Erb Institute Toolbox: Global Value Chains by Erb Institute

SUSTAINABILITY TOOLBOX

Global Value Chains

Contents SUSTAINABILITY TOOLBOX

Global Value Chains

Contents Introduction.............................................1 Activities in the Value Chain.................2 Social, Environmental and Governance Issues in Global Value Chains................3 Committing and Engaging Your Value-Chain Management Organization............................................5 Value-Chain Sustainability Strategies and Tools................................7 Metrics, Measurement + Reporting....11 Future Trends........................................13 Vignettes................................................14 Research.................................................15 Resources...............................................16

Global Value Chains

Introduction This toolbox is a part of a series of Sustainability Toolboxes designed by the University of Michigan’s Erb Institute for Sustainability in Business to inform and aid a wide variety of sustainability practitioners. Global Value Chains presents Erb’s high-level view of the relationship between corporate sustainability and today’s complex global value chains. We designed the toolbox to be relevant irrespective of geography, industry, organization size or budget.

Topics we’ll cover include: • The range of social, environmental and governance issues in global value chains • Committing the value-chain management organization to supplier-focused sustainability and engaging it in appropriate strategies and initiatives

Toward the end of the toolbox, you’ll find vignettes/case studies, a list of additional resources and an appendix that contains templates and similar material. A word on the business case for understanding and investing in value-chain-related sustainability issues: Companies have learned that their supply networks offer both opportunities and risks in terms of environmental and social impacts and governance issues. These risks and opportunities

• Some tools used to advance sustainability in the value-chain context: ɗɗ Responsible sourcing ɗɗ Supplier codes of conduct ɗɗ Sustainable procurement

• Metrics + measurement: ɗɗ Data collection ɗɗ Supplier scorecards ɗɗ Audit models ɗɗ The move toward value-chain “ownership”

are signiﬁcant; most can be translated into direct economic consequences affecting the company’s bottom line. Also, companies are being driven to raise their game around these issues. Regulators and other stakeholders are demanding that businesses assume some level of responsibility for value-chain impacts; companies have responded by investing in more robust information collection and accountability structures in value-chain management functions, all the way from sourcing to product distribution.

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Your companyâ&#x20AC;&#x2122;s specific return on investment on value-chain sustainability initiatives will depend on its circumstances, including industry, size, geography, supplier relationships and capacity to efficiently effect change. At a minimum, an investment in value-chain sustainability will:

identify environmental and social impact risks and governance issues outside of the companyâ&#x20AC;&#x2122;s operations

design and implement appropriate strategies that reach into complex value chains

create additional opportunities for engagement with key external stakeholders

help spot trends

offer opportunities for competitive advantage through improved performance;

facilitate sustainabilityrelated supplier accountability

Activities in the Value Chain

Value chains comprise numerous interrelated activities conducted by a network of actors. Each one of these actors has its own value chain, as well as its place in the value chain of other businesses. Companies are simultaneously supplier and customer.

Activities in a value chain can be characterized as a process of:

Buy

Make

Move

Sell

Return/Reuse/ Recycle

Activities at each phase of the value chain can create environmental, social and governance risks and opportunities.

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Global Value Chains

Social, Environmental and Governance Issues in Global Value Chains Value-chain activity causes multiple positive and negative environmental and social consequences. Many value-chain-specific governance issues exist as well. This results in a unique set of challenges for a company regarding how to (a) identify, (b) analyze and (c) manage sustainability impacts and issues. In the context of a truly global value chain, the challenges are exacerbated because of geographic, cultural and other diﬀerences between customer and supplier. Also important: Many global value chains are opaque (particularly between distant points on the chain) in ways that inhibit opportunities to collect information, measure performance and incentivize sustainable practices. In this toolbox section, we address the very ﬁrst challenge that value-chain sustainability presents: how your valuechain management organization (VCMO)—particularly if it has a global reach—can identify sustainability impacts and issues in your value chain.

IDENTIFYING ENVIRONMENTAL, SOCIAL AND GOVERNANCE IMPACTS AND ISSUES IN GLOBAL VALUE CHAINS

Scan for issues Do a preliminary scan for possible economic, social and governance issues in your value chain. Start with a teambased review of this list of possible issues we know to be prevalent in global value chains.

