Contracting Excellence Magazine - May 2011
Global Commerce: A Myth?
The Economist has a thought-provoking article entitled ‘Globaloney‘, highlighting a new book which apparently ‘at last talks some sense’ on the the topic of globalization.
As the name implies, this book (by Pankaj Ghemawat of IESE Business School in Spain) largely argues that globalization is a myth and that far less has changed than most commentators make out.
Several years ago, when Tom Friedman started declaring that the world is flat, IACCM countered that view by suggesting that the world was in fact increasingly spiky. By that, we meant that global forces had combined to make us far more aware of the differences between cultures and nations. And while in some ways it was breaking down barriers, in others it was causing them to be put up.
I am sure that any statistician, economist or political observer can make a compelling case for or against the theory of globalization (whatever that may actually mean). But for those of us in the world of commerce, there is no question that the last 20 years have seen dramatic changes and that these include far more exposure to international issues. In part this is down to the speed of awareness; in part it is the immediacy of the pictures delivered by the news media; but it is also because far-off incidents have a very real effect on business.
Mr. Ghemawat cites interesting, but selective, data to make his case. But the truth is that modern technologies have opened world markets to many countries – if they wanted to be open. For those that did not adjust, the growth in world trade has thus far passed them by. According to the IMF, about 75 countries have been net losers from today’s international trading patterns.
The opening of world markets has proven a major learning experience. It has driven issues such as ‘commoditization’ and, probably, ‘category management’, as buyers need to be increasingly aware of the counter-balance between low cost, supply options, and levels of risk. It has also resulted in many major corporations reshaping their business – for example, most major corporations now have more overseas employees than they do in their headquarters country. These impacts alone have forced many of us to work across borders, across languages and cultures.
Mr. Ghemawat points out that ‘countries will engage in 42% more trade if they share a common language than if they do not, 47% more if both belong to a trading block, 114% more if they have a common currency and 188% more if they have a common colonial past’. These statistics illustrate that ‘borders’ take many forms and that there are many degrees of risk and complexity. Perhaps one of the most interesting points as we analyze the data is that ‘old style’ global markets were driven by colonialism (and his data shows it lingering effects). New-style globalization is driven by collaboration – that is, the voluntary adoption of a common trading block, or a common currency. And the signs are that other barriers are in fact reducing – for example, the extent to which there is a growing consistency of business language and the creation of more consistent financial rules and legal regulation.
In the past, globalization was driven by physical conquest. Today, it is about a greater meeting of minds for common benefit. Of course that will mean compromises, and requires everyone to be ready to respect alternative values. But in my experience, I think the existence of global communications technology is steadily creating a desire for greater harmony and increased openness to other views. However, this does not change the conclusion we reached several years ago: it is a spiky world and that generates real challenges and opportunities for those of us who wish to be experts in commerce.
IACCM Partner, Corporate United, Honors Winners Of Collaboration Awards
This year, Corporate United, the largest group purchasing organization in the United States, launched its first annual collaboration awards program to honor supply chain, procurement and other related departments that have demonstrated superior collaboration with an internal functional group and/or an external supplier.
The judges of the Corporate United Collaboration Awards program included three experts from the supply chain industry:
- Jason Busch, founder and managing director, Azul Partners, and editor, Spend Matters
- Timothy Cummins, chief executive officer, IACCM
- Dr. Robert Handfield, Bank of America University distinguished professor of supply chain management at North Carolina State University, and director of the Supply Chain Resource Cooperative
2011 Internal Collaboration Award Winner: Biogen Idec
Biogen Idec, headquartered in Weston, Massachusetts, is a global biotechnology leader in the discovery, development, manufacturing and commercialization of innovative therapies. Biogen Idec is recognized for its superior collaboration with internal functional departments by following a very team-centric approach, resulting in substantial cost efficiencies for the organization.
Internal Collaboration Runners Up:
- OfficeMax, Inc.
