Trucost Blog / 23 Dec 2010

WAL-(S)MART and UNI(C)LEVER

Programmes to reduce environmental impacts are, in plain business terms, about improving efficiency. Using less electricity, less fuel, less water is good for the environment but, crucially, it also makes financial sense.

When the likes of Wal-Mart and Unilever put sustainability at the heart of their business models, they were not just following some moral compass. These savvy corporate giants saw an opportunity – efficiency improvements ultimately equal cost savings – and made a strategic business decision.

For Wal-Mart, this paid immediate dividends. A drive to reduce product packaging saved $3.5 million in transportation costs in one year*, making a convincing business case to examine the resource efficiency of all suppliers. So began its supply chain engagement programme.

Programmes to reduce environmental impacts are, in plain business terms, about improving efficiency. Using less electricity, less fuel, less water is good for the environment but, crucially, it also makes financial sense. If you spend less on building products or delivering services you can bolster your own bottom line and offer better value to your customers. Why then is environmental efficiency not a focus for every business? Perhaps because the analysis necessary to pinpoint resource inefficiency/waste/sources of emissions is perceived to be costly and complicated. It’s not. Or at least it doesn’t have to be. The key is to know where – and how – to begin.

In most sectors, the majority of environmental impacts can be traced to a company’s supply chain processes rather than its own operations. The greatest opportunities and risks are therefore in supply chains. Water scarcity is already affecting some suppliers, causing this year’s dramatic rise in cotton prices for example. High cotton prices will hit margins hardest at discount clothing retailers such as Primark. Similarly, droughts forced up wheat prices, increasing the costs of goods such as bread and meat. Energy-intensive suppliers are likely to try to pass on rising oil and electricity costs.

If a buyer selects resource efficient suppliers, it can reduce the risk from commodity price spikes. The competitive advantage this affords is patently clear. It comes as no surprise therefore that Unilever just pledged to halve the environmental impacts of its products over the next 10 years and source 100% of its agricultural supplies from sustainable sources.

How then does a  company begin measuring supply chain risk?

Some models in the market make this remarkably easy. Systems can map environmental efficiency across entire global supply chains using solely a purchase ledger – a process which takes less than 4 weeks. This analysis profiles risk by identifying the most resource intensive suppliers based on their business activities and buyer spend. It identifies a smaller, more manageable group of suppliers to hone in on. And by giving visibility to areas of poor efficiency a buyer can see where, by working together, cost savings can most easily be found.

There are of course broader benefits beyond the financial and risk implications. Adopters of such programmes have earned kudos from environmental aficionados, improved supplier relationships, encouraged transparency, promoted innovation and given their own brand/reputation a welcome boost.

It’s a hard case to argue against.

*Wal-Mart predicts that it will save $11billion across its supply chain through this initiative.

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