Risk and Sustainability-Russ Doak rev 1

Paper topic by Russ Doak +1.604.219.6334 or [email protected] 1

Risk and Sustainability Connection

1. Introduction

This paper will explore and relate the connection with risk and sustainability. Secondarily, there’s a need for improved process management and automated data tools or systems to enable dealing with the demands of increased risk and more sustainability. Thirdly, increased transparency model – visibility using improved process and automation tools supports better traceability in the supply chain that will reduce risk and create sustainability. Risk and sustainability are not separate nor are they mutually exclusive. They are connected to one another like the head and tail of a coin. Risk and sustainability are not typically seen together being opposite sides of the coin. Risk is seen as the home of CFOs and governance to mitigate impacts financially and protect shareholders’ value. Sustainability is seen as the domain of green movements in reducing the carbon footprint or emissions. From these two traditional perspectives they are seen as in their own worlds and not linked or even connected. They can be looked at and worked as a complement. If not, they can work against you. The first step becomes an understanding of the connection they have to each other. The key is a systems approach in recognizing the greater value to supply chain by managing them together. The linkage between risk and sustainability is gaining traction due to social and environmental impacts and requirements for tighter regulations with more detailed monitoring. Leaders in organizations are recognizing sustainability is more than environmental. In fact, it requires managing all risk for business. Global Supply Chains in the future will need to manage both a greater degree of risk requirements and increased sustainability value. To achieve this, stronger process

2 Paper topic by Russ Doak +1.604.219.6334 or [email protected]

management and new automation tools will support these demands on companies’ supply chain for risk performance and corporate social responsibilities (CSR). Naturally, there is the triple bottom line (3BL) of social, environmental and economics. This is balanced against a more sustainable supply chain with reduced risk. Technology is the vehicle and one of the main drivers for heightened awareness though the use of social media and the Internet, which has challenged the traditional view or approach and relationship to each other. There are a number sources and papers that align with this thinking of connections with risk, sustainability and transparency, which I will reference as examples.

Figure 1 Global supply chains are long and complex and must be managed correctly to ensure environmental, social and economic sustainability are balanced against reduced risk. Photograph: Royalty-Free/Corbis


2. The Body

1. Heighten Awareness: In recent news from Dhaka, Bangladesh, channel masters (retailers e.g. H&M + Zara; Joe’s of Loblaw’s-‐Canada) are seen as accountable for a factory building caving in killing close to1000 people and having poor labour conditions where their products are made. The initial thinking is “let’s do what we need to so we avoid any further negative press.” So what are the positive actions and processes that need to go into place now! Send teams to have our own people in place at the facility to monitor and audit what outsourced manufacturing is doing and work with the local governments on agreements for improved labour practices and standards. Need to ensure our supplier’s supplier and outsourced manufacturers are sharing our outlook on corporate social responsibility (CSR). Below is an extract of an article from the Canadian Press. This relates directly to the situation mentioned. See complete article and video at http://www.huffingtonpost.ca/2013/05/15/bangladesh-‐factory-‐joe-‐fresh-‐loblaws-‐safety-‐pact_n_3275213.html “TORONTO -‐ Loblaw Companies Ltd. said Tuesday that it will sign a pact to improve fire and building safety in Bangladesh following the collapse of a factory in that country that killed more than 1,100 workers.”

“The safety agreement comes two years after a fire and safety proposal drawn up by labour unions was first rejected by many clothing companies as too costly**(see updated-‐ insert below)** and legally binding. The latest agreement is a revised version of that proposed pact.”

**Costs -‐Retailers update safety conditions in Bangladesh – improving standards. It is noted in the interviews clip below. “It takes as little 3 cents to 15 cents per T-‐shirt”. There is pressure on sustainability risk for social and economic improvement in better standards. http://bloom.bg/12peMkA


2. Traditional Viewing / Approach: Typically a remote outsourced manufacturer’s factory building collapsing in a far off land and inherent poor labour practices were not viewed as a direct risk. As risk was more related to a CFO perspectives on the company’s financials and shareholder value. Social and environmental impacts are not apparent unless directly quantifiable on the balance sheet. Purchasing has the supplier relationship. This usually did not extend beyond the first level suppliers. Nor did it take in account the supplier’s supplier or offshore outsourced manufacturers, which is geographically remote or distant to their own controlled operations. Because of higher transparency globally on such situations, demands for sustainable products and higher expectations of standards by shareholders / consumers, retailers and manufacturers are taking the social and environment impacts seriously and trying to understand the extended risk. The initial thinking is let’s do what is needed to avoid any further negative press. So what are the positive actions and processes that need to go in place now? Send teams to have our own people in place at the facility to monitor and audit what outsourced manufacturing is doing and work with the local governments on agreements for improved labour practices and standards. Need to ensure our supplier’s supplier and outsourced manufacturers are sharing our outlook on corporate social responsibility (CSR). In addition, resources, retailers and manufacturers are recognizing the potential of enhanced value to their corporate brands in creating sustainable products and subsequent revenue increases. This can result in more profitability by taking a stronger recognition on affirmative actions with social and environmental initiatives. Plus, there are potential economics benefits and opportunities to be gained. With increasing awareness of risk and sustainability, connecting the dots is starting to take place. The linkage between risk and sustainability is gaining traction. It is due to social and environmental impacts and requirements for tighter regulations and consumer /


