As an economist, I subscribe to the belief that an idea will get further if there is an economic incentive to support it.  For so long, the discussion among businesses has been along the lines of “Can we afford to focus on the environment, or are we too small to be sustainable?”  It is exciting that we are moving beyond this false dichotomy as many companies realize that they can do well by doing good, a it was argue in a previous post in this blog.

What is even more encouraging to me is that new business opportunities are arising out of sustainability.  I am on the board of advisors for a very successful local dry cleaning chain called Dependable Cleaners. I recently learned that Dependable Cleaners provides eco-friendly hangers to their customers that they receive for free from an organization called Hanger Network.  Hanger Network provides recycled (and recyclable) plastic hangers to dry cleaners at no cost, earning money from advertising that appears on the hangers themselves.

In this instance, all companies benefit from this sustainable idea: Dependable Cleaners is reducing costs and waste, advertisers are gaining access to consumers through a new and interesting medium, and Hanger Network is creating an entirely new business around sustainable practices.  This endevor is a huge win for the environment, helping to reduce the 3.5 billion wire hangers that go into US landfills every year.

I believe that as the number of people interested in sustainability continues to grow, the opportunities for existing businesses to do well by doing good will grow rapidly, as will the opportunities for innovative entrepreneurs to create new markets.

Companies committed to sustainability as a core business value are responsible for the social, economic and environmental impacts of their entire supply chain. Business relationships with suppliers can be a means of bringing about change towards more sustainable practices and reinforcing responsible practices.

One of the key issues is suppliers’ compliance with environmental and social standards. In the 1980’s when companies began increasingly to source from developing countries, the assurance that those standards would be met became more doubtful. Several developing countries have governments that are neither strong nor independent enough to enforce regulations on business. Companies had to find their own methods for discouraging sweatshops, child labor, and environmental degradation.

The great awakening in the corporate world for extended supply chain responsibility came in 1998, when Nike faced intense criticism from NGOs for working with suppliers that employed children and provided substandard working conditions. These NGOs run a public campaign against Nike. This brand was seriously damaged and sales plunged. Corporations around the world began to realize that consumers do care about the way their products are produced, and they are willing to demonstrate their feelings through their spending habits.

Some of the main issues for environmental standards in the supply chain relate to treatment and disposal of effluents, emission and waste (air, ground and water pollution), water and energy management (efficient use of resources), noise pollution, and the use of harmful metals and chemicals. Labor issues include child labor, workplace health and safety, adequate compensation, vacation and rest days, overtime policies, and anti-discrimination rules.

Ensuring positive impacts in the supply chain poses difficult questions and trade-offs for companies. For example: Is it enough that the supplier comply with local national standards or should they comply with the higher standard of the buyer’s country or company? If you find the supplier is lacking in an important standard, what is the appropriate action: to cut business ties  and look for another supplier, or work with the supplier to improve conditions? If you look for another supplier you may not affect the situation in that community. If you choose to work with the supplier to improve conditions, how far must you be willing to go? What type of resources should you bring to bear on this attempt? In short, the “right” answer is not always clear.

Companies use third party certification as a mean to ensure compliance with all kinds of standards. There several non-profit independent organizations providing those certifications. One of the most well-known for social and labor standards is the Social Accountability 8000 (SA 8000). For environmental management practices, the ISO 14000 series is widely used. In the rug industry, Rugmark Foundation certifies that the product was made without the use of child labor. Rugmark also promote educational opportunities for children in rug producing areas in South Asia.

There are several companies that conduct social and environmental audits for overseas manufacturing facilities. These audits do not necessarily lead to any certification. They are meant to provide an overview of the social and environmental situation of the supplier. An audit can be very helpful to point out areas that need improvement, and they are generally more affordable than a certification.

Auditing, however, takes an “arms-length” approach between buyer and supplier. It does not address the role of the buyer in bringing about certain undesirable practices for suppliers. Buyers typically want the lowest possible price and the highest quality – all in a very short delivery time. Sometimes it is impossible for suppliers to meet these demands without excessive overtime work, lower labor compensation, and less attention to health and safety issues. Companies that are committed to implement sustainable practices in their supply chain should also look at their own practices and the ways they work with suppliers. Changes in purchasing and product development practices may help suppliers meet higher standards.

There is a vibrant debate about whether the auditing model is the best way to achieve better labor and environmental compliance.  Recent research has concluded that, by itself, auditing has not improved conditions significantly. Rather, the key to success has been the implementation of modern and efficient management systems on the supplier side. This research has encouraged corporations to work more closely with suppliers to upgrade managerial and oversight capacity. It has also led corporations to seriously assess how their own processes have negatively impacted their suppliers’ standards.

Price is another key part of a sustainable supply chain. The Fair Trade movement advocates the payment of a fair price for products – a price that allows producers to provide workers with a decent standard of living while running a sustainable business. The Fair Trade movement is still more directed towards agricultural products and small producers and artisans, mainly because it is easier to determine what a fair price is in these contexts, as opposed to industrial production.

Finally, I would argue that a sustainable company has an obligation to improve the financial, economic and technical capacity of its suppliers. For many reasons, companies in developed countries are much better equipped in these areas in contrast to companies in developing countries. In the case of Merida, for example, we deal with several small companies that can readily benefit from our expertise and knowledge in product development, design and technical capability. We feel obliged to transfer skills and knowledge in order to help the supplier grow and develop as a result of the partnership. These types of collaborative partnerships exemplify the shared responsibility buyers and suppliers must accept for creating the conditions for a sustainable supply chain.