Wal-Mart’s Green Strategy: Supply Chain Makeover Targets Chinese Manufacturers
Wal-Mart has demanded that its Chinese suppliers adhere to green, environmentally friendly and product safety standards. But experts say that ensuring compliance in the complicated, vast network of Asian suppliers will be nearly impossible.
By Thomas Wailgum
When you think of “green” and environmentally-friendly retailers, Wal-Mart is likely to be the last retailer that comes to mind. But Wal-Mart has a vision of going green, and the world’s largest retailer is now demanding its suppliers, including the massive number based in China, live up to environmentally friendly manufacturing practices and product-safety guidelines to make that vision come true.
To that end, Wal-Mart recently brought together more than 1,000 of its leading suppliers, in Beijing, to tell them that big changes were in store. All of the suppliers in Wal-Mart’s universe—not just those from China—were soon going to be held to higher manufacturing and operations standards, to “build a more environmentally and socially responsible global supply chain” at Wal-Mart, announced company executives.
This bold and very green message, delivered by CEO Lee Scott, was unambiguous: “A company that cheats on overtime and on the age of its labor, that dumps its scraps and chemicals in our rivers, that does not pay its taxes or honor its contracts—will ultimately cheat on the quality of its products. And cheating on the quality of products is the same as cheating on customers,” Scott told the crowd of Wal-Mart suppliers, Chinese government officials and other attendees.
“We will not tolerate that at Wal-Mart,” Scott stated.
The specifics of the new policies, requirements and deadlines for what Wal-Mart called its “Global Responsible Sourcing Initiative” were equally as bold, and most were targeted at suppliers based in China.
A new supplier agreement, for example, sets out the requirements:
Manufacturers’ facilities must certify compliance with laws and regulations where they operate as well as rigorous social and environmental standards, set by government agencies, beginning with suppliers in China in January 2009 and for all other Wal-Mart suppliers by 2011.
By 2012, suppliers must work with Wal-Mart to make a 20 percent improvement in the energy efficiency inside the top 200 factories in China that Wal-Mart directly sources from.
Suppliers must create a plan to eliminate, by 2012, defective merchandise reaching the Wal-Mart supply chain.
All of Wal-Mart’s direct import suppliers, plus all suppliers of private label and non-branded products, must provide the name and location of every factory they use to make the products that they sell to Wal-Mart.
And by 2012, all suppliers Wal-Mart buys from directly must source 95 percent of their production from factories that receive the highest ratings on environmental and social practices.
In effect, Wal-Mart was telling its suppliers that to get its business, suppliers must make their operations environmentally friendly and socially responsible, and ensure that their suppliers’ business practices and operations are greener than they ever have been.
The nagging question, however, is whether Wal-Mart and its supplier base can pull this off. Or, will this become another RFID misadventure for its suppliers—too much money, too short a deadline and too little ROI.
“Given the time lines that Wal-Mart specified in this initiative,” says AMR Research VP Noha Tohamy, “saying that this is a hard task is an understatement. It’s going to be near impossible to do some of the things they outlined.”
Wal-Mart’s Green Strategy—Why Now?
In announcing the new green and product safety policies and requirements of its suppliers, the world’s largest retailer is aiming to do many things.
No doubt, a driving force behind a greener Wal-Mart—especially with the thousands of Chinese suppliers it works with—is to improve Wal-Mart’s battered corporate image in the United States and abroad by holding suppliers to stricter manufacturing, product safety and environmental requirements. CEO Scott receives much of the credit for taking this critical first step, says Tohamy. “All along, Lee Scott has been pretty committed to this goal,” she adds.
In past speeches, Tohamy notes, Scott and other Wal-Mart execs have noted that sustainability and environmentally friendly business practices not only align well with what customers want from retailers, but they “can align well with profitability and good business sense,” she says.
Wal-Mart’s new standards can also be classified as risk management. China, as a nation of consumer-product good (CPG) manufacturers, has become a supplier to the world. And Wal-Mart tops the retailing list: 70 percent of commodities sold at Wal-Mart are made in China. Furthermore, if Wal-Mart was its own economy, it alone would rank as China’s eighth-biggest trading partner, ahead of Russia and Canada, according to China Business Weekly.
But Chinese suppliers’ reputation for manufacturing operations is anything but green and product safety has been a serious issue, especially for the past couple of years.
At the Wal-Mart summit, Mike Duke, vice chairman for Wal-Mart’s international division, noted that confidence in Chinese products has been sagging after high levels of industrial toxins were found last year in exports ranging from toothpaste to toys, according to an Associated Press article. Last year, for instance, Wal-Mart pulled two brands of dog treats from its shelves after tests found that they contained traces of the industrial chemical melamine, notes the AP article. Melamine had been found in a Chinese-made pet food and was blamed for the deaths of dozens of dogs and cats in North America in 2007.
“We are expecting more of ourselves at Wal-Mart,” Duke told attendees, “and we will also expect more of our suppliers.”
Is Wal-Mart’s Green Strategy a RFID Redux?
For all of the noble reasons Wal-Mart has offered for its new green supplier strategy, several industry watchers question whether the retailer can actually meet those “aggressive goals,” as Wal-Mart called them, and deadlines for compliance.
AMR’s Tohamy says that the plan to eliminate defective merchandise by 2012 will be most difficult. “The idea that there’s going to be an elimination of that threat four years from now seems a little far-fetched,” she says.
The problem lies in the complexity and vastness of China’s supplier networks. “We’re not talking about one nice, clean supply chain, where [Wal-Mart] can go to their tier 1 or tier 2 suppliers and be able to get this ability and eliminate some of the product quality, supplier and environmental risks,” Tohamy says. “We’re talking about a maze of supply chains.” And as one moves downstream in each supplier’s own supply chain, pushing far into operations of smaller manufacturers in Vietnam and Thailand, the visibility into supply chain information becomes narrower and narrower, she adds. (Wal-Mart media relations did not return repeated requests for comment.)
Michael Green, executive director of the Center for Environmental Health, a watchdog group in Oakland, Calif., told the New York Times that suppliers under pressure to offer Wal-Mart the lowest prices are likely to have an incentive to cheat, and outside auditors checking on suppliers’ operations may not want to report violations for fear of losing big Wal-Mart contracts.
On the technology front, Tohamy points out that Wal-Mart is “dealing with very small suppliers that typically won’t have the IT infrastructure that will allow them to give their customers—which are Wal-Mart’s suppliers—visibility into what they’re doing,” Tohamy says. “The amount of data and criteria that we need to look at to make an educated decision on whether a supplier is abiding by whatever regulations and guidelines we need them to abide by, in terms of green and environment—this is not a manual exercise that anyone can go through.” And if those small suppliers can’t supply that data, how can Wal-Mart know if its suppliers are truly compliant?
Wal-Mart, of course, has a long history of pushing forward with IT-based supply chain initiatives—with or without the initial support of its supplier base. The most recent example has been the various mandates that its U.S. suppliers affix radio-frequency identification (RFID) tags to goods moving throughout Wal-Mart’s supply chain. (See CIO‘s articles in 2004, 2005, 2006 and 2007 for more on Wal-Mart’s efforts.)
For all of the challenges Wal-Mart and its suppliers now face, however, Tohamy says the fact that Wal-Mart is embarking on the strategy is a big step in the right direction that will force other large companies to follow suit.
“Just like with RFID, labeling, packaging: it’s Wal-Mart starting these initiatives and putting a stake and time line in the ground,” she says, “and that will make the industry start to think about these things more seriously.”