shareholder expectations that are increasing. This naturally will create more pressure on global supply chains and the need for more detailed monitoring with better transparency. Future initiatives around robust systems and processes, automation tools for improved transparency up and down the supply chain is required. They will be essential to differentiating your supply chain and adding greater value to it. In the near and longer term, the traditional view and approach will give way to a more integrated approach across the enterprise. Robust systems, tools and processes will enable improved transparency with agility and flexibility for supply chain resilience, adaptability and responsiveness. 3. Risk to sustainability Leaders in organizations are recognizing sustainability is more than environmental. Risk drives sustainability. In fact, it requires managing all risk for business. Supply chains have risk embedded within them by their very nature. Global Supply Chains in the future will need to manage both a greater degree of risk requirements and increased sustainability value. As noted and mentioned later, to achieve this a stronger process management and new automation tools for increased transparency will support these demands on companies’ supply chains for risk performance and corporate social responsibilities (CSR). Looking at risk mitigation along the links in the supply chain with an eye on sustainability as it relates to triple bottom line (3BL) of social, environmental and economic impacts or value from suppliers and products is a key focus. It is really about getting to know your whole supply chain end to end.


Below are a few slides that relate to risk points:

Figure 2 Figure 3

Figure 4 Figure 5

Supply Chain Risk

Know the Supply Chains Quantify the Risks

META Research Report, February 11, 2002

“30% of all companies that experience a catastrophic

loss will fail within the first 24 months and an

additional 29% will fail beyond 24 months”

Supply Chain Risk–All Impact or an Opportunity? •  Supply Chain Risk Awareness is needed:

•  Typically supply chains are silent until something goes wrong

•  Volatility and risk to Supply Chains (SC) is the norm not an exception

•  Risk and Supply Chain are like a head and tail of a coin not mutually exclusive but can be complementary base on the approach

•  Supply Chain Risk impact or restrictions is handled:

•  Create a vision to predict, prevent, mitigate impact to Supply Chains (SC)

•  Develop contingencies and buffers with options

•  Employ smart technologies

Cont’d Supply Chain Risk–All Impact or an Opportunity?

Supply Chain Risk Opportunity

•  Looking down the SC pipeline creating more robust processes into your suppliers supplier

•  Bigger role by learning more about risk and employing solutions to handle it

•  Develop cross functionally risk process and create synergies

Supply Chain is Everywhere…So Many

Opportunities!

It’s a Boarder View – Supply Chain Risk- Has Opportunity!


Whether it’s an extended supply chain globally or multi-‐tired or both, there’s an opportunity. The strategic viewing is from the design stage through raw materials sourcing and manufacturing to distribution at the customer level and recycling. Not only is more sustainability pushed from the customer end, it requires a shared outlook with various levels outsourced manufacturing, and the participation of suppliers to acknowledge environmental and social alignment and mitigate economic exposure to risk. In the podcast “Risk, Economics and the Environment – Defining Sustainability and Best Practices for Businesses”, http://www.tompkinsinc.com/podcast/2012/podcast-‐92-‐risk-‐economics-‐and-‐the-‐environment-‐defining-‐sustainability-‐and-‐best-‐practices-‐for-‐businesses/ We hear, it is not just about the environment, but just as importantly, it is about economics and risk reduction too”. Bruce Tompkins, Executive Director. Below is an example that relates more to managing global sourcing risk. It does beg, however, the same question: that is, do you know your supply chain and do you have contingencies in place for disruptions? By understanding your supplier’s quality up the supply chain you also view their alignment for social and environmental responsibilities

• http://www.youtube.com/watch?v=h7cQjQJHbUs

I found the above link on Managing Global Sourcing Risk to be quite interesting. Especially around the supply network side with vendors or


contact manufactures that where not meeting quality as seen by the brand owner. Recently, that situation impacted Lululemon which is a sports or leisure apparel company. Their main black stretch workout and yoga pants were drastically sorted on delivery to their stores due to quality issues (it was too see through – conjecture is the thread weave was to light) and stock was down 4% as consequence. Shareholder experience was not delighted. Again, risk is embedded in supply chains and global sourcing which requires pro-‐active approach and extended plans to mitigate it. 4. Sustainability to risk Retailers and manufacturers are recognizing the potential of enhanced value to their corporate brands in creating sustainable products and subsequent revenue increases. This can result in more profitability by taking a stronger recognition on affirmative actions with social and environmental initiatives. Plus, there are potential economic benefits and opportunities to be gained. Below is a related link:

http://news.thomasnet.com/green_clean/2012/12/03/businesses-‐increasingly-‐rationalize-‐supply-‐chain-‐sustainability/

Sustainable supply chain requires managing and accounting for the impact of major environmental, social and economic (3BL) factors throughout the lifecycle of products. That means companies have to keep track of all the risks in their supply chains. Further, PWC’s recent study sighted the main reasons for investing in sustainable supply chain management, according to their respondents, are to:

• manage the risk of unintended environmental or social damage; • manage their company’s reputation and the expectations of its shareholders;


• reduce costs and realize productivity improvements, and; • create sustainable practices, processes and products, thereby increasing revenues and enhancing the corporate brand.

