Sustainability & Retail

Constantin Blome
Content

• Sustainable SCM in general

• Implementation of Sustainable SCM
Why does everybody talk about
sustainability/ sustainable supply
chains?
Our planet: Let’s takeresource
a finite a step back
Population XLet’s take a step back
Consumption ≠ The Planet’s
take a step back
Example 1: Greenpeace campaign against
KitKat (March 2010)

Procurement needs to understand its ENTIRE upstream value chain to

protect & enhance brand value and to delight consumers
The three dimensions of sustainable
development
“Sustainable development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.”

Economic
Environmental • Supply chain
 Natural resource use value creation
 Water use and  Economic
quality growth
 Deforestation  Employment
 Climate Change  Product life
Sustainability
cycle costs
 Product life-cycle
emissions Social
 Labour standards
 Fair wages
 Child labour, education
 Human rights
 Livelihoods
 Business integrity…
Sustainability issues can impact companies
directly
Threats to ensuring supply :
• Increasing resource scarcity
• Limited availability of water and fertile land
• Environmental pollution
• Climate change affecting yield patterns
• Rising demand from emerging economies
• Rising raw material prices, high volatility
The forces impacting the company create both risks and
opportunities affecting its bottom line
Sustainability challenges
(social, environmental, economic)

Four forces impacting food companies

1. Rising consumer 2. Stronger civil 3. Legislation & 4. Increasing

expectations society activism Standardization resource scarcity

Risks
 Company/brand reputation / NGO attacks
 Products not meeting consumer / customer
expectations
 Supply chain disruptions
 Deteriorating resource base
 Supply chain inefficiencies, high costs
Opportunities
 Building consumer confidence
 Protect and enhance company & brand
reputation
 Brand building, new consumer segments
 Enhanced efficiency
 Business continuity
 Ensuring long term supply

Impact on bottom line

Major sustainability issues are
concentrated in the upstream supply chain

Nestlé’s upstream value chain

Marketing
Agriculture Procurement Manufacturing Supply Chain & Sales

People involved 8/11/21+ 278,000

in value chain(1)

GHG emissions Consumers,

per product (%) 70-80% 20-30%
customers,
NGOs / media hold
Water usage (%) >90%
Nestlé responsible <10%
for the entire value
chain
Number of key
17 5
identified issues
Do you know where the products
are from?

Purchasing managers decide.

Consumers want credible (usually externally
validated) and detailed information about
sustainability in organisations.

Defining „acceptable evidence”

COVERING THE WHOLE CREDIBLE DETAILED

SUPPLY CHAIN EVIDENCE INFORMATION

... not just internal People mistrust corporate What gets measured,
processes and direct sources – you need gets managed.
suppliers. external authorities.

■ internal activities ■ international certifications ■ How “sustainable” are

■ direct suppliers (ISO, etc.) your suppliers?

■ 2nd+ tier suppliers ■ credible NGO- ■ environmental impact

certifications (e.g. FSC,
etc.)
■ global guidelines (e.g.
Global Compact)
■ ethical policies
■ Sustainability stories
for consumers
What do you know about the IKEA
supply chain?

What about sustainability?

Questions for IKEA Case

• How should Marianne Barner respond to the invitation for IKEA to

have a representative appear on the upcoming broadcast of the
German video program?
• What actions should she take regarding the IKEA supply contract with
Rangan Exports?
• What long-term strategy would you suggest she take regarding IKEA’s
continued operation in India? Should the company stay or should it
exit?
• For those recommending that IKEA continue to source carpets in
India, would you suggest that she:
a) continue IKEA’s own monitoring and control processes or sign-up to Rugmark?
b) continue to focus only on eliminating the use of child labor in IKEA’s supply chain
or engage in broader action to address the root causes of child labor as Save the
Children is urging?
As Marianne Barner, what action would you
take regarding Rangan Exports given the
evidence provided by the television
producer?

• The revised contract is very clear, and was only recently communicated
to the suppliers; if it is to have any meaning, its clear terms must be
implemented immediately.

