Supply Chain Management: Strategy,

Planning, and Operation

Seventh Edition, Global Edition

Chapter 17
Week 9
Sustainability and the
Supply Chain

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Learning Objectives
17.1 Understand the importance of sustainability in a supply
chain.
17.2 Discuss the challenge to sustainability posed by the tragedy
of the commons.
17.3 Describe key pillars of corporate social responsibility.
17.4 Identify opportunities for improved sustainability along
various supply chain drivers.
17.5 Understand the role of incentives and regulation for
improved sustainability.

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Role of Sustainability in a Supply
Chain (1 of 3)
• The health and survival of every supply chain depends on
the health of the surrounding world
• Expand the goal of a supply chain beyond the interests of
its participants
• Sustainable development – development that meets the
needs of the present without compromising the ability of
future generations to meet their own needs

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Role of Sustainability in a Supply Chain (2 of 3)

• Three pillars of sustainable development

– Economic sustainability
– Environmental sustainability
– Social sustainability
• Factor categories
1. Reducing risk and improving the financial
performance of the supply chain
2. Community pressures and government incentives and
mandates
3. Attracting customers that value sustainability

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Role of Sustainability in a Supply Chain (3 of 3)

• Most effort expended in reducing risk and improving

financial performance
• Activity slow as actions may require upfront investment
• Barriers to increased focus on sustainability
– Insufficient return on investment
– Customers’ unwillingness to pay a premium for green
products
– Difficulty evaluating sustainability across a product life
cycle

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Summary of Learning Objective 1

As supply chains have globalized and emerging countries

have grown, it has become increasingly clear that the
world’s resources and environment will not be able to
support this growth unless supply chains become more
sustainable. Besides the need to make the world more
sustainable, an increased focus on sustainability can allow
supply chains to reduce risk, become more efficient, and
attract some customers who value these efforts.

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Tragedy of the Commons

• Dilemma arising when the common good does not align

perfectly with the good of individual entities
• Every company and supply chain faces the challenge of
the tragedy of the commons as it operates in a global
environment
• Difficult to imagine a sustainable solution emerging
without some intervention

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Solutions to This “Tragedy”

• Choose from options that are unlikely to be supported by

all of their own free will
• Mutual coercion – social arrangements or mechanisms
coerce all participants to behave in a way that helps the
common good
– Command-and-control approach
§ Government/regulators set standards
– Market mechanisms
§ Cap-and-trade
§ Taxes

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Summary of Learning Objective 2

Many actions that improve sustainability of a supply chain

impose costs that are local (to an individual, a firm, supply
chain, or country) but provide common benefits that are
more global. In contrast, a disregard for sustainability
provides benefits that are local but costs that are shared
globally. As a result, encouraging sustainability without
some external pressure, in the form of either a public
mandate or an economic incentive, can be difficult.

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Key Pillars of Corporate Social
Responsibility
• Measuring performance along all three pillars may be
required to evaluate the impact of sustainability-related
efforts
– Environmental
– Social
– Governance
• Two fundamental challenges
– Scope of measurement
– Absolute of relative measures

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Environmental Pillar

• Firm’s impact on the environment, including air, land,

water, and ecosystems
– Resource reduction
– Emission reduction
– Product innovation
• Not all “green” claims are valid
– Greenwashing

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Social Pillar

• A firm’s ability to address issues that are important for its

workforce, customers, and society
• Audit and support suppliers
– Supplier collaboration and capability building strongly
associated with social and environmental
responsibility performance improvement and lower
operating costs
– Benefits accrue to all customers of the supplier

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Governance Pillar

• Firm’s governance style based on best management

practices
• Vision and strategy for environmental and social
improvements must align with economic performance
• Hard to implement

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Summary of Learning Objective 3 (1 of 2)

Corporate social responsibility performance is measured

along the environmental, social, and governance pillars.
The environmental pillar includes resource reduction,
emission reduction, and product responsibility. The social
pillar includes issues related to workforce, customers, and
community. The governance pillar includes vision and
strategy along with board structure and shareholder rights.
Improved vision and strategy and social performance helps
a firm increase the economic impact of its environmental
activities.