- PolyOne Corporation
- Verizon Communications
2011 External Collaboration Award Winner: Pentair, Inc.
Pentair, Inc. is a global diversified industrial company headquartered in Minneapolis, Minnesota. As a conglomeration of industrial manufacturing businesses with many different systems, processes and products, Pentair was recognized for the emphasis its puts on creating strategic supplier relationships for areas of core spend. With this goal in mind, the company has achieved results like consolidating from five wireless providers in conjunction with one telecom expense management (TEM) provider to only one wireless provider with no need for the TEM supplier.
External Collaboration Runners Up:
- Weichert Relocation Resources Inc
2011 Internal and External Collaboration Award Winner –Memorial Hermann Healthcare System
Memorial Hermann Healthcare System (MHHS) is an integrated health system known for world-class clinical expertise, patient-centered care, leading edge technology, and innovation. MHHS serves southeast Texas and the greater Houston community. MHHS is recognized for its program to redesign its procurement and payment processes to improve working capital, reduce processing time and costs, increase productivity, and improve customer service. This program resulted in an effective and efficient, clear-cut approach to collaboration with all MHHS internal and external stakeholders involved.
Internal & External Collaboration Runners Up:
- BAE Systems, Inc.
- Ohio Farmers Insurance Company (Westfield Insurance)
- Spend Radar
Learn More about the Award Winners’ Programs
To learn more about the winner’s goals, challenges and successes, you can pre-register (or email email@example.com) for the June 21 “Ask the Experts” webinar with Tim Cummins, CEO of IACCM as he interviews each honoree live.
Sign Up for the 2012 Collaboration Awards Email List
To receive information regarding the 2012 Corporate United Collaboration Awards program, please sign up for the email list here.
Sandra Lewy of IACCM (on the right) Enjoying The Celebration of The Royal Wedding!
The Value Of Contract Management Fundamentals For Every Project Manager
During the late 1910s and early 1920s, the Ford Motor Corporation constructed the world’s largest industrial complex along the banks of the Rouge River in Dearborn, Michigan. Henry Ford's vision of mass production included not only the first production lines, but also the centralisation of the entire production chain. Iron ore and coal were shipped in by Great Lakes steamers and railroad, iron ore melted to produce iron, and then processed into steel. Rolling mills, forges and assembly workshops converted the steel into springs, axles and car bodies, foundries poured molten steel to produce engine blocks and cylinder heads. A massive glass factory manufactured the windscreens. The most basic of raw materials came in; cars rolled out. There was no place for suppliers or contracts – Ford basically owned the whole lot.
Fast forward to the 21st Century. A contract for a new tram system for a major Australian city has been awarded to a French company. The 2D drawings will be produced by a subcontractor in France, the 3D drawings by a contractor in Brazil, production will be contracted to 4 different companies in the EU and UK software will be customised by a Chinese company.
Companies can no longer do everything for themselves, or afford to do so, and almost, if not all, major companies depend on a wide range of suppliers for services and materials. As an example, consider BP: one of the UK's largest companies, with an annual turnover in 2008 of $239 billion. In the same year more than 80% of their total expenditure was on contracted goods and services. Rolls-Royce are in a similar position, with over 60 suppliers of pre-assembled modules from Spain to Japan providing pre-built modules as components for the Trent series of jet engines, assembled in Derby, UK.
So what has changed in the last 100 years? Ever more complex technology with multiple components, overall specialisation beyond the economic competence of any individual company, ever increasing competition, a shrinking world, in terms of both suppliers and customers and competition, ever tighter timescales and margins. At the same time user requirements have not only become more complex, but also increasingly hard to define, especially within software or other business based systems.
The popular belief is that the subject of contract management may appear to be of interest only to lawyers and the commercial department. After all, the lawyers need to ensure legal protection for the company, and commercial specialists must ensure that the contracting process complies with competition and/ or procurement law, right?
Not necessarily! This is a common misunderstanding of the fundamental importance of contract formation and management: when a company contracts out the provision of any goods or services, the risk to them increases. Fundamentally risk increases because of the difficulty of communicating to the supplier exactly what it is that’s required by the customer: easy enough if the contract is for the digging of a hole, but much harder if the requirement is for, say, a new customer relationship management system.
