Unlike most normal people, I enjoy reading corporate sustainability reports — whether it’s a detailed explanation of progress towards a company’s environmental goals (good) or a brazen attempt at greenwashing (bad), I generally find something interesting. No surprise, then, that I found something intriguing in a new report from Tesco, the U.K.-based retailer. In fact, not just intriguing, but something that has long been on my personal supply chain wish list (again, unlike most people, I have one of those).
The headline of the Tesco and Society Report 2013 is the introduction of a new core value for the company: to “use our scale for good.” But what caught my attention was not the company’s expression of good intentions. Rather, it was an item buried on page 37 of the report, in which the company says it will “offer contracts with a minimum period of two years to all our suppliers who want them.”
That may sound pretty ho hum, but it could mark the most significant change in how retailers do business in a generation. In fact, that change in contract lengths is potentially the key to real social and environmental progress in how goods are manufactured and delivered.
The high cost of penny-pinching
Let me explain. The traditional model in retail – at least over the past two decades – has been purely transactional. That is, retailers have sought to source goods of reasonable quality at the lowest price possible from a stable of interchangeable suppliers – each of whom can be squeezed to lower their prices or simply dropped without great consequence.
The results of this model have been mixed. Goods have certainly become cheaper, but this benefit to consumers has come at a real cost to workers and the environment. The recent tragedies in Bangladeshi apparel factories are only the latest examples of the horrible unintended consequences of a purely transactional approach.
Some companies have triedto mitigate the negative consequences of this lowest-cost model by implementing unwieldy audit programs and attempting to enroll factories in voluntary environmental initiatives. But participation in such programs often requires new capital outlays on the part of suppliers, who reasonably ask why they should make such commitments to customers if those customers show no loyalty in return.
That’s why Tesco’s move towards longer-term contracts is so exciting. It means the company is willing to invest in deeper relationships and increased trust with its suppliers. Those suppliers, knowing that they have a secure relationship with the retailer, will then have an incentive to do what’s required to create less pollution and better conditions for workers.
The Tesco model will also have positive effect on the bottom line, which I suspect is the core rationale for the company’s shift in policy. Stronger relationships with suppliers can help underwrite the investments needed to generate innovation, enhance productivity and lower costs.
Shining a light on the supply chain
This is a lesson Toyota taught the rest of the automotive sector thirty years ago with the introduction of the Toyota Production System, which required deep trust between the company and its suppliers. This was a markedly different approach from the Big Three automakers, who, like retailers today, had a terrible reputation for squeezing suppliers on cost and contract terms. Toyota’s approach led to a revolution in manufacturing practices and as a result, to higher quality and remarkable growth.
At Environmental Defense Fund, our experience working with factories suggests that two years is typically the threshold managers and factory owners need for paybacks on energy efficiency investments. If customers are willing to guarantee business over this period of time, the risk to factories is greatly reduced.
That’s the good news.
What Tesco’s innovation does not address is the complexity and opacity of the networks of suppliers in the retail universe. The typical foreign company sourcing from Asia depends on a network of fixers and middlemen that stands between them and the actual factories. That is, there is a distinction between suppliers, who are generally just trading companies that serve as intermediaries, and factories, which actually manufacture goods.
The trading companies add very little real value to their customers beyond locating factories and making sure products show up on time. Many retailers don’t know much about who is manufacturing their goods or where they are being made. Some even like it that way. Trading companies bank on this, benefit from it, and they like to keep everyone in the dark as much as possible. It keeps them in business.
So it’s not clear if longer contracts with these middle men will make any difference in the performance of the actual factories. Still, I’m hopeful. Improved contract terms may be enough to create stable relationships of trust between retailers and their suppliers. And once those relationships are in place, suppliers – at least those that own and operate their own factories – may have the incentives they need to make investments in environmental and workforce improvements. Longer contract terms may also force a little more transparency into the supply chain, as buyers decide they need to know more about the companies they’re investing in. As a result, both retailer and suppliers may become more accountable for the improvements they commit to making.
That’s why Tesco’s action is so exciting, particularly if it begins to spread through the retail industry. If that happens, I may have to add something new to my wish list.