They fall into the following broad categories: Environmental issues

Social issues

Governance issues

Greenhouse gas emissions

Human rights

Corruption

• value chain “carbon footprint” • offsetting opportunities

• human trafficking/slavery • rights of indigenous people

• bribery • facilitation

Air pollution

Worker rights

Good citizenship

• particulate matter • NOx

• fair wages/overtime • freedom of association

• license to operate • respect for community

Water consumption and water pollution

Child labor

Ethical business conduct

• minimum age • maximum hours

• fair dealing • preferential treatment

• watershed depletion • effluent discharge

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Chemicals and toxic substances

Worker health and safety

Financial integrity

• biodiversity degradation • human health

• accident prevention • exposure to hazardous substances

• accounting principles • compliance

Waste

Diversity and inclusion

Transparency

• landfill/methane • e-waste

• diverse suppliers • representativeness

• total cost • information access

Land use impacts

Economic empowerment

Disclosure and reporting

• biodiversity degradation • groundwater and aquifer impacts

• developing countries • underserved communities

• noncompliance reporting • whistleblower protection

Your first pass is best framed as a discussion tied to developing a value-chain sustainability vision (rather than drilling down into possible impacts and specific goals). Define the scope. Very quickly, you’ll run into the question of how far “into” your value chain you want to reach. Tier 1 suppliers only? A bit beyond that? All the way back to raw materials? Downstream as well? Check to see whether your industry has established guidelines and/or a framework for making this decision. If not, you will have to establish your own parameters, likely based on a trade-off between reach and effort/ cost. The question of scope can be the trickiest sustainability-related aspect of being in a global valuechain context, but you do need to resolve it as well as possible, because it will relate to your value-chain sustainability vision and goals.

Link to stakeholder concerns and materiality. A clear understanding of stakeholder concerns should guide the discussion, as well as a materiality analysis that has identified sustainability “hot spots” specific to value-chain activities, if possible. Much of this discussion will be focused on mitigating value-chain risk and improving resilience, but make sure to include an analysis from an opportunity creation point of view. Valuechain sustainability visions are achieved through a combination of risk mitigation and opportunity exploitation.

At the end of this process, you should understand the major environmental, social and governance issues in your company’s value chain. This list of concerns will inform your company’s vision of value-chain sustainability and serve as the foundation for strategically engaging the value-chain management organization.

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Global Value Chains

Committing and Engaging Your Value-Chain Management Organization In this toolbox section, we discuss how your company’s VCMO, having identified value-chain sustainability issues, can analyze and manage sustainability-related issues to meet its goals.

Your VCMO’s value-chain sustainability challenge is threefold: Commit to a vision for value-chain sustainability.

Engage each VCMO function in initiatives that develop strategies, goals, tactics and metrics aimed squarely at the issues identiﬁed and speciﬁc sustainability levers under their control.

Coordinate these activities in a strategic manner. Your VCMO must commit to a vision of value-chain sustainability that is rooted in issues speciﬁc to its current circumstances, but dynamic enough to accommodate changing circumstances. The vision should encompass environmental, social and governance-related issues—a “triple bottom line” vision. Once you have a vision, you may choose to communicate it internally only, but VCMOs increasingly are sharing their visions with value-chain partners to align around goals. Fully engaging the VCMO is not an easy task. In most corporate VCMOs—even those with a global reach— it’s rare to ﬁnd someone whose entire work portfolio

is sustainability-related. Rather, people in value-chain management have functional roles, such as sourcing, buying, category management and logistics. Until fairly recently, VCMO employees were tasked with and evaluated on a narrowly deﬁned set of criteria related to executing these functions (such as cost, quality and delivery). We now recognize, however, that because so many sustainability issues arise outside of company operations, value-chain management professionals possess great responsibility for—and power over—environmental and social impacts and governance issues related to the company’s business. These impacts and issues are being added to their work portfolio and performance evaluations.

EXAMPLE: The Automotive Industry Action Group (AIAG) (www.aiag.org) includes original

equipment manufacturers (OEMs) and major Tier 1 suppliers. AIAG has a working group that focuses on “conﬂict minerals” issues in automotive value chains—a social impact issue. OEM representatives in this group are VCMO professionals who have used the working group to collaborate closely with suppliers to understand the issues and reach a consensus about what is achievable regarding the automotive industry’s role in conﬂict enablement. See http://aiag.org/supply-chain-management/steering-committee.

