Session 4: Sustainable Supply Chains as a Lever of Competitive Advantage

1. Session 4: Sustainable Supply Chains as a Lever of Competitive Advantage

2. Approach to Sustainable Supply Chain Management (SSCM): Overarching Framework Framing the Issues Preparing for Implementation Assessing Impact Session 4: Sustainable Supply Chains as a Lever of Competitive Advantage Session 1: From Sustainable Development to Sustainable Supply Chains Session 5: Integrating Sustainability into the Supply Chain Session 8: Measuring and Communicating on Sustainable Supply Chain Performance Session 2: Governance of Supply Chains: From Compliance to Voluntary Standards Session 6: Managing Stakeholder Relations Session 7: Building Supply Chain Partnerships Session 3: Governance of Supply Chains: Introducing International Labour Standards

3. Session Objectives Identify the links between strategy, competitive advantage and Sustainable Supply Chain Management. Understand the strategic and complex nature of Supply Chains. Explore the possibility of gaining Competitive Advantage (CA) through SSCM.

4. Session Outline Unit 4.1: Introduction Unit 4.2: Situating SC strategy within corporate strategy. Unit 4.3: Strategic and complex nature of SCs Unit 4.4: SSCs as a lever of Competitive Advantage Unit 4.5: Conclusion

5. Unit 4.1: Introduction • Convergence of mainstream business practices and sustainability. • “Not only is it (sustainability) the right thing to do as responsible global citizens, but it’s the right thing for our business.” (Christopher J. Nassetta, President & CEO, Hilton Hotels Corporation) • “We cannot choose between [economic] growth and sustainability – we must have both” (Paul Polman, CEO, Unilever) • Businesses exploring new sources of competitive advantage through SSCs (Markley and Davis, 2007)

6. Mainstreaming Sustainability Strongly agree 46% Somewhat agree 41% Neither agree nor disagree 9% Somewhat disagree 3% Strongly disagree 1% “Sustainability will become considerably more important to my company over the next three years”. Source: The Economist Intelligence Unit Report: “Managing for Sustainability”, February 2010

7. Video and Class Discussion Sodexo: Mainstreaming Sustainability into the SC http://www.youtube.com/watch?v=nZ-_M_rFOVM&feature=related Identify the sustainability challenges that Sodexo is addressing in its supply chain.

8. Unit 4.2: Situating SC Strategy within Corporate Strategy Many definitions of strategy: “Strategy is the means by which… organisations achieve their objectives” (Grant, 2010, pp. 16) “Strategy is the pattern of objectives, purposes, or goals and the major policies and plans for achieving these goals, stated in such a way as to define what business the company is in or is to be in and the kind of company it is or is to be” (Andrew (1971), cited by Grant, 2010, pp. 18).

9. Defining Strategy “The determination of the long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals” (Chandler (1962), cited by Grant, 2010, pp. 18). Strategy is focused on achieving certain goals. Critical actions involve allocation of resources. Strategy implies some consistency, integration, or cohesiveness of decisions and actions. (Grant, 2010)

10. Corporate and functional strategies • Corporate strategy is creating a fit among a company’s activities. • Its success depends on doing many things well… and integrating them. (Porter, 1996) • Basic Strategy Questions: • Where to compete? • How to compete? (Grant, 2010) • Functional/ divisional strategies inform and support overall strategy (Marketing, HR, Finance, Operations, etc).

11. Operations Strategy Operations Strategy is concerned with setting broad policies and plans for using the resources of a firm to best support its long-term strategy. It involves decisions that relate to process designs and the infrastructure required. Operations strategy includes supply chain strategy, manufacturing strategy, delivery strategy, etc. (Chase et al, 2007)

12. Supply Chain strategy Central idea is to apply a total system approach to managing the flow of information, materials, and services from raw material suppliers through factories and warehouses to the end customer. (Chase et al, 2007)

13. Group and Class Discussion Sketch the organisational chart of your company or of a selected company or industry and locate the supply chain function/ department.

14. Unit 4.3: Strategic and Complex Nature of SCs • It is advocated that “supply chains compete, not companies” (Christopher, 1992). • “It is absolutely crucial that we strengthen our supply chain capabilities to win in the market…we are currently not at par with competition” (new Unilever CEO - Paul Polman, Feb. 2009) Effective management of complexities in the SC is key.

15. Often Multiple SCs (Handfield and Nichols Jr., 2002) From the basics To the intricate

16. Internal and external linkages Internal Chain: portion of SC within an individual organisation – Order transmittal (sales), order entry (material planning), order preparation (purchasing, manufacturing, warehousing), order shipment (distribution and transportation), etc. Requires cross-functional teams. External Chain: portion of SC outside an organisation – collaboration is important and inter-organisational teams required. (Handfield and Nichols Jr., 2002)

17. Numerous stakeholders and Networks Suppliers Manufacturers Warehouse Retailers Conservation NGOs Local community Investors Industry Associations Regulators Consumers Sectoral Groups Consumer Advocacy Groups Certification Agencies National/local governments Trade Associations Media Trade Unions Workers

18. Diverse and unique risks • Actions and events inside the company (policy, operational, organisational, system, forecasting, capacity, resources, supply, security, delays, etc). • Events outside the company (demand, inter-organisational, technology, disruptions, natural disasters, resources, social, etc). Little or no control over events in the SC. (Simchi-Levi et al, 2003)

19. Conflicting Objectives in the SC (amended from Simchi-Levi et al, 2003)

20. Another layer of Complexity - Sustainability SCs more vulnerable today due to: • Scrutiny from non-traditional SC stakeholders. • Changing customer demands. • Changing regulations. • Rising social and environmental awareness. Businesses that effectively manage these complexities are likely to gain competitive advantage

21. SSCs as a lever of Competitive Advantage • Businesses constantly exploring new sources of competitive advantage. • Competitive strategy is about deliberately choosing a different set of activities to deliver a unique mix of value. (Porter 1996) • Competitive advantage is the extent to which a firm is able to create a defensible position over its competitors (McGinnis and Vallopra, 1999)

22. Sources of Competitive Advantage Customers attracted by different product/ service attributes (low prices, quality, innovativeness, etc). Companies seek to offer desired attributes. Cost Leadership (e.g. Southwest Airlines and Easyjet); Differentiation (e.g. Apple, Sony, etc). CA through SSCM is more of a differentiation strategy.

