Sustainable production or development is increasingly on the agenda in many international forums. Governments, NGOs and businesses have started to embrace this imperative, yet many are still not convinced of the value derived from sustainable development.

Given a landscape where most developing nations are competing to catch up with their developed neighbours, sustainability has often taken a backseat to conflicting objectives. For example, manufacturing and agricultural production methods in developing nations often favour speed to market and yield over sustainability. However, sustainable business practices are not just a fad but also a recognised advantage these days in the minds of consumers. The shifting paradigm is what drives this imperative.

However, what does sustainability truly mean and why should we pursue this imperative in a developing economy?

The World Commission on Environment Development in 1987 defined sustainable development as “that which meets the needs of the present without compromising the ability of future generations to meet their own needs”. Often, this is confined to the context of food sourcing. Yet sustainable businesses have expanded to include ethical business practices. For example, some businesses enforce screening for child labour prior to awarding vendor contracts.

Sustainable sourcing is not just about the supply of a product but also how it is produced, that is, whether community rights have been abused or the impact on the environment has been destructive.

Today, financial institutions and pension funds have started viewing the longevity of a business together with its environmental, social and governance impact as part of the financial rating that they conduct. Increasingly, these institutions are willing to praise or punish such businesses based on their sustainability performance.

However, is there any point in sustainable development without sustainable profitability? And are sustainability and profitability measures mutually exclusive or two sides of the same coin?

These questions can be addressed by taking the sourcing segment of the supply chain value stream as our example.

Sustainable sourcing is the process of purchasing goods and services accounting for social, economic and environmental impact for the long term. This involves looking into the source of the product and how it is made to ensure compliance to policy or standards that gain customer confidence.  

Where is the value proposition in sustainable sourcing?

Engaging the organisation as a whole in sustainable sourcing has six positive outcomes:

1  Increase in revenue
A new consumer segment has emerged that subscribes to ethical and sustainable products and services. This is an additional segment of revenue that The Body Shop tapped and continued to grow with its campaigns on community fair trade.

Another example of new revenue is the trading of Certified Emission Reduction certificates (or carbon credits) obtained from the amount of methane abated through composting projects. Sime Darby Plantations has initiated such a trade with Denmark, under its Methane Abatement project.
Such efforts drive new revenue and brand value by offering ethically sourced products and practices that pose minimal impact to the environment and enhance brand image.

2  Improved risk management
By incorporating sustainability policies into supplier compliance audits, businesses will be able to protect and manage their products or services from poor media exposure. Such audits allow better governance through a systematic sourcing process.

Another way to manage risk is by pre-empting legislative mandates and proactively roll out sustainability initiatives. This allows time for the products or services to mature in the market before legislation is imposed. In one example, the European Union placed cleverly disguised trade barriers on palm oil imports by imposing onerous biodiesel standards, such as cold-flow-plug-point (CFPP). Fortunately for Malaysian businesses, a timely new technology has overcome this restriction.

3  Reduced cost
When tasked with reducing cost, the first area to look into is the “need to purchase”, applying more rigour in evaluating acquisitions and performing make-versus-buy analysis. The focus is on better demand management, balanced with supply dynamics and planning systems within an organisation to minimise spend.

Other ways of reducing cost revolve around the product or service itself. Here, the cost driver is about how the product or service is packaged for competitive and profitable pricing. This looks into order size, varying selling strategies and use of biodegradable packaging. This becomes pertinent when estimating the “Total Cost of Ownership”.

Finally, there is the post-ownership cost. This concerns the cost of disposal, product recalls and environmental cleanup. The cost associated with post-ownership can be reduced by engaging in holistic thinking and pricing even before the product is brought to market.

It is interesting to note that companies from high-cost countries, such as Ikea (Sweden) and Nokia (Finland), have excelled at this holistic view and been able to dominate in a low-cost and low-margin environment despite the competition.
 
4  Increased positive social impact
One of the key concepts of sustainability is to create long-term value to society. Businesses develop sustainable practices by creating a positive impact through social programmes that align with its corporate objectives. The purpose is to position a positive image to be associated with their brand.

Given the growing concerns with alcohol misuse, Carlsberg started promoting responsible consumption through a “Beer Awareness” programme. The programme was carried out in association with local governments, the public sector, NGOs and trade organisations.

In 2006, a campaign to battle drink-driving was launched in Serbia by Carlsberg in conjunction with a music festival. It offered visitors free transport to and from the festival to avoid alcohol-related accidents.

The sourcing component in this sustainability campaign was in establishing a strategic supplier network by connecting both suppliers and consumers through a social cause. In doing so, Carlsberg gained continual support for the brand.

5  Increased supplier integration
Organisations cannot work in isolation in the sustainability drive. There needs to be mutual development with suppliers to ensure that end products or services reflect sustainable means. The tainting of baby formula with melamine and high lead content in paint used in children’s toys are two recent and tragic examples of the negative consequences of insufficient integration with suppliers, which has damaged once well-respected brands. Increased supplier integration automatically results in better visibility and understanding of suppliers’ costs and challenges.

6  Reduced environmental impact
When sourcing for sustainability, we look for better ways to meet our needs with a holistic perspective. Often, the assumption is that there is little relationship between sustainability and cost savings. Some local companies have busted this myth.

Telcommunications firm DiGi, through its communication tower management, reduced electricity consumption per tower by about 9% in 2007. The working environment in DiGi is near paperless: As the number of employees grew by 14% in 2007, purchase of paper dropped by 38%.

Its headquarters in Shah Alam was designed to create a working environment that supports employees’ daily operations while creating an atmosphere of positive energy. Glass and steel elements feature prominently in the building, with wide windows to allow natural sunlight to enter while reducing electricity consumption. A Building Maintenance Automation system helps regulate the usage of lighting and air-conditioning during peak and off-peak periods. In 2007, the electricity consumption in DiGi offices and DiGi centres fell by 12% (or 1.6GWh — enough to power Iceland for a month).

Greater alignment with corporate objectives
All the outcomes from sustainable sourcing must tie in with other business processes to align with corporate objectives. This is often done through continual in-house awareness programmes. Cross-functional sustainability workshops and campaigns will drive this paradigm successfully.

In support of sustainable sourcing practices, relevant performance indicators need to be incorporated into the scorecards of the organisation at all levels. Such scorecards will need to expand on the basic four quadrants of the “Balanced Scorecards”. The additional segments would now be Environment and Shareholder Value with a sustainable perspective.

‘Doing well by doing good’
Sustainability, high performance and profitability are all compatible aims. In fact, pursuing the sustainability agenda is a catalyst for increased performance and profitability. Although it requires additional diligence and effort, ignoring this imperative carries the greater risk of losing relevance in the marketplace.

Organisations that have embraced a sustainability agenda have successfully reduced costs and increased revenues as described in the cases above. “Doing well by doing good” has become a necessary agenda for high-performing businesses. Once a degree of maturity is achieved in an organisation, efforts can be channelled towards adhering to corporate values, of which sustainability should be reflected as a norm.

Dominic Lim is a senior manager while Surendra Raj is a manager with the Management Consulting practice at Accenture in Malaysia. For more information, visit www.accenture.com

This article appeared in the Manager@work, the monthly management pullout of The Edge Malaysia, Issue 760, June 22-28, 2009