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Summary of Learning Objective 3 (2 of 2)

Increasing the scope of performance measurement to

include the whole supply chain along with incentives and
mandates from regulators, however, are important to push
firms to include CSR in their strategy and continue to
improve their environmental and social performance.

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Sustainability and Supply Chain Drivers

• Match pillars with drivers

• Measure environmental impact for each driver along each
of the social and environmental categories

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Facilities

• Consumers of energy and water and emitters of waste

and green- house gases
• Separate the improvement opportunities into those that
generate positive cash flows and those that do not
• Facilities often offer the best opportunity to
simultaneously improve the environmental and financial
performances through innovation

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Inventory

• Most supply chains focus on raw materials, work in

process, finished goods
• Inventory in a landfill
• Cost borne collectively by society
• Reduce harmful inventory, unlock unused value
• “Cradle to cradle” design

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Transportation

• Improve environmental performance through resource

and emission reduction
• Product design can play a significant role

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Sourcing

• Greatest social and environmental impact occurs in the

extended supply chain
• Impact has grown with increased global sourcing
• Verifying and tracking supplier performance with regard
to sustainability a major challenge

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Pricing

• Differential pricing can improve the utilization of assets,

leading to resource reduction
– Delays the need for additional capacity
• Consumption visibility and differential pricing potentially
lead to reduce resource consumption
• Biggest challenge is changing the customer’s willingness
to pay
• Government incentives can encourage customers and
firms

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Summary of Learning Objective 4 (1 of 2)

The facilities and transportation drivers offer firms the best

opportunities to improve environmental and economic
performance simultaneously by improving the utilization of
resources. Differential pricing that helps move demand
from peak to off-peak periods can also improve resource
utilization by creating a more level demand. Firms,
however, are unlikely to increase recycling to reduce
inventory at the landfill unless encouraged through
incentives or pushed through mandates.

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Summary of Learning Objective 4 (2 of 2)

This is also one area where consumer behavior will require

change. While firms have started to consider environmental
and social impact when making sourcing decisions,
significant improvement in this area is unlikely without
suitable incentives and mandates. Improved information
related to performance is critical if the other supply chain
drivers are to be structured for better CSR performance.

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The Role of Incentives and Regulation for
Sustainability
• Neither customers nor firms will fully account for
environmental and social sustainability as long as they
focus on their own economic performance
• Internalize the “monetary value” of the social or
environmental cost of their actions
• Incentives and regulation must play an important role

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Recycling and Closed-Loop Supply Chains

• Improve sustainability by designing products that use

fewer resources and can be recycled and
remanufactured
• Depends on
– The incentive to recycle or remanufacture
– The cost to recycle or remanufacture
• Cannibalization of demand for new products
• Cost of recycling or remanufacturing has a significant
impact on the extent of recycling

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The Pricing of Emissions

• Firms will not put sufficient effort into reducing GHGs

unless they are “forced” to reduce emissions or required
to pay for the social cost of their emission
• Two approaches
– Carbon tax
– Cap-and-trade system

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Pricing Emissions

• Evaluating pricing mechanisms

– Cost of administration
– Price volatility
– Emission uncertainty
– New information uncertainty
– Industry competitiveness
– Wealth transfer to energy-exporting countries
– Revenue neutrality

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Summary of Learning Objective 5

The tragedy of the commons makes it difficult to improve

sustainability efforts by firms and individuals without some
external pressure. To decrease resource consumption and
increase recycling and remanufacturing, a suitable
approach is to tax the producer to encourage resource
reduction and reward the recycler to increase the
percentage recycled. A price on emissions is the most cost-
effective way of reducing emissions. Emissions can be
priced through either a carbon tax or a hybrid cap-and-
trade mechanism. A key challenge when using carbon
taxes is identifying the tax rate. A key challenge when using
cap-and-trade is identifying a suitable cap on emissions.
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