What Is Business Ethics?

What does it mean to say a business practice does not “pass the smell test”? What would happen if
someone read the article and said, “Well, to me it smells all right”? If no substance fills out the idea
and if there is no elaboration, then there probably would not be much more to say. The two would
agree to disagree and move on. Normally, that is okay; no one has time to debate everything.
However, if you want to get involved—if you are like Wagoner, who sounds angry about what is
going on and maybe wants to change it—you will need to do more than make comments about how
things "hit the nose."

Doing business ethics means providing reasons for how things ought to be in the economic world.
This requires the following:

 Arranging values to guide decisions. There needs to be a clearly defined and well-justified set
of priorities about what is worth seeking and protecting and what other things we are willing to
compromise or give up. For example, what is more important and valuable: consumers (in this
case students paying for an education) getting their books cheaply, or protecting the right of the
university to run the business side of its operation as it sees fit?
 Carefully defining the situation itself. Who, for example, is involved in the textbook conflict?
Students, clearly, as well as university administrators. What about parents who frequently
subsidize their college children? Are they participants or just spectators? What about those
childless men and women in Alabama whose taxes go to the university? Are they involved? And
how much money are we talking about? Where does it go? Why? How and when did all this get
started?
 Constructing arguments. This shows how, given the facts, one action serves our values better
than other actions. Although the complexities of real life frequently disallow absolute proofs,
there remains an absolute requirement of comprehensible reasoning. Arguments need to make
sense to outside observers. In simple, practical terms, the test of an ethical argument resembles
the test of a recipe for a cook: others need to be able to follow it and come to the same result.
There may remain disagreements about facts and values at the end of an argument in ethics, but
others need to understand the reasoning marking each step taken on the way to your conclusion.

Ethics is a determination about right and wrong. This actual result, however, is secondary to the
process: the verdict is only the remainder of forming and debating arguments. That is why doing
ethics is not brainwashing. Conclusions are only taken seriously if composed from clear values,
recognized facts, and solid arguments.

Bringing Ethics to Kickback Textbooks

The Wall Street Journal article on textbooks and kickbacks to the university is a mix of facts, values,
and arguments. They can be sorted out and an opportunity to do the sorting is provided by one of the
article’s more direct assertions: "Royalty arrangements involving specially made books may violate
colleges’ conflict-of-interest rules because they appear to benefit universities more than students"
(Hechinger, 2008).
A conflict of interest occurs when a university pledges to serve the interest of students, but finds
that its own interest is served by not doing that. It does not sound like this is a good thing (in the
language of the article, it smells bad). However, to reach that conclusion in ethical terms; the specific
values, facts, and arguments surrounding this conflict need to be defined.
Start with the values. The priorities and convictions underneath the conflict-of-interest accusation are
clear. When a university takes tuition money from a student and promises to do the best job possible
in providing an education to the student, then it had better do that. The truth matters. When you make
a promise, you have to fulfill it. Now, this fundamental value is what makes a conflict of interest
worrisome. If we did not care about the truth at all, then a university promising one thing and doing
something else would not seem objectionable. In the world of poker for example, when a player
makes a grand show of holding a strong hand by betting a pile of chips, no one calls him a liar when
it is later revealed that the hand was weak. The truth is not expected in poker, and bluffing is
perfectly acceptable. Universities are not poker tables though. Many students come to school
expecting honesty from their institution and fidelity to agreements. To the extent these values are
applied, a conflict of interest becomes both possible and objectionable.

With the core value of honesty established; what are the facts? The question: “Who is involved?”
brings in the students buying the textbooks, the company making the textbooks (Bedford/St. Martin’s
in Boston), and the University of Alabama. As drawn from the UA Web page, here is the school’s
purpose, the reason it exists in the first place: “The University of Alabama is a student-centered
research university and an academic community united in its commitment to enhancing the quality of
life for all Alabamians.”

Moving to the financial side, specific dollar amounts should be listed (the textbook’s cost, the cost
for the noncustomized version). Also, it may be important to note the financial context of those
involved. In the case of the students, some are comfortably wealthy or have parents paying for
everything, while others live closer to their bank account’s edge and are working their way through
school.

Finally, the actual book-selling operation should be clearly described. In essence, what is going on is
that the UA English Department is making a deal with the Bedford/St. Martin’s textbook company.
The university proposes, “If you give us a cut of the money you make selling textbooks, we will let
you make more money off our students.” Because the textbooks are customized, the price goes up,
while the supply of cheap used copies (that usually can be purchased through the Internet from stores
across the nation) goes way down. It is much harder for UA students to find used copies, forcing
many to buy a new version. This is a huge windfall for Bedford/St. Martin’s because, for them, every
time a textbook is resold used they lose a sale. On the other side, students end up shelling out the
maximum money for each book because they have to buy new instead of just recycling someone
else’s from the previous year. Finally, at the end of the line, there is the enabler of this operation, the
English department, that requires the book for a class and has it customized to reduce sales of used
copies. They get a small percentage of Bedford/St. Martin’s extra revenue.

With values and facts established, an argument against kickback textbooks at UA can be drawn up.
By customizing texts and making them mandatory, UA is forcing students to pay extra money to take
a class. They have to spend about $30 extra, which is the difference between the cost of a new,
customized textbook and the standard version, purchased used. Students generally do not have a lot
of money and, although some pass through school on the parental scholarship, others scrape by,
working a McJob to make ends meet. So, for at least some students, that $30 directly equals time that
could be spent studying, but instead goes to flipping burgers. Consequently, the customized
textbooks hurt these students’ academic learning in a measurable way. Against that reality, there is
the university’s own claim to be a “student-centered” institution. However, those words appear
untrue if the university is dragging its own students out of the library and forcing them to work extra
hours. To comply with its own stated ideals—to serve the students’ interests—UA should suspend
the kickback textbook practice. It is important to do that, because fulfilling a promise is valuable and
something worth doing.
Argument and Counterargument
The conclusion that kickback textbooks turn universities into liars does not end debate on the
question. In fact, because well-developed ethical positions expose their reasoning so openly (as
opposed to “it does not smell right”), they tend to invite responses. One characteristic, in other
words, of good ethical arguments is that, paradoxically but not contradictorily, they tend to provoke
counterarguments.

Broadly, there are three ways to dispute an argument in ethics. You can attack the:

1. facts,
2. values, and
3. reasoning.
In the textbook case, disputing the facts might involve showing that students who need to work a few
extra hours to afford their books do not subtract that time from their studying; actually, they subtract
it from late-night hours pounding beers in dank campus bars. Therefore, the academic damage done
by kickback textbooks is zero. Pressing this further, if it is true that increased textbook prices
translates into less student partying, the case could probably be made that the university actually
serves students’ interests—at least those who drink too much beer—by jacking up the prices.

The values supporting an argument about kickback textbooks may, like the facts, be disputed.
Virginia Tech, for example, runs a text customization program similar to the one at the University of
Alabama. According to Tech’s English Department chair, Carolyn Rude, the customized books
published by Pearson net the department about $20,000 per year. Some of that cash goes to pay for
instructors’ travel stipends. These are not luxury retreats to Las Vegas or Miami; they are gatherings
of earnest professors in dull places for discussions that may put a few listeners to sleep. When
instructors—who are often graduate students—attend, they are looking to burnish their curriculum
vitae and get some public responses to their work. Possibly, the trip will help them get a better
academic job later on. Regardless, it will not do much for the undergraduates at Virginia Tech. In
essence, the undergraduates are being asked to pay a bit extra for books to help graduate students
hone their ideas and advance professionally.

Can that trade-off be justified? With the right values, yes. It must be conceded that Virginia Tech is
probably rupturing a commitment to serve the undergraduates’ interest. Therefore, it is true that a
certain amount of dishonesty shadows the process of inflating textbook costs. If, however, there is a
higher value than truth, than that will not matter so much. Take this possibility: what is right and
wrong is not determined by honesty and fidelity to commitments, but the general welfare. The
argument here is that, although it is true that undergraduates suffer a bit because they pay extra, the
instructors receiving the travel stipends benefit more. Their knowledge grows, their career prospects
improve, and in sum, they benefit so much that it entirely outweighs the harm done to the
undergraduates. As long as this value—the greatest total good—frames the assessment of kickback
textbooks, the way is clear for Virginia Tech or UA to continue the practice, and it is even
recommendable.
The final ground on which an ethical argument can be refuted is the reasoning. Here, the facts are
accepted, as well as the value that universities are duty bound to serve the interests of the tuition-
paying undergraduate students because that is the commitment they make on their Web page.
However, what can still be debated is the extent to which students actually benefit from the
customized textbook. Looking at the Wall Street Journal article, several partially developed
arguments are presented on this front. For example, at UA, part of the money collected from the
customized texts underwrites teaching awards, and that, presumably motivates instructors to perform
better in the classroom, which ends up serving the students’ educational interests. Similarly, at
Virginia Tech, part of the revenue is apportioned to bring in guest speakers, which should advance
the undergraduate educational cause. The broader argument is that although it is true that the students
are paying more for their books than peers at other universities, the sequence of reasoning does not
necessarily lead from that fact to the conclusion that there is a reproachable conflict of interest. The
verdict could be reached that students’ educational experience is improved; instead of a conflict of
interest, there is an elevated commitment to student welfare inherent in the kickback practice.

There is no irrefutable answer to the question about whether universities ought to get involved in
kickback textbooks. What is clear, however, is that there is a difference between responding to them
by asserting that something does not smell right, and responding by uniting facts, values, and
reasoning to produce a substantial ethical argument.

The Boundaries and History of Business Ethics

Though both economic life and ethics are as old as history, business ethics as a formal area of study
is relatively new. Delineating the specific place of today’s business ethics involves:

 distinguishing between morality and ethics,

 dividing normative from descriptive ethics,
 comparing ethics against other forms of decision making, and
 sketching some inflection points in the histories of ethics and business ethics.
Morality and Ethics: What Is the Difference?
The back and forth of debates about kickback textbooks occurs on one of the three distinct levels of
consideration about right and wrong. Morals occupy the lowest level: they are the direct rules we
ought to follow. Two of the most common moral dictates are: do not lie and do not steal. Generally,
the question to ask about a moral directive is whether it was obeyed. Specifically, in the case of
university textbooks, the debate about whether customized textbooks are a good idea is not morality,
it is not because morality does not involve debates. Morality only involves specific guidelines that
should be followed; it only begins when someone walks into a school bookstore, locates a book
needed for a class, strips out the little magnetic tag hidden in the spine, and heads for the exit.

Above all morality, there is the broader question about exactly what specific rules should be
instituted and followed. Answering this question is ethics: the morality factory, the production of
guidelines that later may be obeyed or violated. It is not clear today, for example, whether there
should be a moral rule prohibiting kickback textbooks (discussed in the learning activity, "Business
Ethics"). There are good arguments for the prohibition: universities are betraying their duty to serve
students’ interests. There are also good arguments against the prohibition—schools are finding
innovative sources of revenue that can be put to good use. For that reason, it is perfectly legitimate
for someone like Ann Marie Wagoner to stand up, at the University of Alabama, and decry the
practice as wrong. But, she would be going too far if she accused university administrators of being
thieves or immoral. They are not; they are on the other side of an ethical conflict, not a moral one.

Business Ethics Is Inevitable

Business ethics is not about scolding, moralizing, or telling people to be nice. Ethics does not have to
be annoying or intrusive. On the other hand, it cannot just be dismissed altogether because ethics in
business is unavoidable. The values guiding our desires and aspirations are there, whether they are
revealed or not. They must be, because no one can do anything without first wanting something. If
you do not have a goal, something you are trying to achieve or get, then you will not have anything
to do when you get out of bed in the morning. Getting up in the morning and going, consequently,
means that you have already selected something as desirable, valuable, and worth pursuing. And that
is doing ethics: it is establishing values. Therefore, the only real and durable difference between
those who understand ethics and those who do not, is that the former achieve a level of self-
understanding about what they want: they have compared their values with other possibilities and
molded their actions to their decisions. The latter are doing the same thing, without fully realizing it.
The question about whether ethics is necessary becomes a false one. You can choose to not
understand the ethics you are doing (you can always drop this class), but you cannot choose to not do
ethics.

Sustainability and Social Responsibility

An understanding of the terms sustainability and social responsibility is fundamental to the principles
that establish the laws or rules that have been agreed upon. These principles are the basis of ethical
supply management conduct and serve as a framework for organizations to adopt and apply to their
particular business model or circumstances; they serve as a guide to supply management best
practices. Here are the ISM’s definitions of sustainability and social responsibility:

Sustainability is the ability to meet current needs without hindering the ability to meet the needs of
future generations in terms of economic, environmental, and social challenges.
Social responsibility is a framework of measurable organization policies and procedures and
resulting behavior designed to benefit the workplace and, by extension, the individual, the
organization and society.
Principles of Sustainability and Social Responsibility
The ISM Principles of Sustainability and Social Responsibility are designed to enable both supply
management and the organization to customize a framework specific to industry and supplier needs
in the following areas: anti-corruption; diversity and inclusiveness—workforce and supply base;
environment; ethics and business conduct; financial integrity and transparency; global citizenship;
health and safety; human rights; labor rights; and sustainability. Statements and content are not all-
encompassing but provide a solid foundation to express important characteristics of each principle.
Often a statement for one principle is applicable to others. Visit ISM (This content will be opened in
a separate window or downloaded to your computer)for a link to the complete ISM Principles and
Standards of Ethical Supply Management Conduct With Guidelines.

Business today is consumed with transformation, innovation, and analytics. Consumer literature,
marketing, and advertising encourages consumption and promises convenience. However, decisions
and behavior of both business and consumers is morphing as a result of heightened awareness of
sustainability and enlightenment about what is sustainable, or “green.”

Supply management is a key contributor to bottom-line success and must lead the drive for global
adoption of sustainability and social responsibility principles throughout the supply chain. Often this
must be done while taking out cost, managing risk and ensuring compliance, all the while dealing
with globalization and the shift from East to West.

There is a need to continue to engage business professionals and suppliers to further sustainability
and social responsibility initiatives. Supply management professionals have the responsibility to (1)
share knowledge, (2) learn and collaborate and (3) make a difference. It is imperative to engage and
earn support of business professionals and suppliers, to integrate policies, procedures, goals and
measures, and infuse transparency into every corner of our businesses.

Sustainability and Social Responsibility Mission

It is part of the mission of the Institute of Supply Management (ISM) to foster and drive
sustainability and social responsibility excellence across the supply chain through the development
and communication of principles and the sharing of tools, information, and best practices.

Sustainability and Social Responsibility Objectives

For the organization to succeed, best-in-class organizations lead the organization’s sustainability and
social responsibility initiative. In support of their efforts, ISM will:

1. Reinforce that supply professionals fulfill a front-line role to lead, drive and influence
sustainability and social responsibility initiatives within the organization and through the supply
chain.
2. Commit resources to support sustainability and social responsibility practices and education.
3. Increase supply management professionals’ awareness of sustainability and social responsibility.
4. Champion the business case for sustainability and social responsibility.
5. Advocate that sustainability and social responsibility initiatives are about more than short-term
financial decisions.
6. Educate the supply chain community and others on sustainability and social responsibility
subjects.
7. Encourage supply professionals to embed relevant sustainability and social responsibility
language in internal strategic sourcing policies and procedures and throughout supplier
documents to foster commitment throughout the strategic sourcing process and into the supply
base.
8. Reinforce the value of personal commitment and contributions including how they positively
impact sustainability and social responsibility initiatives and outcomes.
9. Collaborate and share strategies, policies, procedures, best practices and other relevant material
related to sustainability and social responsibility both internally and with suppliers.
10. Promote the adoption of these principles throughout the supply chain.
11. Raise the strategic value of supply management through the promotion of sustainability and
social responsibility initiatives and results.
The Organization’s Sustainability and Social Responsibility Roles and Responsibilities

Best-in-class organizations in sustainability and social responsibility incorporate specific and

measurable practices across the supply chain. They will:

1. Support sustainability and social responsibility principles and initiatives.

2. Commit resources to support of sustainability and social responsibility principles, practices and
education.
3. Build and integrate programs throughout the organization and cascade them throughout the
supply chain.
4. Engage and involve executive management to ensure sustainability and social responsibility
initiatives are integral to the culture and decision-making of the organization.
5. Ensure the sharing of strategies, policies, procedures, best practices and other relevant material to
assist organizations working to improve sustainability and social responsibility behavior
internally and with suppliers.
6. Encourage building and integrating a program throughout the organization and the supply chain.
7. Make enlightened business decisions that often move beyond the “letter of the law.”
Implementation Process

Consider using this implementation process for establishing and managing sustainability and social
responsibility initiatives across the enterprise.

Policy
Executive management defines and establishes the organization’s program policies, including goals,
standards, acceptable actions, rewards for exemplary behavior and sanctions for improper behavior.
Some of the key best-practice policy elements include:

 Organizational Policy. Executive management has established, documented and is maintaining

a program policy as a means of ensuring behavior reflecting the organization’s values. The
policy is aligned with the organization’s values and all applicable laws. It is updated as new
challenges emerge.
 Management Support. Executive management subscribes to the program policy and acts
accordingly. Further, it communicates, both internally and externally, its expectations for
compliance with program standards.
 Management Review. Executive management reviews the organization’s policy and its impact
at defined intervals to ensure continuing suitability and effectiveness.
 It maintains records of reviews.
 Policy Considerations. Executive management recognizes the need to accommodate different
cultural and legal systems and changing technologies. It also appreciates the value of engaging
others such as the board of directors or other social responsibility functions.
Planning

Best practices in program planning include:

1. Developing clear definitions of organizational values

2. Defining who should have input into the program
3. Securing adequate funding and staffing

4. Establishing program components; for example:

a. Policy and/or code of conduct

b. Internal and external communications

c. Training

d. Rewards and sanctions

e. Whistle-blowing

f. Hotline or help line

g. Assessment and evaluation programs

h. Reporting and tracking mechanisms

Processes/Procedures
The organization has a clearly defined and documented process to manage implementation of policy
and practice, to achieve goals and influence supplier behavior.

Some best-practice processes include:

 Training. The organization has developed a comprehensive training program that enables
employees to become active participants in their own learning.

Training is regularly updated and includes practice in preventing, eliminating and resolving
problems. It is an ongoing, not one-time, occurrence. As applicable, the organization has
developed a comprehensive training program to educate and develop suppliers and other
members of the supply chain.
 Internal communication. The organization integrates program sensitivity into all aspects of
communication to demonstrate that it is an integral part of all operations and decision-making. It
has identified a person responsible for the program who monitors and implements the initiative
internally and externally. It may have established a hotline or help line. The organization
ensures that the program is a regular agenda item for the board of directors.
 External communication. The organization publishes its program policy and incorporates it
into its communications with customers, suppliers and the public.

It regularly publishes detailed reports on performance and responds openly to inquiries from
stakeholders, investors and activist groups. The organization assesses practices of its suppliers to
ensure that its trading partners are aligned with its values.

Measurement, Tracking and Reporting

The organization has established a system to monitor, document and report adherence to the
program. Key elements include:

 Performance. The organization includes program elements as a dimension both in employee

and supplier performance appraisals. It recognizes the value of having a program committee
within its leadership core.
 Evaluation. The organization follows up on training with regular evaluations to ensure
employees retain and act on what they have learned. It also demands compliant behavior from
its suppliers and considers this in supplier selection.
 Assessment. The organization has established and maintains documented procedures for the
assessment of both internal and external programs to determine the effectiveness of program
policy, planning, processes and metrics. It tracks changes and enhancements as required due to
assessment findings.
Assessments are used for learning and enhancing performance. The organization also has established
mechanisms for investigating potential program lapses and holding management, employees and
suppliers accountable for transgressions.

Dedicated Resources

The organization determines requirements for and then allocates sufficient staff and funding to
coordinate, lead and promote its program.

Integrating sustainability and social responsibility concepts throughout supply management, the
business and the supply chain is critical to success. These questions are designed to help the supply
professional and organization determine if it is moving forward, aspiring to industry best practice,
and seeking information from others. The following questions are not all-encompassing but provide a
starting point for adoption and implementation.

1. Are you and your organization aware of sustainability and social responsibility standards and
trends in your industry?
2. Does your organization comply with applicable laws and regulations covering sustainability and
social responsibility?
3. Does your organization have written policies in place that cover the principles?
4. Are goals in place for each principle? What are they? How are improvements incorporated?
5. How does your organization disperse and communicate information on its sustainability and
social responsibility standards internally and to suppliers for adoption, understanding and
compliance?
6. Is training provided covering each area? What is the frequency and to whom is training
provided? Is training also provided for suppliers?
7. Has your organization set minimum standards that suppliers are required to meet? Are suppliers
required to provide information and identify how they support each element?
8. Are sustainability and social responsibility contractual obligations in place with those with whom
the organization does business?
9. Does your organization measure its performance against standards and report results? Are
auditable processes in place?
10. Are managers and appropriate employees measured on meeting goals? What are the rewards for
outstanding performance and sanctions for not meeting goals?
11. Are responsibilities for sustainability and social responsibility assigned to specific individuals or
groups of individuals? What is the level of accountability for “making something happen” within
the organization? Are those accountable made known within the organization?
12. Is there a champion or accountable process owner?
13. What is the highest level of oversight/accountability within the organization? Within each
supplier organization?
14. Are financial and human resources committed in support of each standard? To whom do the
human “resources” report?
15. How is each element measured within the organization? Within each supplier?
16. Is annual tracking in place? Does the organization communicate accomplishments within the
organization, with stakeholders and with the community?
17. Are internal and/or external recognition programs in place?
18. How are sustainability and social responsibility standards and philosophies integrated into your
organization’s code(s) of conduct?
19. Does the organization use external resources to help ensure standards are being met? Does the
organization align itself with industry groups?
20. Are core values, specific to the organization/industry/business, incorporated into human
resources policies, manuals and job descriptions?
21. Are business continuity contingency plans in place to manage natural disasters, terrorist actions
and the like?
22. Does your organization seek out suppliers with sustainability and social responsibility practices
embedded in their practices, products, services and business philosophies?
Adoption and Implementation: Each Principle

These principles are designed to enable both supply management and the organization to customize a
framework specific to industry and supplier needs: anti-corruption; diversity and inclusiveness—
workforce and supply base; environment ethics and business conduct; financial integrity and
transparency; global citizenship; health and safety; human rights; labor rights; and sustainability.
Again, statements and content are not all-encompassing but provide a solid foundation to express
important characteristics of each principle.

