May 1, 2013

Sustainable Supply Chain To Drive Financial And Economic Growth: Middle East Context

INTRODUCTION

In recent years, the sustainability industry has evolved to include almost all areas of business processes. Due to the dramatic strides sustainability has made and its holistic nature, it is understandable that the two most apparent areas, the environment and society, would receive much of our attention.  There has been a lack of concern for the area of the economy and alignment with business needs.  Moreover, it has not been used enough as a mechanism to enhance the supply chain or product value. 

Lately, business leaders are learning to see substantial benefits and profitability beyond “green initiatives” by giving back time and money to the community and eliminating waste.  Interestingly enough, there has been a renowned renewal in using sustainability methodology to improve their supply chain.  

The average citizen might understandably think of a supply chain as the supplier of goods and services to a company. It is essential to understand that a supply chain is, in effect, tied closely to the product life cycle and has elements beginning with energy production, continuing through the entire procurement of raw materials and information leading to advancement of knowledge and ending with the consumer.

Part of the boom in sustainability and green technology is due to consumers’ access to information and their ability to visually see problems in a matter of seconds.  However, research shows that organizations can enhance their performance by improving the sustainability of their supply chains.

Through building closer relations with suppliers, developing supplier capacity, and identifying and investing in opportunities for social, environmental and economical improvement throughout the supply chain, companies can begin to gain benefits from a more sustainable supply chain and achieve productivity and efficiency gains.

The business case for sustainability in the supply chain for a particular company depends on a variety of issues including field of operation, geographic location, stakeholder expectations, business priorities and organizational culture. There are best practices and key value drivers for sustainable procurement and economic indicators that apply across a number of elements as explained in the following five ensuing areas:

  • Risk Management.
  • Cost saving and realizing efficiencies.
  • Producing Sustainable Products.
  • Sustainability as a Vehicle for Cleansing Suppliers and Transparency.
  • Ethical Business Conduct.
  • RISK MANAGEMENT

By mitigating and responding to social, environmental and economical risks in the supply chain, companies can protect their market share and reduce risk premiums. Being able to identify where a risk is probable and develop mitigation approaches fits well within the field of Sustainability. Ultimately, the goal is to develop flexible supply chains networks that can profitably respond to dynamic changes. Moreover, strong management of social, environmental and economical issues can help companies address reputational risks that could impact their customers’ loyalties and affect their market share.

Case Study 1: Sohar Aluminium Sustainable Supply Chain Policies – Oman

Due to Sohar Aluminum’s industrial value, a substantial number of service and material suppliers desire to be part of our supply chain. In 2008, we started integrating policies and procedures to manage suppliers and sieve out the suppliers that are most suited to Sohar Aluminum’s needs.

Since 2008, Sohar Aluminum’s suppliers (services and materials) increased from 260 to 557 in 2010 and our spending on developing a sustainable supply chain increased respectively. This goes to show a more integrated and value added investment instead of a wide reaching shallow investment.

Policies are put in place to ensure that suppliers providing materials and services for Sohar Aluminum comply with governmental regulations, our EHS requirements and the capability to supply materials and services up to our standards. As a minimum and in general terms, to be an “Approved Supplier”, suppliers must demonstrate they are competent to undertake the task at hand and have the ability to effectively adopt and implement EHS procedures and practices

  • COST SAVING & REALIZING EFFICIENCIES

The connection between supply chain and sustainability are erroneously considered as a sunken cost for many companies, because in reality just the opposite occurs. Those who started proactively incorporating sustainability concepts into their supply chain found financial savings, cost cutting and added value to their operations. 

Sustainable management of operational inputs, such as energy, water and raw materials proved significantly to reduce companies’ procurement costs while simultaneously lessening the environmental footprint and impact on workers’ health of supply chains. On the other hand, investing in local purchasing and building capacity with local suppliers greatly helped companies to reduce cost of importing goods and materials, therefore, supporting the local economy to grow and prosper.

