08 Jun Question SPOTLIGHT RADICALLY REINVENT YOUR SUPPLY CHAIN
Question
SPOTLIGHT RADICALLY REINVENT YOUR SUPPLY CHAIN
Spotlight
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ARTWORK Michael Johansson, Self Contained, 2010
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HBR.ORG
by Hau L. Lee
Don’t Tweak Your
Supply Chain—
Rethink It End to End
Hau L. Lee ([email protected]
stanford.edu) is the Thoma
Professor of Operations,
Information, and Technology at Stanford Graduate
School of Business and the
director of the Stanford
Global Supply Chain Management Forum. He is on
the board at Esquel, one of
the companies discussed in
this article.
October 2010 Harvard Business Review 63
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H
SPOTLIGHT RADICALLY REINVENT YOUR SUPPLY CHAIN
Hong Kong–based Esquel, one of the
world’s leading producers of premium
cotton shirts, faced a quandary in the
early 2000s. Apparel and retail customers
CONNECT THE
DOTS BETWEEN
YOUR OWN
OPERATIONS
By coordinating across
every stage of fabric
and shirt production,
the Chinese manufacturer Esquel cut
energy consumption
by 26.4% and water
consumption by 33.7%
in the past five years.
such as Nike and Marks & Spencer had begun asking the company about its environmental and social
performance. Its leaders anticipated scrutiny from
other customers as well, since more of them were demanding that a greater portion of the cotton in their
shirts be grown organically. But the crop required a
lot of water and pesticides, especially in poor and
rapidly developing countries, where Esquel’s cotton
was grown and processed.
Though Esquel’s executives wanted to strengthen
the company’s already serious commitment to social
and environmental sustainability, they realized they
couldn’t simply demand that the farmers who supplied extra-long-staple cotton just reduce their use
of water, fertilizer, and pesticides. A mandate like
that could be catastrophic for the farmers and their
villages. Most of Esquel’s cotton came from Xinjiang,
an arid province in northwestern China that depends
mainly on underground sources of water. The traditional method of irrigation there was to periodically
flood the fields—an inefficient approach that created
a perfect breeding ground for insects and diseases.
Heavy pesticide use was a necessity.
Productivity was an issue, too: A switch to organic cotton could cause crop yields to drop by as
much as 50%. Even though the climbing demand
for organic cotton was likely to boost prices, Esquel
couldn’t expect them to rise enough to compensate
farmers for the lower yields. Indeed, apparel companies and retailers had made it abundantly clear that
they would not be willing to pay a big premium for
clothes made with organic cotton.
Complicating matters even more, organic cotton
fiber is weaker than that of conventional cotton and
has different physical characteristics. It would need
extra processing, leave a greater percentage of scrap
during fabric manufacturing, and require chemicals
and dyes more environmentally harmful and more
expensive than those used on conventional cotton.
All this would add to costs and cancel out some of
organic cotton’s green benefits.
How could the shirtmaker provide the products
customers demanded, conduct environmentally
and socially responsible business in China, and protect its own profit margins?
Companies up and down supply chains in numerous industries confront the same challenge: A wellintentioned individual action or demand aimed at
making a business greener can create a long string of
unanticipated consequences that collectively dwarf
the benefits.
The mounting pressure to conduct business in a
sustainable fashion comes from various stakeholders—customers, shareholders, boards, employees,
governments, and NGOs—and most corporations
respond in a reactive, piecemeal way. They demand
that suppliers change their materials to environmentally friendly ones. They ask suppliers to move
manufacturing operations closer to end markets to
reduce transportation-related carbon footprints.
And they tweak their own operations by replacing
ordinary lightbulbs with compact fluorescent lamps,
recycling more of their materials, refurbishing and
reusing products, using more energy-efficient equipment, and so on.
I call these actions substitutions: swapping one
material, vendor, location, production step, or mode
of transportation for another. Although each change
might seem worthwhile, such actions can, when you
factor in the unintended consequences, end up raising financial, social, or environmental costs and lead
to supply chains that are not, well, sustainable.
Instead, companies—throughout the supply
chain, not just at the end—should take a holistic
approach to sustainability and pursue broader
structural changes than they typically do. These
may include sweeping innovations in production
processes, the development of fundamentally dif-
64 Harvard Business Review October 2010
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DON’T TWEAK YOUR SUPPLY CHAIN—RETHINK IT END TO END HBR.ORG
Idea in Brief
Firms often take a piecemeal
approach to sustainability.
They demand that suppliers replace materials with
greener ones, for instance,
and they tweak their own
operations with recycling,
energy-efficient equipment,
and the like.
Although these changes
often seem worthwhile
individually, they may in the
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