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Here is how sustainability plays out in several key value-chain management functions: Function

Responsible for sustainability

â&#x20AC;&#x153;Leversâ&#x20AC;?

Primary intended outcome

Identifying potential suppliers for required materials and services.

Supplier selection based on sustainability criteria (both materials-based and supplier performance-based).

Pushing sustainability throughout the supply base by rewarding sustainable products and practices, and improving economic and social well-being.

BUY: Purchasing

Contracting with suppliers for purchases and issuing purchase orders. May be responsible for supplier relationship management.

Issuing requests for proposal and contracting documentation specifically calling out sustainability performance criteria.

Improving supplier understanding of, and accountability for, sustainable products and practices.

BUY: Category management

Overseeing standards for goods and services with common attributes. May be responsible for supplier relationship management.

Interfacing with product development, marketing, experts and other stakeholders to establish category-based sustainability criteria.

Expanding percentage of goods and services that meet sustainability criteria.

Manufacturing processes that turn inputs into outputs.

Requiring and enabling the use of efficient processes.

Reducing process-related environmental impacts and waste; reusing assets; improving worker health, safety and well-being.

Receiving and storing materials and services. Distributing to appropriate user(s).

Using sustainability criteria to operate internal and external warehouse facilities.

Reducing negative environmental impacts related to land and energy use; improving worker health, safety and well-being.

Transporting materials in between value-chain activity points.

Using network optimization strategies and logistics services suppliers that integrate sustainable practices.

Reducing negative environmental impacts related to fuel use and improving worker health, safety and well-being.

Post-use product reclamation and/or facilitating reuse and recycling.

Reverse logistics to reclaim product; reuse of reclaimed product through remanufacturing or resale; recycling of appropriate products and components.

Recapturing value and mitigating impacts associated with product disposal.

BUY: Sourcing

MAKE: Production

MAKE: Inventory management MOVE: Logistics

Return/ reuse/ recycle

To fully engage your VCMO in value-chain sustainability, you must design and implement a set of strategies, tools and metrics linked directly to each functional responsibility. Some of these practices are described in the next section. You must ensure that the function-based practices are coordinated in a strategic fashion through the VCMO C-suite, a cross-functional working group and/or a steering committee. The coordinator role is responsible for resource allocation decisions, inter-function communications and continuous improvement.

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Global Value Chains

Value-Chain Sustainability Strategies and Tools This toolbox section discusses some best-practices strategies and tools that companies have developed to help them meet the challenge that value-chain sustainability issues pose. Most companies employ a combination of these strategies and tactics; leading VCMOs employ all in a highly coordinated fashion. If you are responsible for addressing sustainability issues in your value chain, we recommend that you consider investing resources in each of the following, many of which can take your VCMO from a compliance model to a holistic view of value-chain sustainability.

RESPONSIBLE SOURCING Sometimes, value-chain sustainability strategies themselves are referred to as responsible sourcing. For example, PepsiCo refers to its value-chain sustainability program as “responsible sourcing” (see www.pepsico.com/Purpose/EnvironmentalSustainability/Responsible-Sourcing). But in the context of this toolbox, we consider responsible sourcing to be a strategy that identiﬁes and reduces risks and creates opportunities associated with procuring materials in far-ﬂung value-chain locations.

The strategy involves: • identiﬁcation of possible environmental, social and governance risks based on geographic and industry-based risk criteria • supplier selection practices that (a) avoid suppliers that can be linked to known risks, and (b) exploit opportunities by steering procurement dollars toward suppliers with good transparency, rigorous compliance structures and a history of collaborative supplier-customer relationships

Your VCMO can design its own responsible sourcing strategy tailored to the specific issues and goals identified by stakeholders and a materiality analysis. Or it may choose to align itself with a nonprofit that has strong subject-matter expertise in responsible sourcing. For example, the Responsible Sourcing Network (www.sourcingnetwork.org) has developed two programs around specific commodities (cotton and minerals) and one program focused on a specific issue (slavery).