The objective in the development of any contract is simple: a clear understanding on the part of both parties as to what each will do, and a fair and well understood balance of risk and opportunity. The objective of contract management is equally simple: that is, to ensure compliance with the contract.
It’s as simple as that: however, the difficulties of achieving this are considerable. This is why the skills of contract management are so important to business managers, if project and business objectives are to be met in a competitive environment.
So what does this mean for today’s project manager and business manager? The manager of today must know about procurement and contracts. In short, there is a new tool in the managers’ tool kits – contract management! Here are some of the components of procurement and contract management must be mastered – but not all.
Knowing the Legal Framework– It should be understood that contracts exist in a legal framework.
- It is not necessary for the manager to become a lawyer, nor even an expert in laws of his or her own country. That said, he or she does need to have an awareness of the legal concepts in order to be able to effectively use the resources of the company legal specialists to put the details into place.
- In short, the manager needs to know the universally applied fundamentals of contract and procurement management that apply the world over and when (and how) to get the legal department involved. If a contract is set up and run correctly, there will be minimal need to get the lawyers involved. But if something doesn’t go right – get the lawyers to help navigate the legal mine field.
Defining Requirements- Have a systematic method of defining contract functional or technical requirements
- Defining and communicating the tangible requirements may be difficult, but it is so much more difficult to ensure that the supplier understands the customer needs and expectations, including those that might be unstated or assumed, that sit behind the requirements.
- Major risks exist where requirements are ambiguous or missing. It is a very naïve approach to assume that since the supplier is a specialist in this area that they also understand what it is that is required.
Establishing Clear Roles and Responsibilities– know who is supposed to do what
- It must be remembered that the supplier’s horizon is the end of their delivery; this is usually different from the customer’s product delivery. These two differing viewpoints may colour how each sees contract delivery.
- The Contracting parties must be understood. In a world of joint ventures, partnerships, contractors and sub-contractors, it may not be clear exactly with whom you have a contract.
- This is another example of an issue that normally only comes to the fore when something goes wrong and liabilities have been incurred. For example, you may have imposed strict safety requirements on your contractor. How can you be sure that they have imposed similar terms on their sub-contractor?
Managing Relationships– building long term relationships
- Contracting relationships are only successful where there is an equitable balance of risk and opportunity. This may be achieved partly by assigning liability within the contract, but is more commonly achieved by the choice of pricing mechanism (for example lump-sum, cost-re-imbursement or a variation). The wrong type of mechanism motivates the wrong type of performance. This factor was held as a major factor in the escalation in the cost of the Scottish Parliament Building to £414 million from the £109 million original estimate.
- Going through the effort of building a contract forces both parties to evaluate what is expected of each other in the relationship and how ‘things will work’. Expending the effort to do the hard work early establishes the foundation (and documents what needs to happen) so that if things go awry, you know what to do and how to resolve the issues. As one colleague has said many times – ‘Get the hard conversations done early and written down – the rest of the relationship will follow’.
Managing Risk– Contracts can be used to transfer risk to a third party – but not all of it
- The normal extent of a supplier’s liability is rework in the event of failure; however, the customer may have suffered severe consequential loss through a contractor’s failure.
- In 2010 a contractor arrived at a remote gas field in western Kazakhstan to repair a faulty compressor. The contractor forgot to bring an essential tool, and because it was essential for the customer to have the compressor operating, the customer chartered a helicopter to bring the tool to site and allow the contractor to effect the repair. Who paid for the helicopter? The customer. This may seem unfair, but most contracts limit the supplier’s liability to the work being done, and not consequential cost outside of this. Damages usually extend to re-work, and the customer may even have to pay for work that the contractor has done. Certainly a contract could be drawn allocating higher liability, but in that case the price would be higher. So the risk remains with the customer.