1. Anti-Corruption
1. Are there clear guidelines and policies in place to address ethical and legal dimensions?
2. What practices are in place to defend against corrupt practices within the organization, with
suppliers and through the supply chain?
3. What training does the organization have in place?
2. Diversity and Inclusiveness—Workforce and Supply Base
Workforce
1. Does the leadership of the organization support hiring a diverse internal workforce?
2. Does the organization have a formal tracking system to assess the impact of diversity efforts
within the organization? Within the supply base?
3. Are supplier policies and programs reviewed?
4. How does the organization ensure equal access to employment and promotion opportunities?
Supply Base
1. Does the leadership support having a diverse supply base?
2. Does the organization have a formal supplier diversity program? How is the program
communicated internally and to the supplier community?
3. Does the organization have a formal tracking system to assess the impact of diversity efforts
within the organization and across the supply chain?
4. Are copies of supplier diversity policies and programs gathered from suppliers? Are they
reviewed and approved by the supply management organization?
3. Environment
1. Does the organization behave in environmentally responsible ways? What specific programs and
procedures are in place?
2. Does the organization have programs to reduce, reuse and recycle? What percent of disposable
waste is recycled? What does the organization do to reduce the volume of waste created that
must then be recycled? How does the organization reduce waste? Reuse equipment and supplies?
3. How does the organization comply with laws and regulations in the handling of hazardous
waste?
4. How does the organization report its environmental results?
5. How does the organization continue to learn what it needs to know about environmental and
waste issues?
6. Does the organization collect copies of suppliers’ environmental plans? Are the plans of
suppliers assessed and approved by the supply management organization?
7. Does the organization work with engineering in the design of products for disassembly, reuse
and recycling?
4. Ethics and Business Conduct
1. Does the organization have a formal code of ethics in place? How is the code communicated to
employees and suppliers? How does the organization’s code align with ISM’s Principles and
Standards of Ethical Supply Management Conduct?
2. What corrective action and compliance processes exist?
3. Is ethics a part of each individual’s job responsibilities and objectives? How are results
measured?
4. Are suppliers required to have a code of ethics in place to address unethical behavior and a
methodology to support action and compliance? Does this flow through the supplier tiers?
5. Financial Integrity and Transparency
1. Does the organization educate employees about appropriate financial responsibilities? Is there a
process in place that promotes and acknowledges employees who, through their actions,
demonstrate a strong commitment to financial responsibility?
2. What corrective action and compliance processes exist?
3. Has the organization, and have its suppliers, implemented fiscal policies, financial management
systems and accounting controls that help ensure fiscal responsibility and long-term viability?
6. Global Citizenship
1. What specific programs and activities are in place to demonstrate the organization’s commitment
to society and the communities it serves? Locally? Regionally? Nationally? Globally? Virtually?
2. Are relevant actions and activities acknowledged and recognized by the organization?
3. Does the organization allow time for people to be away from the job to work and volunteer?
4. Are charitable donations and support of economic development programs a part of the
organization’s efforts?
5. Has the organization set goals and objectives for philanthropic practices, if applicable?
7. Health and Safety
1. Does the organization have a formal health and safety program? How is the plan communicated
internally and externally?
2. Does the organization have a formal tracking system? What does it measure?
3. How does the organization assess and continually review supplier/subcontractor health and
safety policies and procedures?
4. Are safety specifications embedded within statements of work documents and contracts?
8. Human Rights
1. Does the organization assess human rights conditions internally, and those of the first-tier
suppliers and suppliers beyond the first tier?
2. How are policies being enforced internally? With suppliers?
3. Are human rights laws understood and applied?
4. What does the organization do to promote an environment in which everyone is treated with
dignity and respect?
5. What organizational and supplier policies and procedures are in place to assure protection of
personal data?
9. Labor Rights
1. Does the organization require freedom of association and recognition of the right to collective
bargaining?
2. Does the organization ensure no forms of forced and compulsory labor are allowed?
3. Are child labor policies written and communicated internally and with suppliers?
4. How are employment and occupation discrimination practices identified and eliminated?
10. Sustainability
1. Has the organization developed a position on sustainability? If so, how is this position
communicated to the world at large? To suppliers?
2. How is sustainability integrated within the organization down through individual job
responsibilities?
3. Are policies and procedures embedded throughout the internal supply process? With suppliers?
4. Does the organization periodically review and update its goals and objectives? Are the updates
published?
5. How does the organization work to support initiatives of suppliers and others in the communities
it serves?
Resources, References, and Metrics
1. ISM’s Sustainability and Social Responsibility Metrics and Performance Criteria for Initiatives.
The development and implementation of metrics and performance criteria is important to the
success of sustainability and social responsibility programs. Integrating goals and objectives with
relevant measurements will ensure the ability to track and report progress against various
initiatives. Often an annual sustainability and social responsibility report, sometimes called a
citizenship report, is issued or results are included in the organization’s annual report.
2. CAPS Research Focus Studies and Benchmarking Reports(This content will be opened in a
separate window or downloaded to your computer).
3. The ISM Guide to Sustainability and Social Responsibility (free web-based self-study course).
4. ISM Principles and Standards of Ethical Supply Management Conduct With Guidelines (free
web-based self-study course).
5. ISM Sustainability and Social Responsibility Handbook, 2011.
6. ISM Special Sustainability and Social Responsibility(This content will be opened in a separate
window or downloaded to your computer).
7. Applicable Laws, Regulations and Trade Agreements Information.
8. Agency laws.
9. Contract and commercial laws.
10. Electronic commerce laws.
11. Antitrust laws.
12. Trade agreements.
13. Trade regulations.
14. Industry-specific laws and regulations.
15. Government procurement regulations.
16. Patent, copyright, trade secret and trademark laws.
17. Environmental laws.
18. Employment laws and regulations.
19. Worker health and safety laws.
20. Transportation and logistics laws and regulations.
21. Financial laws and regulations.
22. Other laws as applicable.
23. The United Nations Framework Convention on Climate Change (UNFCCC).
24. The following chart provides a hierarchy the supply professional can use to understand possible
consequences or outcomes from behaviors and decisions.

Table 2.1 A Conceptual Framework of the Hierarchy of Societal “Rules” for Business and
Individuals

Element Entity Risk of …

Laws and Regulations State Jail and Fines

Policies and Procedures Company Loss of Employment

Standards, Guidelines, Requirements Groups Social Rejection

Norms, Morals Society Loss of Self-Respect

Sustainability requires commitment by the board of directors, CEO, and top management team. This
commitment and leadership begins at an executive level and is spread throughout the organization.
Leadership and top-level commitment demonstrate that sustainability is a priority for the
organization. Many corporations have created new positions, such as Corporate Responsibility
Officer or Corporate Sustainability Officer, to oversee this aspect of company operations.

In addition to supporting sustainability as a value of the organization, many organizations, such as

the U.S. Green Building Council, have turned to dynamic governance, which is a model for
corporate governance, decision making, and organizational structure that consists of four principles:
(1) decisions are made by consent, (2) the organization is a hierarchy of semiautonomous circles, (3)
circles are double-linked with two representatives from each circle serving on the next circle up in
the hierarchy, and (4) elections are held by consent. Also referred to as, sociocracy, as a model for
corporate governance, decision making, and organizational structure; the model is inclusive, gives
everyone a voice, and reaches consensus easier and faster than traditional governance, decision
making, or organizational structure models (Endenburg, 1998; Siong & Chen, 2007; Buck &
Villines, 2007).
Values and Ethics

One thing we see in common throughout sustainable organizations is a strong values-based and
ethical corporate culture. In fact, it is argued that the strategic deployment of corporate values is a
necessary building block for competitive advantage in this new era of sustainable business (Landrum,
Boje, & Gardner, 2009; Rochlin & Googins, 2005). Training and development opportunities for
employees will focus on personal growth and development, instilling corporate values and ethics, and
promoting sustainability (Landrum et al., 2009).

Core Competencies and Competitive Position

Sustainability encompasses the entire organization, deeply integrated throughout all activities,
functions, operations, and business activities. Sustainability should also be deeply embedded in the
company’s core competencies and contribute to a strong competitive position for the company
(Hamel & Prahalad, 1990). That is, your business must develop strengths, competencies, and
expertise in a way that sets it apart from its competitors (which makes the business unique, one-of-a-
kind, and different) and that produces a result that is valued by customers (Hamel & Prahalad, 1990).
The business must develop a skill set that promotes its core competencies and strengthens its
competitive position so that the business becomes known as the place to patronize for those who seek
out that particular core competence.

As an example, if you think of a business that has the absolute lowest prices, one particular business
may come to mind. Or if you think of a business that has combined low prices and stylish or trendy
items, another particular business may come to mind. These descriptions might identify the particular
business’s core competency (or what they are known for, the business’s area of expertise). It is also
certain that a broad skill set has been developed across all functions and dimensions of the business
to promote and advance the core competency, thereby strengthening its competitive position in the
marketplace.

A sustainable business must identify its core competency (what it is known for), identify the set of
skills across the entire range of business functions that must be developed in order to perfect the core
competency, and use this information to strengthen its competitive position against rivals.
Sustainability must be rooted in the core competencies and must contribute to strengthening the
company’s competitive position; sustainability should be the linchpin of, rather than peripheral to,
the company’s strategy.

Stakeholder Engagement and Assurance

Sustainability requires a shift in mindset in the way companies interact with stakeholders. Companies
have historically viewed stakeholders in terms of their threat and power and have developed
strategies for managing stakeholders in order to reduce their threat and neutralize their power
(Freeman, 1984; Mitchel, Agle, & Wood, 1997). By contrast, a sustainable business will interact with
stakeholders, including critics, listen to their concerns, and will seek to engage them in identifying
plausible solutions. There appears to be no prominently used stakeholder engagement standard
although several exist, including AA1000 Stakeholder Engagement Standard and the SIGMA
Project’s Stakeholder Engagement Tool. It appears that most companies develop their own approach
to stakeholder engagement. As such, companies must consider how each stakeholder will be
impacted within the sustainability efforts.

Suppliers. A commitment to sustainability will require that the company engage its suppliers in the
move toward more sustainable business practices. This will require a critical analysis of suppliers’
current social, environmental, and economic impacts. It is of critical importance to engage suppliers
in your transition toward sustainability so that your business has a complete understanding of the
supplies being used, the conditions under which they were produced, and their associated impacts.
Sustainable businesses often work with suppliers to help them become more sustainable.
Furthermore, suppliers need to understand what types of products and services you seek to support
your sustainability strategy.
Customers. Customers can offer valuable insights regarding your business and should be engaged in
sustainability efforts. In addition, customers should be part of the sustainable business’s education
and communication efforts related to sustainability. This group of stakeholders might ultimately be
affected by changes in product or service offerings.
Employees. Employees can be engaged in the sustainability process in a number of ways. Training
and education will be critical. For example, employees must understand their role in the
sustainability strategy, rewards for achieving sustainability goals, and the change in corporate
emphasis from a profit orientation to a more balanced triple bottom line orientation. Employees must
also frequently receive communications related to sustainability progress. Lastly, employees can be
an invaluable source of sustainability-related innovations.
Shareholders. Shareholders must also understand the change in corporate emphasis from profit
orientation to triple bottom line. Studies show that sustainability-focused companies outperform
other companies. Most recently, a study of companies with a commitment to sustainability showed
that they continued to outperform other companies even during the midst of the economic crisis
during the period of May through November 2008 (A. T. Kearney, Inc., 2009).
Society. Communities and society at large are important stakeholders that must be included in a
company’s sustainability efforts. Americans are skeptical of and generally do not trust businesses,
particularly big businesses (Deutsch, 2005). Furthermore, it may be more difficult to overcome
image and reputation problems.

As we discuss society as a stakeholder, globalization and international strategies bear mention here.
Once a company begins conducting business outside its own borders, the sustainable business will
become cognizant of the unintended consequences of traditional international strategies (Landrum,
2009). Companies have been accused of exploiting human and natural resources in areas in which
they have business operations.

Base of the pyramid (BOP) strategies seek to address these concerns and improve the social,
environmental, and economic performance of corporations conducting business in emerging
economies (Prahalad & Hart, 2002). Not without criticism (Landrum, 2007), BOP strategies are an
effort to adopt localized nonethnocentric partnership-based approaches to conducting business in
emerging markets. BOP strategies also seek social, environmental, and economic benefits for all
partners involved. The Base of the Pyramid Protocol 2.0 provides an excellent standard for
conducting business in emerging economies (Simanis & Hart, 2008).

One example of a BOP strategy is Grameen Bank. Muhammad Yunus started Grameen Bank as a
means of providing credit to the poorest residents in rural India. Loans are made to an individual,
without collateral, whose family and friends guarantee the loan. Loans are typically small, or
microloans, but can make a significant impact in residents’ quality of life. Yunus was awarded the
Nobel Peace Prize in 2006 for this social banking model and strategy that ultimately fights poverty
and promotes self-sufficiency in BOP communities.

Other stakeholders. The list of a company’s potential stakeholders is much larger than the five
groups of stakeholders mentioned here. Other possible stakeholders include creditors, environmental
organizations, nonprofits, government, and many more. The sustainable organization will engage
each group in a cooperative dialogue to generate mutual benefit.

Numerous academic centers, research centers, and nonprofit organizations around the world work
with businesses toward a sustainable future. Among those centers and organizations are the Applied
Sustainability Center, Business Alliance for Local Living Economies, Center for Business as an
Agent of World Benefit, Center for Companies That Care, Center for Corporate Citizenship, Center
for Responsible Business, Center for Sustainable Business Practices, Center for Sustainable
Enterprise, Center for Sustainable Global Enterprise, Consortium on Green Design and
Manufacturing, Enterprise for a Sustainable World, Erb Institute for Sustainable Global Enterprise,
Ethical Trading Initiative, Forum for Corporate Sustainability Management, Global Institute of
Sustainability, Green Design Institute, Minnesota Center for Corporate Responsibility, National
Association of Socially Responsible Organizations, Peace Through Commerce, World Business
Council for Sustainable Development, and World Resources Institute. Sustainable businesses
recognize the importance of mutual learning and networking with others in order to generate a shared
knowledge base.
Assurance. It is important to provide assurance (a social audit, ethical audit, or monitoring) that
systems are in place to track and measure sustainability claims made by a company. There are two
widely used assurance standards that companies will want to consider: AccountAbility’s AA1000
Assurance Standard 2008 and the International Auditing and Assurance Standards Board’s
International Standard for Assurance Engagements (ISAE 3000).
Business Model, Systems, and Structure

Incorporating sustainability throughout all functional areas of the business and across the entire
supply chain of the business will require closer examination of the business model being used, the
various management systems in place (including reward systems), and the organizational design or
structure in place; changes may be in order. A business model is the way in which a company’s value
chain is organized in order to be most efficient and effective in achieving its social, environmental,
and economic goals while making a profit.

A particular example of an innovative business model emerging in this era of sustainable business is
a social or open business model that engages stakeholders in determining and defining how the
business will operate. Stakeholders are the decision makers and contribute to the ongoing operations
of the business. First termed crowdsourcing (Howe, 2006), social business models leverage the
power of mass collaboration in creating a successful business (Tapscott & Williams, 2006). One
example of a successful social business model (an open-business model that leverages the power of
mass collaboration in creating a successful business; first termed crowdsourcing, stakeholders are the
decision makers and contribute to the ongoing operations of the business) was the sports apparel
company, nvohk, where anyone could become a partner for $50. Partners contributed apparel and
logo designs, voted on designs, advertising, sponsorships, and which charities received 10% of the
company profits, as well as made many other company-related decisions.

Furthermore, the company may need to reexamine its management and control systems (including
corporate governance and reward systems), organizational structure, corporate culture, and other
aspects of the business (such as the discussion on dynamic governance earlier in this chapter). For
example, as with all aspects of strategy and strategic planning, the company must set sustainability-
related goals, measure results, train, educate, and involve employees and other stakeholders, and tie
rewards to the achievement of goals. The organizational hierarchy in place must be one that supports
the sustainability-related goals and objectives of the strategic plan. Sustainability is well planned and
coordinated across all activities of the corporation, and the business model, systems, and structure
must support the sustainability-related goals of the strategic plan.

It is no longer enough to say you have a code of ethics. Organizations must show that employees
have been trained and that standards are enforced. As you read this section, consider how
organizations are training and developing their employees to be socially responsible.

Professionals and organizations are recognizing the importance of communicating and providing
training in the principles, values, goals, ethical standards, and objectives of the organization, as an
ethical responsibility. ISO standards no longer permit just the statement of objectives. Those
objectives must be implemented and tracked. One means for ensuring implementation is to provide
training to suppliers, employees, and others in the supply chain about these standards, proper
practices, and procedures. That communication may take place in many forms, from provisions in
contracts to actual in-classroom training for employees and the requirement of certifications from
suppliers regarding their training for their employees. Communication and training are important
steps to the implementation of the standards, codes, and objectives.

In the United States, with the passage of the Sarbanes-Oxley Act(This content will be opened in a
separate window or downloaded to your computer), the adoption of codes of ethics and provision of
training in those codes are critical. It is no longer sufficient merely to state codes of ethics.
Organizations must be able to show that employees have received training in those codes and that
their provisions are enforced, because enforcement is a means of communicating high ethical
standards. Compliance with these basic requirements provides an indicator of the efficacy of internal
controls, another area in which Sarbanes-Oxley requires certification.
Sustainability Training
New employees must be oriented to the company’s stance on sustainability issues and what the
expectations are for the employee to further sustainability efforts. The company, however, will
continue to conduct sustainability training(employee training focused on increasing employee
awareness to foster creative, sustainability-oriented solutions to business problems) for all employees
at all levels, including management. Sustainability curricula have been developed by the nonprofit
organization Northwest Earth Institute and are appropriate for workplace training.

Companies have historically provided ethics, diversity, and leadership training, but sustainability
education and training must reorient the way employees view their jobs and the business. Employees
should ultimately be trained to rethink every aspect of the job and workplace in terms of
sustainability: relationships between systems; long-term survival and quality of life for social,
economic, and environmental systems; reduced waste, pollution, and toxicity; increased efficiencies;
increased harmony of the person and business with other social, economic, and environmental
systems; and innovative ways to reduce, reuse, and recycle. Increasing employee awareness fosters
creative solutions to business problems through a sustainability lens. An organization’s program may
also include training of suppliers and other members of the supply chain.

In addition to general training to help employees understand sustainability concepts, employees can
be taught sustainability-related skills specific to the job function. This might include triple bottom
line accounting, carbon accounting, social accounting, carbon finance, life cycle analysis, life cycle
costing, benchmarking, and other sustainability-related skills relevant to job duties.

Sustainable organizations can create green training facilities and conduct green meetings. In
particular, meeting rooms should be energy efficient by using energy efficient lighting, motion
detectors for lighting, and ENERGY STAR computers and equipment. Companies can seek to
minimize the number of handouts or papers, use only recycled paper, and reduce and recycle waste.
If food is served, the organization should use vendors that supply organic food grown or raised
locally. If your company will conduct meetings at hotels or other companies’ facilities, make sure the
supplier provides green meeting facilities and services. When hiring others to provide training,
incorporate sustainability requirements as part of the standard request for proposals.

Training can be conducted either on the job or off the job. Businesses focusing on sustainability are
increasingly conducting more on-the-job training and engaging in travel reduction programs. Virtual
conferences are growing in popularity due to their reduced economic and environmental impact. In
addition, video conferencing is growing in popularity for the same reasons. For example, Vodafone,
a telecommunications company, uses video conferencing in order to reduce company-wide travel. It
is estimated that the use of video conferences eliminates 13,500 flights per year and 5,500 tons of
carbon emissions for the company (Creamer Media, n.d.). (This content will be opened in a separate
window or downloaded to your computer)Within one year, the dollars saved under this initiative
provided a return on the investment (Creamer Media, n.d.). Products, such as GoToMeeting.com, are
available to facilitate Web conferencing and virtual meetings.

E-learning, virtual classrooms, and computer- or Web-based learning environments have many
advantages. These options allow trainees to perform at their own pace, they offer multimedia
capabilities, they save costs, and they can standardize learning across locations. These forms of
training are an efficient way to deliver learning content, and the organization can track employee
training performance through scores and completions. Again, these forms of training will reduce
travel and associated economic and environmental costs.

Most companies engage in the traditional performance appraisal system where the employee’s
performance is measured on some prescribed criteria. The purpose of performance appraisals is
generally to provide feedback to the employee on his or her performance in order to correct any
deficiencies and to create increased opportunities. Employees are not always satisfied with the
performance appraisal process. However, some form of assessment is needed to provide feedback for
improvement. Recognition of performance levels can serve to motivate workers toward higher levels
of performance or more creative solutions to problems.

Some companies have tied performance appraisals to sustainability performance. Identification of

performance dimensions is an important first step in the process. Performance criteria should be
directly tied to business goals and objectives. Measures should be meaningful and controllable.
Because one of the sustainable organization’s goals is to pursue triple bottom line performance,
performance appraisal dimensions should reflect the importance of sustainability in the criteria.
Management can weight the various economic, social, and environmental criteria higher than other
criteria in order to indicate the importance of sustainability to the employee. Performance
management should hold managers accountable for meeting sustainability goals through employees.

Trait, behavioral, and outcome appraisal instruments can be altered to include sustainability criteria.
Trait appraisal instruments ask the supervisor to make judgments about characteristics of the
employee. Typical traits are reliability, energy, loyalty, and decisiveness. Organizations can add traits
such as efficient, honesty, or communicative to depict traits the company would like to see
employees exhibit. Behavioral appraisal instruments are developed to assess workers’ behaviors,
such as ability to work well with others, promptness, and development of personal skills. Sustainable
examples might be working toward reducing waste or consciously using techniques that reduce
negative social impacts. Finally, outcome appraisal instruments assess results. In addition to total
sales or number of products produced, sustainable companies can assess energy usage, amount of
miles saved on transportation, or recycling levels.