Case Study 2: Al Ahli Bank – NCB: KSA

NCB has begun discussions with two top suppliers to find ways of collaborating on the development of sustainability. The companies are BTC and IBM – providing the Bank with services and IT respectively. In a broader engagement, all suppliers have received copies of Al Ahli Sustain as part of the Bank’s campaign to raise sustainability awareness.

Procurement achievements in 2011 covered two main areas:  cost savings of about 25 percent above target, and a series of quality improvements. These included the development of centralized procurement policy that clearly sets out principles to increase efficiency, obtain the best deals for the Bank, and enhance corporate governance. Progress during the year builds on environment-friendly practices that are already integral to procurement policy. Additionally, we supported Saudi suppliers in the construction of new Corporate Service Centers.

The Bank has a prequalification process that has been enhanced to filter suppliers. New forms were created to include important factors such as suppliers’ financials, origin, size, type, and sustainability related practices. It also includes references from other customers that have undergone similar projects Introduction of strategic sourcing has enabled better management of opportunities in areas such as print buying and facilities management. All business forms and printed materials are now grouped in an annual mega tender, and major items, eg, elevators, vault doors, and air-conditioning units are contracted with suppliers for fixed terms.

  • Producing Sustainable Products

Sustainable products are becoming more popular to a growing sector of the population that started giving primary consideration to sustainability and the planet.  Customers and consumers are increasingly making difficult buying decisions based on social and environmental impacts. So making your products more sustainable can reach a growing market sector and making smart sustainable decisions today can position a company to be more competitive and more aversive to risk.

In simplistic terms, it often appears cheaper to produce a product with no regard to negative externalities such as those related to sustainability. When similar situations are gauged for the long run including a financial risk analysis they can prove vastly profitable. 

Many companies practically focus on designing a linear process of supplying materials rather than production that reduce waste and pollution through innovative product and process design, including the use of nontoxic or less toxic raw materials and delivery to end of life and disposal, integrating Sustainability throughout the whole product cycle.

Case Study 3: NBAD’s Greenest Branch: Engaging Suppliers in our Quest for Innovation – United Arab Emirates

The growth of NBAD is reflected in our rapid branch expansion. Along with this expansion has come the need to ensure innovative programs to drive continuous improvement in branch quality through officially opening our greenest and newest branch. The branch is located in Masdar City, and is furnished with recyclable furniture constructed from recycled materials, as well as energy efficient and resource optimising IT equipment. Using our environmental criteria to engage with our suppliers, we screened for restricted materials such as toxic, unsustainably harvested, and environmentally harmful materials in furnishing the branch. While the concept of sourcing environmentally is a relatively new one in the region and  most of our suppliers already had environmental policies or procedures in place, it was difficult to find locally based suppliers offering certified products.

In particular, certified raw materials were difficult to find and we ultimately had to import them. This also impacted supplier delivery time. As this initiative marked the first one of its kind in our history, we often worked collaboratively with suppliers to ensure project success.

The Results Three suppliers provided 100% environmentally certified materials which made up 51% of the total material bought. Six suppliers provided energy efficient equipment with the possibility of recycling most of the components through environmentally responsible sources and these items made up 28% of the supplies purchased.

The remaining items procured made up 21% of the total supplies and were not from sustainable sources, as we were unable to find any suitable products available at the time although these items can be recycled at the end of their life cycle. We also selected IT equipment to minimize the number of machines required and the amount of paper and toner consumed in their function, thereby improving upon maximizing IT use energy efficiency and end-of-life recyclability.

  • SUSTAINABILITY AS A VEHICLE FOR CLEANSING SUPPLIERS & TRANSPARENCY

Creating a sustainable supply chain means leveraging the supply chain to ensure fair treatment of people as well as taking a broad view that everyone along the supply chain is a stakeholder. The ultimate goal of engaging with suppliers is to develop a shared mindset about sustainability issues and work more closely with them with shared priorities.

