FOUR | Supply chain demand

In the late 1980s, as economies and markets became increasingly global, companies shifted from traditional, vertically integrated business models to models in which various activities were outsourced. Companies began to focus on core competencies that delivered high value and left low-value parts of the production process—such as manufacturing— to other companies.

The result was a near-total loss of control of the manufacturing process. In the beginning, companies didn’t really care about this lack of control, so long as products appeared on time and at a low cost. Then unregulated suppliers began making headlines that made customer companies look bad. Widely publicized human-rights and labor abuses by companies such as Nike (NYSE: NKE) and Gap (NYSE: GPS) suppliers sparked a global and sudden interest in regaining control of the supply chain, focused primarily on human rights and labor regulations.

Ten years later, food safety scares and public awareness of climate change issues have sparked the same sort of attention toward the environmental impact of the supply chain. As some of the largest U.S. companies, starting with retailers, begin to pay attention to how goods are delivered to the shelves, or even to retailers, a host of start-ups are gaining traction with new technologies that aim to help deliver safer goods more efficiently.

It’s probably no surprise that Wal-Mart (NYSE: WMT) is at the epicenter of the changes. Although the company is notoriously tightlipped about the specifics of its sales, profits and margins, Wal-Mart represents an estimated 10 percent of the U.S. retail economy. Its shelves are stocked with name-brand and private- label products from around the globe, and suppliers often relate stories of intensely competitive bidding wars to retain prized shelf space.

Since the company turned its eye on environmental issues, it has already used its clout with suppliers to make demands on product labeling and packaging, and has made known its interest in purchasing more third-party certified goods. In October 2007, Wal-Mart CEO Lee Scott addressed the CEOs of his company’s suppliers. In his address, Scott said he had realized Wal-Mart could not continue to have simply transactional relationships with its suppliers, that it would have to move toward deeper relationships in order to achieve its environmental impact reduction goals.

“It’s unclear how Wal-Mart will achieve that goal yet, but it’s clear that it has to if it wants to see big changes in the products it carries in terms of sourcing and design,” says Dr. Andrew Hutson of Environmental Defense (formerly the Environmental Defense Fund), who is currently working with Wal-Mart to “green” its supply chain. “If Wal- Mart says, “This is what we want,” you’ll see rest of the retail industry and various product industries follow,” Hutson says. “That’s why we’re here—to guide them on the right path to doing that correctly.”

Although Wal-Mart is the largest commercial energy consumer in the United States, 92 percent of the retailer’s environmental impact can be attributed to its supply chain, according to Hutson. “It’s clear that this is where they should be focusing, and they need to look at the entire life cycle of the products they’re carrying: where they came from, how they were designed and manufactured, what end-of-life plans there are for the product.”

To that end, Hutson and his colleague Michelle Mauthe Harvey, who is helping Wal-Mart look at its food sourcing practices, are currently working to educate the store’s buyers, who select products for the chain. “That’s really exciting, because ultimately, the merchants themselves exert a huge amount of influence on things people buy,” Hutson says.

While Wal-Mart led the charge in 2007, supply chain innovations are likely to go beyond even the mega-retailer’s demands. Innovations that aim to reduce waste and toxins in the supply chain are likely to do brisk business in 2008. According to the U.S. Department of Agriculture, 750,000 refrigeration units ship food from the United States all over the world, and the number is projected to hit 1.3 million in the next five years. The agency reports 30 percent of refrigerated foods are lost to microbial infection. As new systems and technologies improve the twin goals of traceability and transparency for food safety applications, other agricultural supply chains are likely to benefit.

A number of startup companies are launching tools to help suppliers across the industry track and better control their products. Oklahoma-based ZigBeef has developed a system that enables cattle ranchers to track cattle at greater distances and in diverse terrains. Icebreaker, the world’s largest merino wool outdoor apparel company with new North American headquarters in Portland, is creating a Web interface that would allow consumers to trace their garments back to one of 120 farms where Icebreaker directly sources its wool.

Paul Stiros, CEO of NineSigma, an “innovation broker” that connects large companies with scientists and researchers working to solve various technological problems, says he has seen a marked increase in companies looking to minimize the environmental impact of various steps of the design and manufacturing process. Stiros, whose company works with multinational corporations such as Kraft Foods (NYSE: KFT), General Motors (NYSE: GM) and Unilever (NYSE: UL ), says in addition to looking for specific alternatives to materials, companies are increasingly seeking out experts who can look at how they design and manufacture products, and zero in on where they can have the biggest impact on reducing energy consumption, waste or toxic materials.

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TrendWatch 2008
The Sustainable Industries editorial team talked with dozens of industry leaders, reviewed hundred of articles, and sifted through stacks of research to bring to you, our readers, insights on what to expect from sustainable industries on the West Coast and beyond in the year ahead. Keeping reading for more insights into the year ahead!
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