Contracts are formed with and managed by people – and those people are no longer just the lawyers. Today’s managers are more frequently called to manage suppliers, vendors, contractors or even just procure the paper needed for the office. So contracts and contract management are new skills. Start your exploration of the world of contracting by focusing on the universally applied fundamentals that work in any region of the world first. Then work with your legal departments to understand the local laws.
Richard A. Graham, an instructor with ESI International, has more than 20 years’ experience in project management. Richard has held senior roles at Astra Pharmaceuticals, Eli Lilly, International Minerals and Chemicals (IMC), and British Alcan. His most recent position was as a projects director at Bio-Flo Ltd where he was responsible for the project management, development, production, and distribution of downstream processing equipment, including the negotiation of UK, U.S., and European partnership agreements. For the past several years, Mr. Graham also has provided consulting services to various companies, with a particular focus on risk and contractual aspects of projects.
Find out how ESI International can help organisations with their Contract Management requirements. To learn more, please contact ESI at firstname.lastname@example.org +44(0)20 7017 7100 or www.esi-intl.co.uk/contract_management.
(c) 2011 Reprinted with permission by ESI International.
IACCM Plays A Growing Role In UK Government's Drive To Improve Contracting Skills
Improvements to contract management skills lie at the heart of UK government policy as it seeks to tackle the challenges created by the global financial crisis. The importance of commercial and contract management skills has been highlighted in a series of Government reports and statements around the world. In the UK, this has translated to specific action to seek new and improved training and development for Government staff. After long consultation, IACCM was selected to pilot the development of contract management capabilities.
IACCM has been working with the UK Cabinet Office to develop an eLearning programme that draws from the Association’s established and highly successful Managed Learning syllabus for contract management. That work resulted in an exciting milestone on 19th May when a group from the Department for Environment, Food and Rural Affairs (Defra) is the first to complete the 4-month programme. IACCM CEO and President, Tim Cummins and Sally Collier, the Executive Director of Policy and Capability, from the government’s Cabinet Office, awarded certificates to the successful participants at a ceremony in London. Also attending were Debbie Hannifin, the leader of the Defra team, Paul Mallory and Debi Hadrill from IACCM. Debbie’s role in mentoring her team through the pilot was especially acknowledged for its contribution to their achievement.
Tim Cummins remarked: “This is an important step for UK government in addressing the critical role of Contract Management in delivering better value outcomes. IACCM is delighted and proud to be playing a role in improving government contracting and we are looking forward to expanding the programme in the UK and in the many other countries where we operate”.
Contract Benchmarks: Do They Matter?
* Only 11% of organizations are consistently successful in imposing their standard terms and conditions – but they are overwhelmingly from Procurement.
* Sell-side legal and contracts groups are increasingly struggling to get their standard terms accepted by business customers; some spend a lot of time fighting, while others have recognized smarter ways to manage risks and variations and are changing their negotiation strategies.
* 32% of contracts and legal groups have outsourced some elements of their contracting process, improving its quality and freeing skilled resources for more important tasks, such as earlier involvement in deal structuring and analysis.
* The average cycle time to negotiate a medium-complexity contract is 7 – 10 weeks. But top quartile companies achieve 5.1 weeks and those in the bottom quartile take almost 16. On average, international contracts take about 20% longer to complete than domestic agreements. Companies that shorten cycle times gain the benefits of increased speed to cash and less exposure to competitive challenges or changes in market conditions / requirements.
* Productivity of contracts professionals, measured by the average number of contracts handled, varies by more than 100% between high-performing and low-performing organizations. This is after normalizing for role and complexity and reflects factors such as clarity of process, timing of involvement and extent of automation support.
These statistics come from the myriad of data that IACCM has collected through its recent series of contracting benchmark studies. Participants will shortly receive the full results and start using them to drive performance analysis and improvement. But that means the vast majority of contracts organizations – whether within Legal, Commercial, Sales Operations or Procurement – will remain blind to any significant data, because our research also tells us that almost 90% of organizations have virtually no insight to comparative information on contracting process or organization.