In line with other areas of human resources that suggest online or Web applications, performance
appraisals are no different. Organizations can use Web-based performance appraisal software such
as Halogen eAppraisal (This content will be opened in a separate window or downloaded to your
computer)or EmpXTrack(This content will be opened in a separate window or downloaded to your
computer) to prevent excess use of paper products and to increase transparency of the process.

Essential to the success of performance appraisal systems on sustainable performance is the

cooperation and approval of the employees. The employee must feel that the assessment process will
lead to the improvement of the overall sustainability of the company. The need for employee buy-in
may require the company to engage in capacity-building activities. One consulting firm suggests
capacity-building activities such as providing access to various databases, libraries, or websites;
creating publications; conducting training; providing consultation; coordinating alliances; and
implementing team-building tasks (Jean & Paul Associates Consultancy).

About Risk Management Systems

Risk management systems include methods of sensing, understanding, and responding to risks, and
they are designed to reduce or eliminate risks and lessen the impact those risks may have on
businesses. A company’s risk management system is of particular importance as government
regulators and debt-rating agencies increase their scrutiny of companies’ risk management systems.
Risk management systems are constantly evolving to address the needs of increasingly global
industries to ensure that they are properly managed. Risks vary depending on a company’s size and
industry, but they may fall into one of six categories:

1. Financial: Risks that involve a company’s profits, growth, and value.

2. Operational: Risks that arise from a company’s employees, systems, and processes through
which it operates.
3. Brand/Reputation: Risks related but not limited to human rights, labor rights, and
environmental stewardship.
4. Legal: Risks related to a company’s legal position, such as regulations, government relations,
and foreign politics for international corporations.
5. Technical: Risks associated with an execution of technical processes, engineering, or
manufacturing procedures.
6. Environmental: Risks related but not limited to environmental sustainability as a result of
adverse effects on living organisms and the environment.

A risk management system includes several elements that play a role in a company’s response to risk,
such as supply management, strategic planning, marketing, quality assurance, customer service, and
accounting. Companies will often perform an internal audit of these elements to evaluate their
effectiveness.

Risk Management Assessment

In an effort to strengthen risk management, the Sarbanes-Oxley Act of 2002 requires publicly traded
companies to issue reports about their risk management systems and related internal controls.
Similarly, the New York Stock Exchange and debt rating agencies inquire about companies’ risk
management systems during evaluation processes.
Note. Adapted from Corporate Social Responsibility as Risk Management: A Model for
Multinationals, by B. Kytle & J. G. Ruggie, 2005. Copyright 2005 by Harvard University.
Adapted from “Risk Management Planning,” by A. Watt, 2012, Project Management, Chapter 16.
Copyright 2012 by Adrienne Watt.
1. Keys to Narrowing Business Continuity Planning Gaps: Training, Testing & Audits

Betty A. Kildow, CBCP, FBCI, Emergency Management Consultant, Kildow Consulting

95th Annual International Supply Management Conference, April 26, 2010

The following introduces you to the concept of continuity planning, including a discussion on
training, testing and audits. A Business Continuity Plan is not a plan until it has been tested; it is only
theory, sheets of paper in a binder. A program of training, exercises, and tests moves plans beyond
the concept stage, provides training opportunities for employees, and helps identify needed
corrections in procedures and plans. All employees are critical to the success of your Business
Continuity Program and need to receive the appropriate level of education and training. For most
employees this will entail the basics—what programs exist, the purpose of each, what the program
means for them, what they can expect from the organization when disaster strikes, and what the
organization expects of them. For Business Continuity Teams, exercises and tests provide advanced
training and an opportunity to identify needed improvements to strategies and plans before a disaster
occurs.

Business Continuity planning is not a “check the box” endeavor, not a project with a “start” and a
“finish.” To ensure that your Business Continuity Program will serve the organization well when
disasters occur, it must be maintained through regular reviews, updates, and revisions.

You Have a Business Continuity Plan . . . Now What? Once a business continuity plan has been
developed—likely after the initial business continuity planning cycle and going through several draft
iterations—it is important to make sure that the plan provides the guidance necessary to make the
business continuity strategies work.

Have all business continuity team members read and assess the plan document. Here are some of the
questions to consider when assessing your business continuity plan:

 Does the plan address the requirements of the entire supply chain including the manufacturing
process through the distribution process, spanning all movement and storage of raw materials,
and in-process and finished inventory from point-of-origin to point-of-consumption?
 From a supply chain perspective, does the plan take into account all internal and external links
and interdependencies?
 Have consumer requirements been taken into account?
 Does the plan meet customer requirements by including strategies for maintaining full customer
service and meeting all service level agreements?
 Does the plan meet all applicable regulatory requirements?
 Does the plan fully document under what circumstances the plan will be activated and the team
notified, who has the authority to initiate the activation, and the activation process?
 Does the plan tell those responsible for carrying it out: where they are to go, what are they are to
do, and how they are to do it?
 Does the plan include a reporting structure?
 Is the plan user friendly and easy to read with step-by-step checklists for all team members?
 Does the plan consider people issues and provide business continuity team staffing that includes
primary assignments and at least two backups for all business continuity team members and
others assigned responsibility for continuing or restoring critical functions following a disaster?
 Is there “people redundancy,” cross-trained personnel who can fulfill all identified critical
functions should the primaries be unavailable?
 Does the plan include an attachment listing complete contact information for all external as well
as internal key contacts, e.g., customers, suppliers, and contractors?
 Are hard copies of the plan available off-site?
 Does the plan detail requirements for regularly-scheduled reviews and/or internal or external
audits?
 Are there controls to track distribution of copies of the plan and make certain all plan holders
receive all updates and revisions?

Keep in mind that it is highly unlikely that only those involved in developing your business
continuity plans will want to review them for sufficiency. Auditors, both internal and external, are
increasingly interested in business continuity and disaster recovery plans. Gone are the days of
simply checking a box indicating that a plan exists. Today it is likely that auditors will review the
plans in detail for content and for frequency of updates and testing.

For some businesses, regulatory agencies have business continuity-related requirements.

Additionally, be aware that customers and clients are more and more interested in your company’s
capability to continue to deliver your product or service following a disaster and may have questions
about your business continuity capability.

Continually look for gaps and areas needing improvement. There are several areas of business
continuity planning that are often overlooked or under-planned. One of these is disaster
communication.

Disaster Communication. Maintaining contact with employees, other company locations,

customers, suppliers, contractors, regulatory agencies, shareholders, and other stakeholders is an
essential part of the managing the disaster, and one that is often overlooked or given insufficient
attention. Post-disaster communication strategies need to be detailed in your business continuity plan.
Additionally, being prepared to handle requests from print media, radio, and television can help
ensure that the media does not become a secondary disaster. Situations, initially viewed as minor
annoyances or small emergencies, may turn into a disaster if adequate communication is not
maintained or if the media becomes interested.

In particular for the visual medium of television, action events are perfect for newscasts. Therefore,
fires, incidents resulting in injuries or fatalities, bombing, etc., will draw attention and be excellent
candidates for a broadcast with “film at eleven.”

A serious problem and the way in which you opt to respond to the situation, including your crisis
communication strategy, may represent a critical turning point in the way your company operates and
in the way you are perceived by your stakeholders, including customers, suppliers, regulatory
agencies, and the public in general.

It is important to consider and have a plan for keeping those who may have heard about the crisis and
who have a vested interest in your company in the loop. This includes customers who need assurance
that the products or services they receive from you will still be delivered on time at the quality level
they expect. Employees will want to know what they are to do and how the crisis may impact them
and their jobs.

There are four components of effective disaster communication with stakeholders: (1) getting the
right information to the right people at the right time; (2) the technical capability to communicate; (3)
clearly communicating the information; and (4) rumor control to prevent misinformation.

Your post-disaster communication with stakeholders will be timelier and more effective if, before a
crisis occurs, there is pre-assigned responsibility for keeping key contacts informed. Identify who
will establish and, as necessary, maintain contact, with whom, and how. As with all others who have
disaster response responsibilities, have a backup for each person with primary responsibility should
they not be immediately available when a disaster occurs.

Create a database of key stakeholder contacts; review and update it frequently, not less than
quarterly. Prepare templates and sample letters to speed the process of getting written updates to
stakeholders. Present your information to all stakeholders quickly and honestly. As appropriate,
provide frequent updates on how you’re doing in responding to and recovering from the disaster.
Customers, while they will sympathize with your plight, need to know how your situation will impact
them. Above all else, will the service/product you provide be delivered as scheduled?

Identify the groups and individuals with whom your company will need to communicate when a
disaster occurs. Get input from throughout the organization. Include both those who have an actual
need for information and those who believe that they need information. In the case of the latter
group, remember that if you don’t provide information, they will most likely get it elsewhere, or even
“create” their own answers.

If not already in place, consider developing and implementing a policy that employees are not to give
statements to the media. Not everyone is skilled at giving statements or interviews and having a “no
statement” policy benefits both the organization and the employee. It protects employees from
possibly being responsible for giving media representatives incomplete, incorrect, or proprietary
information that can make its way to the front page of a newspaper or the source of a damaging
sound bite on an evening news broadcast.

Educate employees about the importance of following the company’s media policy and also provide
them with information about whom to refer media representatives. Include complete and accurate
contact information. Having a reporter with a microphone ask for your opinion or having a news
camera bearing down on you can be impelling. While reporters have the right to interview anyone
they want to, everyone has the right to decline to be interviewed. A “no comment” policy and a
person to whom to refer media representatives provide direction and make it easier for employees to
decline to comment.

The importance of acting promptly when responding to a disaster cannot be overstated. Tell it in
sufficient detail, tell it fast, and tell the truth. To prepare for successful disaster communication,
develop and regularly maintain notification lists, a list of immediate internal notifications to be made
in each type of crisis (e.g., CEO, Public Relations Department, Security, and Legal). Designate how
each person will be contacted and by whom. Include business and home contact information—
landline telephone, cell phone, PDA’s, and e-mail. A helpful tool is a laminated card containing this
information that is carried in a purse, wallet, or briefcase.

Keep all employees informed through use of an employee 800 number, e-mail, intranet, and
increasingly sophisticated electronic notification systems. Employees need to know when and where
to report to work or that they are to stay at home until notified otherwise.

Also consider how your company’s Internet presence may be used to communicate your message
when a crisis occurs. An additional pre-assignment may be a person(s) who will facilitate use of the
Internet to contact identified stakeholders and keep them advised of the company’s actions in
responding to the crisis and possibly make information available to the general public.

Test disaster communication capabilities often. Update all contact lists and contact information in
electronic notification systems. Ensure that those assigned communication responsibilities receive
complete training with periodic updates and refresher training. Develop communication redundancies
and test the technology often.

Training and Testing . . . The Reality Check. A plan is not a plan until it has been tested; it is only
theory. A program of training, exercises, and tests is an integral part of any Business Continuity
Program, moves plans beyond the concept stage, and provides all employees with the appropriate
level of education and training.

A written plan by itself is of little help when disaster strikes. To ensure that the plan is workable and
do-able, personnel must be trained and the planned strategies must be tested. Staff assigned to
business continuity teams need tailored, detailed training that focuses on their particular roles. In
addition, it is essential that the plan’s strategies, equipment, and personnel be exercised and tested.
This can be accomplished through tabletop and function exercises and specialized field tests such as
Business Continuity Center exercises and hot site and alternate work site tests. Think of training,
exercises, and tests as disaster rehearsals, an opportunity to learn critically important lessons before a
disaster occurs. It is through ongoing tests and exercises that we work out the kinks, enhance our
strategies, and help ensure a smooth return to normal business operations.
Training for those involved in carrying out business continuity responsibilities provides an
opportunity to develop practical knowledge of the business continuity plan and its processes.
Business continuity team members also gain a more complete understanding of their responsibilities:
what to do, why it is being done, and where it fits in the company’s bigger business continuity
picture.

When planning exercises and tests we have options. First, provide basic business continuity
orientation for all employees beginning with an orientation for new hires. Provide regularly
scheduled refresher training as well as updates as needed to introduce revised strategies and
procedures. Develop and deliver detailed training for business continuity team members and others
charged with carrying out business continuity strategies.

Then, choose the best exercise type for the situation and the maturity of your business continuity
program and team members. There are three basic types: tabletop exercise, simulation (or functional)
exercise, and field (or full-scale) exercise (test). In business continuity “exercise” is the more
commonly used terminology, while “test” is more commonly used in disaster recovery.

A tabletop (walk-through, desktop) exercise is a non-stressful, slow-paced exercise used to evaluate

strategies, plans, and procedures and to provide a training opportunity for team members. Team
members are presented with a disaster scenario, and as participants discuss the situation and problem
solve using the plan document, they become more familiar with their roles.
A simulation (functional) exercise is designed to give team members a more realistic, hands-on
experience in dealing with a disaster situation. A simulation is faster paced and more stressful than a
tabletop exercise. It enhances communication and decision-making skills and helps further
familiarize team members with the plan and procedures. A simulation exercise involves two groups.
The first is the business continuity team; the second is a simulation team.

Working with an agreed-upon realistic disaster scenario and scope, prior to the exercise the
Simulation Team develops messages that in the event of a real disaster might be received by the
business continuity team from anyone, anywhere inside or outside the organization. This will likely
include public safety officials, customers, suppliers, regulatory agencies, stockholders, government
officials, media representatives, and employees. Team members must then decide what actions are
needed and what response to the messages received is required, if any. To be fully effective, test
actions must mirror reality. All actions taken by team members must be based on existing plans and
procedures and resources that actually exist.

A field (full-scale) exercise is based on a disaster scenario and involves the actual mobilization of the
business continuity team. This type of exercise adds an integration and coordination component to
the simulation (functional) exercise as people and resources are moved, perhaps to a disaster
recovery hotsite or an alternate work area.

Think of exercises and tests as rehearsals, an opportunity to practice before an actual disaster occurs.
Exercises raise awareness and provide a teambuilding opportunity, as well as identifying needed
corrections, improvements, and enhancements to plans and strategies. Develop an annual program of
orientation sessions, drills, training sessions, exercises, and tests. Remember to eventually include
both primary and alternate team members in the exercise process. And once your plan is mature,
consider including suppliers, contractors and even customers in exercises. Doing so increases the
realism, expands learning, and provides opportunities for partnering in business continuity planning.

New lessons are learned with every test, every exercise, as well as when disasters occur. We want to
be certain that our planning incorporates all the lessons learned, not only our own but those of others
who have been impacted by recent major disasters, for example:

 Prior planning had been done on the assumption that the results of a disaster would be much less
far-reaching and long-term.
 People expected to carry out Business Continuity responsibilities were not available.
 Air transportation infrastructure was shut down, resulting in it being impossible to air products,
supplies, or people. Some businesses realized that a great percentage of their business was tied
to the airports.
 More extensive communication outages of longer duration were experienced.
 There was a lack of reliable transportation.
 Electrical power outages were accompanied by a lack of fuel for generators.
 Multiple facilities were destroyed or sustained significant damage.
 Buildings were under water or otherwise inaccessible for weeks.
 Mail service was interrupted for as long as several months.
 People were displaced for extended periods of time.
 The recovery period extended far beyond what was expected and what was addressed in
business continuity plans.
Answers to important questions are found through an ongoing schedule of tests and exercises. How
effective are the plan documents? Is greater detail needed in some sections of the plan? Is our
business continuity team structure what is needed, or do we need additional roles? Do we need more
communication equipment? Is our notification procedure working as planned?

While exercises have enormous importance as a training vehicle, the greatest value comes when we
fully capture the lessons learned. Have exercise participants and an observer(s) take notes on issues
and challenges that arise during the exercise. Conduct a debriefing session as soon as possible
following the exercise. Did we do what the plan said we would do? What worked well, what did not
work as planned, and what do we need to do to improve strategies, procedures, and the plan
document? Capture the lessons learned, assign responsibility for completion of each action item and
a specific deliverable date, and begin preparations for your next exercise.

The Perpetual Work In Progress. Developing a business continuity plan is never a job that is
complete. Best practices call for a full review and update of plans annually in addition to interim
revisions made necessary by substantive changes in any information contained in the plan including
business continuity staffing, contact information, procedures, technology, or lessons learned from
tests and exercises. Ensure that all plan holders receive all updates and revisions. If changes are
significant, provide necessary training.

A Business Continuity Plan is never “finished,” rather, it is always a “work in progress.” Conduct a
formal review/audit of the entire plan not less than annually. In addition to a full review, there are
certain triggers that signal the need for additional plan reviews and updates.

Changes in the physical plan or equipment, changes in hazard and vulnerability information, changes
in personnel, a reorganization, changes in policy, changes in regulatory requirements, and audit
requirements are signals that strategies and plans should be reviewed for necessary changes. It is
likely that the greatest challenge in containing current information in plan documents is ongoing
changes in contact information for employees and critical suppliers and contractors.

To help manage the impact that ongoing organizational changes make in Business Continuity
Programs, establish documented policies supported by management that require all changes that
possibly impact Business Continuity be reported to the Business Continuity Manager. If the
organization has a Change Management Department or function, link Business Continuity to the
established change management process.

Experience will almost always identify needed changes in plans. The hope is that the experience will
be a test or exercise rather than an actual disaster.

Summary. In today’s world, everyone in the organization has responsibility for their own safety and
security and that of others, as well as a responsibility to help prevent and protect the organization
from disasters. Through a program of training and testing that includes all employees, we can help
ensure that everyone is aware of the part they play and understands what the organization is prepared
to do. Exercises and tests provide the best possibility reality check for your plans other than an actual
disaster. Plans must be reviewed and updated frequently to ensure that the information they contain is
accurate and current. The overall result is better prepared organization and a stronger line of defense
against future disasters.
Note. Adapted from “Keys to Narrowing Business Continuity Planning Gaps: Training, Testing &
Audits,” by B. A. Kildow, 2010. Copyright 2010 by Institute for Supply Management.
2. The Transaction Review Process: Identifying Risk in Supply Chain Contracts

Laurie Brooks, Chief Risk Officer, PSEG

95th ISM Annual International Supply Management Conference, April 2010

Introduction. Supply chain professionals don’t have to go it alone when it comes to reducing risks
inherent in the terms and conditions of contractual arrangements. Most organizations will have
functional area experts who can aid in the identification and mitigation of some or all of the terms
and conditions that could give rise to market, credit, accounting, tax, legal or operational risks. The
trick is in creating a review and approval process that does not unduly slow down the transacting
process but involves the expert resources in a timely and meaningful way. This requires the creation
and adoption of appropriate governance (policies and procedures); the training of business unit
personnel that require materials or services, supply chain transactors and functional area experts; and
lots of communication, some of which can be aided through process automation.
Rationale. Effective management of the transacting process is critical to overall risk management
and corporate compliance processes. The complexity today, for example, of valuing and hedging
transactions that create exposure to underlying commodity prices; or assuring that counterparties
have the financial wherewithal to deliver on commitments—on time and within proposed fees;
among other risks, and then documenting the processes by which all of the above have been
accomplished to create an auditable and appropriate compliance and control environment, requires
the collective efforts of individuals with diverse skill sets.
Governance. The first step in our journey was given impetus when we were involved simultaneously
in tracking down all of our corporate commitments as part of the due diligence process for a merger
and documenting for Sarbanes Oxley compliance that we knew all of the contracts that contained
derivatives for derivative accounting purposes. Both processes were manual, labor intensive and, at
the time, not well defined in our existing practice documentation. My department, Enterprise Risk
Management, working collaboratively with,
Internal Audit, Legal, Accounting and Supply Chain. Companies can take the lead in crafting a
practice that defines the process and accountabilities for identifying certain risks before a contract
reaches the signature stage so that there is time while still in the negotiating process to mitigate risks.
The primary purpose for this practice is to ensure that:

“. . . all Transactions have known, measured and controlled Risks that have been evaluated and
where appropriate mitigated in a consistent manner by parties having the appropriate expertise prior
to execution of a Contract or other legally binding document. An audit trail to confirm that the
appropriate evaluations and reviews have taken place can be created. Risks to be evaluated include
but are not limited to: Legal Risk; Financial or Market Risks that have not been quantified or where
appropriate insured; terms and conditions that by inclusion or absence create Credit or Counterparty
Risk; and Accounting or Tax Risk.”

The practice requires the supply chain professional to make a determination as to which reviews are
required.

Training. Working together with the Accounting, Legal and Supply Chain organizations, training
programs to help all participants understand their roles and the requirements of the practice can be set
up. The following example of a procurement serves to highlight the significance that training serves
with respect to derivative accounting, credit and market risk as well as legal issues.

It involves building a major new 145 mile electric transmission line from Pennsylvania into New
Jersey. Aluminum conductor cable will be strung on towers along the route. A lot of aluminum will
be required! 2000 Tons! There are only a few vendors in the world capable of supplying the quantity
of product that we will need. The dollar value of the contracts certainly required the upfront
participation of both legal and credit personnel to review the potential counterparties and draft
contracts with protective terms and conditions. Two reviews that might not be obvious for this
procurement were also essential in this case. First, this is going to require a lot of aluminum over a
two year time horizon for construction. World market prices for aluminum are fairly low at present
but in a recovering economy could rise quickly.

The market risk group was involved to help structure an agreement with the supplier to create price
certainty for the required aluminum. Second, as soon as the idea of locking in a commodity price
comes into play one needs to get the accountants involved. Price certainty can create embedded
derivatives in contracts which require careful wording of notional quantities and settlement
provisions to achieve hedge or settlement accounting treatment if desired. In most cases, the desire is
to avoid having to mark the contract to current market prices which can create earnings volatility.

This contract, for example, includes some relatively complex pricing. It refers to exchange prices for
aluminum. Whenever a contract includes an index such as an interest rate (LIBOR), an exchange
price (NYMEX, LME), or even gross domestic product it could have unintended derivative
accounting consequences. Fortunately, this contract was reviewed by accounting and all derivative
issues were vetted before it was signed.

The challenge with any procurement of this magnitude is to keep the process moving and arrive at a
contract that is mutually agreeable. Including the accounting and market risk experts in this process
early in the game kept the process on schedule and resulted in a better, risk-mitigated outcome.

