The EY Trialogue Sustainability forum was held on 18th February 2016 and included panelists Alexander Haw from Massmart, Sanjeev Raghubir from Nestle, and William Hughes from Imaphla Clothing.
WHERE IS THE PRESSURE COMING FROM TO INFLUENCE SUPPLY CHAIN SUSTAINABILITY?
According to Sanjeev it is a combination of factors. There has been a noticeable increase in consumer concern about how products are produced, what products are purchased and what the implications of such purchases might be. This is prevalent all the way through the value chain from agricultural input, through the manufacturing stage, and up until the point at which the consumer decides to purchase the product. Sanjeev conceded that for an international company like Nestle, there is significant pressure in terms of international standards of conformity and commitments. Nestle expects all of its units worldwide to conform to these. However, Nestle’s South African operations are guided first and foremost by South African legislation.
In William’s experience Impahla Clothing’s specific business strategy was based on trying to create a niche market, where they were approached by customers and not vice versa. With the unfortunate and volatile value of the Rand, it is very difficult to compete in a market already inundated with products. Therefore an alternative and innovative approach was the only option. It was here that the sustainability aspect of the company set them apart. William stressed the necessity that alignment with a sustainable business strategy is not just a tick box exercise; rather it has to be completely integrated into every facet of the business plan. In his particular case, integrating sustainability has had positive bottom line impacts. For example, absenteeism is currently sitting at 2%. This is remarkably different to the industry average of 6% and an incredible achievement for Impahla. Additionally, Impahla is beholden to certain sustainability compliance requirements set by customers such as Puma. While the influence of such customers was instrumental in formalising Impahla’s sustainability approach, the drive to be sustainable comes from within the core of the company itself and that is essential. As a result of this drive, Impahla has been carbon neutral since 2008.
Similarly Alex commented on the change of sustainability at Massmart since Walmart’s involvement. According to Alex the two companies are still separately listed however Walmart has provided a different set of eyes for monitoring sustainability progress. However, the challenge lies in the ability to achieve sustainability in an economically viable manner. Encouraging suppliers to be proactive about it is a big part of Massmart’s approach but at the end of the day the suppliers are separate business entities and the governance thereof falls outside Massmart’s reach.
William suggested that instead of focusing on trying to reach a particular number of suppliers or asking every possible question about how sustainability might be achieved in each particular supplier, the focus should rather be on perfecting a single area or component of sustainability. He also encouraged the use of comparisons to competitors to benchmark companies and then focus on areas where improvements are required.
HOW CAN YOU APPROACH SUSTAINABILITY WITH SUPPLIERS, SURELY THERE IS A FAIR AMOUNT OF POWER HELD OVER SUPPLIERS THAT CAN BE HARNESSED TO STEER THEM IN A PARTICULAR DIRECTION?
Sanjeev was the first to refute the idea that the suppliers are swayed by the power held by the customer. According to Sanjeev it is ultimately about a partnership as the suppliers themselves hold a fair amount of power. A customer looking to be efficient and profitable over a long period of time needs to invest in suppliers for at least the foreseeable future. If they are seen to be constantly jumping ship not only is it disagreeable to investors and shareholders but it is unfeasible financially. It is therefore
essential that both the supplier and the customer work in union to achieve a common goal of sustainability for the mutual benefit of both parties. It is on this basis that Nestle has invested in long term programmes (that stress the importance of sustainability) which support specific suppliers. For example, this support includes an agricultural service which acts as a knowledge base for agricultural suppliers. Achieving a sustainable future must originate from an inherently holistic approach and should not be based on pressurising people or companies to comply but rather on forming partnerships and embarking on the journey together.
Alex reiterated Sanjeev’s thoughts, pointing out that the influence Massmart holds over its suppliers varies hugely depending on who the supplier is (i.e. it is easier to influence suppliers that produce Massmart branded products). Historically, the approach has been to de-list a company that did not comply with the stringent sustainability criteria set by Massmart. However, more recently the approach has started to favour engagement with the supplier to promote understanding around the benefits and necessities of sustainability practices. This is achieved through Joint Business Planning, where by Massmart sits with suppliers and puts forward an achievable sustainability agenda that can then be collectively achieved. In essence, you have more influence as a customer than if you are not. In engaging with suppliers on the topic of implementing sustainable practices, it is important to keep the supplier informed, to provide guidance and to address existing suppliers with sensitivity as there are often initial cost implications for the supplier.
In William’s experience, most local suppliers and customers are most concerned about the margins or the bottom line as opposed to the sustainability or origin of the product. Given the economic situation and the volatility of the Rand this can be an important concern for keeping business afloat in South Africa. Therefore, any engagement with the suppliers should focus on pointing out the monetary advantages and benefits associated with the adoption of such policies.
All of the panelists agreed that promoting and encouraging sustainability in the supply chain should be about engagement with the supplier as opposed to issuing a directive with which the supplier must comply.