They went on to say …”risks run both ways”, according to The Carbon Disclosure Project’s (CDP) 'Reducing Risk and Driving Business Value' . https://www.cdproject.net/CDPResults/CDP-‐Supply-‐Chain-‐Report-‐2013.pdf Climate change is recognized by 70 percent of CDP members as a potential business risk. The report shows that both CDP members and their suppliers see the supply chain as vulnerable to physical disruption from events such as droughts, flooding, hurricanes, and water shortages. They realize such events can lead to reductions/disruptions in production capacity (44 percent), as well as increase operational costs (31 percent)”. 5. Transparency via process management and automation tools First of all a cultural shift will have to occur in most companies. Some companies are more advanced and the sophisticated ones are all ready there. Moving from I shape position, which is a silo way of thinking to a T shape approach in reaching out beyond one’s functional area and own enterprise will not be an option, but a requirement in the near future. Simplifying the understanding through time-‐process-‐based mapping and developing trust relationships across the supply chain is key with improved transparency. Future supply chain management (SCM) will require a greater emphasis on automation and efficiency. Leaders are turning to new technologies. Cloud solutions, such as control towers, GPS and down to RFID will facilitate automation and efficiency in support of better transparency models. In addition, SCM will require suppliers to share their outlook and emphasis on (3BL) environmental, economic and social issues. According to another recent study, it will be data that drives sustainability. PWC said more than 50 percent of respondents to the survey stated that they are implementing or planning to implement new tools for better

10

Paper topic by Russ Doak +1.604.219.6334 or [email protected]

process automation and transparency. In addition, it was just under two thirds who consider automation and data management as vital parts of their operations by 2015. They went on to say this focus is consistent across all industries, but the pharmaceuticals and life sciences; technology and telecom; and chemicals and process industries are at the forefront of this movement. PWC results on businesses across all sectors indicate they want integrated solutions that encompass everything from order to delivery. As Industry Market Trends reported last week, manufacturers are turning to “big data” to extract more value from the supply chain, particularly as it pertains to logistics and distribution operations. PWC said that data management and automation is critical to achieving a leadership position in sustainable supply chains, according to the CDP report. Implementing data collection tools across the supply chain builds efficiency and reduces redundancy in reporting. Some companies are using basic procurement data systems to collect basic sustainability information from suppliers. Others are using more advanced platforms to monitor climate change-‐related data and metrics. But, while tools are important, CDP notes that cross-‐functional collaboration, supplier engagement and communication are still the foundation of solid working relationships. With stronger process management and new automation tools there will be greater support to meet the demands on company’s supply chains for addressing risk performance and corporate social responsibilities (CSR). The increased traceability from these improved processes and new automation tools will create better visibility and transparency that will be required in future global supply chains. Having better transparency means insight into information starting from the source of supply to end-‐of-‐life and disposal in the overall value chain. This can reduce risks, while improving sustainability performance of the company. Although it can be quite challenging, transparency needs to be achieved in order to maintain sustainable supply chains. Traditionally, a one-‐size fits all approach is widely used in supply chain management. This entails risks. Supply chain segmentation is recommended as the best means in dealing with it.


3. Conclusion As noted above, risk and sustainability are neither separate nor mutually exclusive or even stand alone elements. The traditional approach was to deal with risk and sustainability in this manner. Actually, they are best worked as complementary to the same coin for gaining maximum value in the supply chains of the future. The linkage between risk and sustainability has gained traction recently through a number of studies and realizations socially. This is facilitated through a lens of better transparency brought on by new technologies and improved processes. There is a social contract that companies cannot afford to ignore and gains to be made in maximizing value for them. There is a heightened awareness that companies are to be seen taking action on social, environmental and economic issues. In addition, they are held accountable for reducing risk with improved sustainable products and services. Transparency via improved process and new technologies are an enabler to take the complexity out of large global supply chains. This makes the connections with an extended depth of supplier’s supplier relationship management, while creating sustainable value. This alignment in outlook also leads to deeper relationships and engagement between the buyer and the supplier. It improves design, reduces risk and helps the company operate more sustainably. Sustainability risk drives the value chain.

Documents

Risk and Sustainability-Russ Doak rev 1