SUPPLIER CODES OF CONDUCT Supplier “codes of conduct” seek to establish written environmental, social and governance criteria that constitute baseline performance expectations for contracted suppliers. Suppliers usually sign codes of conduct before being put on approved-supplier lists, or they are deemed to have agreed to them by accepting their ﬁrst order.

The most common components of a supplier code of conduct are: • labor standards and practices (working hours, compensation, child labor, freedom of association, nondiscrimination, health and safety) • environmental requirements (materials composition, process-related environmental impacts, compliance with applicable laws and regulations) • documentation and compliance obligations (document retention, auditing procedures (announced/ unannounced), non-conformance reports and whistleblower protections) GLOBAL VALUE CHAINS | OCTOBER 2016

Although codes of conduct have come under criticism for being enforced rarely (or even being unenforceable), we believe that your business must have a supplier code agreed to by every supplier (although de minimis spending can be excluded). Most large companies put supplier codes of conduct on their websites, which their authors often encourage be shared.

SUSTAINABLE PROCUREMENT Sustainable procurement strategies establish principles and guidance that aid institutional purchasers in making decisions about goods and materials that are environmentally and socially friendly and that can be purchased from responsible suppliers. Principles generally represent highlevel, sometimes aspirational, statements about best practices and approaches. Guidance provides information on how to operationalize sustainable procurement in VCMOs, usually at a category level. For example, guidance may seek to answer what constitutes environmentally and socially friendly ﬁber-based products. Sustainable procurement is growing in importance as a value-chain sustainability tool. In fact, two significant efforts are under way to define category-specific standards and guidance that would aid institutional purchasers in purchasing environmentally and socially friendly goods and services from responsible suppliers. These are the U.S.-based Sustainable Purchasing Leadership Council (SPLC) (www.purchasingcouncil.org) and ongoing work by the International Organization for Standardization (ISO) Technical Committee 207 (https://committee.iso.org/tc207sc1) to establish a global sustainable procurement standard. The SPLC has issued a ﬁrst version of principles and guidance for leadership in sustainable procurement. The ISO’s working group has circulated a draft standard to internal stakeholders for their review and comment.

INCREASING MANUFACTURING EFFICIENCY TO MITIGATE ENVIRONMENTAL IMPACTS Increasing the efficiency of manufacturing processes up and down the value chain creates significant opportunities for impact mitigation and cost savings. (Your company’s manufacturing function controls its production processes; your company’s VCMO can influence suppliers’ manufacturing processes.) Many traditional manufacturing processes are energy-intensive, which can generate significant greenhouse gas emissions, depending on the fuel source used to create the energy. Some manufacturing processes employ petroleum-derived and other types of solvents and lubricants that can harm worker health and the environment (particularly if no effective capture and disposal practices are in place). Manufacturing processes themselves, and the energy they use, are also associated with water consumption and pollution issues. Companies addressing environmental concerns associated with production employ various methods to address these issues, which can be grouped under the concept of “efficient manufacturing.”

These methods include: • using alternative energy sources to provide energy for manufacturing processes • using process-reengineering strategies (such as Six Sigma and lean manufacturing) that reduce work time and speed material ﬂow

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Global Value Chains

• substituting bio-friendly solvents and lubricants for toxic chemicals • measuring and reducing direct water consumption associated with manufacturing processes; ensuring the recapture/reuse of post-process gray water • adjusting worker shift times to reduce impacts associated with worker commutes (such as a ﬁve-day work week)

FACTORY-RELATED SOCIAL IMPACT RISK MANAGEMENT Production activities throughout the value chain represent potential social impact risks, primarily related to human rights and labor rights issues. Factory policies and practices may put workers at risk of physical, emotional and/or mental harm. In some geographic areas, workers’ travel freedoms are restricted by employers that confiscate identity documents as a condition of employment. Workers may have little or no say in setting wages and benefits and identifying unsafe and/or unhealthy working conditions. Underage workers also may be present in some production facilities. Production activities can be a harbor for human trafficking. Employers and/or groups of employers may arrange access to trafficked people who can provide low-cost labor with little or no power to influence conditions or wages. These people may be further trafficked to meet labor demands in other employers in a group, or in other geographic regions. Addressing human rights and labor rights issues in supplier factories is a key concern of many stakeholders, including regulators. For example, the California Transparency in Supply Chains Act and the U.K.’s Modern Slavery Act of 2015 both require companies to identify and disclose value-chain trafficking risks. This is a real challenge, particularly in global value chains.

