What happens when manufacturers tell their suppliers to go green -- or else?
Office furniture maker Herman Miller Inc. may be one of the few manufacturers that can truly claim an enterprisewide legacy of environmental stewardship. Unlike companies that only in recent years have begun touting waste-saving initiatives as "green" projects, the $1.6 billion manufacturer traces its history of environmental awareness back to the 1950s when founder D.J. DePree opened work areas to natural light by locating employees no more than 75 feet from a window.
In 1997, DePree's vision led the company to implement a product-design concept that requires its suppliers to help incorporate more environmentally friendly materials into the finished product. The company says it's difficult to measure whether the program has yielded significant investment returns from the purchase of higher-cost materials, but President and CEO Brian Walker says there's definitely a business case to be made for greener supply chains.
"Looking at the molecular level of chemicals in products, there are cases -- no doubt about it -- where we have to pay increased costs to get compounds and materials that are more environmentally sensitive," Walker says. "Now, we're very careful to say if we do that we have to be able to make those investments back in our products in either A, our customers value it enough to pay for it or B, find other savings to pay for those increased costs."
Herman Miller's commitment to extending green manufacturing practices from its facilities through the entire supply chain was an undertaking with several challenges that may be preventing other manufacturers from following suit. Green initiatives are largely taking place within manufacturers' own facilities -- oftentimes as energy-reduction projects in disguise, says Larry Lapide, research affiliate at the MIT Center for Transportation & Logistics. "In my view those companies that say they are being more green have really only done so by being energy efficient to drive down costs, not for altruistic reasons," he says.
The Cost of Being 'Green'
The reason why more manufacturers haven't extended environmental initiatives throughout their supply chains is likely cost. For instance, consumer-electronics manufacturers pay an estimated $3 billion annually to meet European Union regulations that restrict the use of certain substances in their products, according to a June 2008 study published by the Consumer Electronics Association. When Wal-Mart announced its green supply chain mandate in July, the company said it was premature to estimate the cost to suppliers, The Wall Street Journal reported. But the paper noted that clothing manufacturer Patagonia Inc. said its well-established supply chain sustainability efforts had been costly.
That may account for why the number of manufacturers adopting green supply chain programs appears to be few and far between. Only 10% of companies have implemented successful green supply chain initiatives, according to a survey of 245 supply chain executives published in February by consulting firm Accenture.
"I would say that if you look at all the data and research, we're in early adopters stage here for the most part," says Adrian Gonzalez, director of Logistics Viewpoints at ARC Advisory Group. Part of the problem is getting multiple suppliers, some of which are located thousands of miles away in different countries, to get on board with sustainability initiatives, Gonzalez says.
Getting the Supplier Buy-In
Herman Miller's sustainability program has included nearly 1,000 different suppliers over the past eight years, says Gabe Wing, manager for the company's Design for Environment team. When the company began 12 years ago working with product and process design firm McDonough Braungart Design Chemistry LLC to obtain the firm's Cradle to Cradle environmental certification, most of the company's primary suppliers jumped on board because of their long-standing relationships with Herman Miller, says Kim Buckley, the company's director of supply management. But some of the other companies further up the supply chain, such as chemicals manufacturers that might produce materials used in plastic resins, weren't as willing because of proprietary concerns, Buckley says.
Herman Miller responded by telling suppliers that were reluctant to divulge their chemical ingredients that they would not receive new business from the company if they did not comply. "Two material suppliers in the early 2000 era did not want to give us their chemical formulations, and we said that's fine but realize you're not going to get new business from us," Wing says.
Buckley acknowledges that smaller companies might not be able to pull as much weight during supplier negotiations but says Herman Miller's efforts to build positive relationships with its business partners over the years has helped reduce push-back.
Besides, it's not always the size of the company that counts but also the orders, says Ben Graham, vice president for privately owned packaging manufacturer Bell Inc. Like Herman Miller, the $68 million company received Cradle to Cradle certification, this time at the request of the U.S. Postal Service, for more than 200 million courier envelopes Bell manufactures for the department.
"Looking at the molecular level of chemicals in products, there are cases -- no doubt about it -- where we have to pay increased costs to get compounds and materials that are more environmentally sensitive."
Bell's suppliers went through a demanding series of measurements and assessments that included audits of raw materials production, ink, tape, tear string and adhesive. Bell faced similar issues that Herman Miller encountered when notifying suppliers about the process. "While many of Bell's suppliers immediately recognized the value of achieving this goal together, others were reluctant to share their proprietary processes and ingredients, or to risk discovering that they might have to invest in some changes," Graham says. Eventually the company did issue some ultimatums to achieve supplier compliance.
So is There a Payoff?
Most green supply chain initiatives are the result of customer requests similar to those demanded by the Postal Service or Wal-Mart, or government regulations. But can these often grueling processes help a manufacturer's bottom line? Cost savings are possible providing they're not part of customer mandates, says Rob Handfield, a professor of Supply Chain Management at North Carolina State University.
"It's not going to occur simply by pushing it down on to people, and saying thou shall improve," he says. "It's really more about identifying the cost drivers in the market, understanding how those cost drivers are impacting the environment and starting to eliminate those factors where possible."
Manufacturers can achieve this by mapping out their supply chains and understanding what goes into their products and where wastes are created, Handfield says. Pharmaceutical and health-care products manufacturer Baxter International Inc. has begun measuring the environmental impact of its top 100 or so suppliers through a sustainability survey.
In 2008 the company modified its request for proposal document to cover information about its suppliers' green commitment and included sustainability language in its standard supplier agreement, says Tina Bova, manager for Baxter's purchasing and supplier management department. The company is in the midst of measuring savings specifically related to its supply chain sustainability activities, but estimates it's achieved an annual savings and cost avoidance of about $3 for every dollar invested into its overall environmental program.
For Herman Miller's chief executive, the real value lies in customer perceptions. Walker points to the U.S. auto industry and its struggles to catch up to foreign manufacturers that were more proactive developing alternative-fueled cars. "Sustainability is becoming as prevalent in customer requirements as quality was 10 or 15 years ago, and we're at the tipping point of this movement where our customers, at least, are no longer saying it's nice to know you do it. It's a requirement."
Being at the forefront of the sustainable supply chain movement, says Walker, has meant the company can focus on its normal day-to-day business activities rather than scrambling to keep pace with more forward-thinking manufacturers.