WHAT ARE THE COSTS INVOLVED IN ADOPTING ENVIRONMENTAL OR SUSTAINABLE POLICIES?
As Sanjeev pointed out, a company adopting sustainable practices and policies should not experience significant additional costs. In the long run, the adoption essentially adds to the bottom line and is therefore actually cost effective.
ARE ENVIRONMENTNAL ISSUES MORE OF AN INTERNATIONAL CONCERN THAN A LOCAL ONE?
According to Sanjeev, at a global level environmental concerns are somewhat heightened in comparison to the local focus. However, in the case of Nestle, there is a necessity that compliance with international standards is achieved throughout the company. He did add that, having said that, there is still the reality that the consumer dictates demand and there is the expectation that Nestle products to meet certain standards, particularly relating to quality, taste etc.
HOW HAVE YOU EMBEDDED THESE IDEALS INTO THE BUSINESS APPROACH?
William suggested that it is somewhat easier to achieve this with old suppliers than with new suppliers and believes that it needs to be implemented from a process point of view. Sanjeev reiterated that a partnership needs to be established and believes that it is essential that a Sustainability Policy is implemented from the get-go. Thereafter, as long as the effective controls are established that are amendable to accommodate sustainability aspects, it should be attainable.
Massmart has begun conducting responsibility audits on all of their suppliers. This means that the suppliers are audited on all business practices and this is then recorded and monitored. Depending on the outcomes of the audit, supplier contracts can be amended accordingly when they are up for renewal to encourage the supplier to operate in a more sustainable manner. If this is not accepted by the supplier, the contract is not renewed. It is important that sensitivity is exercised in these cases; a responsibility audit is a large undertaking and needs to be implemented with care.
HOW IMPORTANT ARE LONG TERM RELATIONSHIPS WITH SUPPLIERS?
Sanjeev stated that long term relationships with suppliers are absolutely pivotal. Over the years, Nestle has learnt that long term relationships are essential to securing a reliable supply of products as well as products of a consistently high quality.
William indicated that in order for them to be sustainable, they need long term relationships with customers. Long term relationships are particularly favourable with international customers.
DO YOU RECEIVE MUCH FEEDBACK FROM SUPPLIERS?
Alex noted that based on the outcomes of their audits, Massmart have begun awarding their top achieving suppliers. The top 20 achieving suppliers are invited to an awards ceremony along with big business and the media. This has sparked the interest and made the idea of complying with sustainability requirements more attractive. There is also the added benefit of Massmart’s commitment to providing consultants to help assess the supplier and to provide advice on improvements.
WOULD INTENSIFIED EDUCATION IMPROVE THE SITUATION OR IS SOUTH AFRICA JUST BEHIND THE REST OF THE WORLD?
According to Alex, one of the biggest challenges is the tension between products being more environmentally friendly and the cost of the product on the shelf. Many believe that an inherent consequence of implementing sustainable production practices is a higher price tag. As such, there is a need to get a handle on producing in a more sustainable manner but without the additional cost. We need to identify and unlock the value associated with better produce. Light bulbs for example are a perfect example as the result is tangible and accessible to consumers. The energy efficient option may carry a higher price tag but the result is decreased energy consumption and therefore reduced electricity costs which can be felt directly by the consumer.
In Sanjeev’s experience consumers want all the functionality of a product that has always been produced in a more sustainable manner but within the parameters of a comparable price range. Nestle needs to remain cognisant of what consumers want: people might like the idea of organic products but very often they don’t want to pay a premium price for them.
THERE IS A LOT OF PRESSURE TO SUPPORT SME’S, HOW DO YOU ACCOMMODATE THIS AND HOW CAN IT BE ACHIEVED?
William suggested that if SME’s want to be supported and if they want their products to be purchased, they need illustrate that they can be innovative and competitive in the market. First and foremost, as the basis for engagement, all suppliers have to be legally compliant. Therefore, as a first step SME’s must ensure that they are legally compliant, and then be able to demonstrate that their product is of value to the buyer. If SME’s want to become sustainable, the sustainability agenda needs to be driven from the board level in order to succeed.
ARE THERE OPPORTUNITIES TO CREATE PRODUCTS THROUGH “CLOSED LOOP” PRODUCTION PROCESSES?
“Closed loop” production is a process through which pre- or post-consumer waste is collected, recycled and used to make new products. It can also be used to refer to donations of products that can no longer be sold, for a variety of reasons. Sanjeev indicated that these processes are being considered. However, there is risk associated with this, and there is uncertainty regarding the readiness of South African consumers for these products.
An area that requires urgent intervention is that of food waste in the form of food that has reached or is close to its sell by date, but is still safe for consumption. There are a variety of issues with the redistribution of this food including: negative perceptions regarding post sell by date food, the point in time at which freshness can still be guaranteed and the ability of companies to effectively quantify this; associating oneself and one’s brand with redistributed food; and the legal implications of food
redistribution. These types of issues hinder the adoption of a true closed loop from a food perspective.