Small- and medium-sized enterprises (SMEs) help determine whether corporations can reach their climate-related goals. That’s especially true when it comes to setting supply chain sustainability targets. And yet, an increasingly wide gap remains between the standards SMEs must meet, and the resources they have to meet them.

In part 1 of this three-part series, we shine a light on the glaring blind spot in corporate supply chain sustainability targets and highlight the lack of power that SMEs and workers have.

 

Jason Judd.

"The purpose for the lead firm, like any firm, is to maximize profit. So let’s say flooding interrupts production, or extreme heat is reducing productivity. Well, the supplier is not going to get a break on the price from the buyer. They’re just going to have to eat the cost. Eating the cost might mean forcing workers to work more hours without additional pay, or push through flooding in their neighborhoods, which means damage to their health. So when I say workers are bearing the cost, that’s what I mean." 

— Jason Judd, Executive Director, Global Labor Institute & Professor, Cornell University

 

Dan Viederman.

So there are literally over one billion workers in the world who have jobs that don’t make enough from those jobs to support their livelihoods. Well-treated workers are more productive workers. Well-treated workers stay at a place longer; they don’t leave, they don't run away, they don’t try to find another job. Good businesses require a stable workforce.

Just because it’s true for us, you know, in our knowledge-based workplaces, doesn’t mean it’s not true in manufacturing workplaces. And certainly, from the developed world, there are studies that demonstrate it is true. So why wouldn’t it be true for people in Bangladesh making clothes or China making electronics, or Malaysia making electronics, just like it is for us? 

 — Dan Viederman, Partner, Working Capital Fund

Lydia Elliott.

Some corporations are very reluctant to set an ultimatum for an SME to say ‘You have to set a net-zero target or you have to fill out this form or you're no longer in our supply chain.’ Because they do know that you need a certain level of support to help that SME, but they don't always have their internal sets of money and capacity needed to provide that support, because it's quite large. So that there is a bit of a mismatch of like how much money they have to spend on the problem and how big the problem is. 

— Lydia Elliott, Deputy Director of Supply Chain Decarbonization, We Mean Business Coalition's SME Climate Hub

 

Transcript

Daniel Baker (WRI) 0:08: Welcome to WRI’s podcast: Big Ideas into Action podcast. My name is Daniel Baker, communications manager here at the World Resources Institute and the host, editor and producer of this podcast. And this is the first episode of a 3-part podcast series called Voices on Supply Chains is the beginning of a conversation about creating sustainable and resilient global supply chains.

Dan Viederman (Working Capital Fund) 0:32: So typically a supply chain will include raw materials, manufacturing and processing step, some sort of retail and sales step, and logistics and delivery.

Adel Guitouni (University of Victoria) 0:41: Textbook definition; it’s about the different actors or organizations that are connecting supply and demand.

Jason Judd (Global Labor Institute at Cornell University) 0:48: It’s about who makes it and under what condition. And how it moves between the place the product starts and the place it ends up. I always think that one of the things that’s most complicated about supply chains is that you constantly change suppliers, and they change suppliers. People often view it as static, like here’s my chain and here’s where I can measure it. But actually, it is constantly changing and updating.

Lydia Elliott (SME Climate Hub) 0:56: I always think that one of the most complicated things about supply chains is that you constantly change suppliers. And they constnatly change suppliers. People often view it as static like, ‘Here’s my chain, and here’s where I can measure it.’ But actually, it is constantly changing and updating.

Daniel Baker (WRI) 1:13: As you just heard, global supply chains impact basically everyone on earth -- you’re either part of the production process for a given commodity or a consumer of that product or service...or both! Think about the phone that you’re probably listening to this podcast on.

Jacques Leslie (YaleEnvironment360) 1:28: You can think of a supply chain as something like the roots of a tree. With modern products, such as a smartphone which may have 300 or more parts, these systems are so extensive, I was told, that the cumulative mileage by all those parts for a smartphone would probably reach to the moon.

Daniel Baker (WRI) 1:49: Now, global supply chains are important, no matter why you’re listening to this episode.

Sheri Hinish (EY & Supply Chain Revolution Podcast) 1:54: Hi, my name is Sheri Hinish. I currently work at EY as their global sustainable supply chain leader and I also have a podcast, the Supply Chain Revolution.

Sustainable supply chain involves multiple paradigm shifts. And it’s not just moving from business-as-usual to circular or responsible or transparent; the buffet of buzzwords that are, you know, often associated with supply chains, including risk [and] resilience. It’s really thinking about this through the lens of systems and ESG. Historically, we haven’t thought about that and it’s going to change the way we work with each other, the way that we interact with the world around us, including nature.

