As the world begins to assess the global economic impacts of the Japan disaster, it is clear that many industries are facing major supply chain disruptions.
Generally, companies have robust business continuity/disaster recovery plans that provide for employee safety and continued business operation. At the same time, in the last 5 years have we have witnessed an explosion in the adoption of green/ethical procurement standards. So we have posed the question:
How are corporate green/ethical procurement standards addressed in emergency recovery plans – if at all?
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As the world grapples with the immense impact of the disaster in Japan, attention is turning to the global economic impact of the country’s lost production. Japan has long been a critical link in the supply chain of many industries – perhaps most notably in the automotive and electronics sectors.
The Financial Times ran a piece today on this which touches on contingency plans to help replace lost production stemming from unforeseen major disruptive events.
In this context, a question arises: Will companies enforce their procurement requirements for vendor EHS performance during this period?
Elm has long discussed EHS risks in the context of supply chain disruption contingency planning. In past years, the risks have been more focused on matters related to how production redistribution could cause violations of various environmental permit limits tied to production levels. However, the rise of ethical purchasing standards – as voluntary and highly publicized corporate commitments – has altered the definition of EHS risks in supply chains.
It may be months or years before some of the Japanese plants are in production mode again. In the interim, companies impacted by the disruption face a conundrum:
- Do they attempt a rapid production recovery by quickly engaging second-tier alternative suppliers that may not meet EHS procurement standards (i.e., relaxing their supplier requirements)?
- Or do they stick to the EHS standards for suppliers, thereby risking potentially extended production downtime while either (a) searching for a supplier who meets the standards, or (b) bringing a supplier up to speed?
Certainly, it is easy to say there is a third option – implementing an existing contingency plan with an existing alternate supplier that already meets the EHS procurement standards.
But few manufacturers have that third option available, as EHS concerns tend to be overlooked in supply chain disruption planning.
Even before Walmart’s supplier sustainability index was announced, interest in green procurement (GP) practices had been growing. The trade publication Supply Chain Management Review had a piece on it earlier this month. IBM recently published an article on the subject as well.
But what seems to be missing from the current discussions is how implementing GP standards could create significant disruptions in a company’s supply chain.
Consider this scenario: A company implements GP standards and negotiates supply agreements with “green suppliers”. The number of “green suppliers” for a particular process input is likely to be small, so the company is forced to reduce its supplier base, possibly to a single supplier.
Supply chain professionals know this conundrum too well – by consolidating purchases, you increase purchasing and negotiation power, but you lose flexibility in addressing supply disruptions should there be problems. GP programs may also result in purchasing consolidation and reduce a company’s ability to manage that supplier’s inability to deliver (for whatever reason).
GP programs should not be viewed as anything less than a significant business change. Underestimating the business risk posed by implementing GP standards may have dramatic consequences.