• IKEA’s handling of this will set a precedent, and it needs to use this
opportunity to send a clear message to its suppliers that it is serious
about this issue and will enforce it strongly.

• Strong and immediate action is required if IKEA’s brand image is to be

protected and to prevent the threat of a consumer boycott.
Should we take such strong action without
giving Rangan a chance to defend itself?
Isn’t it is a bit like “trial by media”?

• To those arguing that Rangan should be assumed innocent until proven guilty:
What kind of “due process” do you imagine you could provide? What kind of an
appeal process do you envisage?

• To those who suggest that the video evidence should be sufficient: how would
you respond if Rangan denied the charges and insisted that the video must be
faked?

• And to all, how much time they have to make the decision and take action?
Where is the court of public opinion likely to be after the television program is
aired?
Should Marianne accept the invitation to have an IKEA
representative appear on the television program? How
should that person respond to the video that will be
shown during the program?

Let’s take a vote: Should IKEA appear on the TV program?

Role play:
• A year ago, IKEA was identified by a Swedish television program as one of
the companies buying carpets from supplies using child labor. How do you
justify the fact that a year later, you are still engaged in the same
abhorrent practice?
•  Why have the contract changes and internal audits you claim to have
implemented been so ineffective?
• Why have you not yet joined Rugmark?
• Can you assure your customers that any carpet they might purchase at
IKEA in the future will be guaranteed to have been made without the use
of child labor?
Let’s take again a vote: Should IKEA appear
on the TV program?

• Once you have implemented these short-term actions, how do you plan to
continue sourcing carpets and avoid this problem recurring? What changes do
you plan to make in your monitoring and control program?
• Is IKEA able to effectively control the use of child labor in its supply chain?
• Is a coalition of manufacturers and exporters likely to provide a more effective
monitoring process? Will it be seen as a truly independent means of control?

• Isn’t this a “no-win” situation? Given the difficulty of controlling this problem, and
the potential risk it creates for your brand image -- and perhaps even your short-
term profitability if there is a consumer boycott -- is it worth the risk?
• If we leave India, where do we go to replace our sources of supply?
Further

• In all this talk of brand image, public relations, sourcing contracts, control systems, and
consumer boycotts, where is our discussion about the children? What is IKEA’s responsibility
here? Shouldn’t we be trying to have an impact on the underlying situation?
• What does the Indian legislation require of employers in this industry?

Please choose:
• to recognize that the risks involved in this situation far exceed the reward and withdraw from
India as a source for rugs and carpets
• to continue to work with Indian suppliers to eliminate the use of child labor, either by
improving IKEA’s own monitoring processes or by joining Rugmark
• to continue trying to eliminate its suppliers’ use of child labor, but also take responsibility to
work towards a broader solution of the root causes of the problem.
Part 2

What do you do now?

Why do you think IKEA decided not to join Rugmark?
• IKEA was concerned that an affiliation of exporters, manufactures, and other
industry representatives would not have the means or the will to undertake the
kind of control processes necessary to monitor the use of child labor in the
industry.
• Furthermore, IKEA was concerned about the credibility of Rugmark’s promise
that “no Child labor has been used in the manufacture of this product.”
• Finally, as Anders Dahlvig describes in the video recording, IKEA felt it had the
kind of on-the-ground resources to undertake a more rigorous monitoring
process, thereby keeping control of this highly sensitive situation that had the
potential to become a real risk to their brand.
What do you think of IKEA’s response to the situation? How has it changed your
own opinion on the appropriate long-term strategy?
Video 3

• How do these views affect our previous discussion?

• What is your evaluation of IWAY as a Code of Conduct? How effective

is it in enabling IKEA to become the kind of responsible corporation it
aspires to be?

• Isn’t this a bit of a paternalistic attitude to be taking towards its

suppliers?
Further

• What should IKEA to about the recent audit results at Venkat Industries?
What advice should Maryanne Barner offer to Kaisa Mattson?

• What should she do if audit investigations or management

acknowledgment confirm the problem?