Daniel Baker (WRI) 2:40: These system shifts are important for people, nature, and the very economic system supply chains are built on. For example, fixing supply chains means addressing working conditions for the small business employees who work at the start of most supply chains.

Dan Viederman (Working Capital Fund) 2:56: So there are literally over one billion workers in the world who have jobs that don’t make enough from those jobs to support their livelihoods. I’m Dan Viederman, and I’m a partner at a venture capital fund that’s trying to support and build equity in supply chains; mostly focused on marginalized workers around the world. The name of our fund is the Working Capital Fund.

Well-treated workers are more productive workers. Well-treated workers stay at a place longer; they don’t leave, they don't run away, they don’t try to find another job. Good businesses require a stable workforce.

Just because it’s true for us, you know, in our knowledge-based workplaces, doesn’t mean it’s not true in manufacturing workplaces. And certainly, from the developed world, there are studies that demonstrate it is true. So why wouldn’t it be true for people in Bangladesh making clothes or China making electronics, or Malaysia making electronics, just like it is for us?

Daniel Baker (WRI) 3:49: Current supply chain practices fail to value our natural resources, just as one of my colleagues from WRI points out.

Rene Zamora (Restoration Policy Senior Manager, WRI) 3:57: Rene Zamora, and I’m a senior manager on restoration policy at the World Resources Institute. We live in a world that is ruled by markets in many ways. And because it's ruled by markets, we have to acknowledge that there are things that don’t have a market value, like, for example, a pristine forest in a tropical region. in the Americas. It has a value that is not monetizable. It has [such] a high value but we cannot put it on terms of U.S. dollars or Euros.

Daniel Baker (WRI) 4:29: But we can’t forget the economic environment that companies operate in. To change supply chains, we need to make a strong business case.

Taj Eldridge (Jobs For the Future) 4:38: Meaning that you can't just say, ‘Oh if you don't do this, Earth is going to die, we’re going to die.’ That messages has been said [for] numerous years and, unfortunately, it's not resonating with a lot of folks. It's resonating with some, but not all.

I’m Taj Eldridge. I am the Managing Director for Climate Innovations at JFF [Jobs For the Future] Labs.

And so perhaps a different way of looking at that needs to be, and that the different way could be from an economic standpoint to say that being more sustainable or resilient can be a way for you to gain more market share. [It] can be a way for you to displace your competitor. You talk in the language of the people and sometimes you talk in the language of the organization and the organization is [sometimes] the business.

Daniel Baker (WRI) 5:16: Speaking of language, there’s got to be a better way to describe the people and processes that cultivate the food we eat, stitch together the clothing we wear, and create the technology that connects us... so while we might continue to call this complex system a supply chain, we want to paint a more accurate picture in your mind.

Becca Coughlan (Remake) 5:38: My name is Becca Coughlan, and I am the Senior Advocacy Manager at Remake. Remake is an advocacy organization fighting for fair pay and climate justice in the fashion industry.

Personally, when I think about global supply chains, I think of one of those detective crime solving boards with all the pins and the thread linking all the different pieces of evidence together, and you know it looks all like incredibly convoluted and complicated.

Brian Lipinski (10x20x30 Initiative Project Manager, WRI) 6:02: I work in the food program here at World Resources Institute and I serve as the project manager for our 10x20x30 Initiative, where retailers work with the suppliers within their supply chain to cut food loss and waste.

So it's not always a direct, linear approach but there are shortcuts. There's sometimes reverse situations happening so it can really get quite tangled, quite quickly. So you know actually maybe it's more of a big bowl of noodles that is all tangled up together. Some of them are short and some of them are long.

Rene Zamora (Restoration Policy Senior Manager, WRI) 6:38: It’s like in Google Maps, you have one way that is the shortest path, but you have 10 other ways depending on if there is traffic or if there is no traffic. The same is with the value chain.

Namit Agarwal (World Benchmarking Alliance) 6:50: My name is Namit Agarwal. I work as the Social Transformation Lead at the World Benchmarking Alliance. So basically, we’re people looking at companies’ accountability on human rights, decent work ethical action in their operations and supply chains as well.

I think it's a horizontal chain. It's similar to a forest where there are different parts of the forest; trees, plants, animals, insects, [and] water. If any of those parts is not in harmony, then I think the forest is compromised. So for me, a supply chain is similar to a forest ecosystem.