Conclusion. As with any new process, there are growing pains. It will take time and communication
for all supply chain associates to feel comfortable with decisions around required reviews and for
reviewers to speak-up when asked to perform a review that is not necessary. Hopefully, it will take
less time for the business units to see the positive effects of the review process in cost savings and
risk avoidance. The control environment clearly benefits from the creation of a single repository for
signed contracts, a single version of the truth for works in progress and an audit trail of reviewer
comments.
Note. Adapted from “The Transaction Review Process: Identifying Risk in Supply Chain Contracts,”
by L. Brooks, 2010. Copyright 2010 by Institute for Supply Management.
3. Risk Management: What Could Impact Your Company’s Reputation?

Cathy Herr, CPSM, Senior Director of Global Manufacturing Procurement

Eli Lilly and Company, Indianapolis, Indiana

95th ISM Annual International Supply Management Conference, April 2010

Risk . . . The Merriam-Webster Dictionary defines risk as the probability of loss or injury. This
meaning has been emphasized to us since we were very young. Most of us have vivid memories of an
adult warning us not to pursue an activity due to the chance that we might get hurt. As we age, we
learn to assess the risk involved in activities and make our own decisions about what to pursue.
While some may think they are very risk averse, chances are they do take many calculated risks, like
driving over the speed limit, talking on a cell phone while walking to a meeting, or drinking too
much caffeine. But we learn to manage the risks in our lives.

The same is true in Supply Chain Management. Supply chain professionals’ number one job is to
assure that material is where it needs to be when it needs to be there. Whether it pertains to being in
charge of final product distribution or raw material procurement, it is critical to identify and manage
risks on a daily basis. It is important to set target inventory levels and pay careful attention to lead
times.

The following is a case in point wherein Eli Lilly and Company in Indianapolis, Indiana, asked the
question, “What are the biggest risks that our business faces?” Through an executive exercise the
identification of third-party risk was identified as the area of most risk to that company. The
executives recognized that if the materials and services they purchase were not of top quality and
they manage to directly impact the products they make, people could get sick and die. This risk is
just unacceptable and in direct conflict with their company mission, which is to improve the lives of
individual patients.

There are many naysayers around, and they argue that managing this risk is impossible, either
because the probability of a supply chain interruption or of contamination or of a service impacting
products is so remote that it is a waste of time to even attempt to manage.

Let’s consider several areas of supply chain risk, including supply interruption, contamination, or
service failure.

Supply interruption can occur for a large number of reasons. Human error can result in an order not
being placed in time to support the production schedule, which can ultimately lead to stock outs.
Anyone who has had to explain to the production manager that they don’t have a product to meet the
schedule knows what a difficult conversation that can be.

Worse than that is a long-term supply interruption. The reality is, unfortunately, that supplier plants
can have major production problems. Over the last six years, I’ve personally experienced two major
supply interruptions due to explosion at supplier manufacturing facilities. Imagine, sipping your
morning coffee and listening to the news only to hear that there has been a major explosion at a plant.
Your first thought probably is for the workers, hoping that no one was injured. Then we begin to
listen for the name of the company and location of the facility. And when you learn that it is a
supplier of a material critical to one of your best selling products, you cringe. And if that material is
sole-sourced either by choice or because of intellectual property rights or any other reason, you might
feel a little sick to your stomach. How much inventory do we have in-house? Do I have orders that
might have been in-transit? Is there a distributor that might have material that would match my
specification? What is my relationship with the supplier? Am I a large or small customer? Where will
I be in their list of customers to get back and running in another plant?

It is during those tough times that the level of risk understanding and risk management you’ve
completed can either ruin or save your company’s bottom line. No one wants to be called into the
CEO’s office to explain how a supply interruption for a material that we spend thousands of dollars
on annually may impact the lives of millions of patients who are depending on it for their health.
That is just one of many reasons that our Procurement and Supply Chain Management teams take the
time to actively manage our supply chain and service risks.

Warren Buffett is quoted as saying, “It takes 20 years to build a reputation and five minutes to ruin it.
If you think about that, you'll do things differently.” The following is an example of how a
procurement organization completed a risk assessment process and how they actively manage risks in
their supply chain. For this example, my focus will be on the materials that go into the end products
that we sell.

The first step in understanding supply chain risk is to identify everything you use to make your
company’s products. Create a spreadsheet and list your company end products across the top and the
materials or services that go into those products down the left side. If you are like us, some of our
raw materials and services are used in several of our products. Identify which raw materials/services
go into which end products.

Now that you have this listing, identify the critical factors for each raw material. For example, how
many sources do you have for that raw material? Where is the material manufactured? If it comes
through a distributor, where is the distributor’s storage facility and how is it transported to your
plant? Calibrate the level of risk associated with several factors, like quality, lead time for
production, transportation difficulty, geographic location. For example, we purchase a key material
through a local distributor, but the manufacturer is located deep in Louisiana. When Hurricane
Katrina devastated New Orleans and buried much of Louisiana in water, my team used our risk
spreadsheet to quickly identify the raw materials being supplied from that region and begin a current
state assessment of inventory, manufacturing plant status, and potential risk to production. Similarly,
our energy commodity manager watches weather forecasts closely during hurricane season. A
hurricane approaching the Gulf of Mexico can cause energy prices to rise swiftly, dealing a blow to
the cost of production. And because over 80% of our raw materials are impacted by the cost of crude
oil (i.e., chemicals, resins, etc.), swift increases in the price per barrel can impact the cost of raw
materials for months.
The next step is to identify the risk management strategy for each item. We compile a cross-
functional team of key stakeholders to review, discuss, and agree to the risk management strategy, as
well as to identify the method of tracking compliance to the strategy over time. There are many
options for risk management strategies. One approach is to approve multiple sources for the material.
This approach can be the least costly risk management strategy, but beware of qualifying too many
sources as you may not hold a deep enough relationship with any one to gain access to the quantity or
quality of material you need in a market-wide shortage. Another approach is to hold strategic
inventory to offset the risk of stock-outs. Adoption of this strategy obviously is dependent on many
factors, not the least of which is material pricing, warehouse capacity, and material shelf life. The
key here is for the team to discuss the options and identify, document, and implement the best
approach for each material. It is also key to develop a tracking mechanism that is monitored regularly
by management of the group responsible for strategy implementation to assure the approach is
maintained. Many times these strategies can lose priority once the crisis is past. Inventory metrics or
supplier consolidation projects can put a strain on maintenance of the risk management strategy. By
tracking implementation over time on a regular basis, these traps can be avoided.

From the listing, you may want to identify the materials most at risk and go a step or two further in
your risk assessment activities. As an example, that next step may involve the creation of a one-page
category overview and strategy. The simple one-pager highlights the key facts about the material:
What end products is it used in? Who is (are) the manufacturer(s)? Which of these are qualified as
suppliers to our company? What is the negotiated price? What has happened to pricing historically
and how is the price expected to fluctuate over the next x-y months? How much inventory do we
hold? Does the supply contract require the supplier to also hold x months of inventory on-site for us?
For the most critical items, we recommend regular meetings to review these strategies with the key
business owners and financial representatives of the business unit. During these meetings, discuss the
strategy and the risks associated with the strategy, and discuss options and the cost of each option in
order to gain buy-in from the key management members. In the unfortunate case where there is a
problem with one of these materials, having these management members aware of and involved in
the risk management strategy can reduce time wasted on finger pointing and get everyone focused on
solving the issue.
Procurement or supply chain organizations who follow a philosophy of category management are
typically best at risk assessment and management. By having a professional whose job it is to
understand a category of materials inside and out, an organization can stay abreast of potential risks
before they hit.

Unfortunately, most supply chain professionals who have been in the business for years can share
stories for hours of instances where an unconsidered factor impacted their supply chain. In most
cases, the crises are averted . . . but why depend on luck or chance. By investing a little time in risk
assessment and management of your supply chain, you can reduce the probability of injury to your
company . . . in other words, reduce the risk.

Warren Buffett is also quoted for saying: “Risk comes from not knowing what you're doing.” Don’t
let risk to your company’s supply chain impact your company’s reputation. Know what you are
doing. . . . And exercise responsible supply chain risk management!

Note. Adapted from “Risk Management: What Could Impact Your Company’s Reputation,” by C.
Herr, 2010. Copyright 2010 by Institute for Supply Management.
4. Proactively Managing Supplier Risk

Larry Giunipero, PhD, CP.M, A.P.P. Florida State University

Phillip L. Carter, D.B.A

Executive Director CAPS Research and Harold E. Fearon Chair of Purchasing, Arizona State
University

95th Annual International Supply Management Conference, April 2010

Abstract Supply chain disruptions create significant costs and problems. In today's economy, the risk
of supply chain disruption due to supplier failure has increased dramatically. Reacting after a supplier
has failed is always more costly and less effective that taking action to avoid the failure or to mitigate
its impact. The following is an in-depth study of supplier risk management that uses new
technologies and techniques to monitor the supply base for potential disruptions. User experiences
with these risk management techniques will also be discussed.

The Opportunity. The understanding of why and how to manage supply base risk will help supply
managers to:
 Ensure supply continuity
 Reduce unexpected delays in meeting customer requirements
 Provide effective methods to minimize costs associated with supplier failures
 Begin to develop a mind-set within supply department that risk is an important element of the
purchasing/supply management job.
Objectives. The objectives of presentation are to: 1) provide an understanding of the concept of risk
and risk management, 2) discover why risk management needs to be part of the strategic sourcing
process and how this can be accomplished, 3) learn about the advantages of utilizing various third
party providers of supplier financial information to track the changing conditions in the supply base
and to predict supplier financial performance, 4) improve supply management's ability to respond in
a timely and effective manner to supplier risk, and 5) present preliminary findings of field research
with companies who have implemented risk management practices.
What Is Risk?

Risk is the combination of uncertain events and outcomes associated with those events. Supplier risk
focuses on events that have outcomes detrimental to the sourcing plans that have been put in place
with the supply base. These events are generally in one of two categories: 1) supplier financial
distress and 2) supplier operational fall-down. These events are often linked but are monitored in
different ways.

Probability and impact are often combined into a 2x2 matrix which allows supply managers to
categorize their risks and better manage it.

Using a systematic approach to analyzing risk allows supply manager to improve their risk
management by isolating and focusing on the higher risk categories. High-risk events, that is, those
with high probability of negative events with high impact, can originate from supplier financial or
operational difficulty.
Recent trends in supply management have increased efficiencies in the supply chain but have also
increased supply chain risk. Examples of these trends include: 1) increases in outsourcing, and 2)
lean initiatives which have resulted in reductions in people, inventory, and suppliers. These
strategies, while increasing efficiencies, have increased the probabilities of supply chain disruptions
and the impact of the disruptions. Together they created a need for proactive risk management on the
part of supply managers.

The risk associated with these strategies has been further increased by the recent recession, which put
increased financial strain on suppliers and impeded their ability to meet contractual agreements. This
has been a vicious circle of financial distress leading to operational problems that lead to even more
financial problems. For example, a supplier who cannot get financing for raw material inventories
will not be able to meet production schedules and will miss deliveries. This, in turn, will result in
reduced payments from customers. This will lead to further cash flow problems and even greater
hurdles in financing needed inventory.

What Is Risk Management?

Risk management is the process of identifying potential negative events, assessing the likelihood of
their occurrence, heading off these events before they occur, if possible, and making contingency
plans to mitigate the consequences if they do occur. This view of risk management is predicated on
starting with an acceptable sourcing plan that meets the needs of the company. Negative events are
those that disrupt the sourcing plan.

Effectively managing supplier risk first requires a systematic process to monitor the supply base for
potential problems and, secondly, taking pre-emptive actions when potential problems are identified.
Over the past several years new data management and analysis tools have been developed for
monitoring the supply base. These approaches continuously monitoring suppliers on a “watch list”
and provide buyers with advance notice that allow them to take action prior to a disruption.
Advanced notice of supplier distress allows supply managers to have more alternatives for dealing
with the problem. These actions include:

 Pay early to help with supplier cash flow

 Take early delivery to move supplier payments forward
 Buy raw material for suppliers
 Visit the supplier to see if more long-term help, rather than just a quick fix, can be provided
 Asking a larger supplier to lend a hand to a smaller supplier
 Direct investment
 Help with third-party buyouts
 Move the business
 Buy the business

After a supplier goes into bankruptcy, the list of options available to supply managers is greatly
reduced and those that are available are more costly. Supply managers who are surprised by supplier
failures are forced to react to and solve these problems in a crisis mode, leading to increased costs,
reduce revenue and lower profits.

Third Party Providers of Risk Management Information

There are several third party providers who have developed the capability to monitor the supply base
for financial risk. Most of the providers analyze the current financial (and other) data for a supplier
and use this to predict their future financial condition. The analysis and forecasts are based on
examining millions of historical data sets and ratios for their predictive ability.

Based on this monitoring the software’s predictive analytics generates alerts that allow the buying
firm to take preventative actions (such as identified above) prior to a major negative event, such as
supplier bankruptcy. Several third party providers will be discussed in this presentation to give
participants an understanding of their various capabilities and philosophies.

Using Risk Management Tools in Supply Management

Case examples from buying organizations that have successfully integrated these new tools into their
risk management process will be presented. Implementation issues, training issues, and process
integration issues will be discussed.

Note. Adapted from “Proactively Managing Supplier Risk,” by L. Giunipero & P. L. Carter, 2010.
Copyright 2010 by Institute for Supply Management.
5. The Supply Chain and Business Continuity: Preparing to Survive the Next Disaster
Betty A. Kildow, CBCP, FBCI, Emergency Management Consultant, Kildow Consulting

95th Annual International Supply Management Conference, April 26, 2010

Abstract. Today more than ever before every business and organization faces emergencies daily. In
most instances these situations are handled relatively easily and are transparent to the world outside,
and we move forward. Unfortunately, some of these situations expand to the crisis level. Natural
disasters can strike with no warning, wreaking havoc and destruction in their wake. Recent financial
challenges have heightened the impact of these challenges on operations and employees.

Technological and human-caused disasters are an area of continuing concern for all organizations. In
our rapidly-changing world, new threats arise on a regular basis, ones we have never previously
considered. If not dealt with effectively and quickly, these events can threaten the reputation and
future success of your organization, even its very survival.

While supply chain professionals are not typically assigned primary responsibility for business
continuity planning, the success or failure of an organization’s efforts to continue or resume
operations following a disaster likely depends on the supply chain operating at an acceptable level. A
failed link in the supply chain can result in an inability to recover operations before the organization
experiences grave consequences.

Business Continuity Considerations. Disaster can strike quickly and without notice, and if it has
not already, a serious emergency or a disaster will likely occur at your company at some time in the
future. While we often think in terms of major disasters that create havoc and impact whole
communities, such as terrorist attacks, hurricanes, tornadoes, earthquakes, or floods, your
organization’s disaster is more likely to be a smaller scale, non-headline-generating occurrence—a
power outage or water main break in your immediate area, fire in a room of your building, a bomb
threat, or workplace violence incident. Just as it is not possible to totally prevent most disasters and
emergencies, it is not realistic to assume that all emergencies will happen to other organizations but
never to yours. Being prepared is both ethically correct and good business.

In today’s world it is not only necessary to have a robust business continuity plan to protect your
organization and its operations, others outside the company including customers are interested in
your level of business continuity preparedness. Increasingly, prospective customers may ask about
your business continuity program, and there is every likelihood that a competitor is using their
capability to continue operations following a disaster as a potential marketing edge.

While you may not have direct business continuity planning responsibilities or be a member of a
business continuity team, every employee needs to be aware of the company’s business continuity
strategies and their specific role in carrying out those strategies. Business continuity will not succeed
until all elements of the supply chain are an integral part of the company’s approach to business
continuity planning.

Continuity of the supply chain is more complex and challenging today than ever before. Just-in-time
inventories, longer and more complex supply chains that may include reliance on out-of-area and
out-of-country suppliers, leaner supply chains, stringent service level agreements, an increasingly
greater number of new products, extended hours of operations, and stricter regulatory requirements
all contribute to an environment where a disruption of the supply chain that was once considered an
inconvenience is now viewed as unacceptable. And in the current and continuing economic turmoil,
even greater pressure is being exerted on supply chains, as a result of efforts to maintain a smaller
footprint, minimize costs, and cope with an unstable economy that results in pricing and credit
concerns.

Business Continuity Basics. As early as the 1960’s and increasingly in the 1970’s, companies began
recognizing the need to protect, and in the event of a disaster recover, their technology—systems,
networks, data, and communication. Some industries (e.g., financial institutions and pharmaceutical
companies) implemented disaster recovery programs to meet increasingly strict regulatory
requirements.

Business continuity is still a relatively new and evolving business practice. Over the years, the scope
has broadened, in part due to business continuity and disaster recovery planners’ continuing efforts to
raise awareness of the need to protect not just technology, but the enterprise as a whole. By the mid-
1990’s many organizations had expanded their planning to include recovery of critical work
processes—the business of the business—not just the supporting technology. As late as the early- to
mid-1990’s having a capability to restore operations within 72 hours or less was considered an
acceptable—even admirable—goal. Today for some organizations it is unacceptable for some
functions to be non-operational for minutes, even seconds.

Continuing disasters, the most significant of these being the September 2001 terrorist attacks and
multiple severe natural disasters, continue to heighten the awareness of the need for business
continuity planning. Today, there is a continually growing awareness that the supply chain is
susceptible to potentially crippling disaster-caused disruptions and that supply chain continuity must
be fully considered and integrated for a comprehensive enterprise-wide business continuity program
to succeed.

As Business Continuity further matures, we continue to search for improvements. In response to the
growing importance of business continuity planning steps are being taken to establish standards to
use as guidance in developing effective Business Continuity Programs, and to serve as a standardized
guide in determining the quality and effectiveness of an organization’s Business Continuity Program.
The rush to meet has resulted in multiple sets of standards and benchmarks being developed both in
the U.S. and around the world, such as BS25999 developed by The British Standards Institution;
NFPA 1600 developed by The National Fire Protection Association (U.S.); and ISO/PAS
22399:2007 developed by the International Organization for Standardization. These are in addition to
existing industry-specific standards, i.e., financial and health care, and are expected to be far-
reaching in all business sectors. As a result there is some uncertainty as to which of these standards
will become the most widely accepted as we sort through the various voluntary and required
certification programs and regulations to determine which will serve as our official yardstick to
measure continuity sufficiency.

For now, organizations can voluntarily be audited and accredited against these standards. As with
any non-mandatory certification process, there will likely be advantages for those who elect to utilize
a certification standard. It behooves each business and organization to stay informed and to consider
which certification is of the greatest benefit to them, as well as which standard may be preferred in its
industry or by its customers and clients. Select a standard or standards that make the greatest
contribution to your organization’s Business Continuity

Program and serve as a vehicle for ongoing improvement.

As with most other subject matter, business continuity and disaster recovery terminology and
acronyms have developed and evolved over the years. These include:

 Emergency Management: A process within a comprehensive risk management program that

includes all the components of the overall approach to managing major emergencies and
disasters.
 Emergency Preparedness and Response (EP&R): Focuses on preparations to protect safety of
employees and visitors when a disaster occurs; usually includes formation of employee teams
who assist others when an emergency occurs.
 Disaster Recovery (DR): The restoration of an organization’s technology to provide the IT,
telecommunications, and related technology needed to support business continuity objectives.
 Business Continuity (BC): Continuity or rapid restoration of deliver of the organization’s service
or product following a disaster. (Replacing “Business Recovery” as the preferred term as the
acceptable time in which to restore operations continues to shrink.)

There are differences in terminology among different types of businesses, between government and
non-government organizations, and to a lesser degree from one geographic area to another. Of great
importance is the need to standardize usage of the agreed-upon terms throughout an enterprise and to
develop a business continuity glossary.

Over the years, the focus of disaster recovery/business continuity has changed. Originally focused on
reconstituting the IT environment after a disaster occurred, we now look for ways to avoid and
mitigate risks and to maintain or restore operations throughout the organization.

This comprehensive approach also includes interdependencies outside the company, e.g., suppliers,
contractors, and infrastructure.

Assessing Current Preparedness. Today’s supply chain professionals need to have—at a minimum
- an understanding of business continuity basics and their organization’s business continuity
approach and strategies, regardless of their level of active involvement in the planning process or
their role in carrying out Business Continuity Plans. If you do not have primary responsible, know
who does, what methodologies were used to create the business continuity program, and how it is
tested, maintained, and updated. Ask to review the plan document and make sure your business unit’s
operations are addressed in the procedures. Was a hazard assessment conducted, and if so, what are
the results? Was a formal business impact analysis conducted, what criteria were applied to identify
the most time-critical business functions, was your business unit included, and what are the results?
In what timeframe will the IT systems that support your operations be restored?
Conducting a Hazard Assessment (aka Risk Assessment, Hazard Analysis). What is a disaster?
We all deal with emergencies every day . . . no two are exactly the same in nature, magnitude, and
the resources required to respond to them. Much of what each of us does on an ongoing basis is
handle emergencies.

A disaster is something quite different. It may be a seemingly insignificant situation or an emergency

that went unrecognized and got out of control or an unexpected serious event that struck suddenly
and violently. Some impending disruptions may be known well in advance, while others strike
suddenly with devastating force. In either case it becomes a problem of such magnitude that it
interrupts your company’s ability to do business...to deliver your product or service. It may also
threaten or severely damage your company’s image, integrity, or reputation. Some of the hazards that
may be potential disasters for your company are:

 Natural disasters: hurricane, earthquake, severe winter storm, flooding, tornado

 Lengthy power outage
 IT failure
 Violence in the workplace
 Fire
 Explosion
 Hazardous material incident—internal or external
 Terrorism
 Sabotage—external or internal
 Product tampering
 Organized labor action
 Pandemic
 Political risks (particularly when the supply chain goes beyond geographical borders)

From a supply chain perspective, any event that results in a significant disruption of transportation,
loss of inventory, inability of suppliers to fulfill your orders, inability of your organization to fulfill
customers’ orders, and in an inability to communicate with customers, suppliers, transportation
providers, or other stakeholders is likely to become a disaster.

