The green Tiebreaker
For shippers, is the sustainability of their supply chain vendors a deciding factor in buying decisions?
By Eric Johnson
If you're looking for a buzzword in the logistics industry of late, it doesn't get much buzzier than 'sustainability.'
There are many ways of phrasing the idea ' social responsibility, environmental American Shipper took on the topic in a new study, Environmental Sustainability Benchmark Study: Leaders Prepare for the 'Greening' Supply Chain.
The study turned up a number of interesting results, but among the most intriguing is the idea that the sustainability plans of logistics and transportation companies might have an effect on shippers' buying decisions.
To be more precise, it appears certain shippers are factoring how green a carrier or logistics company is when deciding whether to use them to transport goods.
According to American Shipper's survey, nearly 40 percent of 156 respondents said they ask their logistics services providers (LSPs) to submit a sustainability plan ahead of buying decisions.
More than 13 percent 'used a vendor sustainability plan to make a purchasing decision,' the study said. 'These results are surprising. Anecdotal evidence from the LSP community would suggest the exercise of providing a sustainability plan to shippers was a 'box-checking' on the buyers' part and served no real purpose. Survey responses suggest that sustainability is an emerging differentiator and decision-making factor.'
Looking more in-depth at the idea, more than one-third of buyers use vendors' sustainability plans as a tiebreaker or deciding factor in buying decisions, the survey found. And nearly 70 percent of carriers with a 'proven plan' earned higher rates because of it.
Mega-retailer Wal-Mart is perhaps most famously associated with the idea of making supplier decisions based on sustainability criteria. Wal-Mart has a 33-page document explaining its rationale, including 15 questions it asks vendors, ranging from 'What are your total annual greenhouse gas emissions in the most recent year measured?' to 'Have you set publicly available water use reduction targets? If yes, what are those targets?'
The document focuses heavily on the ways sustainability can cut costs. Though it doesn't focus specifically on supply chain activities, many of the initiatives inevitably trickle down to transportation and logistics functions.
For instance, Wal-Mart requires all suppliers of laundry detergent to use concentrated forms, so as to cut down on water usage, but also to significantly reduce transportation costs. Consumer goods giant Procter & Gamble found similar rewards when it switched to the manufacture of solely concentrated laundry soap a few years back.
While Wal-Mart, with its size and prominence, may be seen to be pushing the issue, retail associations said there is a widespread drive within the industry to make sustainability a part of transportation procurement decisions.
'The issue of sustainability has definitely become a factor in the buying decisions of retailers,' said Jonathan Gold, vice president of supply chain and customs policy for the National Retail Federation (NRF). 'This applies to both logistics services as well as the products being sold on retail shelves.'
executive vice president for retail operations,
Retail Industry Leaders Association
|'Sustainability being an equal partner to rates and service? We're not there yet. But a deciding factor on two equal bids? Absolutely.'|
Casey Chroust, executive vice president for retail operations at the Retail Industry Leaders Association (RILA), said his organization talks with its members about how sustainability can translate into bottom-line benefits.
'Green equals money,' Chroust said. 'The more efficient and sustainable (carriers and logistics companies) are, the better rates they can provide. Does sustainability factor in the rate decision-making? There's definitely a theme there.'
But Chroust said sustainability hasn't quite reached a point where it's a make-or-break aspect of negotiations.
'If I've got two carriers, and one has a higher rate but is more sustainable, I'm not sure we're quite at that point yet,' he said. 'Sustainability being an equal partner to rates and service? We're not there yet. But a deciding factor on two equal bids? Absolutely. That's here and now. It can be a kind of tiebreaker. There's a coupling ' those carriers who are so sustainable they can inevitably have better rates. Implementing sustainability initiatives drives costs out of the services.
'Most of our retailers like to take a strategic approach,' Chroust continued. 'It's not, 'Hey you have to be sustainable.' It's, 'Let us partner with you to become more sustainable.' A carrot more than a stick in the selection process.'
Gold said retailers will ask how the sustainability of their supply chain partners can benefit other aspects of the contract. In other words, does sustainability translate into cost savings throughout the chain.
'As far as the importance of sustainability as a factor, I believe it is being considered on par with the other traditional criteria such as price and service,' he said. 'Rates and service, particularly service, are still key factors, but sustainability is definitely being discussed and considered. Is it a key decision right now? I don't think so, but it's definitely in the mix. It depends on the company, and how they do the rankings. For some it will be higher than others.'
RILA members, Chroust said, are working on ways that sustainable practices can translate into savings on transportation and logistics spend, the idea that sustainability might, or indeed should, lower rates.