Is this absence of data due to difficulty in acquiring it, or because it doesn’t really matter? Historically, it may well be that no one considered it important. Contracts were viewed as important items, but as by-products of the sales or acquisition process. Today, leading organizations (as revealed by the benchmark study) have grasped that the contracting process is itself important and can in fact drive the quality and efficiency of many internal commercial practices. Academics share this view, with a growing number highlighting the competitive advantage to be gained through superior contract and commitments processes.
If you recognize the importance of benchmarks for your business (and the impact they can have on process improvement and investment), you may wish to take this chance to submit input to the surveys and thereby gain access to the results. There is no charge to IACCM members for this valuable output.
The survey links will remain open until May 31st. They are:
Performance Measurement survey, please visit: https://www.surveymonkey.com/s/PerformanceMeasurements
Primary Areas of Activity survey, please visit https://www.surveymonkey.com/s/PrimaryAreasofActivity
Value Proposition survey, please visit https://www.surveymonkey.com/s/valueproposition
Compete Or Cooperate - Do You Use Your Emotional Side?
Much has been said about how suppliers should be managed by procurement.
Indeed one view (Supply Management January 2007) was that the Procurement Manager will become re-titled as the Relationship Manager in future years. This would then mean considering cooperative management styles and perhaps stepping back from any adversarial “them and us” competing power based styles.
For there to be such a change, then what needs to be done?
The competitive way
Most buying and selling organisations have to compete, not only in their local markets but also on a global market. Interestingly this competition is not just for customers demand, but also for suppliers, as many are becoming selective in their choice of customers.
When organisations compete, this is a seen rational and sound business practice. This rational and logical way creates a sense of what is “right and wrong” and has norms, that are clear and objective, for example, “this is how I should behave” or in its extreme, “this is how I must behave.”
This rational view is however only, one, of the two options available and for example, baking a cake with only 50% of the ingredients will never produce the best cake.
Compete or cooperate
A competing process fosters the protection of “my” interests and a tendency for “I win, you lose” styles of negotiations and methods of business. Competing can also become a fiercely fought business discipline, not just between organisations and with external suppliers, but also internally between departments and between the people within organisations.
Indeed as has been noted by Professor Alan Waller, “we have been taught to compete and not cooperate.” What has happened here is that competition has taken over from cooperation and rules and procedures have majored over relationships.
This subduing of suppliers and competitors by competitive power plays involves minimising the risk “for me.” This can mean in the longer term, suppliers have to survive on limited margins as they may be continually expected to meet the demands placed on them for lower prices and higher productivity. This in turn leads for some having to survive on extended cash flows and credit, (that one day will have to be re-paid). Indeed one may wonder how long such continual searches for lower prices and increased performance will continue to give increased quality and more added value.
It has been comprehensively proved, by those organisations practicing TQM, that low prices and high levels of quality are incompatible goals; however dominant buyers choose to believe they can maintain their position because they are easily able to switch suppliers and markets.
Market forces at play here, yes, but at what cost? Is there not a better way to use the market?
The joining of needs, values and norms
Whilst dominant buyers may choose to believe their needs will continue to be met by forcing external competition driven by rules and procedures; what they are really ignoring here, is that any power to influence others, is also determined by the perceptions of these others as to how, their own needs will be met.
This duality of meeting needs is going to be largely ignored in the power based rational and norms of for “me” approach. Additionally, ignored will be the desire to find common ground and the use of cooperating “we” views and values.
This incompatibility and conflict between values and norms, means, that unless a newer form of mutuality of interest in working emerges, disintegration is the only ultimate and eventual result. For those who cannot see any relationship between values and norms, then witness the colossal changes made in East Europe in the 1980’s and 1990’s. Here, eventually people values on society, became at odds with the norms from the political society and a major change in political systems followed.
The rational and emotional best way view
Most western organisations lean more towards a rational scientific view. Whilst emotional and subjective views are often subordinated in Western cultures, they are not in Eastern cultures. Here, the role of buyers and suppliers in practicing continuous improvement with a fuller involvement of suppliers in buyers’ organisations. This is in turn, connected to the dominance of Japan in certain sectors.