The purpose of a hazard assessment is to identify the potential threats to your organization and to
quantify their impact on your operations, facilities, people, and information.
Developing a hazard assessment for the supply chain may be as simple as gathering managers
together and asking these questions, “What can go wrong that will keep us from fulfilling our
mission—to deliver our product/service? How likely is it that this will occur? Has it happened in the
past? What impact will such an occurrence have on our operations?” It is likely that 80% of the
potential hazards will be identified through this simple process.

The results of the hazard assessment can be used to develop a mitigation program to eliminate
potential disasters as possible, lessen the impact of those you cannot eliminate, and provide
information that assists in the business continuity planning process. It will also identify the disasters
that require the most immediate and extensive business continuity planning.

Once the greatest hazards are identified, there are options for controlling risks. Among the choices
are: absorbing the risk, transferring the risk through insurance, or reducing the risk through
mitigation. One of the four elements of a comprehensive a business continuity program, mitigation is
ongoing actions taken in advance of a destructive or disruptive event to reduce, avoid, or protect
against its impacts.

In creating a mitigation program the goal is to eliminate risks where possible and to lessen the
negative impact of disasters that can not be prevented. Mitigation is as simple as fastening down
computer terminals in earthquake-prone areas or moving computers to a higher floor where flooding
is a potential threat to identifying and contracting with multiple suppliers for critical goods or
materials, to relocating an operation from an area where the risks are extremely.

Mitigation steps must be based on common sense, and it is seldom that a mitigation budget is
unlimited. First, target those threats that are the most probable and that will create the most harm. A
simple cost/benefit analysis of possible mitigation steps will help in the decision-making process
where funds are limited.

The Business Impact Analysis. A business impact analysis (BIA) is the foundation on which a
comprehensive business continuity program is based. Its purpose is to determine the most to least
time-critical business functions throughout the organization. For each of these functions a related
recovery time objective (RTO), the target time in which each function must be operational following
a disruption, is determined, as well as the related manpower and resource needs. For supply
management a BIA will include a review of manufacturing, transportation, distribution services,
support technology, warehouses, and service centers.

The BIA process typically uses a written or electronic survey or questionnaire often in combination
with interviews of business unit heads. A review of financial records and process flowcharts is also
helpful.

When conducting a BIA for the supply chain it is necessary to recognize both internal functions and
external supply chain links. No single department or division delivers the organization’s product or
service, and within each business unit the level of criticality of functions (tasks) performed varies
from extremely high to very low.

Of tremendous importance internally, particularly in service delivery businesses, are employee-

related business continuity issues. This may include continuing operations even when employees
can’t make it to their usual business location. While more traditional business continuity gave great
emphasis on the protection of data, information systems, and equipment, today’s business continuity
professionals agree that while data restoration is important, the greater issue is employee continuity.
With very rare exceptions, data without employees does not fulfill customer needs.

No organization can deliver its product or service independently; there is great dependency on
external components such as suppliers, transporters, contractors, and business partners. Most
organizations have a complex supply chain that encompasses multiple supplies and services provided
from outside the organization.

All touch points, both upstream and downstream, must be assessed when conducting your BIA.
Supplier issues must be considered. Are there single points of failure—chokepoints? If a key supplier
or service provider is hit by a disaster, how will it impact your operations? What if you ARE the
supplier or service provider who experiences a disaster? Can you still meet your customers’ needs?
It is important to be knowledgeable of your critical suppliers’ level of disaster preparedness and the
steps they have taken to prepare to continue business following a disaster that impacts their
operations. When assessing suppliers, consider:

 Is a supplier your only source for a vital product or service?

 How critical is the product or service they provide?
 What do you see as being their primary risks?
 How financially healthy is the company?*
 What is their history?
 Do they have a business continuity plan?
 If yes, is the plan comprehensive and does it include staffing and operational continuity in
addition to technology recovery?
 Is “we can handle it” an acceptable response to questions regarding their disaster preparedness?

*This criterion is of escalating importance in today’s economic climate when previously financially
robust companies may be suffering extreme financial setbacks and even be in risk of bankruptcy or
sudden shutdown.

As part of the BIA process you may want to consider asking about key suppliers’ and contractors’
business continuity plans—and don’t be surprised if your customers ask for information about your
business continuity plan.

Plans typically contain proprietary, highly-sensitive information, such as names, contact information,
addresses, applications, process flows, and business strategies. You want to avoid plan documents
getting into the hands of a competitor, vandal, or even a terrorist, and your suppliers and contractors
have the same concerns. So what do you do?

To meet both “the need to know” regarding the level of business continuity preparedness and the
need to maintain confidentiality, here are some suggestions for what you may want to consider
providing in response to a request from a customer or may want to accept to validate a supplier’s
business continuity program:

 A copy of your business continuity mission statement signed by the executive sponsor of the
business continuity program.
 A certified, sanitized copy of the exercise / test schedule, an audit record of past tests and
exercises, and a certified copy of the plan maintenance / update record
 Copy of plan table of contents, overview, and introduction
Another option is to let the requester read a sanitized version of your plan at your location without
providing hard or electronic copy.

Developing Continuity Strategies. To begin developing your continuity strategies, again gather the
supply chain managers for a brainstorming session to identify options for maintaining or restoring
supply chain operations. “You arrive at work next week to find that the building is surrounded with
yellow caution tape. You can’t get in. How are operations impacted? Who are the most essential
people needed to address this situation? What do these people need to keep the business running? Do
we need to diversify any portion of our supply chain to avoid having all our eggs in one basket? If so,
how will we accomplish this? What plans do we currently have to address this situation?”

Throughout the planning process, stay focused on the goal: keeping the organization operational by
continuing or restoring critical business functions as identified in the BIA. Consider all the options.
Think strategically; old solutions don’t always work for new problems.

Among the things to consider:

 Is our transportation system sufficiently diversified? If not, what will we do if a disaster hits our
primary carrier(s)?
 Do we use multiple transport companies on an ongoing basis? If not, is this an approach we
need to consider to prepare for a disaster situation?
 Are documented procedures in place that will allow backup personnel to carry out critical
business functions if the primary persons are not available or if we do not have full IT support
systems? If not, how can these be developed?
 Do we have detailed procedures available to provide to new suppliers and transporters if
necessary? If not, which ones need to be developed or enhanced?
 Is it possible to develop reciprocal agreements for sharing warehouse space, transportation
equipment and personnel following a disaster? If this is a viable option, how can these
agreements be arranged?
 Do our suppliers and logistics providers have sufficient business continuity capabilities? If not,
what are our options?

What are your options? When developing strategies, consider the all elements of the supply chain,
the people who are the most important element of the supply chain process, and the technology that
supports supply chain operations. Consider the supply chain big picture, internal and external; plan
for backups for all critical people; and understand IT infrastructure as it relates to the supply chain
management systems. Know the level of disaster recovery planning that is in place to restore the IT
support needed by the supply chain. Think out of the box; business continuity requires innovative
problem solving.

Always keep in mind that the supply chain must avoid a silo approach to business continuity
planning. Take into account warehouses, inventory control, transportation, and
procurement/purchasing.

Consider all the options. For example, when developing business continuity strategies for critical
suppliers, some of the options are:

 Select low-risk suppliers

 Have multiple suppliers
o Identify an alternate supplier(s); give them a small percentage of your business on an
ongoing basis
 Take another look at inventory levels
 Consider establishing reciprocal agreements
o Beware of casual or verbal agreements
 Purchase the supplier

Another option, and perhaps in the long run the most effective, is for suppliers and customers to
explore ways to partner in the development of mutually beneficial business continuity strategies.
Doing so will almost certainly result in a win-win for all those involved.

Planning and the Plan: Documenting Your Strategies. It is common that those charged with
developing their company’s business continuity capability focus on “The Plan” as though the plan
document is the be-all/end-all. Dwight D. Eisenhower is quoted as saying, “Plans are nothing;
planning is everything.” In business continuity, while comprehensive, well-written plans are a
necessity, they must be based on a sound planning process.

While not a simple undertaking, business continuity planning will enable your organization to
prepare for, respond to, and continue or recover operations following a disaster. The ultimate result
may be the difference between the organization surviving and prospering or barely getting by or even
no longer existing following a disaster.
In addition to the disaster-related benefits, the planning process may help pay for itself through day-
to-day improvements. The examination and documentation of procedures accomplished in the BIA
often identifies opportunities for day-to-day improvement, better use of shared resources, and
possible elimination of duplicate resource costs. Developing a greater awareness of departmental
interdependencies helps foster relationships between business units and builds bridges between silos
within the organization.

The tracking and monitoring of problems in the hazard assessment phase and implementation of a
mitigation program of can lead to threats being addressed before they become disasters. Cross
training for better business continuity staffing helps develop more knowledgeable, better qualified
employees and allows distribution of tasks as needed on a day-to-day basis.

While there is great value to be gained from the planning process, we do need a plan to document the
strategies and procedures developed during the process. The plan becomes the operating manual
when disaster strikes by providing the information needed to continue or restore operations. What is
to done, by whom, when and where, and detailed, specific procedures will provide the direction
necessary for appointed teams to keep the business operational or to get it back up and running in the
shortest time possible.

Summary. More than ever before a comprehensive business continuity program that includes all
internal and external links in the supply chain is essential if the business is to survive following a
major disaster. For employees having a comprehensive business continuity program in place may
mean protecting their livelihood and paycheck by helping to ensure that the business will continue
and thrive. Neglecting to fully consider the supply chain in the business continuity planning process
will result in a business continuity plan that will likely fail when the next disaster strikes.
Supply Chain Operations Reference (SCOR) Model
Because of the challenge of building and maintaining a safe, effective supply chain, the better the
organization responds to and documents risk, and aligns its processes with its suppliers, the better the
outcome. Read this section to learn about the Supply Chain Operations Reference-model (SCOR),
which provides a framework for measuring an organization’s risk exposure and shows where the
supply chain enhances or detracts from product safety compliance and risk management
responsibilities.

APICS Supply Chain Council: Supply Chain Operations Reference-model (SCOR®)(This content
will be opened in a separate window or downloaded to your computer)

Supply chain management and product safety have become integrated over the past decade. The two
business processes used to be different, but planning, implementation, and accountability have since
combined. As a result, there is a risk that product safety will suffer without an effective product
safety system.

As an example, the measure of the risk can be determined by analyzing the Supply Chain
Operations Reference-model (SCOR®) model. An organization’s risk exposure can be measured
by evaluating the model’s parts. There are several elements, each of which (from a product safety
perspective) shows where the supply chain enhances or detracts from product safety compliance and
risk management responsibilities:
 Plan: Supply chain systems require well-designed plans. Each plan has direct relevance to the
elements of a manufacturer's product safety system, which covers:
o a planning process for product concept and design,
o risk assessment, including hazard analysis,
o materials specification,
o production procedures,
o testing and certification protocols,
o supplier auditing,
o product recall and retrieval planning and management, and

documentation.

 The plan should be part of a greater organizational design that integrates international standards.
Two examples are ISO 9001 for quality and ISO 31000(This content will be opened in a
separate window or downloaded to your computer) for risk management. ISO 31000:2009 is an
example of a standard which provides the quality guidelines for companies to continuously
identify opportunities and threats and improve risk management. Organizations can use ISO
31000 to compare their risk management practices with a reputable benchmark (International
Organization for Standardization, n.d.). Organizations need to keep detailed records of their
 databases and activities, and to back up their record keeping. Because changes happen so often
due to new environmental concerns, staying updated is important to comply with laws.
 Buy: The supplier purchases materials and components for a finished product. Customers
typically define the materials and parts, but the product is expected to comply with applicable
regulatory statutes. There are, however, numerous examples of products that have become
hazardous because of unauthorized component or raw materials substitutions. The customer
should ensure that a product safety analysis is documented in the supplier contract, and that
there are testing and auditing procedures so that no changes are made to the final product.
 Make: The supplier controls the production process, and a system that does not have
consistency and reliability threatens the entire supply chain. In order to ensure consistency and
reliability, regulatory agencies have put standard procedures in place (i.e., testing and certificate
programs) that are agreed to and verified by importers.Most large organizations already have
processes for this, though regulators may need more documentation. In the past 10 years,
millions of products made offshore have been recalled because of something that went wrong
with the supply chain. It is important to establish procedures contractually with all parties to
avoid the need for a recall.
 Distribute: Responsibility must be clear to avoid questionable situations when a product leaves
the place of manufacturing and moves into distribution. All proper certificates and
documentation must be finished because the product will be inspected once it leaves its home
port.
 Retrieve: If manufacturers find that a product could be hazardous—through such things as
market surveillance or customer complaints—they should report it to government regulators.
Safety issues should be researched thoroughly, but this should not delay notification. A
company should be prepared with a product recall system tested and running before it is needed.
This type of preparation will decrease the risk of disruption.
 Finance: The elements of cost include:
o supply chain remanufacture,
o repair,
o replacement,
o refund, and

costs of a recall.

 An ineffective supply chain management system is subject to a range of costs that, for many
organizations, pose a material threat. There could be legal costs with defending a company in
litigation or regulatory proceedings. Proper documentation of costs is essential.

Supply chains have been a staple of companies for many years. Most businesses today would likely
understand the connection between the fate of the customer and the effectiveness of the supply chain
partnerships. Because of the challenge of building and maintaining an effective supply chain with
product safety responsibilities, the more the interests of the supplier and customer are similar, the
better the commercial relationship between the two. Thus, better products will be created. An
organization’s risk exposure with respect to both safety (storage/disposal of hazardous/regulated
materials) and profit are not mutually exclusive processes.

The Supply Chain Council(This content will be opened in a separate window or downloaded to your
computer) provides a discussion on SCOR best practices (supply chain risk management).

To read more about cost savings and safety, visit these links:

 Cost Savings and Process Improvement(This content will be opened in a separate window or
downloaded to your computer)
 Professional Safety(This content will be opened in a separate window or downloaded to your
computer)
 Environmental Health Safety(This content will be opened in a separate window or downloaded
to your computer)
 Risk Management Services

ISO 31000 provides quality guidelines for companies to continuously identify opportunities and
threats, and improve risk management. This document provides an overview of risk management
basics, and principles and guidelines of the ISO 31000 Standard. As you read, use your Learning
Journal to take notes on the following steps:

 risk identification,
 risk analysis,
 risk evaluation,
 risk treatment, and
 monitoring and review.
Technology and economics aside, companies must still consider the risk posed by operational
failures. This type of risk, called operational risk, is a broad category of non-financial risk that
encompasses all aspects of a company’s risk not related to markets, finance, or technology. It
includes the failure of a company’s procedures, employees, and systems. An example of poor
operational risk management is Lufthansa’s 2004 ticketing system failure. The airline planned to
launch a new computer system but resulted in the crashing of its ticketing system, affecting 6,000
passengers worldwide and causing a nearly 2% decrease in its stock value (“Understanding and
Managing Risk,” n.d.).
Operational risk may not be considered a financial risk, but operational risk management failures can
have a significant financial impact on companies and the financial markets. Poor operational risk
management is blamed for many of the largest and most damaging financial failures in recent history;
most notably, the 2008 collapse of American financial markets and subsequent bailouts of
corporations large and small, under the Troubled Asset Relief Program (TARP) (Risk Management
Society, n.d.).

Operational Risk Management

Although this risk will vary between companies and industries, it is an essential consideration when
developing a risk management system. Companies wishing to mitigate or reduce operational risk
must evaluate:

1. The adequacy of staffing. Companies with high turnover and poorly trained or unqualified
workers are vulnerable to operational failure.
2. The reliability of systems. Contingency plans and backups for downed systems, along with
established procedures for testing and implementing new systems, greatly reduce operational
risk.
3. Internal controls. An internal procedures manual detailing staffing structures, business
operations, and the reporting of business activities reduces operational risks and their financial
impact.
Reputation risk has become a key strategic initiative for executives and is a major focus of risk
management systems. Reputation risk is the risk of financial loss or decreased value related to
damages to a company’s reputation. To determine a company’s level of reputation risk, it must
evaluate to what extent its reputation reflects its true character, the likelihood of perceptions about
that reputation changing, and how well the company handles internal coordination of its reputation
and character. A company’s culture plays an important role in its reputation and how that reputation
is managed.
Evaluating Reputation Risk

To manage risk, companies must consider:

1. how quickly an event or circumstance will affect the business,

2. how long the event or circumstance will last, and
3. how resilient the company is to the effects of the event or circumstance.
An additional reputation risk is today’s global economy and the potential for a company to be
affected by suppliers and other affiliates that fail to adhere to the laws and regulations to which the
company is subject. Issues like product recalls and environmental hazards can quickly damage a
company’s reputation.

Responding to Risk Through Sustainability and CSR Initiatives

In response to these risks, companies develop sustainability and corporate social responsibility (CSR)
initiatives. These initiatives are self-regulated within a company, promote a company’s reputation,
and support responsible business practices with suppliers and partners. Although CSR initiatives are
focused on compliance with ethical and legal standards and requirements, many companies expand
their CSR initiatives to include positively contributing to society to build and maintain a positive
reputation.
Environmental Law

Any organization has a social responsibility to act sustainably, encompassing the health and safety of
the community in which they operate. Today that community is a global stage with a complex
interrelated supply chain. Understanding regulations at both a national level as well as international is
of vital importance to mitigate risk when dealing with the storage/disposal of hazardous/regulated
materials. Documentation can no longer be taken for granted, as financial and legal risks may prove
insurmountable if left to chance. When it comes to hazardous/regulated material, environmental laws
have become all inclusive, covering a broad range of sustainable issues that have continued to evolve
from the very infancy of the industrial revolution. Medieval England had smoke control laws that
established the seasons when soft coal could be burned. Nuisance laws give private individuals
limited control over polluting activities of adjacent landowners. But a comprehensive set of U.S. laws
directed toward general protection of the environment is largely a product of the past quarter-century,
with most of the legislative activity stemming from the late 1960s and later, when people began to
perceive that the environment was systematically deteriorating from assaults by rapid population
growth and greatly increased automobile driving, vast proliferation of factories that generate waste
products, and a sharp rise in the production of toxic materials. Two of the most significant
developments in environmental law came in 1970, when the National Environmental Policy Act took
effect and the Environmental Protection Agency became the first of a number of new federal
administrative agencies to be established during the decade.

National Environmental Policy Act

Signed into law by President Nixon on January 1, 1970, the National Environmental Policy Act
(NEPA) declared that it shall be the policy of the federal government, in cooperation with state and
local governments, “to create and maintain conditions under which man and nature can exist in
productive harmony, and fulfill the social, economic, and other requirements of present and future
generations of Americans. . . . The Congress recognizes that each person should enjoy a healthful
environment and that each person has a responsibility to contribute to the preservation and
enhancement of the environment.”

The most significant aspect of NEPA is its requirement that federal agencies prepare an
environmental impact statement in every recommendation or report on proposals for legislation and
whenever undertaking a major federal action that significantly affects environmental quality. The
statement must (1) detail the environmental impact of the proposed action, (2) list any unavoidable
adverse impacts should the action be taken, (3) consider alternatives to the proposed action, (4)
compare short-term and long-term consequences, and (5) describe irreversible commitments of
resources. Unless the impact statement is prepared, the project can be enjoined from proceeding.
Note that NEPA does not apply to purely private activities but only to those proposed to be carried
out in some manner by federal agencies.

Environmental Protection Agency

The Environmental Protection Agency (EPA) has been in the forefront of the news since its creation
in 1970. Charged with monitoring environmental practices of industry, assisting the government and
private business to halt environmental deterioration, promulgating regulations consistent with federal
environmental policy, and policing industry for violations of the various federal environmental
statutes and regulations, the EPA has had a pervasive influence on American business. Business
Week noted the following in 1977: “Cars rolling off Detroit’s assembly line now have antipollution
devices as standard equipment. The dense black smokestack emissions that used to symbolize
industrial prosperity are rare, and illegal, sights. Plants that once blithely ran discharge water out of a
pipe and into a river must apply for permits that are almost impossible to get unless the plants install
expensive water treatment equipment. All told, the EPA has made a sizable dent in man-made
environmental filth” (“Tricks of the Trade-off,” 1977).

The EPA is especially active in regulating water and air pollution and in overseeing the disposition of
toxic wastes and chemicals.

The University of Northern Colorado Hazardous Materials Management Plan provides an example
of how this institution processes their hazardous/regulated material. Although the university, in this
case, strives to meet minimal regulatory requirements, there is much more that can be done. The
university has an ethical obligation to exceed minimum regulations that affect the management of
hazardous materials, as a socially responsible community citizen. By putting in place innovative
practices, keeping pace or staying ahead of new regulations and policy changes, and following a
cradle-to-cradle philosophy, this institution can lead by example. Therefore, the University of
Northern Colorado Hazardous Materials Management Plan should be considered as an interim
standard of practice, providing a foundation from which they can improve.
ENVIRONMENTAL HEALTH AND SAFETY
HAZARDOUS MATERIALS MANAGEMENT PLAN

November 2011

University of Northern Colorado

Hazardous Materials Management Plan
1. General
2. Responsibilities
3. Definition of Hazardous Materials
4. Shipment of Hazardous Materials
5. Identifying Hazardous Waste
6. Hazardous Waste Handling

7. Labeling
a. UNC Hazardous Material / Waste Tag
8. Packaging

9. Waste Storage Areas

.Pick-up Schedule
10. Waste Profile / Analysis
11. Recordkeeping
12. Training
13. Emergency Procedures
Appendix

Appendix A—Hazardous Material / Waste Tag

I. General

The Hazardous Materials Management Plan (HMMP) is developed and implemented for faculty,
staff, and students of the University of Northern Colorado (UNC). This guidance applies to all
University employees and students, as well as other community entities, contractors, and individuals
who may be using or participating on campus. It is the purpose of this plan to provide guidance in the
safe and proper storage, handling, transportation, and disposal of hazardous waste.

With the enactment in 1976 of the Resource Conservation and Recovery Act (RCRA), the storage,
handling, transportation and disposal of hazardous wastes became regulated under Federal, State, and
local laws. The Environmental Protection Agency (EPA) and the Colorado Department of Public
Health and Environment (CDPHE) have developed regulations for compliance with RCRA. CDPHE
regulations are in some instances more stringent that the EPA regulations.

This plan does not cover all regulatory requirements regarding hazardous materials, but should be
considered minimal requirements in order to comply with regulations which affect the management
of hazardous materials.