These relationships can in turn provide companies with crucial information about potential trends, market changes, and other external influencers that could impact business. They also enhance companies’ abilities to secure business friendly outcomes from stakeholder decisions.

Case Study 4: National Bank of Abu Dhabi: Valuing and Engaging Our Suppliers – United Arab Emirates

We strongly believe in supporting our local economy and since 2009, we have given priority to engaging suppliers with a local base. This means that we choose to purchase our goods and services through companies which have a presence in the UAE contributing to our local economy.

We continually challenge our suppliers to improve their performance as we create quality standards which our suppliers must meet. These requirements ensure that we purchase quality products that match the value of our brand and products. To ensure we work with superior suppliers, we conduct checks through face-to-face meetings and visits to their premises and facilities during the supplier registration process.

In 2010, 11 of our direct suppliers volunteered for a pilot engagement campaign to assess their willingness to support us and our human rights policies. These 11 suppliers signed declarations demonstrating their human rights’ policies and procedures relating to the avoidance of child and forced labor.

“Sustainable procurement should reflect the sustainability ambitions of the company and the nation as a whole incorporating Emiratisation rates and human rights policies and procedures in the screening process.”” Izzaddin Mohamed Manager of Administration Sustainability Stakeholder Group Member.

  •  ETHICAL BUSINESS CONDUCT

Sustainable supply chain is also about the encouragement of good ethical and responsible governance practices throughout the lifecycles of goods and services. These practices contribute to build a healthier economy by fighting procurement fraud, bribery and non-ethical business relationships. The direct costs of these corruptions are considerable and affect the quality of the product and indirect costs related to management time and resources spent dealing with issues such as legal liability and damage to a company’s reputation.

Engaging with suppliers in these issues helps to improve the quality of the product, reduce fraud and related costs, enhance business’s reputation and contribute in building a sustainable business environment.

Case Study 4: Abu Dhabi National Oil Company (ADNOC) – United Arab Emirates

ADNOC has established a committee specifically to focus on the labor conditions of suppliers, contractors and workers employed by contractors on ADNOC projects. The committee refers to the UAE labor laws, international best practice, and ADNOC Codes of Practice as reference to define the violations of workers’ rights. There is a well-documented procedure for the selection of suppliers and the evaluation of bids. This includes technical criteria and several mandatory requirements that comprise factors relating to HSE, Quality Assurance and ISO Certification. Generally, the selection of suppliers is based on the greatest value offered on a balance of quality, timeliness and price.  In 2010, over 75% of the procurement budget across the Group Companies was spent on local suppliers. This amounts to approximately AED 13.4 billion.

Case Study 5: Etisalat: Synergies and economies of scale – United Arab Emirates

The great advantage of having such a diverse spread of operations is economy of scale and benefiting from the many synergies of operating and standardizing numerous mobile networks. Etisalat has been able to centralize its contracts, marketing and planning functions along with equipment and handset procurement.

This enables the Corporation to effectively plan, build and manage new mobile networks, develop strong branding strategies, and introduce new product and service offerings. Significant cost savings are the result, as compared to stand-alone operators, and Etisalat gains more favorable terms from suppliers, in particular with popular handsets that are instrumental in the many market-leading offers and services.

The benefits of centralization also extend to the procurement of network equipment and the creation of value-added services through content licensing, joint ventures with media providers and similar initiatives. Such efforts have allowed for leverage in negotiating power, sharing market intelligence, and researching and coordinating technology sourcing, investment and management.

CONCLUSION

Claiming that sustainable supply chain is just a voluntary exercise that can just improve business’ reputation does not make sense in today’s world. As sustainability consultants, we see more and more best practices in the successful implementation of a sustainable supply chain. These practices are not just applied by the large manufactures or industrial businesses. Companies of all sizes are today seeking to make additional steps toward a sustainable supply chain. 

Some companies and industries have invested strongly in a sustainable supply chain, finding that sub-tier suppliers have the most significant challenges in addressing sustainability issues, and these companies started incorporating changes to advance practices that create value for their businesses as well as for economy at large.