Five Lessons from Walmart’s Supply Chain Work in China

Late in 2008, following Walmart Vice Chairman (now CEO) Mike Duke’s announcement that the company would improve the energy efficiency of its top 200 China-based suppliers by 20 percent by 2012, Walmart enlisted BSR to help launch its first supply chain energy-efficiency efforts in China.

From our post in Walmart’s Shenzhen global procurement headquarters, we started by studying how the successes of Walmart’s U.S.-led Supplier Energy-Efficiency Project could be adapted to China’s unique environment. We then led a launch meeting, trainings, and the development of measurement tools to connect suppliers with energy-service companies.

In its first year, the program recorded an increase in efficiency of more than 5 percent in more than 100 factories, and revealed that suppliers had the capacity to do much more. That success emboldened Walmart to announce it would eliminate 20 million tons of greenhouse gas (GHG) emissions from its supply chain — about 40 percent of the collective annual commitment of the nearly 200 companies (PDF) in the U.S. Environmental Protection Agency’s Climate Leaders program, as of late 2009. That’s progress as far as sustainability is concerned, but it’s also good business sense: Walmart, a relentless cost-saver, sees it as a way to make suppliers leaner, more resilient, and more competitive.It’s time for more companies to follow Walmart’s lead. By expanding energy-efficiency efforts into their supply chains, companies can quickly and substantially decrease supplier costs, substantially reduce greenhouse gasses, produce satisfyingly quantifiable results, and provide a gateway for further sustainability initiatives. There’s never been a better time to start: With the long-awaited GHG Protocol guidance on “Scope 3” GHG accounting scheduled for release in December, an era of more comprehensive supply chain reporting is imminent.

Companies whose supply chains lead to China should start there, because the opportunity is profound. On average, Chinese supplier factories are five times less efficient than factories in the United States, and the country is the No. 1 emitter of GHGs. By cutting energy waste in China, it’s possible to reduce the world’s energy demand by 5 percent.

Fortunately, energy-efficiency investments in China are cost-effective (PDF) compared with similar initiatives in industrialized countries. In spite of this, improved energy efficiency has not taken off in China because the country suffers from an inefficient market. Factory managers and other energy users often don’t have meaningful diagnostics about the price of energy, government subsidies make it cheap to waste energy, energy-management contracts are hard to implement, and people in positions to improve efficiency — building owners, investors, and tenants — often aren’t the ones paying the bills.

The problem is vivid when considering that neighboring Hong Kong, one of the world’s most energy-efficient regions, has a thriving industry of energy-service companies (known as “ESCOs”) that identify energy-saving opportunities and then install and locate funding for energy-saving equipment.

On the bright side, this shows that the challenge for companies is not one of engineering, equipment, or even finance. Instead, it’s about taking pieces of the puzzle that are already there and putting them together. For these reasons, China is one of the best places for companies to start scaling up knowledge about climate-related supply chain risks and opportunities, communicating results to investors, and improving climate performance by leveraging business networks.

The job of international companies in supply chain energy efficiency is to keep China’s specific challenges in mind and build bridges between ESCOs and suppliers. What follows is a series of steps based on our recent experiences working with Walmart that can help companies effectively engage suppliers in China on energy efficiency:

1. Establish Common Ground

Often in China, suppliers see productivity as a distraction from growth (PDF), and by extension they can be skeptical about consulting services and the value of pursuing savings versus top-line sales. Such suppliers may agree to participate in a company’s program but are unlikely to make significant progress over time until their culture rewards enhanced managerial productivity in general. Therefore, companies should begin their engagements on efficiency by surveying suppliers’ views about continuous improvement broadly and then educating them on that subject early and often.

2. Show the Road Map

When it comes to labor compliance, companies like Nike have famously warned (PDF) that demanding conformity on its own is not likely to yield sustained and honest results. On the other hand, sustainability initiatives are likely to take hold only if the specific action requirements include goals, timelines, and rules that are made clear at the outset.

Ensuring that suppliers head in the right direction means showing them clear pathways, with options, in a road map. This was confirmed for us at Walmart’s first launch meeting, where suppliers and ESCOs agreed that Walmart’s 20 percent goal, five-year timeline, and detailed participation guidelines enabled the suppliers to get traction.