Leading companies take a multipronged approach to identifying and mitigating risks, including: • adopting the United Nations Global Compact (www.globalcompact.org), the Institute for Supply Management’s Principles of Sustainability and Social Responsibility (www. instituteforsupplymanagement.org/ssr) or other similar principles and incorporating these by reference into codes of conduct • conducting announced and unannounced factory audits • subscribing to corporate social sustainability information/rating services (CSRHub and EcoVadis are two examples: www.csrhub.com, www.ecovadis.com) • using technology to empower factory workers to report potential unsafe working conditions directly to retail brands (LaborVoices offers one such technology: www.laborvoices.com)

INVENTORY MANAGEMENT BEST PRACTICES Storing and warehousing materials and ﬁnished goods involves buildings, land, people and processes. Sustainable building and land-use practices can reduce costs and environmental impacts such as greenhouse gas emissions, air pollution, biodiversity degradation, excessive water use, water pollution and hazardous materials issues. Sustainable inventory management practices can reduce costs, reduce numerous environmental impacts (such as greenhouse gas emissions associated with energy use) and improve worker health, safety and well-being.

Some methods associated with sustainable inventory management include: • using LEED or other sustainable building design and operating standards for warehouse facilities • sourcing alternative energy for electricity-related needs • employing energy-efficient lighting in

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warehouse facilities • improving HVAC efficiency • reclaiming rainwater and runoff for reuse in irrigation • substituting fuel-cell or electric for direct fossilfuel burning materials handling equipment • using technology to improve space usage and storage/retrieval processes • creating and enforcing stringent hazardous materials storage and handling protocols

EFFICIENT LOGISTICS Traditional logistics involve outgoing and/or pointto-point transportation and handling of goods and materials from upstream to downstream until reaching the ﬁnal consumer. Some companies have “captive” logistics functions, and some companies contract with third parties (“3PLs,” which may or may not own transportation assets) to move goods and materials. (3PLs may also have control of some inventory management functions.) Today, a good share of value-chain logistics activity is “multimodal,” employing air, sea, rail and/or truck transportation. Each of these modes creates environmental and social impacts and may involve governance concerns as well. Sustainable logistics can improve service, worker health, safety and well-being, and reduce costs and environmental impacts.

VCMOs responsible for sustainable logistics employ several strategies and tools to achieve environmental, social and governance objectives: • cargo capacity/usage improvement strategies based on weight, size and other analytics

• technology-enabled modality selection tools that reduce negative impact • sea-based transportation that employs slow-steaming techniques and/or burns low-sulfur fuels

REVERSE LOGISTICS Many influences (such as regulatory requirements, consumer preferences and cost recapture/revenue opportunities) have caused businesses to consider end-of-life treatment options for finished products. One “sustainable” option for product end-of-life is to get that product back into the hands of the manufacturer (or its designee) so that it can be assessed for reclamation, reuse and recycling opportunities. Reverse logistics is the tool that enables this result. If you’re a finished-goods seller, your company’s VCMO logistics personnel must first consider the costs and benefits of a product reclamation strategy. Then they must ensure serious coordination among your company, its distribution network and its logistics providers (whether in-house or third-party).

EXAMPLE: Sears/Kmart contracts with

its third-party logistics provider FedEx/GENCO to retrieve unsold and returned merchandise (everything from brooms to clothing to TVs to gardening machinery) from its stores and send that merchandise to one of several centralized warehouses around the U.S. There, workers sort incoming goods and designate them for reuse/ resale, recycling or scrapping, according to designated criteria.

• route optimization strategies to reduce distance and fuel burn and improve asset life • alternative-fuel vehicles for road-based transportation

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Global Value Chains

Metrics, Measurement + Reporting The current model for measuring the effectiveness of value-chain-focused sustainability efforts is based on collecting data, auditing data and providing feedback through mechanisms such as supplier scorecards. These efforts also feed into sustainability reporting frameworks, including the Global Reporting Initiative’s G4 Framework (www.globalreporting.org). The data collection tasks are increasingly challenging because of data volume and security concerns. The auditing and feedback model has come under fire from several directions as inadequate for solving many of the issues; both hard and anecdotal data suggest that suppliers have improved on sustainability measures only incrementally. This has led to a suggestion that companies “take ownership” of their value chains to achieve better and faster results (see “Future Trends” in the next section).

