Improving Environmental Performance in Your Chinese Supply Chain

It’s not easy, but some leading companies have found that the right incentives and collaborative efforts can help their suppliers achieve better environmental performance.

Rather than simply monitoring Chinese suppliers’ compliance with local environmental, health and safety standards, leading multinational companies are giving suppliers tools and incentives to independently improve environmental performance.

Image courtesy of Flickr user jurvetson.

Given how much of the world’s manufacturing takes place in China and the damage it has wrought on that country’s environment, most analysts expect that multinational brands’ supply chains will face increasing scrutiny in the coming years. As nongovernmental organizations heighten their monitoring and the Chinese government enforces new laws to increase transparency and accountability, multinational corporations can expect growing pressure to run a clean supply chain.

For companies, the costs of ignoring problems can be considerable. For example, in August 2011, a consortium of five Chinese environmental NGOs focused attention on Apple, the beloved U.S. technology giant, for using Chinese suppliers with outstanding public pollution violations and ignoring the NGOs’ earlier entreaties to redress the problems.1 International headlines soon reported “Apple Attacked Over Pollution in China”2 and “Apple Cited as Adding to Pollution in China.”3 Within a month, Apple was in talks with the environmental organizations to clean up its — and its suppliers’ — act.

And NGOs no longer just scrutinize MNCs’ immediate suppliers. Greenpeace International in July 2011 singled out Nike, Adidas and other major brands for doing business with a big Chinese textile group found to be discharging toxins into a local river. It didn’t matter that Nike and Adidas sourced finished garments from the group’s cut and sew facilities, not from its fabric factories that most likely released the toxins.4

The Leading Question

How can multinational corporations encourage their Chinese suppliers to improve environmental performance?

Findings
  • Auditing is not enough; provide incentives for identifying and addressing problems.
  • Collaborate with nongovernmental groups and other buyers.
  • Learn from your suppliers — and facilitate learning among them.

How can MNCs avoid such embarrassments? Even for high-profile companies like Nike and Adidas, which are ahead of industry peers in promoting environmental improvement in their supply chains, it may never be completely possible. But MNCs can minimize risks in China if they heed the sometimes painful lessons that these and other leading companies have learned in recent years about managing their Asian supply chains.

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References

1. See “The Other Side of Apple II: Pollution Spreads Through Apple’s Supply Chain,” Friends of Nature, Institute of Public & Environmental Affairs, Green Beagle, Envirofriends, and Green Stone Environmental Action Network, Aug. 31, 2011, www.ipe.org.cn/Upload/Report-IT-V-Apple-II.pdf.

2. L. Hook and K. Hille, “Apple Attacked Over Pollution in China,” Financial Times, Aug. 31, 2011.

3. D. Barboza, “Apple Cited as Adding to Pollution in China,” New York Times, Sept. 1, 2011.

4. See “Dirty Laundry: Unravelling the Corporate Connections to Toxic Water Pollution in China,” Greenpeace International, July 2011; “Adidas Group Response to Greenpeace Report,” Adidas Group, July 2011; and J. Watts, “Greenpeace Report Links Western Firms to Chinese River Polluters,” The Guardian, July 12, 2011.

5. J. Pfeffer and R.I. Sutton, “The Knowing-Doing Gap: How Smart Companies Turn Knowledge Into Action” (Boston: Harvard Business Press, 2000).

6. R. Locke, M. Amengual and A. Mangla, “Virtue out of Necessity? Compliance, Commitment, and the Improvement of Labor Conditions in Global Supply Chains,” Politics & Society 37, no. 3 (September 2009): 319-351; R.M. Locke, F. Qin and A. Brause, “Does Monitoring Improve Labor Standards?: Lessons from Nike,” Industrial and Labor Relations Review 61, no. 1 (October 2007): 3-31; and R. Locke and M. Romis, “Improving Work Conditions in a Global Supply Chain,” MIT Sloan Management Review 48, no. 2 (winter 2007): 54-62. Our analysis of a game-theoretic model suggests that an increase in auditing effort by a buyer results in lower compliance effort by the supplier and increased risk of violations and negative public relations (of the sort recently experienced by Apple) in two cases. In the first case, the buyer bears a substantially higher cost associated with a violation than does the supplier, and the supplier is likely to be able to hide problems from the auditor. Then, high audit intensity motivates the supplier to hide rather than comply. In the second case, the supplier has thin margins, a high cost of compliance and substantial cost in the event that a violation is detected. Then, the supplier does not hide information from the auditor. Instead, the supplier relies on the auditor to identify problems. As the buyer puts more effort into auditing, the supplier has a lower risk of suffering an externally detected violation for any given level of compliance effort, and therefore the supplier puts less effort into compliance; in short, the supplier free-rides on the buyer’s auditing effort. An alternative approach is for the supplier to engage and pay a reputable third party to undertake the auditing. That may improve compliance and profitability for both buyer and supplier — assuming the third party is not corrupt. Q. Zhang and E.L. Plambeck, “Auditing, Hiding, and Compliance in Socially Responsible Supply Chain Management,” working paper, Stanford Graduate School of Business, 2011.

7. T. Fuller, “‘Sweatshop Snoops’ Take on China Factories,” New York Times, Sept. 15, 2006; and “Secrets, Lies, and Sweatshops,” Business Week, Nov. 27, 2006.

8. E.L. Plambeck and L. Denend, “Wal-Mart’s Sustainability Strategy,” Stanford Graduate School of Business case no. OIT-71 (Stanford: Stanford University, April 17, 2007): 9.

9. W. Clem, “Timberland Linked to Polluting Factories,” South China Morning Post, Aug. 7, 2009.

10. “Electronics Supply Networks and Water Pollution in China: Understanding and Mitigating Potential Impacts,” Business for Social Responsibility, November 2010.

11. S. Oster, “China Report Finds Extensive Pollution,” Wall Street Journal, Feb. 10, 2010.

12. The Electronic Industry Citizenship Coalition in 2007 launched the E-TASC program (the electronics industry’s Tool for Accountable Supply Chains) to manage data and share audit results.

13. “Walmart Global Sustainability Report: 2010 Progress Update” (Bentonville, Arkansas: Wal-Mart Stores Inc., 2010), http://cdn.walmartstores.com/sites/sustainabilityreport/2010/WMT2010GlobalSustainabilityReport.pdf.

14. “Unlocking Energy Efficiency in China: A Guide to Partnering With Suppliers,” Business for Social Responsibility, May 2010, p. 11.

15. “Walmart Global Sustainability Report.”