Sharing the road map with suppliers is also a good way to make action seem urgent, which is a strong additional motivator. Finally, providing a road map is a good way to encourage suppliers — which may be reticent to make long-term commitments without good prospects for continued business — that the program is meant to drive long-term collaboration.

3. Require Accountability

Just like with sustainability efforts more broadly, suppliers are best positioned for progress when senior management sponsors the initiative, and then teams are instituted to execute objectives with clear roles, responsibilities, and substantial performance consequences. At our Walmart launch meetings, we included both operations managers and senior leaders, and we emphasized to executives the ease and benefits of participation. Another ingredient for accountability is open communication between suppliers and companies. On one level, companies should review suppliers’ progress frequently (ideally quarterly) to ensure continued momentum. On another level, companies should make a help line available to quickly answer suppliers’ questions. Companies should also pay close attention to demonstrated commitments to management systems like named teams and action plans, because these programs can predict whether the supplier will succeed.

4. Build Capability

Next, companies should integrate into their programs efforts to help suppliers understand where and how to focus tactics. This includes teaching factories how to identify low-hanging fruit, and understanding expected inefficiency hotspots and challenges to implementation.

According to surveys we have taken during BSR’s China Training Institute events, operations managers consistently identify training as the top need in successfully starting energy-efficiency programs. Many don’t have a strong energy or efficiency background, in part due to the prevailing focus on growth, so providing insight and resources through trainings, call-in lines, and diagnostic tools are often critical resources.

5. Solve the Problem Itself

A final step is for suppliers to identify and deploy efficiency solutions, such as retrofits with better lighting and cooling systems, by tapping into the ESCO industry. However, many ESCOs aren’t arranging deals in China because the lack of infrastructure makes energy savings difficult to verify, and contracts can be hard to enforce (PDF). Companies can help efficiency projects take hold by making the cost of doing business easier for ESCOs. For example, companies can host forums gathering both ESCOs and suppliers, and inform them of possible opportunities by sharing statistics and needs revealed in the suppliers’ reports.

First posted at GreenBiz.

A Green Supply Chain Starts in China

As companies work to reduce their carbon footprint, the easiest steps to take are often the closest to home.

Yet for companies with global operations or supply chains, the biggest practical wins are likely to be found in improving energy efficiency of owned and supplier facilities overseas, where they have the ability to multiply impacts across tens, hundreds, or even thousands of sites through relatively simple central coordination.

For companies looking to increase their supply chain’s energy efficiency, China is a good place to start, for a number of reasons:

• China is a top location for energy-intensive manufacturing and a key node of many supply networks.
• As the No. 1 emitter of greenhouse gases, China is likely to face more regulatory pressure to improve its performance.
• Due to its size, China is an ideal place to take energy-efficiency programs to scale.

BSR has spent the last several months helping Walmart establish its supplier energy efficiency program in China, where the company has set a target of improving the energy efficiency of 200 factories by 20 percent over the next three years. Working with Walmart, we have seen firsthand how initiatives from other countries can be adopted and adapted to the Chinese context.

This is BSR’s guide to starting energy efficiency programs at company operations and in company supply chains in China.

First, the Basics of Building a Successful Program Anywhere

Be Flexible. Effective energy-savings programs, particularly for owned operations, often focus on a specific goal but leave significant flexibility for how corporate targets will be met. Rather than taking a strictly top-down approach that regulates specific changes in technology and behavior, BSR recommends developing an initiative based on strong leadership and a clear mandate for change. This allows internal business units to find their own solutions and strategies for meeting targets.

The need for flexibility and autonomy is even more pronounced when companies deal with suppliers. Companies often have limited visibility into where the most significant energy savings might be in supplier operations. The best approach is therefore to provide specific tools or approaches that suppliers can use to discover and implement customized solutions for themselves.

Focus on the People and Systems, Not Advanced Technology. Companies usually gain more by investing in existing people and systems rather than expensive new technologies. For example, Swire Beverages, a major Hong Kong-based bottler, has created energy-management committees composed of production, engineering, environmental health and safety (EHS), and facilities managers who meet regularly to explore possible opportunities for reducing waste and increasing the productivity of manufacturing and logistics processes.

