, and lower overall costs — not just cut prices. (It is also providing ample reward, such as reserving shelf space for compliant suppliers.)

    These workouts may be difficult at first. But once suppliers get into the routine of leaning our their supply chain, their businesses will increase their financial performance and longevity.

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