Category Archives: Sustainability

Commodity Prices Have Exceed the Peak of World War I

And it doesn’t look like they are going to decrease any time soon. But more importantly, recent analysis by the McKinsey Quarterly indicates that commodity prices will remain high and volatile for at least the next 20 years. As per this recent article in the McKinsey Quarterly on “a new era for commodities”, demand for energy, food, metals and water will continue to rise inexorably as three billion new middle-class consumers emerge in the next two decades.

And the changes will be significant. As per the article, the global car fleet will double by 2030. Calorie intake per person in India will increase 20%, per capita meat consumption in China could increase by 60%, and urban infrastructure demand will soar in both countries. A hundred years ago, this was not that big of an issue as improvements in exploration, extraction, and cultivation techniques kept the world ahead of ever-increasing global needs. But today, the potential climatic impact of carbon emissions associated with surging resource use limits exploration and extraction because we’re already at a level where global carbon emissions are significantly above the level required to keep increases in the global temperature below 2° Celsius — the threshold which has been identified as potentially catastrophic. Plus, current cultivation technology is pretty much at its limit as only so much food can be grown in a fixed space.

And everything is connected. The ripple effects of water shortfalls at a time when 70% of water is consumed by agriculture and 12% is consumed by energy production can be catastrophic. For example, in Uganda, water shortages led to escalating energy prices which led to the use of more wood fuels which led to deforestation and soil degradation that threatened the agricultural food supply.

As a result, for the short term, commodity prices are going to stay high and your organization had better be prepared.

How Long Before Your Company Has to Produce an Integrated Report?

Integrated Reporting, defined by the IIRC (International Integrated Reporting Council) as a new approach to corporate reporting that demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates, is on the rise as companies try to demonstrate their focus to sustainability, an increasingly important issue to many consumers.

Of course, producing one is only the first challenges. As noted in this recent ISM article on how “Integrated Reports [are] on the Rise”, there is no universally accepted framework for integrated reporting, and it remains largely a voluntary practice. Given that this report is supposed to show the relationship between financial and non-financial performance, and how strong performance in environmental and social areas contributes to good financial performance, and that this report may include facts regarding potential trade-offs that might occur across financial and non-financial performance, it’s difficult to select an appropriate structure.

But given that some countries are now requiring such reports for public companies, it likely won’t be long before we see such a requirement in North America. For example, South Africa now requires all companies listed on the Johannesburg Stock Exchange to provide integrated reports (or explain why they are not doing so). France passed a law in 2010 for companies with 500 or more employees to include a section in their annual reports that describe the environmental and social consequences of their actions. Denmark requires its largest companies to include similar non-financial information in annual reporting, and the UK is making a push for similar legislation.

Given that about 100 companies from different industries and countries plan to use the IIRC framework to produce their own integrated report, and then provide feedback for future revisions, it’s likely that the IIRC framework will involve into a standard, just like GAAP, but how long it will take will likely depend upon when additional legislation requiring integrated reporting comes into effect in the G-20.

So what does this have to do with Supply Management? As noted in the ISM article, that quoted Robert G. Eccles, Professor of Management Practice at Harvard Business School, Supply Management, by virtue of its function within an organization, is an ideal catalyst to spread integrated reporting. No one knows the impact of organizational activities better than Supply Management, so the requirement for integrated reporting will fall heavy on Supply Management.

The big issue though is how to make such a document a “living report”. As the supply chain evolves, so does the ramifications of the company’s activities on social and environmental ecosystems. Supply Management will need a solution that allows this information to be kept up to date. Will SIM (Supplier Information Management) systems step up to the challenge, or will an entirely new solution be needed?

Are You Ready For Name-And-Shame Legislation?

On January 1, 2012, the California Transparency in Supply Chains Act (SB 657) want into effect. it’s an example of “name and shame” legislation, which requires companies to report on specific actions taken to eradicate slavery and human tracking in their supply chain. The idea is that if slavery and human trafficking is in your supply chain, you’ll have to tell the world and the resulting consumer and shareholder pressure will force you to achieve the social goals of doing whatever it takes to eliminate human trafficking and slavery.

If your company

  • files California taxes as a retailer or manufacturer,
  • does business in California as defined in the California Revenue and Taxation Code, and
  • earns more than 100 Million in worldwide gross receipts

then your company must report on five specific points under this act. Summarized by the VACIT acronym, the company must report whether it:

  • Verifies
    and engages in third party verification (that identifies the risk of slavery and human trafficking)
  • Audits
    and engages in independent, unannounced, auditing to check on adherence to company standards
  • Certifies
    and requires its direct suppliers to certify that the materials incorporated into its products comply with local laws
  • Maintains Accountability
    and holds its employees and contractors accountable to company standards and
  • Trains
    employees directly responsible for risk mitigation in its supply chain.

This is not the first example of such legislation. For example, in July 2008 the New South Wales Food Authority passed laws amending existing provisions which allowed the authority to publish details of successful food business prosecutions on its website. And it won’t be the last. At the Federal Level, H.R. 2759 (Business Transparency on Trafficking and Slavery Act) was introduced last August and, if passed, would require publicly-traded companies to disclose on their annual reports to the Securities and Exchange Commission any measures that are being taken to identify and address conditions of forced labour, slavery and human trafficking within the company’s supply chains.

