Foxconn Scandal Offers Supply Chain Lessons

By Manish Bapna - February 29, 2012

This article was originally posted on Forbes.com.

What do Apple, HP and Dell have in common – apart from making computers? They all source electronics from Foxconn, the beleaguered Chinese company under fire for working conditions at its factories. 

There is a clear lesson to be drawn from the ongoing Foxconn furor. Fortune 500 companies’ supply chains are increasingly under the microscope— by consumers, investors, and the media. This scrutiny benefits not just factory workers but also the environment. And while uncomfortable for companies caught in the spotlight today, in the longer-term it will help business, too. Here’s why.

Suppliers of goods and services often account for a large, even majority, percentage of a company’s environmental footprint, especially in sectors such as retail, and food and beverages. Kraft, for example, estimates that an eye-opening 70 percent of its greenhouse gas emissions originates not from within its own operations but from its raw material suppliers. Other types of suppliers emit greenhouse gases by consuming energy during production, transportation, processing, and distribution.

This all adds up to a huge opportunity for companies to encourage their suppliers to reduce emissions contributing to climate change– and spur efficiencies in the process. Increasingly, investors, shareholders, and consumers are pressing for such action. And often they are pushing at an open door, as multinational companies seek support about how to improve the sustainability of their complex, global supply chains.

Until recently there was no authoritative, internationally accepted guidance for measuring suppliers’ emissions. But this gap was filled late last year when the Greenhouse Gas Protocol (GHGP) released the first comprehensive standard for measuring the carbon footprint of the entire corporate value chain, from sourcing materials to end of life disposal. Road-tested by 34 leading companies, including Kraft, Coca-Cola, IBM, Ford, Siemens, and Levi Strauss, the standard is already being implemented by dozens of companies worldwide. The Consumer Goods Forum, representing over 400 companies with a combined $3 trillion dollars in sales, has also endorsed its use.

While measuring the carbon footprint of what may be hundreds of suppliers is a considerable and painstaking investment for companies, this enthusiastic response has not come as a surprise. When WRI and the World Business Council for Sustainable Development launched the GHGP Corporate Value Chain (Scope 3) Standard in New York and London last October, corporate leaders were united about the importance of getting their supply chain in good environmental order.

Kelly Semrau, Senior Vice President of Global Corporate Affairs, Communication and Sustainability for S.C. Johnson, for example, described their road test of the standard as providing “key data to drive our strategic business decisions regarding greenhouse gas reductions.” Meanwhile, PepsiCo’s Senior Director of Environmental Sustainability, Robert ter Kuile, praised it as “an economically, as well as an environmentally valuable tool,” which will help the company manage the carbon footprint of its vast supplier network.

Measuring supply chain emissions, in other words, is much more than a PR exercise or risk avoidance strategy. It paves the way for companies to operate more efficiently, cut costs, and introduce product innovations. Kraft, for example, has responded to discovering its supply chain’s carbon footprint by working with farm suppliers to grow crops for its food products more efficiently.

And you don’t have to be a corporate giant to make the exercise worthwhile. Companies large and small can discover buried treasure by identifying energy and waste savings in their supply chains, which in turn cuts costs. For instance, Swire Beverages, a bottler and supplier of Coca-Cola products in China, has cut its electricity use by 35 to 40 percent by installing more energy efficient refrigeration equipment in its operations.

Sustainable supply chains will not only help businesses build loyalty from increasingly discerning stakeholders; they will also make companies leaner and better prepared for a future in which natural resources will be increasingly scarce, and for economic policies and incentives directed toward a low-carbon economy.

The market seems increasingly aware of this. Just last month, for example, a University of California study found that companies that voluntarily disclosed their carbon emissions saw their stock prices rise by just under half a percent in the days following the announcement.

The business benefits alone should be enough to convince CEOs. But if not, they should think hard about Foxconn– and the reputational icebergs that may be lurking under the surface in their own supply chain.

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