II. Responsibilities

UNC is registered with the EPA as a Conditionally Exempt Small Quantity Generator (CESQG) of
hazardous waste. It becomes the responsibility of each employee to identify any possible hazardous
waste that he or she might be generating and then assure that the waste is handled in a manner
consistent with regulations.

Campus Policies
UNC Board of Trustees has adopted a policy (1-1-507 Hazardous Materials) which states:

Employees who handle toxic or hazardous substances on behalf of the University are required to
maintain, use and dispose of such substances in accordance with applicable UNC Hazardous Material
Management Plan procedures, state, federal and local laws/regulations as a condition of their
employment. The employee should obtain assistance in ascertaining his/her obligations under these
laws and regulations from the Manager of Environmental Safety or his/her designee. Any employee
who violates any such laws or instructions given by the University Environmental Safety Office shall
be deemed to have acted outside the scope of his/her authority.

Environmental Health & Safety

Environmental Health and Safety (EHS) is primarily responsible for the implementation of the
Hazardous Materials Management Plan. The Director of EHS is responsible for administering UNC’s
HMMP.

III. Definition of Hazardous Materials

“Hazardous Material” is any material or substance, which if improperly handled, can be damaging to
the health and the environment.

Hazards associated with a material may be determined by reviewing the Material Safety Data Sheets
(MSDS), the product label, or the shipping papers. Federal and State regulations determine if a
material is hazardous through specific listings and definitions addressed in EPA regulation 40 CFR
261 and CDPHE regulation 6 CCR 1007-3, Part 261. The final tool in determining if a material is
hazardous is personal knowledge; an individual may have created the materials or have specific
information about the material’s ingredients.

IV. Shipment of Hazardous Materials

Any Hazardous Materials needing shipped from the University of Northern Colorado will be
coordinated through the Department of Environmental Health & Safety. The University will hire a
certified contractor to properly prepare all documentation and ship hazardous materials from the
University to maintain regulatory compliance.

V. Identifying Hazardous Waste

EPA’s RCRA has established authority and control of handling and disposing of all solid chemical
wastes and discarded liquids and gases in containers. All generators of RCRA regulated waste are
required to determine if the waste is hazardous. This is accomplished by determining if any of the
constituents of the waste are specifically “listed” hazardous waste constituents or if the waste has a
regulated characteristic of hazardous waste.

“Listed” Chemical wastes are broken down into the following lists:

“K” listed waste from specific sources.

“F” listed waste from non-specific sources.
“U” listed wastes from off-spec or discarded commercial chemicals.
“P” listed wastes from off-spec or discarded commercial chemicals which have been designated as
acutely hazardous.

Under the Hazardous and Solid Waste Amendments (HSWA) of 1984, additional substances were
incorporated into the hazardous waste regulations by having characteristics of hazardous waste. A
generator must determine if a waste possesses one or more of the following characteristics:
ignitability, corrosivity, reactivity or toxicity. A waste known to be contaminated with constituents
having one or more of the four characteristics must be handled by the generator as hazardous waste,
unless the generator develops the detailed waste analysis required to establish the absence of
regulated characteristics to the point specified in the regulations.

Characteristics of Hazardous Wastes

Ignitability—A chemical waste is ignitable if it has a flash point below 140 degrees Fahrenheit, if it
is an ignitable compressed gas, or if it is a substance that readily yields oxygen to stimulate
combustion. EPA hazardous waste number D001.
Corrosivity—Chemical solutions with a pH less than or equal to 2 or greater than or equal to 12.5
are considered corrosive. EPA hazardous waste number D002.
Reactivity—Chemicals that are normally unstable or react violently with water. EPA hazardous
waste number D003.
Toxicity—Toxicity Characteristic Leaching Procedure (TCLP) toxic chemicals are waste in which
extracts contain high concentration of heavy metals or pesticides that could be released into the
groundwater.

Federal, state and local laws regulate the disposal of hazardous materials. The disposal of any
hazardous material in the sewer system, storm water system, on the ground, or in the regular trash is
strictly forbidden.

VI. Hazardous Waste Handling

Once solid waste is identified as hazardous waste by the generator, it must be handled in accordance
with the HMMP. Hazardous waste must not be: disposed or recycled with other forms of trash or
waste, burned or allowed to evaporate into the air, disposed or diluted in water (i.e., down the drain),
disposed on or buried in the land.

An appropriate, compatible container (bottle, jar, drum, etc.) must be used to accumulate waste. It
must be properly labeled. Hazardous waste containers must be kept closed except when adding or
transferring waste and the contents of the containers must be compatible with the container.

Transporting hazardous waste by vehicle on campus shall be conducted by the EHS department or
his/her designee (contracted waste hauler, etc).

VII. Labeling

A chemical container must be labeled as hazardous material / waste at the time its content is
designated as a hazardous material / waste. When a hazardous waste is added to a container, it must
be labeled as hazardous waste at the time the first amount of hazardous waste is added to the
container and the label must be dated.
The UNC Hazardous Material/Waste tag (section VI.A) will be used on all waste containers. The
container must clearly be labeled with the fully written chemical name and Generator’s signature. If
the collection container contents contain a mixture, all components must be listed by percent or
volume on the UNC waste tag.

Containers will not be reused once designated for hazardous waste disposal.

A. UNC Hazardous Material / Waste Tag

The UNC Hazardous Material / Waste tag (Appendix ‘A’) shall be filled out completely when used.
If a mistake is made on the tag, discard the tag and complete a new tag. Dispose of the old tag in the
trash.

Once the material is ready for pickup or taken to the waste storage area, check the “Ready for Pick-
up” box in the top right corner, and then send the top copy to EHS.

Tags can be obtained through the EHS department.

VIII. Packaging

U.S. Department of Transportation (DOT) regulates the proper packaging of waste containers. DOT
regulation 49 CFR 172 provides information on the proper container selection for hazardous waste.
In addition, waste storage containers must be non-leaking, chemically compatible, safe, and clearly
labeled. Hazardous materials must be kept in appropriate closed containers at all times, except when
adding or removing material. The following guidelines must be followed when packaging hazardous
waste:

 Use a leak-proof container that will safely contain the contents.

 Do not mix incompatible chemicals.
 Do not overfill a container with liquid waste.
 Do not mix hazardous materials with non-hazardous materials.
 Allow an empty space of approximately five percent of the container volume for thermal
expansion.
 Be suspicious of any pressure build-up inside the container.
 Hazardous waste must be stored based on compatibility. Store materials of the same hazard class
together.
 Loose solid materials must be placed in a sealed container.
 Old cans of ether, picric acid and other peroxide forming or shock sensitive items shall be left in
place and not disturbed. Contact UNC Police Department (UNCPD) immediately.
 Do not leave funnels in the collection container (unless the funnel has a lid and then the lid must
be kept closed at all times except when adding waste material).
IX. Waste Storage Areas

Hazardous wastes must be stored in designated waste storage areas. Waste storage areas must be
placed next to or near the point of waste generation, and the individual who operates that process or
area must manage and control the hazardous waste container.

Waste storage areas can be in a laboratory fume hood, on a countertop, or on the floor (5 - 30 gallon
containers), but not in an aisle. They should not be placed in front of or behind doors or windows,
blocking means of egress or suspended from equipment.

Aisle space must be maintained to allow the unobstructed movement of emergency equipment and
personnel into all areas where waste is stored.

UNC has two Hazardous Waste Storage Rooms on campus. Once waste containers are full, they are
then transferred to the hazardous waste storage room.

 Waste generated in Parsons Hall or the Heating Plant will be stored in the waste storage room in
the Facilities Management storage building (east of the Heating Plant).
 Waste generated in all other areas on campus will be stored in the waste storage room in Ross
Hall.

Proper labeling (section VI.A) must be used when placing containers in a waste storage room.

A. Pick-up Schedule

EHS coordinates hazardous waste pick-ups once every two months for all campus departments that
generate hazardous waste. It is the responsibility of the generator / manager of the hazardous waste to
notify EHS of hazardous waste to be disposed.

A contracted hazardous waste disposal company provides waste pick-ups to campus.

X. Waste Profile / Analysis

When EHS receives Hazardous Material / Waste tags, information is reviewed to find out if a waste
stream profile is required for transporting and disposing of the waste. If a waste stream profile is
required the generator of the waste will be asked for additional information which may include:
physical and chemical properties, hazardous characteristics, viscosity, physical state, and chemical
composition.

The contracted waste disposal company may request additional analysis of the waste. This can vary
for each waste stream. Once the analysis is completed the waste stream profile request can be
reviewed. Waste stream profiles require a minimum of two weeks for review/approval from the
contracted waste disposal company.

Waste stream profiles are reviewed and re-certified annually by the EHS department.

XI. Recordkeeping

All waste management activities shall be documented. The following are documentation
requirements and will be maintained by EHS.

 All hazardous waste documentation related to transportation, shipment, regulatory reporting, and
land disposal records, etc.
 Hazardous Material / Waste tags.
 Waste Management inspections.
 Initial / Annual hazardous waste management training. (Training conducted by departments
separately—send a copy of the training roster to EHS.)
 All other hazardous materials documentation.

All waste management documents must be maintained for a minimum of three years.

XII. Training

Training is required for any UNC employee that generates or handles hazardous materials.
Generators and/or handlers of hazardous waste must receive, at a minimum, Hazardous
Communication training based on OSHA 29 CFR 1920.1200 and 29 CFR 1910.1450. Hazardous
Communication training will include an introduction to the HMMP. Refer to the UNC Hazard
Communication Program.
Additional training should be received by generators and handlers of waste. This training shall
consist of emergency procedures, emergency system, and a review of the hazardous materials
regulatory requirements set forth by EPA, DOT, OSHA, and Homeland Security. The training will
also include details of the HMMP as described in this document.

All training records must include the dates of training sessions, contents or a summary of the training
session, names and qualifications of persons conducting the training, and names of persons attending
the training session.

XIII. Emergency Procedures

The HMMP documents the University’s commitment to manage hazardous materials / waste so as to
minimize the possibility of a release of hazardous waste into the environment. As part of this
commitment, UNC maintains equipment on-site to facilitate spill cleanup.

The University has a Spill Prevention, Control, and Countermeasure (SPCC) Plan and Hazardous
Materials Incidents Emergency Response Plan that is maintained by the EHS department. These
plans support the spill response and emergency situations related to hazardous waste management.

If organizations do not take their own initiatives toward greater sustainability within their supply
management systems, then customer-driven requirements, laws, and regulations will inevitably
direct these efforts. As you read this section, take notes in your Learning Journal on the key
concepts in minimizing waste.

Businesses and consumers are increasingly seeking, even demanding, safer and nontoxic products.
Forward-thinking entrepreneurial firms now incorporate sustainable design considerations to provide
preferred design and product formulations. Many companies have adopted sustainability strategies
and, as a consequence, have designed better, healthier, and cleaner products. Companies are applying
systems and molecular thinking approaches, green chemistry concepts, cradle-to-cradle design ideas,
and sustainable supply chain practices to meet the growing demand for “clean” products.
It is important to understand that an individual company’s “clean” and “green” operations and
strategy may be real and laudable, but sustainability is a systems concept that, at a minimum, applies
to the network of suppliers and buyers composing the value chain.

Customer-Driven Requirements

There is an expectation from customers that the suppliers and organizations with which they do
business will act in an environmentally compliant and responsible manner. Environmental regulatory
agencies often publish the names of noncompliant organizations in local newspapers as an incentive
to follow the rules and not create a potential environmental or health impact within the communities
where they operate. Many organizations adopt policies that integrate environmental protection and
stewardship as part of their business strategy.

Minimization of Waste

It is every organization’s responsibility to minimize the waste and by-products resulting from their
activities. A sustainable supply chain strategy focuses on fundamental principles as a starting point.
The idea of reducing, reusing, and recycling is a logical beginning point; starting small with a focus
on the most obvious areas to apply a sustainable strategy. If organizations do not take initiatives
toward greater sustainability within their supply management systems, customer-driven
requirements, laws, and regulations will inevitably mandate, with or without internal organizational
innovation. Key concepts follow:

A. Reduce—One of the most sustainable strategies is simply to reduce the amount of energy and
materials used and, thus, are required to be manufactured. This reduction has an exponential effect as
it further reduces packaging, recycling, transportation, cleaning, disposal, and a host of other costs
(The Dictionary of Sustainable Management, n.d.).

Supply management professionals should work with their internal customers to identify possible
ways to reduce waste. Continually seeking new technologies and working with suppliers for
continuous improvement are ways to minimize waste.
B. Reuse—Often, the most sustainable option is to reuse materials and objects already manufactured,
either for their original or new purposes, rather than recycle them into other products. This decreases
further energy and materials use in recreating them into a new form (The Dictionary of Sustainable
Management, n.d.).

Finding ways to reuse materials or products can be an effective cost-saving technique. Identifying
other uses for materials or products elsewhere in the organization, selling them to another
organization, returning them to suppliers for credit, selling surplus items to employees, or even
donating them to institutions are some ways to reuse materials.

C. Recycle—Recycling is the process of reclaiming materials from used products or materials and
using them in the manufacturing of new products. It is different from reuse, where products are not
destroyed and remanufactured but cleaned and repaired to be used again, also known as
remanufacturing. Another strategy to use resources more efficiently includes reducing the use of
materials needed for product and process manufacturing, also known as dematerialization.

Many products are now marked with a variety of recycling symbols meant to help consumers and
waste managers in separating recycled products and materials. Not all materials and products can be
recycled, however. Those designed for disassembly or made from one material are the easiest. Even
when used materials and products are recycled, often there is no economically viable market for
these materials, and they are either disposed of with other waste or stored in warehouses for future
uses (The Dictionary of Sustainable Management, n.d.).

D. Cradle-to-cradle design—The ISM Glossary (Flynn et al., 2009) describes cradle-to-cradle as a

principle in which products and services are designed with a goal of an efficient and essentially
waste-free life cycle for all components. The design incorporates material inputs and outputs that are
categorized as either technical or biological nutrients. Technical nutrients are inputs or outputs that
may be recycled or reused with no loss of quality, and biological nutrients are inputs or outputs that
may be composted or consumed. A distinguishing characteristic of this principle is that it
incorporates putting the constituent components of the product or service back into use (recycle,
reuse, compost, or consume).
E. Zero Waste concept—Zero Waste is a concept designed to guide people in changing their
lifestyles and practices to emulate sustainable natural cycles, where all discarded materials are
designed to become resources for others to use (Zero Waste International Alliance, 2013).
Implementing zero waste eliminates all discharges to land, water, or air that may be a threat to
planetary, human, animal, or plant health (The Dictionary of Sustainable Management, n.d.). Several
organizations have been formed to promote the concept, such as the Zero Waste International
Alliance(This content will be opened in a separate window or downloaded to your computer) and
the Zero Waste Alliance UK(This content will be opened in a separate window or downloaded to
your computer).
F. Waste from Electrical and Electronic Equipment (WEEE)—Waste from Electrical and
Electronic Equipment (WEEE) is an EU directive, the purpose of which is to prevent the emergence
of electrical and electronic equipment waste, and to promote the reuse, recycling, and other forms or
recovery of such waste (Flynn et al., 2009). The directive makes producers (manufacturers, sellers,
and resellers of own-brand equipment, and importers and exporters) responsible for financing most
of these activities (The Dictionary of Sustainable Management, n.d.).
End of Life Cycle
A. Disposal options—Prior to the end of life cycle, a supply management professional should be
seeking disposal options for waste. These options must be in compliance with all laws.
B. Sell to another organization—Organizations are responsible for the wastes and by-products
resulting from their activities, from cradle to grave. The organization may use the wastes and by-
products elsewhere in the organization, sell them to another organization, utilize scrap brokers,
dispose of the materials by some legal means, or destroy the wastes or by-products.
Customer-Driven Requirements
Many organizations have developed supplier conduct principles, to which suppliers must adhere if
they want to win and retain the organization’s business. These principles cover such issues as health
and safety, ethics, business conduct, and labor laws. From the supplier’s viewpoint, the
organization’s expectations are customer-driven requirements. Read this section to learn about
customer-driven requirements.
Many individual multinational organizations have implemented globally overarching supply chain
sustainability and social responsibility principles affecting their suppliers as well as workers
employed at these suppliers. For instance, IBM follows a program on Supply Chain Social
Responsibility by which the organization holds itself and its supply chain members to high standards
of social responsibility (IBM, n.d.). It has published “IBM Supplier Conduct Principles,” which
covers a wide range of issues similar to the ones addressed in the ISM principles. IBM holds its
suppliers responsible for not practicing forced or child labor; implementing fair wages, benefits, and
work hours; and ensuring health and safety. IBM also holds its suppliers accountable for protecting
the environment and conducting their businesses in an ethical manner. These principles have been
incorporated into IBM’s supplier selection processes and IBM actively monitors suppliers to ensure
compliance. From IBM’s suppliers’ viewpoint, IBM’s expectations are “customer-driven
requirements.” If the suppliers want to win and retain IBM’s business, they must meet its
sustainability and social responsibility standards.

When considering customer-driven requirements, laws, and regulations, it is important to be able to

apply the principles and theoretical concepts of sustainability and social responsibility. Organizations
and supply management professionals must hold their supply chain accountable in order to mitigate
risk. This is particularly challenging when dealing with international suppliers; laws and regulations
vary, especially in developing countries. Customer-driven requirements in the context of
sustainability and social responsibility are becoming increasingly critical to the long-term success of
any business. Laws and regulations, albeit inconsistent on a global platform, are nonetheless critical
to successful supply management. Health and safety issues are at the forefront of customer-driven
requirements. Policies and procedures supporting ethics and business conduct provide the framework
through which sustainable and socially responsible initiatives can be accomplished.

Health and Safety Issues

The supply management professional must be aware of the policies and procedures of health and
safety-related matters for their own organizations as well as their suppliers. Only when health and
safety are maintained for both the buyer and the supplier can a fruitful long-term relationship be
established. Worker health and safety issues usually encompass the following areas: building safety,
machine guarding, hazardous materials, personal protective equipment, ergonomics, lifting
procedures, extreme temperatures, and emergency procedures.

Buildings may not be adequately ventilated, may lack adequate fire suppression equipment, and
emergency exits may be locked or blocked especially in facilities in developing countries. For
example, based on supplier audits, Siemens found that the lack of posted evacuation plans is a
common problem for suppliers in India and Brazil (Siemens, n.d.). Because machines can pose
operating hazards resulting in injury or death, they should be guarded in a poka-yoke fashion
(mistake-proofing or fool-proofing) rather than simply relying on workers to be
careful. Ergonomics is “the science of meshing technology, the work environment and the needs of
individuals” (Flynn et al., 2009). Workplace ergonomics addresses how to lift heavy objects safely,
assume correct postures when working, and avoid extreme temperatures.
Organizations should have and follow explicit policies and procedures for handling hazardous
materials. For example, organizations should have designated storage areas for chemicals using
proper storage conditions. Label instructions should be carefully followed and material safety data
sheets (MSDS) should be studied by workers prior to using the materials. MSDS are “documents that
provide information about physical dangers, safety procedures and emergency response techniques
related to hazardous materials contained in purchased products” (Flynn et al., 2009). MSDS often list
personal protective equipment (PPE) to be worn when handling such materials. Typical PPEs include
safety goggles, gloves, and boots. MSDS and attached instructions must be posted clearly in the
workspace and monitored for compliance.

Unfortunately, with long and complex global supply chains it is difficult to ensure the health and
safety of suppliers’ workers, especially in developing countries. Developing countries have different
health and safety standards. Even when standards exist there is often a lack of oversight, monitoring,
and enforcement compared to developed countries. Further, suppliers sometimes subcontract work to
unapproved suppliers in violation of contracts without the buying organization’s knowledge or
approval. Extreme pressures from buying organizations for low costs, very short delivery times,
increased order sizes with short lead times, and frequent order changes may also encourage suppliers
to violate contractual agreements and ignore supplier codes of conducts.
In 2013, two high-profile tragedies in the garment industry, a factory fire in Pakistan which killed
almost 300 workers (Ur-Rehman, Walsh, & Masood, 2012) and a factory building collapse in
Bangladesh which killed over 1,000 workers (Yardley, 2013), highlight the challenges in health and
safety that must be addressed by organizations purchasing from suppliers in developing countries.
Following these tragedies, major European retailers such as H&M, Inditex (Zara), and Marks &
Spencer signed an agreement to improve worker safety in their supply chains (Alderman, 2013).
These companies have agreed to help pay for improvements to buildings and fire safety in their
suppliers’ factories in Bangladesh.

Within large organizations, usually an environmental, health, and safety (EHS) department oversees
health and safety-related issues. The EHS department typically reviews laws and regulations to
ensure compliance and develops an organization’s health and safety policies and procedures. EHS
professionals also offer training programs; develop communication strategies such as websites and
newsletters so that employees are aware of hazards and proper procedures; maintain records of
environmental, heath, and safety-related occurrences; and investigate to determine root causes if
incidents occur.

Government agencies such as the U.S. Occupational Safety and Health Administration (OSHA(This
content will be opened in a separate window or downloaded to your computer)) and the European
Agency for Safety and Health at Work (EASHW(This content will be opened in a separate window
or downloaded to your computer)) also provide health and safety guidance, training materials, and
assistance. OSHA offers information on industry best practices if an organization is interested in
benchmarking other organizations for any particular area of health and safety. A list of health and
safety laws and regulations can be found at OSHA’s website. OSHA investigates complaints,
enforces health and safety laws and regulations, and gathers and compiles health and safety data.
The EASHW was created in 1996 to make Europe’s workplaces “safer, healthier, and more
productive” (European Agency for Safety and Health, n.d.). The EASHW works with governments,
organizations, and individual workers and serves as a single reference point for occupational safety
and health information. It also collects safety data and publishes new scientific research results.
Others sources of information on environmental, health, and safety best practices include EHS
Today, the Board of Certified Safety Professionals(This content will be opened in a separate window
or downloaded to your computer), and NAEM(This content will be opened in a separate window or
downloaded to your computer), The Premier Association for EHS Management.

Within the supply chain, supply management professionals must consider health and safety issues
when sourcing, writing contracts, and managing ongoing supplier relationships. This involves having
explicit policies and procedures within the organization and for suppliers. The next section discusses
the ethical issues that affect supply management professionals.