What are needed therefore are norms and values of “rational-emotionality for us.” However, it seems to be difficult for many pre-conditioned “rational only” Western managers to make such a change. This for example, was one of the reasons for the 1980/1990’s failure of TQM methods to impact many organisations. TQM was then being seen, as the source for future success of “UK Limited” and whilst TQM has been successful for a few, most UK companies who tried, failed.
Here the already existing superficial attitudes and short term views drove behaviour and the needed fundamental changes were not made “deeper inside.” Organisations wanted the quick fix tools and not the thinking that went behind them.
Changing our views
It seems therefore that Western managers must individually determine how they look at things, and then to be prepared to change their view to incorporate emotional values. After all, they have such emotional values, they were born with them and use them regularly away from work; but Western organisational socialisation and methods have often subdued them and bred competition as, “the one best way”.
Changing however can be a most difficult form of learning for many managers as they have their own "fixed" perception, which can, in effect, block the view. Therefore, if we want to see things differently, we need to change our perception. Remember that perception is reality. The way we see, leads to what we do and what we do, leads to the results we get. So to change the results, we really do need to change the way we see. As an American colleague of mine says, a crazy person is defined as someone who keeps doing the same things but expects better results.
The choice today is change or die
It is my belief that business is, at its roots, an emotional experience. Trying to pretend people’s emotions don't exist in business relationships is dangerous, as building and developing good relationships involves more than just following rational rules and procedures.
To have effective procurement and supply chain management, then we must fully consider how cooperative relationships are to be handled so we can achieve the greater benefits that will only occur when sharing and mutuality happens.
By retaining the current dominance of competition and rules, this means subduing the place of cooperation and relationships. Cooperation and relationships must take a stronger place and find a better balance with traditional rational competition and rules found in most UK supply chains.
For some organisations therefore, the future will mean demise and possibly death, for others, a re-birth and growth. Growth is the better option and needs a conscious choice to learn new ways and in so doing, to change.
MSc. (Cranfield). BA (Hons) (OU).
FCIT .FCILT. FIFP. FCMI.
MCIPS. MCIPD. M.Inst.LM. MIMC. M.Inst.Ex
Stuart Emmett is a freelance independent trainer and consultant who trades under the name of Learn and Change – Stuart believes that in times of change, it is only those who consciously learn, that will inherit, a successful future.
Stuart has operational and strategic experience in varied commercial service industries - gained in the UK and Nigeria – and is particularly interested in the “people issues” of management processes, as well as logistics and supply-chain management. He has worked on 6 continents, in over 30 countries and delivered to over 50 nationalities.
Stuart can be contacted at email@example.com or by visiting
Stuart is the Author of the following books:
"The Supply Chain in 90mins" published by mb2000.com
"Excellence in Warehouse Management" published by eu.wiley.com
"How to Mentor and Support Learning" published by capita-ld.co.uk
"Logistics Freight Transport: Domestic and International" published by Cambridge Academic Press
“Excellence in Supply Chain Management” published by Cambridge Academic Press
"The Leadership Gospels" published by Cambridge Academic Press
“The Business Toolkits” (individual titles on Learning, CPD, Motivation, Team Building, Customer Service, Communication, Systems thinking) published by mb2000.com
Joint Author of:
"Stores & Distribution Management" published by Cambridge Academic Press
"The Relationship Driven Supply Chain; creating a culture of collaboration throughout the chain" published by Gower
“Excellence in Inventory Management” published by Cambridge Academic Press
“Excellence in Procurement” published by Cambridge Academic Press
"Excellence in Supplier Management" published by Cambridge Academic Press
Learn & Change Ltd
Developing Leadership, Management and Supply Chain Excellence
Registered in England: 4531332
Registered Office: 205, Queens Road
Bradford, West Yorkshire, BD2.4BT
Tel: 44 (0) 127 463 5342
EFax: 44 (0) 870 913 4024
How Green Is Your Supply Chain?