Daniel Baker (WRI) 7:31: Those are much better descriptions, which is important, because an accurate description of the problem is the first step toward solving it. At its core, our problem with global supply chains is that business as usual cannot continue.

Jason Judd (Global Labor Institute at Cornell University) 7:45: I’m Jason Judd. I'm the Executive Director of the Global Labor Institute at Cornell University in New York.

The purpose for the lead firm, like any firm, is to maximize profit. So let’s say flooding interrupts production, or extreme heat is reducing productivity. Well, the supplier is not going to get a break on the price from the buyer. They’re just going to have to eat the cost. Eating the cost might mean forcing workers to work more hours without additional pay, or push through flooding in their neighborhoods, which means damage to their health. So when I say workers are bearing the cost, that’s what I mean.

Adel Guitouni (University of Victoria) 8:24: Adel Guitouni, Associate Professor with the School of Business at the University of Victoria. If we continue business as it is, probably there will be those science fiction [scenarios] where we have only some pockets of people living on this Earth and the rest have left or died. So this kind of planet of abundance and supporting lives will probably be a dissolvation because we will go through probably a cycle of extermination. So are we going to be, as a humankind, part of that future or not? That is our decision.

Daniel Baker (WRI) 9:00: With that uplifting prediction, we can really dive into supply chains...and the decisions and choices that corporations can make to build resilient ecosystems for their products or services...and the people that make them.

Sheri Hinish (EY & Supply Chain Revolution Podcast) 9:15: If we put humans at the center of everything that we do in being a successful business or organization, you also have to think about meeting their needs and that opens up a lot of things around equitable workplaces, certainly accessibility, fair wages. None of these things I find are common with the risk-resilience thread. 

We hear a lot about disruptions from climate change that are difficult to predict and plan for and how does that, you know, impact your operational footprint? Are you creating redundancy in your sourcing? You know, you think about geopolitical risk and how that impacts your product design and the materials that go into your BOM [Business Object Model] and your manufacturing process to meet that customer demand, but we don't talk about the social angle as much.

MUSIC BREAK

Daniel Baker (WRI) 10:15: The brutal shock of the COIVD-19 pandemic exposed a glaring blind spot in corporate supply chains.

Jacques Leslie (YaleEnvironment360) 10:21: Up until that time, large companies couldn’t even tell you the identity of many of the companies in their supply chain. My name is Jacuqes Leslie, Los Angeles Times Contributing Opinion Writer, I write frequently for YaleEnvironment360.

But the pandemic should be thought of as a temporary problem, whereas climate change is a much more serious long-range problem.

Daniel Baker (WRI) 10:47: To prepare for that long-term future, corporations must build more resilient supply chains. That starts with understanding their present circumstances. And by circumstances, we mean understanding the needs of the small- and medium-sized enterprises – known as SMEs or the small businesses that make up their supply chain. Let’s turn back to Dan Viederman and Jason Judd for more on that knowledge gap.

Dan Viederman (Working Capital Fund) 11:12: So there are a few dozen to a few hundred big companies that might really understand the needs and the requirements of their top-tiers strategic suppliers – they provide either just an absolutely core element of the final product, or they’re suppliers that are of such technological or sustainability characteristic in quality, that the brand or the buyer has decided to focus production on that top tier.

Jason Judd (Global Labor Institute at Cornell University) 11:37: I’d say the buyer, the lead firm’s knowledge of its suppliers tapers off pretty fast in apparel or food. But it’s only in the last, I’d say 10 years, and intensively in the last five years, that buyers in the U.S. or in Europe, for example, have had to pay close attention to what happens upstream, what happens beyond Tier one.

Daniel Baker (WRI) 11:58: “Upstream” means going toward the beginning of a supply chain, which typically consists of those SMEs, those smaller businesses. Tier 1 suppliers are the ones furthest downstream. In other words, they’re right “next” to the lead firm, or primary corporation. The larger the tier number, the more upstream, or further away from the lead firm, the supplier being referenced is.....so tier 2 is one step farther from the lead firm or end product than Tier 1. Tier 3 is below tier 2, and so on and so on.

And with that, let’s take you back to learning more about the gap between what corporations know about the risks facing their SMEs.