'A lot of our members are working on carriers on the trucking side to be part of programs like SmartWay,' a U.S. Environmental Protection Agency program that encourages the use of newer, cleaner engines and technologies, Chroust said. 'Lowe's, for instance, has virtually 100 percent of truckers on SmartWay. They push them to follow SmartWay because there's tremendous cost savings in these types of programs.'
In the American Shipper survey, SmartWay was far and away the most followed sustainability program by respondents.
Chroust said RILA is measuring the sustainability of its members, and admitted that defining what constitutes sustainability ' both internally and for vendors ' is difficult.
'Retailers are one of the leaders in terms of sustainability,' he said. 'But it's varied. There are many retailers on the cutting edge and there are those who are just starting out. It's a broad spectrum. Those on the leading edge have seen numerous demonstrable results.'
There are three basic sustainability levels, or scopes, a concept created by the Greenhouse Gas Protocol Initiative, a partnership of businesses, governments and non-government organizations convened by the World Resource Institute and World Business Council for Sustainable Development.
'Scope 1 is an initiative I can control,' Chroust explained. 'The power used. A private fleet. Scope 2 is reaching out and influencing service partners and suppliers. Scope 3 is going to the suppliers and service providers of your suppliers and service providers. It's going farther upstream. Most of our retailers start with Scope 1 and are moving through Scope 2. Sustainability in supply chain is interlocking, and it builds on itself.
'And it's not going away. Sustainability is going to become a part of how the retail supply chain is operated. We won't be talking about 'green' trucking or a 'green' warehouse. It'll just be trucking and warehousing. It's like e-business. Now it's just business.'
And Chroust said retailers are in a position to drive green initiatives perhaps more than any other industry stakeholder.
'Retailers are at top of the food chain,' he said. 'They're the ones deciding which suppliers, which factories, which service providers to use. Retailers' influence on supply chain sustainability is tremendous. We control behaviors and can be a positive influence on the supply chain.'
Interestingly, however, the American Shipper study found that manufacturers were more apt to have a sustainability program than retailers. And 17 percent of manufacturers said they would pay for sustainability compared to 12 percent of retailers, while 71 percent of manufacturers said cost neutrality is O.K., compared to 44 percent of retailers.
supply chain and customs policy of National Retail Federation
|'As retailers are looking at sustainability as a whole, everyone is figuring out what it means.'|
Gold said those results were a bit surprising, but that manufacturers may have stepped up their sustainability efforts in order to meet higher expectations of them from retailers.
'Some of the manufacturers know that retailers are looking at this and have maybe tried to get ahead of the game,' he said.
Ocean carriers, chief among them Maersk Line, have been touting their environmental initiatives much more prominently in the last few years, a sign that they see the importance of cutting their environmental footprint internally, and from a customer perspective.
In mid-March, CMA CGM unveiled a new online 'eco-calculator' that lets shippers track the carbon journey of their shipments. In February, MOL touted its place among the world's top 100 sustainable companies.
'With respect to the shipper's interest in these issues, we can say it is increasing in line with the growing demand from society,' said MOL spokesman Kazumi Nakamura. 'It of course depends on the industry the shippers belong to, but generally speaking, among the most concerns are, understandably, safe operation and environmental issues.'
Gold said carriers are well aware of the importance being placed on sustainability.
'I fully believe that the carriers and (logistics service providers) are cognizant that retailers are considering sustainability as part of their buying decisions,' he said. 'These issues are definitely being discussed as a number of carriers are promoting what they are doing individually on sustainability.'
The American Shipper study showed that another major hurdle is simply getting past the idea of defining what sustainability means to a company ' less than half of companies surveyed had actively defined it for themselves.
'As retailers are looking at sustainability as a whole, everyone is figuring out what it means,' Gold said. 'There are so many different definitions of what it means.'
Chroust said the mantra RILA has put out is: 'Define it how you want, just take action.'
'It's whether a company is looking at its brand versus cost savings,' he said. 'The social components of sustainability have an impact on the brand, so if something goes awry, it's felt on the brand. Environmentally, we tend to see the initiatives' fruition being cost savings. Supply chain has a tremendous impact on costs savings. Think of how many products you're trying to move. There are a lot of entities involved in getting product from factory to store shelf. There are a lot of opportunities to be green and save money.'
Perhaps the direction the industry is heading with regard to buying decisions can be summarized by a passage in the Wal-Mart supplier sustainability document: 'We understand that there are many variables inherent in measuring energy use, greenhouse gas emissions, waste and water use, and in absence of common, transparent rules or protocols, one number cannot be legitimately compared with another. Despite these complications, in the future we do intend to reward those suppliers who have measured impacts and show progress toward meeting stated reduction goals.'