Questions for all to answer
Adapted from the book “Green Supply Chains, An Action Manifesto” (2010) by Stuart Emmett and Vivek Sood
There are five fundamental questions that every environmentally pro-active leader and manager needs to ask about their Supply Chains.
It is generally accepted that environmental consciousness is now changing to being more pro-active, as organizations are discovering that it makes good commercial sense. Boards are asking managers to review their policies related to environmental norms, not only to bolster their corporate social responsibility aims, but also because consumers are increasingly asking for it.
It is also widely agreed that consumers will increasingly prefer to buy more, and even pay more, for products or services provided in environmentally sound manner.
A recent analysis has however revealed the following key additional points
Companies are still primarily focused only on having environmentally conscious internal production. For example, any company can become totally carbon neutral by outsourcing all its production, however, shifting the carbon producing activity up or down the supply chains does nothing more than hide the dirt under someone else’s carpet. A holistic approach to carbon management is required, and this is provided by adoption of a Green Supply Chain methodology.
Environmental pro-activism is generally assumed to come at an additional cost to the corporations. It is widely thought that going green is expensive. On the contrary, our research and modeling indicates that adoption of Green supply Chain methodology should result in overall cost reduction, providing this is done in a thorough and logical manner.
Most business models are focused on growing the volume of their current offerings of goods or services to increase profits. A change in this focus towards providing customer end outcomes will, not only, reduce the impact on the environment, but also secure and/or increase market share whilst improving profitability.
So it is clear that a move to Green Supply Chains is not only necessary for sound environmental management, but it is also profitable and makes sound financial management.
How therefore can companies start making the move?
From our research and practical work in this area, we believe the following five fundamental questions really help to focus the discussion and crystallize action plans:
1. What are the tangible and intangible benefits of moving towards a Green Supply Chain?
In our experience these benefits are frequently neither fully explored, nor adequately quantified. Even where a robust analysis is carried out, analysts can either ignore some of the potential benefits, or find it hard to analyze the full impact on the business. As a result, the overall benefits do not get adequate attention at the board level and therefore do not generate enough interest to release the necessary finance to create the transformation.
In one company we know (a large global industrial and building products company with revenues in excess of $5 Billion) the task of exploring opportunities in Green Supply Chains was handed over a senior executive as an additional job over and above his regular job, without any funding, clear direction or expectations. In a situation like this (which is all too common), the potential benefits cannot be fully understood or be agreed by the key stakeholders, resulting in understaffed projects, and poor implementation.
Our analysis has also found that without any new technologies being utilized, just a move to a Green Supply Chain can reduce costs by 5-20%. The adoption of new technologies, however, can take cost reductions to a whole new level.
In addition, by raising their Green credentials amongst customers, employees, government authorities and other stakeholders, organizations also move rapidly towards ensuring a sustainable and successful future.
2. What are the costs, both direct, and indirect?
This is the flip side of the question above. For the same reasons, while companies have vague ideas of the costs, these are rarely fully explored and analyzed. In our experience, these are also frequently exaggerated because of uncertainty surrounding many of the costs. While all future costs have a certain amount of uncertainty, and there is general tendency to allow a buffer; our analysis finds that costs of going green are generally more uncertain, but the buffers allowed are made to be disproportionately higher.
The indirect costs are generally the source of most complications. It is really hard to estimate costs of process changes, disassembly lines planning and set up, waste collection and recycling modeling, additional research and development, inventory reduction and green supply chain modeling etc. Once each one of these systems are fully functional, the costs will follow a predictable experience or learning curve pattern, but it is indeed, difficult to predict the transitional costs, and this makes the analysis complicated and perhaps insurmountable for many project teams.
Our research indicates that direct and indirect costs associated with Green Supply Chains are substantial but however they can be fully funded and more than offset by the benefits they generate.
3. What influence do we have over our suppliers, their suppliers and our customers (especially the party with the most power in the supply chain) that would allow us to jointly work together and move the supply chain towards a green supply chain?