Policies and Procedures Supporting Ethics and Business Conduct

Written policies and procedures are essential for ensuring sustainability and social responsibility and
ethical behavior by supply management professionals, internal customers, and suppliers. These
policies and procedures should address the scope and level of supply management authority,
organizational structure and responsibility, processes and procedures for managing suppliers, forms
and document control and retention, and such issues as unacceptable practices such as knowingly
deceiving a supplier and gift receiving. Documentation also should cover matters pertaining to
applicable laws and regulations that affect supply management as well as the actions of those in other
functions within the organization. It is of utmost importance that all concerned parties understand
that different organizations follow different policies and procedures and different countries abide by
different laws and legal proceedings.

Developing policies and procedures can be a complex process. However, such documents facilitate
communication within the organization and with suppliers while eliminating confusion, encouraging
standardization, and assisting in the training of new personnel. They also provide protection for the
organization under certain circumstances. The following section discusses laws governing ethical
issues and how supply management professionals may conduct their duties and responsibilities in an
ethical manner.

Laws Governing Ethical Issues

There are many applicable laws and regulations, but laws that pertain to supply management ethics
involve primarily four areas of concerns: (1) defamation (libel and slander), (2) disparagement, (3)
bribery, and (4) extortion. Defamationis a “publicly made, false and malicious statement, either oral
or written, that injures another’s character, fame or reputation” (Flynn et al., 2009). When these
statements are made in writing, it is called libel. When made orally, it is called
slander. Disparagement, applied to supply management, refers to “making malicious or false
statements of fact as to the quality or performance of an organization’s products” (Flynn et al., 2009).
Disparagement attempts to influence others (for example, the public) to not buy those goods or
services.
Because supply management professionals hold power to affect procurement decisions, bribery often
becomes an important issue. Commercial bribery refers to “a gift of greater than nominal value given
in advance of a transaction or service for the purpose of influencing the behavior of the other party. A
purchaser’s acceptance of bribes from suppliers in unethical and illegal behavior” (Flynn et al.,
2009). Rulings on commercial bribery rest on the doctrine of agency, by which any breach of faith on
the part of the agent, who is recognized by law as keeping a fiduciary position, is not permitted. A
supply management professional generally is considered an agent of the organization. When crossing
national and cultural boundaries, however, the issue of bribery and gifting often gets blurred. For
instance, China has very strict laws against taking bribes. Nonetheless, expensive gifts are exchanged
quite frequently, and when these gifts are refused, the offering party may, in fact, take offense.
Extortion involves obtaining assets, typically money through coercion such as threats of violence.
For example, extortion might involve paying money to government officials to ensure that shipments
arrive safely, they pass quickly through customs, or necessary government approvals are given. The
International Chamber of Commerce, Transparency International, the United Nations Global
Compact, and the World Economic Forum developed a scenario-based training tool to reduce
extortion (International Chamber of Commerce, n.d.). This tool, RESIST (Resisting Extortion and
Solicitation in International Transactions), provides 22 example situations and responses, and is
available free of charge at the International Chamber of Commerce(This content will be opened in a
separate window or downloaded to your computer).
More Sustainable Supply Chains: Accelerating Response to Changed Context
Sustainable supply chains (SSCs)—approaches to sourcing and production that consider
sustainability for every participant at every step, from design to manufacture, transportation, storage,
and use to eventual disposal or recycling—became Supply Chain Digest’s number-one supply chain
trend of 2006 as more companies such as Walmart embraced them (Gilmore, 2006). Fully developed
sustainable supply chains consider sustainability for every participant at every step, from design to
manufacture, transportation, storage, and use to eventual disposal or recycling. This attentiveness
would reduce waste, mitigate legal and environmental risks, minimize and possibly eliminate adverse
health impacts throughout the value-added process, improve the reputations of companies and their
products (enhancing brands), and enable compliance with increasingly stringent regulations and
societal expectations. Thus SSCs offer the opportunity to boost efficiency, value, and access to
markets through improving a company’s environmental, social, and economic performance.

Although sustainable supply chains could present novel challenges, they had spread to address a
convergence of legal requirements, consumer expectations, and competition for continued
profitability. In 2001, a study of 25 suppliers showed 80% received significant requests to improve
the environmental quality of their operations and products, and they in turn asked their suppliers to
do the same (Business for Social Responsibility Education Fund, n.d.). A larger survey from 2008,
indicated 82% of respondents were planning to implement or were already implementing green
supply chain management strategies (Lassar & Gonzalez, 2008). The trend toward green supply
chains was expected to continue.

Concern for sustainable supply chain topics emerged in the 1990s as, on one hand, globalization and
outsourcing made supply networks increasingly complex and diverse and, on the other hand, new
laws and consumer expectations increasingly demanded that companies take more responsibility for
their products across the entire life of those products (Linton, Klassen, & Jayaraman, 2007; National
Environmental Education and Training Foundation, 2001). Companies had to more closely monitor
their suppliers. Total quality management and conventional supply chain management adapted to
address some of these challenges in “a paradigm shift [that] occurred when the scope of analysis was
broadened beyond what was customary [for operations analysts] at the time” (Corbett & Klassen,
2006). These broader management practices and ISO 9001 in turn laid the foundation for green
supply chain management and ISO 14001. ISO 9001 provides “requirements for a quality
management system where an organization needs to demonstrate its ability to consistently provide a
product that meets customer and applicable statutory and regulatory requirements, and aims to
enhance customer satisfaction through the effective application of the system” (International
Organization for Standardization, n.d.).
Between 2000 and 2009, the increased emphasis on sustainability expanded the scope further and
deeper into environmental, public health, and community/social issues and embraced stakeholders
beyond consumers and investors (Corbett & Klassen, 2006). This new paradigm of “extended
producer responsibility,” which included a call for greater transparency and accountability, also
compelled companies toward green supply chain design (Klausner & Hendrickson, 2000). Laws to
reduce human exposure to hazardous and toxic chemicals drive corporate attention to supply chain
materials use. Noncompliance with laws could hurt profits, market share, and brand image. For
example, Dutch customs agents prevented approximately $160 million worth of Sony PlayStation
consoles from entering Holland in December 2001 because cadmium levels in their wiring exceeded
levels set by Dutch law (Aston, Reinhardt, & Tiplady, 2005). Sony disputed the root cause with its
Taiwanese cable supplier but nonetheless had to pay to store, refurbish, and repack the machines.

Most forward-thinking global firms moved toward adopting consistent standards across all their
markets, as opposed to different standards for different countries. Hence the tightest rules from one
place tended to become the de facto global standard. For example, the EU’s directives 2002/95/EC
on “the Restriction of the Use of certain Hazardous Substances in Electrical and Electronic
Equipment” (RoHS) and 2002/96/EC on “Waste Electrical and Electronic Equipment” (WEEE) had
many ramifications for suppliers and producers in the electronics industry. RoHS required all
manufacturers of electronics and electrical equipment sold in Europe by July 2006, to substitute safer
materials for six hazardous substances, such as lead and chromium. WEEE required producers to
collect their electronic waste from consumers free of charge (European Commission,
n.d., Environment: Waste Electrical). The EU’s 2006 directive on “Registration, Evaluation,
Authorization, and Restriction of Chemicals” (REACH) might further tighten global standards for
producers and suppliers because it “gives greater responsibility to industry to manage the risks from
chemicals and to provide safety information on the substances” (European Commission,
n.d., Environment: REACH). Similar efforts have begun in Asia with Japan’s Green Procurement
rules and China’s Agenda 21 goals (Aston, Reinhardt, & Tiplady, 2005).

Consumers and institutional investors, meanwhile, have exerted pressure on companies through a
variety of tactics from socially responsible investment screening criteria to market campaigns for
engaging in fair trade or ending sweatshop labor. Failure to publicly improve practices anywhere
along the supply chain could hurt brand image and curtail access to markets. American universities
and colleges founded the Worker Rights Consortium in 2000 “to assist universities with the
enforcement of their labor rights codes of conduct, which were adopted to protect the rights of
workers producing apparel and other goods bearing university names and logos” (Worker Rights
Consortium, n.d.). Manufacturers such as Canada’s Hudson Bay Company began to audit suppliers’
factories for compliance with labor standards (Reeve & Steinhausen, 2007). In 2005, the Investor
Environmental Health Network, following the effective strategy of institutional investors negotiating
with companies for more action and accountability on climate change, was encouraging investment
managers and corporations to reduce high-risk toxic chemicals used in their products and used by
companies in which they invest.

Successful Green Supply Chains Manage Added Complexity

Businesses might face novel challenges when implementing, operating, or auditing sustainable
supply chains. Given these challenges, businesses that already used an environmental management
system were more equipped to build a green supply chain (Darnall, Jolley, & Handfield, 2008;
Arimura, Darnall, & Katayama, 2009). Nonetheless, all businesses could take steps to green their
chains.

“Sustainable” has become strategic. When sustainability is recognized as an operating and strategic
opportunity, as in the cases of General Electric and Walmart, senior management supports
sustainable supply chain initiatives and integrates them into the business’s core capabilities (Yosie,
2008; Srivastava, 2007). In 2010, however, authority over green supply chains still tended to be held
by a variety of groups, such as supply chain managers, environmental health and safety offices, and
sustainability divisions (Lassar & Gonzalez, 2008). Personnel who might have once functioned
separately within a company often had to collaborate and create new teams for green supply chains to
work effectively, and those people needed time for the green supply chains to yield their maximum
benefits.

Companies must actively include suppliers and service providers in greening supply chains so that
they can build trust, lend their own expertise to increase sustainability, and receive adequate
guidance and assistance in improving their operations (Sharfman, Shaft, & Anex, 2009). Businesses
must state clear and reasonable expectations and allow sufficient lead time for suppliers to respond.
They must also be willing to listen to suppliers (Business for Social Responsibility Education Fund,
2001). Furthermore, companies cannot simply issue guidelines from their headquarters; their
representatives must instead be available on the ground and cooperating with local contacts to ensure
results and prevent increased competition within the supply chain (Yosie, 2008). Indeed, suppliers
need incentives and assurance that their share of the profit will be protected if they innovate to
improve the process because maximizing the overall value of the supply chain may reduce value for
individual links (Linton, Klassen, & Jayaraman, 2007). For example, a design for disassembly that
relies on pieces that snap together may obviate the need for suppliers of adhesives, even if it may
create demand for disassembly and remanufacturing services.

Reverse supply chains complicate the overall supply chain, and therefore they need to be carefully
crafted and considered in overall product design, production, and distribution. Materials and
components recovered from used products need to reenter the same forward supply chain as new
materials or components. Hence companies must recover items efficiently, train employees or
subcontractors to assess properly the condition of a recovered item and what is salvageable and what
is not, and manage their inventory to even out variation in the rate and quality of returned items
(Guide et al., 2000; also Rudi, Pyke, & Sporsheim, 2000). They must also balance the availability of
salvaged components or recycled materials with the need for new components or materials,
especially as certain proprietary parts become unavailable or production processes change. In cases
when consumers may want the same item they had before with only minor changes, such as a
vehicle, businesses will also have to track individual pieces through disassembly and refurbishment
(Guide, Jayaraman, Srivastava, & Benton, 2000).

After establishing a green supply chain, companies need to assess its performance. In their 2008
survey of 70 supply chain executives, Lassar and Gonzalez (2008) noted, “Almost 40 percent of the
56 firms that are active with green activities do not have any metrics to measure green/sustainability
results in their firms.” Companies with metrics tracked quantities such as fuel use, packaging, and so
on. Another study corroborates this trend: what metrics companies do have tend to cluster around
eco-efficiency indicators, such as packaging used or miles traveled, likely because those are the
easiest to observe, quantify, and associate with specific actions (Veleva et al., 2003). Companies can,
however, include broader measures such as customer satisfaction. However, even then a company
may fall short. A systems, health-oriented, and green approach to design does not always work. Some
view Frito-Lay’s SunChips compostable bag (offered to the market consistent with biodegradable
bags being the fastest growing segment in packaging) as having failed due to its loud noise when
handled. Because the crinkling of the bags at up to 85 decibels is comparable to glass breaking or an
engine revving, the company has gone back to the drawing board with this packaging design.

Fading Extrinsic Challenges

Finally, green supply chains had to overcome institutional inertia and confusion. First, large
companies with financial and political resources tended to resist change, especially at the outset,
because of the large capital and infrastructural investments in the status quo. Walmart’s green
initiative, however, appears to be the turning point that moves other large enterprises toward green
supply chains.

Second, in 2009, no official criteria defined a green supply chain. Standards such as ISO 14000
usually focus on a single entity and not the supply chain, while legal requirements often focus on
products and ingredients. ISO 14001, the core voluntary set of standards, is used by firms to design
an environmental management system that provides internal monitoring and provides practices,
procedures, and tools for systematic efforts to improve performance. However, nothing defines how
much of the supply chain is required to have ISO 14000 or other certifications to qualify for the
green supply chain label. When Home Depot solicited its suppliers for candidates to its Eco Options
marketing campaign, one manufacturer praised the plastic handles of its paintbrushes as more
environmentally sensitive than wooden handles, while another praised the wooden handles of its
paintbrushes as environmentally better than plastic (Krauss, 2007).

The lack of standards could promote individual certification programs, such as the cradle-to-cradle
certification provided by McDonough Braungart Design Chemistry, LLC, which implies a
corresponding green supply chain. This program, however, is private, largely to protect the
confidential business information of its clients to ensure their cooperation, and has therefore been
criticized for its lack of transparency (Sacks, 2009; den Held, 2009). However, the cradle-to-cradle
approach is now being explored in California as a statewide system to encourage safer, less polluting
design protocols. In the worst cases, vague standards or opaque processes can lead to charges of
“greenwashing,” or exaggerating or fabricating environmental credentials (Whellams & MacDonald,
n.d.). Greenwashing distracts people who are serious about taking care of the environment with
counterproductive activities, misinforms the public, and undermines the credibility of more
substantial initiatives of others.

Nonetheless, resistance to change and lack of an official definition reflect extrinsic problems rather
than problems intrinsic to the mechanics of green supply chains. Such problems are more about
marketing than about function. As green supply chains prove themselves through superior
performance, they will likely become more studied, better understood and defined, and more widely
spread. Good starting points for firms that understand these issues as strategic are to look at the
inherent risks of not examining their supply chains and to envision a future market position in which
a green, differentiated product and brand will grow revenues.

Green Supply Chains Improve Performance

Green supply chains yield a wide range of benefits. They can reduce a company’s negative
environmental or social impact, decrease operating costs, increase customer service and sales,
promote innovation, and mitigate regulatory risk. The most immediate benefits of green supply
chains are reduced environmental harm and operations costs. For example, Fuji Xerox adopted a
cradle-to-cradle philosophy that emphasized supporting document services over a life cycle rather
than selling photocopiers and forgetting about them. Fuji Xerox leased equipment and recovered
99% of materials from used equipment in Asia in 2006, saving $13 million on new materials,
generating an additional $5.4 million in revenue, and reducing raw material consumption by 2,000
tons at its factories in China (Fuji Xerox Australia, 2007). Government institutions could also benefit.
For example, Norway’s health care system saved money by refurbishing more medical equipment
(Rudi, Pyke, & Sporsheim, 2000). Decreased costs could even accrue to suppliers (Business for
Social Responsibility Education Fund, 2001).

Another benefit from green supply chains was increased innovation, largely because people worked
together who had not done so before, or new challenges brought new answers. By collaborating with
suppliers and designers to design its cradle-to-cradle system, Fuji Xerox saw the opportunity to make
material and component improvements. The decision was made to redesign a spring and a roller,
saving the U.S. affiliate approximately $40 million annually (Corporate Societal Responsibility, n.d.,
14).

Moreover, green supply chains can lead to improved customer satisfaction and higher sales. Through
product recovery programs, Dell increased sales and strengthened its brand reputation for customer
satisfaction and corporate citizenship. Dell Asset Recovery Services (ARS) designed a customized
solution that quickly recovered 2,300 servers from the Center for Computational Research at the
University at Buffalo, SUNY. “That solves two problems for us,” said SUNY’s Tom Furlani. “It
helps get rid of the old equipment in a cost-effective way, and it allows us to get new, faster
equipment that is under warranty.” In addition to secure destruction of hard drive data, the Dell ARS
maintains a zero landfill policy and a zero trash export policy. Unwanted equipment is disassembled
into materials that reenter the manufacturing stream (Dell, 2006). This step also placed Dell in a
more favorable position with the Basel Action Network, a nongovernmental organization (NGO) that
targeted the company as contributing to e-waste exports to emerging economies.

Finally, green supply chains mitigate regulatory burdens and litigation risk. With the increasing
severity of environmental regulations in different regions of the world and the global scale of today’s
supply chains for even simple products (e.g., cloth from Latin America, cut and assembled into a
shirt in China, and the product itself sold in Europe), green supply chains play a critical role in the
operations strategy of multinational organizations. The consequences of not meeting regulations in a
particular location can be major. For instance, Chinese suppliers have suffered from scandals over
lead paint in toys and toxins in pet food and powdered milk, costing companies money in recalls and
prompting calls for tighter regulation. In 2009, drywall produced in China was implicated in
emissions of toxic sulfur compounds in homes built in America between 2004 and 2008, causing
problems for homeowners, builders, and state regulatory agencies (Corkery, 2009; Skoloff &
Burdeau, 2009).

Conclusion

Green supply chains have arisen in response to multiple, often interwoven problems: environmental
degradation, rising prices for energy and raw materials, and global supply chains that link labor and
environmental standards in one country with legal and consumer expectations in another. Green
supply chains strive to ensure that value creation, rather than risk and waste, accumulates at each step
from design to disposal and recovery. They have gained audience with large and small organizations
across cultures, regions, and industries. Managing complex relationships and flows of materials
across companies and cultures may pose a key challenge for green supply chains. Nonetheless, those
challenges are not insurmountable, and the effort to green a supply chain can provide significant
benefits.

In its simplest form, a conventional supply chain assumes that firms take raw materials at the
beginning of the supply chain and transform them into a product at the end of the supply chain.
Ultimately, the supply chain terminates at the point of the final buyer purchasing and using the
product (see Figure 6.1). Vertical integration absorbs steps in the supply chain within a single
corporation that conducts exchange through internal transfer pricing agreements. Disaggregation
maintains ownership in discrete businesses that determine prices through market-based transactions.

A company that sells a final product must meet certain requirements and interact with suppliers,
third-party logistics providers, and other stakeholder groups that can influence the entire process.
Each institution tries to shape the supply chain to its own advantage. As the product moves from
design to consumption (black arrows), waste and other problems (gray arrows) accrue. Whether those
problems are unfair wages, deforestation, or air pollution, these costs are not necessarily reflected in
the price of the finished product but are instead externalized to the public in some fashion or
expected to be borne by intermediate links in the conventional chain.

Although the term supply chain implies a one-way, linear relationship among participants (e.g., from
concept, to resource extraction, to processing, to component manufacturing, to system integration, to
final assembly, etc.), the chain is more accurately described as a network of individuals and
organizations. Managing such networks can become quite complex, especially as they sprawl over
more of the globe. Conventional supply chain management plans, implements, and controls the
operations of the supply chain as efficiently as possible—typically, however, from a limited vantage
point that ignores and externalizes many costs.
Figure 6.1 The Conventional Supply Chain

Larson, A. (2011). Sustainability, Innovation, and Entrepreneurship. Irvington, NY: Flat World Knowledge, Inc.

In contrast, a sustainable supply chain takes a broader, systems view that internalizes some of these
costs and ultimately turns them into sources of value. Sustainable supply chains thus modify
conventional supply chains in two significant ways: they increase sustainability and efficiency in the
existing forward supply chain and add an entirely new reverse supply chain (see Figure 6.2).

Figure 6.2 A More Sustainable Supply Chain

Larson, A. (2011).
Sustainability, Innovation, and Entrepreneurship. Irvington, NY: Flat World Knowledge, Inc.

Improving Logistics
A company can select various ways to improve the sustainability of its logistics systems. The
company may communicate sustainability standards backward to suppliers and require them to adopt
environmental management systems or certifications, such as ISO 14001; survey and monitor
suppliers’ current practices or products for their sustainability and offer training, technology, and
incentives to improve those practices or products. According to the International Organization for
Standardization, which established this qualification, ISO 14001 “gives the requirements for quality
management systems [and] is now firmly established as the globally implemented standard for
providing assurance about the ability to satisfy quality requirements and to enhance customer
satisfaction in supplier–customer relationships” (International Organization for Standardization,
n.d., ISO 14001:2004). It requires suppliers to avoid certain hazardous ingredients and label others,
and/or ask suppliers and other supporting firms, such as transportation companies, to suggest ways to
improve the efficiency and sustainability of the whole process. Hence companies thinking
sustainably about their supply chains are likely to communicate and collaborate more with suppliers
and subcontractors to innovate and find the best solutions. They might also reach out to NGOs and
government agencies for further assistance.
Reverse Logistics
In addition to dramatically improving conventional supply chain logistics, sustainable supply chains
extend past the point of product use, where conventional chains end, and consider how to recover and
reuse materials—questions of reverse logistics (the part of the supply chain that takes used products
from consumers and recycles, refurbishes, or otherwise disposes of those products). Many companies
already have rudimentary reverse logistics systems to deal with customers’ returns of items they do
not want or that were found defective or otherwise unsatisfactory. An expanded reverse logistics
system would ultimately replace the linearity of most production methods—raw materials, to
processing, to further conversions and modification, to ultimate product, to use, to disposal—with a
cradle-to-cradle, cyclical path, or closed loop that begins with the return of used, outmoded, out-of-
fashion, and otherwise “consumed” products. The products are either recycled and placed back into
the manufacturing stream or broken down into compostable materials. The cycle is never ending
because materials return to the land in safe molecular structures (taken up and used by organisms as
biological nutrients) or are perpetually used within the economy as input for new products (technical
nutrients).
Companies typically funnel spent items from consumers into the reverse supply chain by leasing
their products or providing collection points or by other means of recovering the items once their
service life ends (Dowlatshahi, 2000). For example, Canon and Xerox provide free shipping to return
used toner cartridges and have thus collectively recovered more than 100,000 tons of ink and
cartridges since 1990 (Canon, n.d.; Xerox, n.d.).