23. SCs and Competitive Advantage “Differences among competitors’ value chains are a key source of competitive advantage”(Porter, 1985: 36)as valuable SC activities enhance existing resources & capabilities and/ or produce new ones. Resources and capabilities underlie successful competitive strategies (Dobson et al, 2004).

24. Resources and Capabilities • Financial: equity, bonds, bank loans, etc. • Physical: technology, computers, equipment, etc. • Human: experience, intelligence, training, skills, etc. • Organisational: culture, reputation, coordinating systems, formal and informal planning, etc. • Capability: the capacity for a team of resources to perform some task or activity. Resources are the source of capabilities. Capabilities are the main source of competitive advantage. (Barney, 2007; Porter, 1985)

25. Enhancing SSC competitiveness: • Improving operational efficiencies. • Enabling better working environments that increase productivity. • Engaging consumers and increasing loyalty. • Developing partnerships that open new markets. • Benefiting from the competencies of diverse stakeholders (NGOs, research institutions, civil society, regulatory agencies, competitors, etc)

26. Significant shifts required to gain competitive advantage through SSCM Opportunistic Short-term Maximizing profit Unclear Limited Low-level Strategic Long-term Fair share Shared Full High-level Nature Timeframe Focus Accountability Transparency Engagement

27. Competitiveness entails new SC models Short-term contractual relations... ...Long-term collaboration Challenges require long-term solutions and partnerships with non-traditional SC partners (NGOs, competitors, government entities, etc). Creating company value... ...Creating shared value in the SC Value created should benefit business, SC partners and society. From... To...

28. Way Forward: • Develop a sustainability vision/ mission. • Integrate sustainability concerns into SC policies and practices. • Enhance existing resources and capabilities and/ or build new ones. • Set performance targets and measure progress. Top management commitment and leadership is key

29. “Our vision is a world in which all people's basic requirements - such as shelter, clean water, sanitation and reliable power - are fulfilled in a way that sustains our environment”. http://www.caterpillar.com/sustainability/vision-mission-strategy Sample sustainability visions “We envision a supply chain that profitably yields high-quality, safe products without supply interruption while leveraging our leadership position to create a net benefit by improving ethical, environmental and economic outcomes”. http://www.aboutmcdonalds.com/mcd/sustainability/our_focus_areas/sustainable_supply_chain.html)

30. Nokia Sample SSC Mission Statement “At Nokia, we work hard to anticipate risk, demonstrate company values, enhance our governance practices, increase employee satisfaction, and look after the environment and communities where we do business. We expect the companies in our supplier network to take a similar ethical business approach and to demonstrate progress and achievements in these areas as well as in educating and overseeing the practices of their own suppliers. Our aim is to ensure that environmental, ethical and health and safety issues, as well as labour practices, are not separate add-on features, but are embedded within all our sourcing processes, including supplier selection and relationship development.”

31. Sample SSC Mission Statement L’Oréal “We are committed to building strong and lasting relationships with our customers and our suppliers, founded on trust and mutual benefit. We do business with integrity: we respect the laws of the countries in which we operate and adhere to good corporate governance practices….We are mindful of our impact on the natural environment…We are committed to the respect of human rights. We want to end the exploitation of children in the workplace and the use of forced labour…We actively seek out and favour business partners who share our values and our ethical commitments.”

32. 4.5: Conclusion • Sources of Competitive Advantage becoming rarer. • SC sustainability can be a lever of Competitive Advantage. • Proactive SSC policies and strategies: adopt a clear vision/ mission statement • Senior management commitment is essential.

33. Additional References Chase, R. B., Jacobs, F. R, and Aquilano, N. J. (2007), “Operations Management for Competitive Advantage”, International Edition, NY, McGraw-Hill/ Irwin Christopher, M. (1992), “Logistics and Supply Chain Management: Strategies for Reducing Costs and Improving Services”, London, Pitman Publishing. Dobson, P., Starkey, K. and Richards, J. (2004), “Strategic Management: Issues and Cases”, Oxford, Blackwell Publishing, pp. 51-85. Grant, R. M. (2010), “Contemporary Strategy Analysis: Text and Cases”, 7th Edition, John Wiley and Sons, Ltd. Handfield, R. B. and Nichols Jr. E. L. (2002), “Supply Chain Redesign: Transforming Supply Chains into Integrated Value Chains”, NJ, Financial Times Prentice Hall. McGinnis, M. A. and Vallopra, R. M. (1999), “Purchasing and Supplier Involvement in Process Improvement: A Source of Competitive Advantage”, Journal of Supply Chain Management, 35 (4), pp. 42-50. Porter, M. (1996), “What is Strategy?”, Harvard Business Review, November-December, pp. 61-78. Porter, M. (1985), “Competitive Advantage: Creating and Sustaining Superior Performance”, New York, Free Press.