• Is 84% compliance on the child labor requirement in Asia satisfactory

(see Exhibit 7)? Is the problem revealed at Venkat industries indicative
of a larger failure of IKEA’s approach?
Video Part 4

What are the key lessons that IKEA management -- and you --
have taken from this experience?
Update

• Marianne Barner continued in her managerial role but was also appointed as the Head
of the IKEA Foundation (2011: $90 million)
• IKEA’s entry into India was constrained by laws requiring foreign retailers to enter into
joint ventures with local partners. IKEA’s CEO Mikael Ohlsson maintained that the
company’s business model "doesn't lend itself to a joint venture.” IKEA announced that it
would abandon its plans to invest $432 million to set up a network of stores.
• In early 2012, the Indian government finally relaxed the FDI restrictions and allowed
IKEA, and other major retailers to retain 100 percent ownership in their Indian retail
operations. However, the rule changes also required foreign retailers to source 30
percent of the products sold to Indian consumers from Indian suppliers.
• IKEA announced that it might invest as much as $757 million in the first stage of its entry
into India, and that its total investment in India over the subsequent 10-20 years could
approach nearly $2 billion. IKEA also announced that it planned to double the pace of its
worldwide store openings to 20-25 stores per year, focusing particularly on emerging
markets such as China and India.
• By mid-2012, IKEA was working with 70 suppliers and 1,450 sub-suppliers in India and
the company revealed its plans to double the sourcing for its global operations to nearly
$1 billion by 2016.
Questions

• Can firms really not guarantee that products are child labor free?
Should we ask it from then or not?

• How much are IKEAs activities “green washing”? Is “green washing”

bad and when do we talk about “green washing?

• Is it good to have an own sustainability department in firms?

Some effects

• The International Labour Organization estimates that 215 million children ages
5-17 are engaged in child labor (ILO, Accelerating action against child labour,
2010).
• An estimated 12 percent of children in India ages 5-14 are engaged in child
labor activities, including carpet production (UNICEF, State of the World’s
Children 2010).
• It would cost $760 billion over a 20-year period to end child labor. The
estimated benefit in terms of better education and health is about six times
that—over $4 trillion in economies where child laborers are found (ILO,
Investing in Every Child, 2003).
• Experts estimate that child labor on South Asia’s carpet looms has dropped
from 1 million to 250,000 since the launch of GoodWeave in 1995.
Sustainability throughout
the supply chain

-
- Supply

-
Internal
Managem
ent Org.

Client

-
-

- Sourcing / - Inbound - - Outbound

Customer
Internal
Supplier

- Procurement logistics - Value Chain Logistics

Environmental Green Green IT Reverse

Environmental Sourcing Green Packaging logistics
friendly Product Transportation Waste
Design Green elimination
Energy Green Reuse &
Supplier Life Cycle Green
Management Assessment Meeting Recycle
Warehousing

Procurement
Procurement in
Procurement Initiative
cooperation with
Programmes corporate-wide
internal client
contribution
The Supply Chain Analysis

The analysis comprises 4 key components:

1. Origin mapping

2. Supply Chain Assessment:

a) Supply chain mapping
b) Supply chain sustainability assessment

3. Stakeholder mapping

4. Prioritization of Sustainability issues, origins and markets

Upgraded spend analysis – origin mapping
TODAY:

Supplier
Business billing address
Warehouse

NEW:

Volumes (tonnes)?

Country of origin of raw material?

Farm level origin?

A multiplicity of initiatives
Governments define the legal baseline.
Business & NGOs develop voluntary standards at different levels.
• National and international legislation
Government: • E.g. EU Regulation on Organic Agriculture
Laws and regulations • Legislation may require certification under
a standard (e.g. EU biofuels obligation)

• Supplier Code
Company standards • Responsible Sourcing Guidelines

• CIES/Consumer Goods Forum guidelines

• Global G.A.P. standards for agricultural products
Industry standards
• SAI Platform Principles & Practices

• Rainforest Alliance /SAN standard

NGO standards • UTZ Codes of Conduct
• Fair Trade Standards/Schemes

• FSC – Forest Stewardship Council

Multi-stakeholder
• MSC – Marine Stewardship Council
standards
• RSPO – Roundtable for Sustainable Palm Oil
(business & NGOs)
• RTRS – Roundtable for Responsible Soy
 Understanding the terms and concepts