Once collected, whether by the original manufacturer or a third party, the products could be inspected
and sorted. Some items might return quickly to the supply chain with only minimal repair or
replacement of certain components, whereas other products might need to be disassembled,
remanufactured, or cannibalized for salvageable parts while the remnant is recycled or sent to a
landfill or incinerator. “Companies that remanufacture are estimated to save 40–60% of the cost of
manufacturing a completely new product . . . while requiring only 20 percent of the effort,” leading
to significant, structural savings, wrote Shad Dowlatshahi in Interfaces (Dowlatshahi, 2000, 144).
Moreover, the reverse supply chain might spawn new suppliers as well as other sources of revenue
for companies that engage in collection, disassembly, and so on, making the entire network more
efficient (Field & Sroufe, 2007). This concept of an eco-efficient closed loop thereby makes green
supply chains a central piece of sustainable industrial ecosystems.
Life Cycle Assessment and Design for Environment

The same techniques that improve the sustainability of conventional logistics also aid reverse
logistics. In addition, sustainable supply chains fundamentally require two tools: life cycle
assessment (LCA) and design for environment (DfE). According to the U.S. Environmental
Protection Agency’s National Risk Management Research Laboratory, LCA takes the viewpoint of a
product, process, or service by “(1) compiling an inventory of relevant energy and material inputs
and environmental releases; (2) evaluating the potential environmental impacts associated with
identified inputs and releases; [and] (3) interpreting the results to help you make an informed
decision,” typically to minimize negative impacts across the entire life of the product (U.S.
Environmental Protection Agency, n.d.; for examples, see Bevilacqua, Ciarapica, & Giacchetta,
2007; Matos & Hall, 2007). This analysis helps identify the points in the green supply chain that
detract from ultimate sustainability and establishes a baseline for improvement. For example,
Walmart’s third-party logistics provider in Canada began using railways more than roads to supply
10 stores, thereby cutting carbon emissions by 2,600 tons. The company estimated it would save
another $4.5 million and prevent 1,400 tons of waste annually by switching from cardboard to plastic
shipping crates (“Wal-Mart’s ‘Green’ Campaign,” 2007).

Application of DfE acknowledges that design determines a product’s materials and the processes by
which the product is made, shipped, used, and recovered. Hence DfE could be used to avoid toxic
materials from the outset; minimize energy and material inputs; and facilitate disassembly, repair,
and remanufacturing. For instance, Hewlett Packard (HP) used DfE “product stewards,” whose role,
HP explained, was as follows: “[Product stewards] are integrated into product design and research
and development teams to identify, prioritize, and recommend environmental design innovations to
make products easier to disassemble and recycle. Such features include modular designs, snap-in
features that eliminate the need for glues and adhesives, fewer materials, and molded-in colors and
finishes instead of paint, coatings, or plating” (Hewlett-Packard, 2005).

Conversely, process designs could influence product designs through new technology that
implements an innovative idea. For example, in the Walden Paddlers case, Hardigg Industries was a
plastics-molding company that partnered with Clearvue Plastics to create plastic pellets with 50%
recycled content, which Hardigg thought was impossible until it was encouraged by the
entrepreneurial founder of Walden Paddlers. Later, Hardigg was able to change its rotomolding
technology to allow for the use of 100% recycled resins. Through the use of recycled materials and
Clearvue’s innovation, Hardigg was able to lower costs, establish a competitive advantage within its
industry, attract new customers, and increase customer satisfaction (Farrow, Johnson, & Larson,
2000). An organization not willing to adapt and innovate, as in this case example, may experience a
financial loss as a result of market competition.

Cradle to Cradle
Various factors, like stricter enforcement of environmental laws, limited resources, and fewer
disposal options, are creating the need for research and development (R&D) departments to rethink
plans, policies, and procedures. Read this section to learn how cradle to cradle is being used to
facilitate meaningful R&D for sustainability.

Growing public pressures, stricter enforcement of environmental laws, costly cleanup costs, limited
resources, and fewer disposal options are creating the need for research and development (R&D)
departments to rethink plans, policies, and procedures. The unique nature of R&D activities makes
planning sustainable efforts extremely difficult. To provide perspective, several concepts (cradle to
cradle, biomimicry, life cycle assessment, and crowdsourcing) that facilitate meaningful R&D for
sustainability are explored in this competency.

Cradle to Cradle
Products and processes have historically been designed for cradle to grave. That is, design has only
considered the product from the point of manufacture to disposal. With growing awareness of
environmental impacts and companies’ tendency to externalize costs, there has been a shift in
thinking about design in terms of cradle to cradle. Cradle-to-cradle design requires a shift in
thinking about traditional manufacturing, recycling, and environmentalism. Cradle-to-cradle design
encourages us not to choose the least environmentally damaging approach but rather to create and
design a better approach. It encourages the integration of nature into the design process with a goal of
zero waste. Products and processes integrating this design philosophy can receive Cradle to Cradle
certification (McDonough Braungart Design Chemistry, 2008).

Cradle to cradle is a design philosophy articulated in the book of the same name by William
McDonough and Michael Braungart in 2002 (McDonough & Braungart, 2002). As of 2005, Cradle to
Cradle is also a certification system for products tested by McDonough Braungart Design Chemistry
(MBDC) to meet cradle-to-cradle principles. The basic premise of cradle to cradle is that for most of
industrial history, we have failed to plan for the safe reuse of materials or their reintegration into the
environment. This failure, born of ignorance rather than malevolence, wastes the value of processed
goods, such as purified metals or synthesized plastics, and threatens human and environmental
health. Hence, McDonough and Braungart propose: “a radically different approach for designing and
producing the objects we use and enjoy. . . founded on nature’s surprisingly effective design
principles, on human creativity and prosperity, and on respect, fair play, and good will” (McDonough
& Braungart, 2002, 6).

In this approach, ecology, economy, and equity occupy equally important vertices of a triangle of
human activity, and waste is eliminated as a concept in advance, as all products should be designed
to become harmless feedstocks or “nutrients” for other biological or industrial processes. These
closed loops acknowledge matter is finite on earth, earth is ultimately humanity’s only home, and the
only new energy comes from the sun. Cradle to cradle thus shares and elaborates some of the basic
understandings of technical nutrients (TNs) and industrial ecology, albeit with an emphasis on
product design and life cycle.

McDonough is an architect who was inspired by elegant solutions to resource scarcity that he
observed in Japan and Jordan. In the United States, he was frustrated by the dearth of options for
improving indoor air quality in buildings in the 1980s. He also was frustrated with eco-efficiency’s
“failure of imagination,” although eco-efficiency was a trendsetting business approach at the time.
Eco-efficiency stressed doing “less bad” but still accepted the proposition that industry would harm
the environment; hence, eco-efficiency would, at best, merely delay the worst consequences or, at
worst, accelerate them. Furthermore, it implied economic activity was intrinsically negative.
McDonough specified his personal frustration: “I was tired of working hard to be less bad. I wanted
to be involved in making buildings, even products, with completely positive intentions”
(McDonough & Braungart, 2002, 10).

McDonough and Braungart’s efforts proved that cradle-to-cradle design was possible, concretely
illustrating concepts important to cradle-to-cradle design while affirming the prior decades of
conceptual work. The first concept of eco-effectiveness or ecological intelligence to be realized in
cradle to cradle was the sense of nature and industry as metabolic systems, fed by “biological
nutrients” in the “biosphere” and “technical nutrients” in the “technosphere,” or industry. “With the
right design, all of the products and materials of industry will feed these two metabolisms, providing
nourishment for something new,” thereby eliminating waste (McDonough & Braungart, 2002, 104).

McDonough and Braungart operationalized and popularized the concept of “waste equals food,”
meaning that the waste of one system or process must be the “food” or feedstock of another. They
were drawing on the industrial ecology writing of Robert Ayres, Hardin Tibbs, and others, since in a
closed loop the waste is a nutrient (and an asset) rather than a problem for disposal. Hence waste
equals food (Hawken, Lovins, & Lovins, 1999, 12; also see Hawken & McDonough, 1993; and
William McDonough Architects, 1992, 7). A core goal of sustainable design is to eliminate the
concept of waste so that all products nourish a metabolism. Although lowering resource consumption
has its own returns to the system, the waste-equals-food notion allows the possibility for nontoxic
“waste” to be produced without guilt as long as the waste feeds another product or process.

To explain further the implications of designing into the two metabolisms, McDonough and
Braungart and Justus Englefried of the EPEA (Environmental Protection Encouragement Agency, the
so-called “Cradle of Cradle to Cradle”) developed the Intelligent Product System, which is a
typology of three fundamental products that guides design to meet the waste-equals-food test. The
product types are consumables, products of service, and unsalables (Hawken, Lovins, & Lovins,
1999, 67; McDonough, 1998).

A “consumable” is a product that is intended to be literally consumed, such as food, or designed to

safely return to the biological (or organic) metabolism where it becomes a nutrient for other living
things (Hawken & McDonough, 1993; McDonough, 1998). McDonough added that “the things we
design to go into the organic metabolism should not contain mutagens, carcinogens, heavy metals,
persistent toxins, bio-accumulative substances or endocrine disrupters” (McDonough, 1998; for an
explanation of endocrine disrupters, see Colburn, Dumanoski, & Peterson Myers, 1996).

A “product of service,” on the other hand, provides a service, as suggested by Walter Stahel and Max
Börlin, among others (Stahel, 1994, 183; Ayres & Kneese, 1989, 90). Examples of service products
include television sets (which provide the service of news and entertainment), washing machines
(which provide clean clothes), computers, automobiles, and so on. These products would be leased,
not sold, to a customer, and when the customer no longer required the service of the product or
wanted to upgrade the service, the item would be returned to the producer to serve as a nutrient to the
industrial metabolism. This system of design and policy provides an incentive for the producer to use
design for enviroment (DfE) and concurrent engineering to design for refurbishing, disassembly,
remanufacture, and so forth. Braungart suggests that “waste supermarkets” could provide centralized
locations for customer “de-shopping,” where used service products are returned and sorted for
reclamation by the producer (Hawken & McDonough, 1993; Braungart, 1994).

An “unsalable,” also known as an “unmarketable,” is a product that does not feed metabolism in
either the technosphere or the biosphere and thus should not be made. Unsalables include products
that incorporate dangerous (radioactive, toxic, carcinogenic, etc.) materials or that combine both
biological and technical nutrients in such a way that they cannot be separated. These latter
combinations are “monstrous hybrids” from the cradle-to-cradle perspective or “products plus”—
something we want plus a toxin we do not. Recycling, as Ayres explained, has become more difficult
due to increasingly complex materials forming increasingly complex products. His example was the
once-profitable wool recycling industry, which has now virtually disappeared because most new
clothes are blends of fibers from both the natural and industrial metabolisms that cannot be separated
and reprocessed economically (Ayres, 1994).

In a sustainable economy, unsalables would not be manufactured. During the transition, unsalables,
as a matter of business and public policy, would always belong to the original manufacturer. To
guarantee that unsalables are not dumped or otherwise discharged into the environment in
irretrievable locations, “waste parking lots” operated perhaps by a public utility would be established
so that these products can be stored safely. The original manufacturers of the unsalables would be
charged rent for the storage until such time when processes were developed to detoxify their
products. All toxic chemicals would contain chemical markers that identify the chemical’s owner,
and the owner would be responsible for retrieving, mitigating, or cleaning up its toxins should they
be discovered in lakes, wells, soil, birds, or people (Hawken & McDonough, 1993; Braungart, 1994).

The second principle of ecological intelligence, “use current solar income,” is derived from the
second law of thermodynamics. Though the earth is a closed system with respect to matter, it is an
open system with respect to energy, thanks to the sun. This situation implies that a sustainable,
steady-state economy is possible on earth as long as the sun continues to shine (Ayres & Kneese,
1989, 105). Using current solar income requires that earth capital not be depleted—generally mined
and burned—as a way to release energy. Thus all energy must be either solar or from solar-derived
sources such as wind power, photovoltaic cells, geothermal, tidal power, and biomass fuels.
Geothermal power, although perhaps more plentiful than other sources, ultimately derives from heat
within earth’s mantle and is thus not technically solar derived. Fossilized animals and plants, namely
oil and coal, although technically solar sources, fail the current solar income test, and their use
violates the imperative to preserve healthy natural system functioning since burning fossil fuels alters
climate systems and produces acid rain among other adverse impacts.

The third principle of ecological intelligence is “respect diversity.” Biodiversity, the characteristic
that sustains the natural metabolism, must be encouraged through conscious design. Diversity in
nature increases overall ecosystem resilience to exogenous shocks. Clinton Andrews, Frans
Berkhout, and Valerie Thomas (1994) suggest applying this characteristic to the industrial
metabolism to develop a similar robustness. Respecting diversity, however, has a broader
interpretation than just biological diversity. In its broadest sense, “respect diversity” means “one size
does not fit all.” Every location has different material flows, energy flows, culture, and character
(McDonough, 1998). Therefore, this principle attempts to take into account the uniqueness of place
by celebrating differences rather than promoting uniformity and monocultures.

In addition to the requirement of ecological intelligence, an additional criterion asks of the design, “Is
it just?” Justice from a design perspective can be tricky to define or quantify and instead lends itself
to qualitative reflection. However, the sustainable design framework forces an intergenerational
perspective of justice through its design principles and product typology. As William McDonough
explains, products designed to fit neither the biological nor industrial metabolism inflict “remote
tyranny” on future generations as they will be left with the challenges of depleted earth capital and
wastes that are completely useless and often dangerous (McDonough, 1998).

Finally, cradle-to-cradle eco-effectiveness “sees commerce as the engine of change” rather than the
inherent enemy of the environment and “honors its ability to function quickly and productively”
(McDonough & Braungart, 2002, 150). Companies should make money, but they must also protect
local cultural and environmental diversity, promote justice, and in McDonough’s world, be fun.

As environmental awareness becomes more prevalent, businesses are assessing how their activities
affect the environment. The environmental performance of products and processes has become a key
issue, which is why some companies are investigating ways to minimize effects on the environment.
Life cycle analysis (LCA, sometimes referred to as life cycle assessment) measures the
environmental impact of specific products or processes from cradle to grave. LCA provides a
snapshot in time of a specific product from a specific manufacturer, and it may be difficult to
generalize findings. However, LCA is a useful tool for making product and process decisions that
consider environmental criteria. The benefit of LCA is that businesses can identify the most effective
improvements to reduce cumulative environmental impacts resulting from all stages in the product
life cycle, often including upstream and downstream impacts not considered in more traditional
analyses (e.g., raw material extraction, material transportation, ultimate product disposal, etc.). LCA
is widely used for different purposes by different groups: environmental groups use it to inform
consumers on what to buy, legislators use it for creating rules and regulations, and manufacturers use
it as they seek to improve design and production standards. Less commonly used methods for
environmental comparisons include value–impact assessments, environmental option assessments,
and impact analysis matrices.

The greatest benefit of LCA is that it allows scientific comparison of products or processes in order
to determine the most environmentally friendly option from cradle to grave. This scientific evidence
may or may not support our beliefs about the best choice among options. However, the limitations of
LCA studies should be understood when interpreting results. LCA studies are a static profile
capturing the qualities of a specific product at that moment in time. The studies are constrained by
the product (or process) selected, the manufacturer selected, its manufacturing practices, its supply
chain practices, and the other boundaries of scope defined at the onset of the study. In addition, there
are numerous approaches to the use of LCA, which further restrict comparison of studies. For
example, depending on the purpose of the LCA, researchers may opt to use economic input–output
LCA, screening LCA, process LCA, hybrid LCA, full-product LCA, financial LCA, life cycle energy
analysis, or other specific approaches. As such, there exists much controversy over LCA study results
as an indication of eco-friendliness (Narayan & Patel, n.d.). Furthermore, there is criticism that LCA
studies only focus on environmental aspects and neglect other aspects of sustainability. Although not
a perfect method, LCA is the best model that exists for considering the environmental impact of
products, processes, and services.

Concurrent Engineering
Concurrent engineering is a design philosophy that brings together the players in a product’s life
cycle during the design stage. It presents an opportunity to integrate environmental protection in the
design process with input from representatives across the entire product life cycle. Participants in a
concurrent engineering design team include representatives of management, sales and marketing,
design, research and development, manufacturing, resource management, finance, field service,
customer interests, and supplier interests. The team’s goal is to improve the quality and usability of
product designs, improve customer satisfaction, reduce cost, and ease the transition of the product
from design to production. Definitions of concurrent engineering vary, but the key concepts include
using a team to represent all aspects of the product life cycle, focusing on customer requirements and
developing production and field support systems early in the design process (Carlson & Ter-
Minassian, 1996).

While seemingly a commonsense approach to design, concurrent engineering is far from typical in
industry. The traditional procedure for product design is linear, where individuals are responsible
only for their specific function, and designs are passed from one functional area (e.g., manufacturing,
research and development, etc.) to the next. This approach can be characterized as throwing designs
“over the wall.” For example, an architect may design a building shell, such as a steel skyscraper
around an elevator core, and then pass the plans to a construction engineer who has to figure out how
to route the heating, ventilating, and air-conditioning ducts and other building components. This
disjunction can create inefficiency. Concurrent engineering instead would consider the many services
a building provides—for example, lighting, heating, cooling, and work space—and determine the
most efficient ways to achieve them all from the very beginning. Concurrent engineering therefore
shortens the product development cycle by increasing communication early, resulting in fewer design
iterations (Carlson & Ter-Minassian, 1996).

Companies that employ a concurrent engineering design philosophy feature empowered design teams
that are open to interaction, new ideas, and differing viewpoints (Carlson-Skalak, 1997). Concurrent
engineering then is an effective vehicle to implement product design frameworks such as DfE,
sustainable design, and even the process-oriented tool TNS, which is not a design framework per
se but can be used effectively as a guide to change decision making during design.
Sustainability involves taking a holistic perspective to understand the true short-term and long-term
impacts of a business activity. Life cycle thinking has emerged as a useful tool in sustainability to
consider the total impacts of an activity, product, or service from its origin to its end. This differs
from conventional business practices in which the focus has traditionally been on more immediate
factors, such as cost, quality, and availability in the supply chain. Life cycle thinking still takes into
account these factors but considers them over a product’s lifetime. Although conventional business
practices have given limited consideration to disposal costs, life cycle thinking considers the impacts
of disposal to be an important part of the overall process of product or service provision.

Life cycle thinking in a business context considers business activities using a “cradle to grave”
perspective. Cradle to grave starts by considering the impacts of raw material extraction and other
inputs. It considers transportation of inputs to the organization and the impacts of the transformation
process into a useful product or service that occur at the organization. It then considers transportation
from the organization through the use of the product or service up to the ultimate disposal. Each step
in the life cycle features a specific focus on inputs and outputs, such as raw materials and waste.

Life cycle thinking came into attention in the 1960s, when life-cycle-based accounting was first used
to account for environmental emissions and economic costs associated with various energy
technologies over their life cycle. Life cycle thinking has evolved as a sophisticated method for
businesses to consider their environmental and social impacts.

Life Cycle Management

The management philosophy that integrates a comprehensive life cycle approach for organizations in
managing their value chain is called life cycle management (LCM). A value chain is the connected
activities that an organization undertakes in providing a product or service, with each interconnected
activity adding value. LCM is a systematic progress of organizing, analyzing, and managing of
sustainability impacts throughout the entire life cycle of a product, process, or activity. LCM can
occur at the product or service level or at the entire company level. For example, a company may be
interested in managing the life cycle of one of its products to improve sustainability, or it may take a
more comprehensive look at the portfolio of activities that it engages in as part of a more far-reaching
approach to sustainability. One of the key benefits of life cycle management is that it can alert
management to potential “hot spots,” or areas that may be ecologically or socially problematic.

Phases of a Life Cycle

Figure 6.4 illustrates three key phases in a life cycle. Cradle is the resource extraction or impacts of
elements that serve as inputs to the process. Throughout the business activity or process, there are
inputs and outputs, including water, energy, emissions, and waste. Upon completion of the activity,
the finished output of the activity is at the gate. The gate is the defining point when a business output
activity is completed and it moves beyond the organization to the next step in its life cycle. For
example, the gate at a factory that produces tablet computers is when the manufactured tablet is
boxed and ready to be shipped from the factory. Between the gate and up until the grave is the active
use phase of the output of the organization, with the grave being the ultimate disposal of the output.

Two terms that are associated with the life cycle are upstream (the portion of the value chain that
plays a role in the supply chain of the producing organization. This can include extraction and
transportation of raw materials) and downstream (the portion of the value chain that plays a role in a
later step in the product life cycle past the producing organization itself. This can include the
distribution, use, or disposal of goods) processes. Upstream refers to activities occurring before the
organization (supply chain) and downstream refers to activities occurring after the organization
(product distribution and product use and disposal). Upstream and downstream can also be in
reference to a specific point in the life cycle. For example, a company might be interested in the
impacts of all activities “upstream” of a specific supplier. Although business life cycles frequently
are focused on products or tangible goods, it can also apply to services.
Figure 6.5 Key Components of Life Cycle

Gittell, R., Magnusson, M,

& Merenda, M. (2012). The Sustainable Business Case Book. Irvington, NY: Flat World Knowledge, Inc.

Life cycle management does not need to consider the entire life cycle, but instead, it can consider
discrete phases or parts. This depends on the needs of the organization. Sometimes, the greatest
opportunities for reducing environmental or social impacts may exist outside a company’s own
operations and in its supply chain, in which case, life cycle management would focus on its supply
chain. Or the assembly of a product might be quite complex, and life cycle management is focused
on one specific part of the assembly process.

Different types of life cycle management include the following:

 Cradle to grave includes the whole product life cycle from beginning to disposal.
 Cradle to gate focuses on the phase from input extraction through the organization output, but
not downstream impact.
 Cradle to cradle specifically focuses on the end-of-life step being recycling. This type of life
cycle management is becoming more in focus, where considerable attention is paid in
designing products so that they can become part of another beneficial use and not be disposed
of as waste.
Note. Adapted from “Sustainable Financing,” by N.E. Landru