Get Buy-in From Senior Management. This is essential to establish a clear direction and goals for people within the company. Many of the most successful initiatives have been started by executives who challenged employees to reduce energy use or carbon emissions, and then charged each department with determining how to do it. In this way, management can solicit opinions from employees and reward those with innovative ideas. Inter-departmental competition can make the process fun and increase employee engagement. These management techniques can turn employees into an asset rather than a barrier to energy efficiency and waste reduction.

Management buy-in is also necessary when working with suppliers, even if they are small factories. In this situation, while you may target facilities or EHS personnel with trainings and tools, the general manager or other central decision-maker should be your direct liaison.

Don’t Wait to See the Data Before You Act. Good data can help you justify new programs and is important for evaluating progress toward goals, but program development can be unnecessarily slow if the initial focus is on assessment of current energy usage. During start-up, while you are building the system and processes for data reporting, most information should actually be flowing toward suppliers, in the form of trainings, tools, and ongoing support. With this approach, suppliers are more likely to align with the emphasis on action, which subsequently can be supported by trustworthy reporting.

Managing from Afar

The lack of hands-on operational control can present challenges — especially for companies with a large supplier base. To ensure that your program is creating the right incentives, invest time and resources in designing the appropriate system for reporting, monitoring, verification, and communicating the right message to suppliers.

Here are some tips for an effective supplier program:

• Clearly communicate goals, progress, and incentives. Demonstrate your own commitment with clear, quantitative expectations, and then work closely with suppliers to monitor and track progress, and share successes and challenges with other relevant stakeholders.

• Focus on multiple benefits. Energy-saving efforts can provide significant financial returns for suppliers.

• Emphasize that you are building long-term relationships with suppliers. Suppliers will recognize the need to be in line with the company’s goals and values to maintain the relationship, and with an emphasis on long-term partnership, suppliers can make investments that require a longer payback period.

• Explore cost-sharing options. In one supplier program, a global furniture firm paid the program and consulting fees, while the factory paid for energy meters.

• Promote open communication. Frequent and transparent communication on progress is an important way to provide both support and resources, and to collect credible data to verify claims about energy savings and emissions reductions.

Second, What’s Special About the Chinese Context?

Many of the lessons from BSR’s energy-efficiency work in China are equally valid for other locations, but working with suppliers in China has specific challenges related to the regulatory context, economic incentives, and the availability of technical and financial resources.

When working in China, business leaders should:

• See the government as not just a regulator but also a resource. The Chinese government has become increasingly proactive in encouraging improvements in energy intensity (amount of energy used per unit of GDP), and the government’s new regulatory targets have been accompanied by resources and training support for manufacturers. Government can also provide advice on project implementation as well as clear direction on how energy-intensity targets are being applied and measured.

• Watch utility and fuel prices. Currently, water and electricity are heavily subsidized, which limits the return on energy-savings investments. The economic argument for energy efficiency will be stronger when utility prices rise in accordance with government plans. Some cities and provinces are already beginning to test price increases. Be prepared to take advantage of improvements in the economic argument for energy savings, but meanwhile look for other ways to strengthen the business case.

• Seek financial help. Many sources provide financial help for energy-efficiency investments, including local governments, energy service companies (ESCOs), the Hong Kong Productivity Council, the International Finance Corporation’s  China Utility-Based Energy Efficiency Program, the P2E2 program (a partnership between the U.S. Environmental Protection Agency and China’s State Environmental Protection Administration), and international and local banks.

• Use ESCOs to fill knowledge gaps. The ESCO market in China is young but growing rapidly, with both domestic and foreign service providers offering a range of consulting and project-management services. Some cheap, do-it-yourself methods such as installing energy meters can create useful data to help suppliers understand where the energy savings opportunities lie, so they can make an informed decision about when to call for external consulting expertise. BSR has also been working with ESCOs to provide low-cost technical training sessions for factory managers, as consultants are often willing to share basic information and tips on energy management at supplier forums and workshops.

Work on energy efficiency in China has been gradually building for a few years, and it is now expanding rapidly as an increasing number of global companies endeavor to improve supplier performance along with their own environmental impacts. This presents a real opportunity for global companies with operations and supply chains in China to make a bigger impact in emissions reduction.

First posted at GreenBiz.