This question is easier to answer as many pragmatic managers have a good idea of the relative power balance in their customer supplier relationships. While occasionally the influence is wrongly estimated, in general, we do find that just asking this question helps to focus action in the right direction.
Some organizations have broken their intra- organizational silos, starting by “winning the home games first” (Emmett 2005) and now do think in terms of the end-to-end supply chains.
However, there are still many more organizations that need to do this. Thinking holistically outside the boundaries of the organization, when applied to Green Supply Chain methodology, can yield some outstanding results. Under this primary question, a few additional secondary questions will help sharpen the focus even further to create the clarity, impetus and momentum towards positive plan and action.
Clearly, the organization which has the most influence over an end-to-end supply chain is best positioned to create the clarity and impetus towards the Green Supply Chains. For example in the retail sector, companies such as Tesco (UK) or Wal-Mart (USA) are best positioned to exercise this type of influence. However with the automobile sector, retailers have far less influence and the influence comes more from the manufacturers.
In each supply chain, it is that entity which has the most influence that needs to be encouraged to think holistically and then to act in the interest of all parties that form part of that supply chain.
It is perhaps also clear why this crucial third question can only be answered after we answer the first two questions. Once the benefits, costs and influences are clearly expressed, defined and analyzed, then it much easier to have an informed discussion with the party that ‘controls’ the supply chain.
A corollary to this discussion is then going to be just how to distribute the costs and benefits of movements towards Green Supply Chains; as unless all the incentives are properly aligned, some parts of the supply chain may well end up sabotaging the overall Green Supply Chain project.
4. How will we communicate and measure our progress towards the green supply chain to the key stakeholders? How will we engage them?
A new road needs new milestones. Traditional supply chain or financial measurements will not suffice in this case. We know of several organizations who started to make some progress towards vague environmental goals and defined this in terms of carbon impact reduction but without any clear definition of 4 or 5 key measurements that relate to supply chains at all levels. Not only were the measurements not clearly defined, but even the traditional KPI’s adapted for the purpose, could not be uniformly and easily accessed by the key personnel who needed the information.
A typical Green Supply Chain project has far more stakeholders than any other transformational projects inside an organization. Besides internal staff, key suppliers, customers, and even the public; media, regulators and government are also stakeholders in a green supply chain transformation.
Therefore, a well thought out stakeholder engagement strategy, diligently executed, that includes clear and regular communication; is essential to success.
5. What barriers to Green Supply Chains can be expected and how can these be overcome?
There several categories of barriers to Green Supply Chains and these include legislation conflicts, inadequate or misaligned stakeholder incentives, lack of environmental norms and tools, lack of resources, and the high costs of implementation and technology.
Within each of these categories, are several specific components making the total number of potential barriers quite formidable and daunting.
Like in any other change initiative, barriers can be overcome through a properly structured, comprehensive and phased migration strategy.
A “Big-Bang” approach is not to be recommended.
Rather, each major project stream is dealt with by a series of phases that cover detailed analysis, design and implementation, and organization change management. Time and care should be taken on the first phase to ensure its success and the ability to leverage subsequent phases.
In summary, those organizations that wish to start on Green Supply Chain projects must ask some fundamental questions. The answers will then help to illuminate their way towards innovation, profitability and sustainability.
As is the case with all ground breaking endeavors, the first mover advantage is enormous, as are the challenges.
Stuart Emmett (2005) “The Supply Chain in 90 minutes
Stuart Emmett and Vivek Sood (2010) “Green Supply Chains, An Action Manifesto”
Stuart Emmett is a freelance independent trainer, mentor/coach and consultant who trades under the name of Learn and Change.
Stuart has operational and strategic experience in varied commercial service industries working in the UK and Nigeria, and is particularly interested in the “people issues” of management processes, as well as logistics and supply-chain management.
He has worked on 6 continents, in over 30 countries and delivered to over 50 nationalities.
Stuart can be contacted at firstname.lastname@example.org or by visiting