DATA COLLECTION, SCORECARDS AND AUDITING Your VCMO must collect quantitative and nonquantitative information from suppliers and valuechain partners about their sustainability-related efforts and performance on an ongoing basis. This information set must include environmental and social impact data, as well as governance-related documentation and material, which will feed into accountability and sustainability reporting practices. Your company must have effective storage and data security practices in place, as well as good data analysis capacity to make effective use of the information. Companies must provide consistent feedback to their supply base about their economic and environmental performance. We strongly encourage your VCMO to incorporate its environmental, social and governance criteria in a supplier scorecard, a common VCMO accountability tool. Supplier scorecards, which give scores to or grade suppliers on multiple performance attributes, have been around for a long time. Until

recently, they were primarily focused on “traditional” attributes of supplier performance (such as cost, quality and delivery). Usually, a supplier’s overall score is the result of a weighted combination of individual attribute scores (for example, 50 percent for cost, 30 percent for quality and 20 percent for delivery). Suppliers whose scores do not meet minimum standards risk losing the customer’s business. Now, supplier scorecards are beginning to incorporate grades for sustainability-related performance. Companies assign various weight to environmental and social performance.

EXAMPLE: Procter & Gamble has

a comprehensive supplier scorecard that incorporates several environmental performance criteria. P&G makes the scorecard freely available to the public. Visit www.pgsupplier.com/suppliersustainability/sustainability-scorecard to learn more.

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Another common VCMO accountability mechanism is the supplier audit. This audit can be: • a supplier-performed self-assessment • an on-site audit conducted by members of your company’s VCMO • an on-site audit conducted by a third-party provider • a combination of the above Audit results may be “verified” by third-party assurance providers. You should use supplier audits as a part of your VCMO’s accountability strategy, because, at a minimum, they signal your intentions to your supply base.

But be aware of the serious limitations associated with supplier audits: • Supplier self-reporting is often self-serving, incomplete or, in some instances, misleading. • Announced on-site audits are notoriously ineﬀective at uncovering deﬁciencies, because they allow suppliers time to hide noncompliant conditions. • Third-party auditors, whether announced or unannounced, can collude with suppliers and/or regulators in a manner that results in incomplete or misleading reports.

Frankly, we (and others) believe that the current auditing model may have outlived its usefulness in many situations. Rather, best practices suggest a deeper level of engagement between your VCMO and its supply base around sustainability issues. One such deeper level of engagement, value chain “ownership,” is described in the Future Trends section.

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Global Value Chains

Future Trends In response to dissatisfaction on the part of VCMOs, suppliers and other stakeholders with eﬀorts and achievements in value-chain sustainability, some companies are moving to a more integrated approach. Rather than see customers and suppliers as discrete nodes in a value chain separated by (most often) logistics, these companies see the entire supplier-customer universe as a network connected by activities, information, finance and outcomes. Taking this view can profoundly change how companies approach value-chain sustainability.

VALUE-CHAIN “OWNERSHIP” Rather than view value-chain activities and suppliers as discrete links in a value chain, motivated by self-serving concerns, value-chain “ownership” views the entire value chain as an interconnected network that goes beyond primarily financial relationships. From a sustainability standpoint, this model requires that your company’s VCMO treat its entire supply base on a basis similar to internal business functions. Your VCMO is therefore “responsible” for the environmental, social and governance impacts of its suppliers. When this model is adopted, VCMOs:

help the company use tools like natural capital accounting to translate environmental impacts into financial costs (“internalize the externalities”)

invest in supplier capacity around sustainability, through training, mentoring and sharing best practices, to head off negative impacts before they are created

go beyond a risk-based sustainability model to one that focuses equally on creating opportunities through innovation and shared value strategies

We are strong believers in the ownership model as it applies to sustainability concerns.

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Vignettes Companies have employed several strategies to address environmental, social and governance issues in their global value chains. Similarly, existing and new suppliers have developed solutions to valuechain sustainability challenges. Here are some examples.