Namit Agarwal (World Benchmarking Alliance) 12:39: When it comes to companies understanding their supply chain from their own needs and risks, I think they do a fair job. But when it comes to understanding the needs of the suppliers and needs of SMEs I think there is a big gap there

Adel Guitouni (University of Victoria) 12:55: And as you move up in the chain of the governance of these big corporations, the more they are actually isolated from the reality of how things really work. And now that some of these corporations are starting to wake up to the importance of really what that means to not just sustainable, but sustained supply chain because they discover that they cannot deliver if they don't have those supply chains working.

Becca Coughlan (Remake) 13:20: Large fashion companies need to be financially assisting and incentivizing their suppliers to decarbonize. You know, these companies are the ones that have been profiting off of these emissions and what have you in these countries for years and years; particularly if they're, you know, demanding that their suppliers reduce emissions so that they can reduce their own scope 3 emissions.

Daniel Baker (WRI) 13:45: Exactly. Just as Becca Coughlan from Remake just alluded to, corporations – whether they’re in the apparel sector, food and agriculture sector, or even the clean tech industry -- can’t reach the ambitious sustainability goals they set without a network of SMEs that have the necessary resources to meet those goals.

The Science Based Targets Initiative defines Scope 3 as all indirect upstream and downstream emissions. They cover the extraction and transformation of raw materials, to the manufacturing, logistics, distribution, use and end-of-life of products. According to the Carbon Disclosure Project, emissions in a company’s supply chain are, on average, 11 times higher than their direct emissions. In short, you can think of Scope 3 as a short-hand for supply chain emissions.

So that’s why WRI’s focus is on the relationship between corporations and the SMEs in their supply chain. And right now, it’s pretty one-sided.

Andrew Olah (Ethical Denim Council) 14:47: I’m Andrew Olah. I’m the Founder of the Ethical Denim Council, a non-profit organization that is trying to bring commercial compliance to the supply chain in the denim industry.

Brands can find alternative suppliers relatively easily. When you are a supplier of a garment to a brand or retailor, you get a big book of rules and you have to comply to all those rules, and if you don't, you have penalties.

It’s like hungry birds at the park fighting over the little seeds. The bird that’s picking up the seed is not going to demand anything. There is no real pertinent or topical discussion on the treatment of the supply chain by brands that I’m aware of.

Lydia Elliott (SME Climate Hub) 15:33: Hi, my name is Lydia Elliott. I work in an organization called the We Mean Business Coalition. My official title is Deputy Director of Supply Chain Decarbonization.

Some corporations are very reluctant to set an ultimatum for an SME to say ‘You have to set a net-zero target or you have to fill out this form or you're no longer in our supply chain.’ Because they do know that you need a certain level of support to help that SME, but they don't always have their internal sets of money and capacity needed to provide that support, because it's quite large. So that there is a bit of a mismatch of like how much money they have to spend on the problem and how big the problem is.

Daniel Baker (WRI) 16:15: That disparity matches with what we found in our research....and as Namit from the World Benchmarking Alliance explains, suppliers need corporations, not the other way around.

Namit Agarwal (World Benchmarking Alliance) 16:26: At the crux of this is the power imbalance that exists between large corporations and suppliers and it's not a level playing field. Suppliers are really looking for big companies to partner with, to become part of their supply chain. So they are always in this power imbalance where they don't have necessarily the opportunity to be able to negotiate with some of these big companies.

Daniel Baker (WRI) 17:01: the status quo between buyers and suppliers is already fraying supply chain, as Sheri Hinish who hosts the Supply Chain Revolution Podcast lays out.

Sheri Hinish (EY & Supply Chain Revolution Podcast) 17:11: Generally, the smaller players absolutely shoulder the majority of risk and when it comes to sustainable supply change, you have to think again a lot of them are still operating through you know, myopic old-school 1980s supplier portals. A lot of this stuff is not automated when it comes to Scope 3 metrics, which is a big push right now in terms of visibility.

And I think what happens is when they push these new requirements onto the smaller players, they have limited resources, they typically have lower negotiating power because they don't have economies of scale unless they have that discrete capability that you mentioned like it's a manufacturing secret sauce or a material or some sort of, like, innovative thing that only they do.

But oftentimes they don't and that has lowered negotiating power. It leaves them exposed to market fluctuations, environmental changes, and political disruptions compared to larger corporates

Daniel Baker (WRI) 18:14: COVID-19 and more frequent and destructive climate events have highlighted serious flaws in corporate procurement policies; particularly around visibility and strategies for addressing vulnerabilities upstream in their supply chains.