The net effect is that there are not only legal and business issues heading your way as this legislation crops up in other states, and eventually, in other countries, but reputational concerns that will materialize as well. For example, as pointed out in this recent article in Retailing Today on how Name and Shame is the New Supply Chain Game, not only must the company disclose how it is complying with the provisions of the Act on the company’s website, but it must also consider how this will affect its stakeholders, customers, investors, and their view of the company. A less than robust (policy) disclosure can cast the company in a bad light and do considerable damage to the supply chain organization. From a Risk Management standpoint, your organization needs to be ready. Are you?

A Primer on Private Equity for CPOs

Private Equity (PE) investment is on the rise in the EU and the US. However, most of us still don’t know very much about what PE is, how it works, or what Procurement’s role is when dealing with a PE firm. That’s why it was great to see this recent article over on CPO Agenda on “The Final Frontier for CPOs” that tried to create more transparency around the practices and importance of Procurement and Supply Chain in this field.

The first thing to note is that PE groups generally make their money by increasing the value of their portfolio companies while retaining part of the generated value by the time they exit the investment in the company at a higher financial valuation. The acquisition of a portfolio company is financed from funds that are raised from private and institutional investors that give the PE group the task of investing the money, managing the portfolio companies and returning an appropriate profit on the investments.

Given the pivotal role that Procurement and Supply Management have in a company’s competitiveness, product innovation and environmental and social footprint, Procurement and Supply Management serve two important tasks in a corporate context from a PE viewpoint:

  • a strong cash flow contribution to meeting debt obligations under the financing terms in the short term
  • a dedicated and measurable effort to swiftly and sustainably improve EBIT and company valuation in the medium term

Remembering that cash is king in a PE buy-out, cash-flow is crucial. Giving Supply Management’s razor-sharp focus on cost reduction and cost control, Supply Management improves cash-flow that is the vital blood of a PE turn-around. It does this by

  • releasing supply-chain related working capital tied up in unnecessary inventories or unfavourable payment terms
  • achieving like-for-like annual company spend reductions of 3% to 6% though the establishment of price competitive with the most suitable suppliers

Plus, Supply Management’s focus on sustainability helps PE since

  • a lasting and recognizable improvement of the procurement and supply chain capabilities can have a considerable positiveeffect on the sale price of the company
  • the benefits of cost engineering, supplier development and supply chain relocation can be harnessed within the typical investment period of four to five years

And Supply Management can benefit from PE and their support for the establishment of procurement platforms they strive to harness spend synergies (mostly in indirect materials) and best practice across the portfolio companies. In other words, done right, PE and Supply Management can be a win-win relationship.

Risk Mitigation 2012: Environment

In our last post, we covered some potential mitigations for each of the top three societal risks that we identified in our Risk 2011 series. In this post, we are going to cover some potential mitigations for each of the top three environmental risks as we continue our series of posts inspired by the World Economic Forum‘s recently released 6th annual Global Risks report, 2011 edition.

03: Climate Change

There is very little that a single corporation can do to prevent climate change. It can reduce it’s carbon emissions until they are almost zero, but if all of the other corporations don’t follow suit, the climate will change. And even if many other corporations follow suit, a major volcanic eruption that spewed cubic kilometres of ash into the air could significantly affect climate, as could a significant asteroid impact that sent cubic kilometres of dirt into the air and triggered a chain of volcanic eruptions.

However, if the temperature keeps rising, it is a given that sea levels will rise, droughts will worsen, and deserts will expand. These are three aspects of climate change an organization can plan for and take steps to minimize their impact. The organization can take care not to build near the ocean where the ground level is near sea level, as these areas would not only be at high risk of flooding as a result of high rains or tropical storms, but could be under sea level in the years to come. It can also avoid building near the edges of deserts as the water supply could become scarce as time goes on. And it can expect droughts in hotter regions and be sure to create additional reservoirs just in case.

02: Earthquakes & Volcanic Eruptions

Earthquakes can’t be prevented, and can’t be reliably predicted, but they are inevitable, and they are more likely in certain areas. Specifically, on the edge of active tectonic plates and near the Ring of Fire, the Mid-Atlantic Ridges, and the Mediterranean-Asian seismic belt. If you must maintain, or use, production facilities at, or near, these areas, make sure that you have secondary facilities available to you that can be ramped up quickly in case the primary are temporarily, or permanently, taken out by an earthquake.

The same goes for volcanos, but many volcanos that erupt are, or were recently, active. Thus, if there is, or was (in the past few hundred years) an active volcano in the nearby region, take the same precautions as you would if the production facility is in a major earthquake zone.

01: Flooding

Flood are becoming more common in recent years, and the devastation they can cause can be significant and far reaching. With sea levels projected to rise, the planet expected to warm, and the climate expected to change accordingly, the risk of floods is on the rise. As a result, you can expect more floods in years to come. Identify each location near the ocean, and especially near areas at risk of any kind of tropical storm (such as a hurricane, cyclone, or tsunami), and plan for the worst. As with earthquakes and volcanos, have secondary facilities lined up and ready to ramp up at a moment’s notice. And have one or more ways to quickly relocate inventory should the need arise.