Unilever uses a supplier-derived packaging technology that injects gas during packaging production, reducing material requirements by nearly 15 percent in its body-wash product line.

Coca-Cola, in an effort to double the incomes of farmers in certain African communities where it operates, sources ingredients for fruit beverages locally, from 50,000 individual farmers.

Nike’s supplierfacing “Considered Index” puts environmental and social performance on a par with cost, quality and delivery.

Ecovative is a startup manufacturer of fungi-based sustainable packaging material that won Dell’s business as a preferred packaging supplier.

Walmart requires many of its suppliers to source 95 percent of products from factories with a “high” environmental and social audit score.

LaborVoices, a retailer-supported start-up, provides cellphone-based technology that allows factory workers to report working conditions in real time, which can be relayed to brands at the far end of the value chain.

Marks & Spencer has committed to adding at least one sustainable sourcing criterion into every one of its products each year through 2020.

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Global Value Chains

Research Recent research undertaken by Ming Xu, assistant professor at the University of Michigan’s School for Environment and Sustainability, explored the development of a systematic and quantifiable risk assessment model for global valuechain sustainability. Researchers analyzed data in the apparel and automotive industries to map operational, environmental and social risks and recommend improvements in value-chain sustainability in these industries. In discussing their ﬁndings, the researchers noted that the differences in recommendations they made for the apparel and automotive industries were derived from “the industrial motivation to maximize internal resource allocation efficiency.” That is, more complex products like automobiles require a very broad value chain, while less complex products like apparel require a very deep value chain. To advance value-chain sustainability, automobile OEMs need to engage broadly with Tier 1 suppliers, deploying codes of conduct and related tools, and apparel brands need to drill deep into their value chains, perhaps by leveraging industry-wide standards and third-party enforcement mechanisms.1

The University of Michigan’s Ross School of Business David B. Hermelin Professor of Business Administration & Professor of Operations Management Ravi Anupindi recently published research on the transformative and emerging role of reverse logistics in packaging value chains. Initiatives in reverse logistics in an unregulated industry context are particularly enlightening, because many reverse logistics streams are developed in response to environmental regulation. In this case, joint industry action in a complex, extended global value-chain context increased packaging recycling from 18 percent to 40 percent. Anupindi’s case study is available at http://webuser.bus.umich.edu/anupindi/ cases/VPR_Case_GL1429338I.pdf.

1 Yuanyuan Cui, Meng Hu, Xinkai Xu and Zechi Chang, “Defining Next Generation Supply Chain Sustainability—From a Risk Assessment Perspective,” unpublished research paper provided by Professor Ming Xu.

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Resources The World Economic Forum has released a study, conducted in association with Accenture, titled “Beyond Supply Chains.” It can be accessed at: www3.weforum.org/docs/WEFUSA_BeyondSupplyChains_ Report2015.pdf

Business for Social Responsibility offers a comprehensive guide to value-chain sustainability: www.bsr.org/reports/BSR_UNGC_SupplyChainReport.pdf

The Global Impact Investing Rating System’s “Creating a Supplier Code of Conduct” is useful: www.bcorporation.net/sites/default/files/documents/bestpractices/EM_Creating_a_Supplier_Code_of_ Conduct.pdf

The CDP offers a comparison of value-chain sustainability risks in various countries: https://www.accenture.com/t20150523T015757__w__/kr-en/_acnmedia/Accenture/Conversion-Assets/ DotCom/Documents/About-Accenture/PDF/2/Accenture-CDP-Supply-Chain-Report-2015.pdf and its Climate Action Exchange Initiative provides a forum for collaboration among major purchasers, suppliers and solutions providers: https://www.cdp.net/Documents/Guidance/2014/cdp-actionexchange-program-overview-2013-2014.pdf

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Global Value Chains

Notes

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PREPARED BY:

WITH CONTRIBUTIONS FROM U-M FACULTY AND STAFF

Robert W. Kuhn, Kuhn Associates Sustainability Advisors LLC

Dr. Joe Árvai Faculty Director, Erb Institute | Business for Sustainability

October 21, 2016

Dr. Ravi Anupindi Professor of Operations Management and Research, Stephen M. Ross School of Business Terry Nelidov Managing Director, Erb Institute | Business for Sustainability