Dan Viederman (Working Capital Fund) 18:26: I would say there are very few big companies that understand the needs of the SMEs in their lower tiers. They generally, in fact, refuse accountability for lower tier sustainability characteristics or even certain business characteristics. They’re legally not contracted with those lower tiers, and therefore it’s actually difficult in business terms to take responsibility for someone with whom you don’t have a contract.

Jason Judd (Global Labor Institute at Cornell University) 18:50: Well, the apparel industry is notorious for its willingness to pick up pull up stakes and move somewhere else. This is the history of the industry. Much of New England was home to fabric production and apparel-making two hundred years ago. And it moved south, and then it moved further south into Mexico, and then it moved then it moved to China and Korea, elsewhere. It's an industry on the move. It's in its DNA to seek out the lowest possible wages.

It's typically wages that drive the sourcing decisions, the decision by the lead firm about where to get stuff. Because it's price, price, and price. Those are the three priorities for the industry and when it finds a price that's lower -- sometimes it's just across the street -- it'll move contracts, it'll change suppliers and that keeps the suppliers on edge. This constant downward pressure on price seems to be in the DNA of the industry and it can be enormously destructive.

Becca Coughlan (Remake) 19:51: They're looking at resilience as being powerful enough to cut and run whenever they need to, instead of looking to batting down the hatches and making their existing supply chains as resilient as possible. They’re not going to be able to run forever. I think if they continue to do that, there are going to be huge financial implications.

Daniel Baker (WRI) 20:12: Very costly indeed. By some estimates, environmental risks could cost companies hundreds of billions of dollars, moving forward.

Rene Zamora (Restoration Policy Senior Manager, WRI) 20:19: But if you see it differently, these investments in SMEs that are working on being more resilient will ensure, at the same time, that the problems that are being delivered to the supply chain are more sustainable and, at the end, the whole value chain is more sustainable.

Daniel Baker (WRI) 20:34: Rene from WRI basically just summed up the business case for corporations to invest in and support the SMEs in their supply chain. However, the money is simply not flowing to the SMEs.

Jason Judd (Global Labor Institute at Cornell University) 20:47: It was important for us in the analysis to say that the costs of doing nothing are significant and the costs of a climate-adaptive industry are relatively low. What you have to spend to reduce heat inside a factory, for example, you will soon earn back in terms of improved productivity.

Daniel Baker (WRI) 21:06: From our conversations with experts, SMEs want to comply with sustainability targets. The problem with their ability to actually meet them can be broken down into three parts.

Lydia Elliott (SME Climate Hub) 21:16: The themes that we definitely see are barriers of time; so you know they don't have the time to include all of this stuff into their daily business because they're already kind of at a max in terms of their capacity. Challenges of funding; they don't have the money to do it and they struggle to get that money and in the way they want to. And then challenges of knowledge; so they don't have the internal knowledge to be able to do something complex like calculate their emissions which can be very complicated if you're talking about a, like, 150-person SME that has offices in multiple countries.

That is not a simple task to get to your Scope 1, 2, and 3 emissions. That is a complicated task and there are lots of different strategies you could take to do that. But we do see that kind of Time-Funding-Knowledge barriers are repeated

Daniel Baker (WRI) 22:13: So before the next devastating flood or debilitating heatwave leaves SME workers to suffer and supply chains broken in their wake, we propose an alternative route corporations can take. Our solution in a word....partnership.

And Brian Lipinski from WRI explains that it’s people who make the difference.

Brian Lipinski (10x20x30 Initiative Project Manager, WRI) 22:32: There is a sort of pervasive notion that, within the private sector, within capitalism, that a company will always optimize all of their behaviors. And we know that's just not true. We know that companies are comprised of people, and people don't always behave in rational ways. They don't always optimize their economic choices.

So I think that more than any specific company or any specific sector, is sort of this mindset of getting over the idea that this isn't an everyone else problem, this is an all of us problem.

Daniel Baker (WRI) 23:05: Don’t miss the next episode where we’ll expand on partnerships – the not-so-secret ingredient that corporations can use to create more resilient supply chains with their SMEs.

Thank you to our guests who lent us their expertise and insights for this edition of Voices on Supply Chains. The story continues at www.wri.org/CREST.

For all of us at WRI, my name is Daniel Baker – host and producer for the series, which is funded by the Ares Charitable Foundation as part of their CREST Initiative; a 5-year career preparation and reskilling project that aims to close the gap between the demand for a skilled workforce for green jobs and the number of people prepared for these opportunities to build an equitable, low-carbon economy.

Don’t forget to leave a 5-star rating on whatever podcast streaming service you heard this episode on. Every review counts. Thanks for listening!