Certif
ic ation ards
sc heme Stand
s

n Trace
cc re ditatio Chain ability
A of C u
stody

Verification Labels

od ies Aud
its
tio nb
rti fica
Ce Certif
ic ation
 Costs and benefits of different types
of verification

High
Credibility

3rd Party
(independent auditing
body assesses
supplier, can be part
1st Party of certification
(Supplier self 2nd Party scheme)
assessment) (e.g. OEM
assesses supplier)

Low

High
Low Costs, external
influence
Tools for Sustainability in Sourcing

HEC 2010
Hurdles for Sustainability in Sourcing

HEC 2010
Hazelnut Supply Chain

You are Nestle and have the task to enable a child labour free hazelnut
supply chain. Please address the following two tasks

• What are the issues with child labour in the hazelnut supply chain?
What are the reasons for these problems?

• How do you address these issues as Nestle? How to you make sure
that your supply chain is child labour free? Please provide effective
solutions.

• Each presenting group has 10 minutes. Please submit ppt until ????
to me: c.blome@sussex.ac.uk
Blood Bananas

What happened?

https://www.youtube.com/watch?v=r1vswKQrEwI
Chiquita

• Chiquita Brands International and its leaders learned a very hard lesson about paying off terrorist groups to
protect their employees. Over the past 25 years, no place has been more perilous for companies than
Colombia, a country that is finally beginning to emerge from the effects of civil war and narco-terrorism. In
2004, Chiquita voluntarily revealed to the U.S. Justice Department that one of its Colombian banana
subsidiaries had made protection payments to terrorist groups from 1997 through 2004. The Justice
Department began an investigation, focusing on the role and conduct of Chiquita and some of its officers in
this criminal activity. Subsequently, Chiquita entered into a plea agreement that gave them the dubious
distinction of being the first major U.S. company ever convicted of dealing with terrorists, and resulted in a fine
of US$25 million and other penalties. To make matters worse, the industry was facing pressure from
increasing retailer purchasing power, major changes in consumer tastes and preferences…

• What would it take to position the company on a more positive competitive trajectory?

• Would this even be possible in this industry and in the business climate Chiquita faced?
Questions

• What do you think were the root causes for Chiquita’s

actions in Colombia that ultimately led to their conviction?
• Do you think Chiquita or its managers had a choice? Why
or why not?
• What can current CEO Fernando Aguirre do now to
restore Chiquita’s reputation and ensure future
competitiveness?
Some discussion points

• The industry is very concentrated; the “big three”—Dole (US$6.9 billion

revenue), Chiquita (US$4.7 billion revenue), and Del Monte (US$3.4
billion revenue)—control 60 percent of the global banana trade
• The higher value-added segments of the business are controlled by the
“big three,”
• Chiquita was attempting to control costs in light of the low margins
associated with their primary product, bananas
• Chiquita has clearly articulated core values—Integrity, Respect,
Opportunity, and Responsibility
Approach

(1) Understanding the facts requires the exploration of the long and short-term
consequences of their actions, including collateral effects, alternative
interpretations, and likely impacts on others.

(2) Identifying relevant standards can often begin with the company’s own code
of conduct or core values, and relevant industry standards.

(3) Maintaining objectivity can be accomplished by applying three “simple tests.”

• Visibility, or Sunshine, Test: Would I be comfortable if this action were described
on the front page of a respected newspaper?
• Generality Test: Would I be comfortable if everyone in a similar situation did
this?
• Legacy Test: Is this how I would like my leadership to be remembered?
Reading

Thomas Donaldson (1996). “Values in Tension: Ethics Away from Home.”

Harvard Business Review, September- October, pp. 48-62.
Virginia G. Maurer (2009). “Corporate Social Responsibility and the
‘Divided Corporate Self ’: The Case of Chiquita in Colombia.” Journal
of Business Ethics, 88, pp. 595-603.