This week, the AUC School of Business welcomed Lisa M. Ellram, the James Evans Rees Distinguished Professor of Supply Chain Management at the Farmer School of Business, Miami University, to give a series of talks on the subject.
Business Forward had the pleasure of hosting Ellram for an exclusive Q&A to discuss the current and future challenges of global supply chains, environmental concerns, issues of taxation, labour rights, and what should be done to secure their long-term sustainability.
Ellram is one of the world’s top 10 academics in the field of supply chain management and her works have been featured in an extensive number of publications including the Journal of Operations Management, the California Management Review, the Academy of Management Journal, the Journal of Operations Management, and the MIT Sloan Management Review just to name a few. She is currently the co-editor-in-chief of the Journal of Supply Chain Management, the oldest existing journal in the field.
So to people who don’t know anything about it, what is supply chain management?
Well, the way I look at supply chain management, I look at it very broadly. So, it’s really the end-to-end from extracting materials from the earth, all the way to transforming it, moving goods, moving materials, all the way to meeting the customer’s needs. And then at the end of the life if you’re dealing with the product, getting them back and transforming it and putting it back into the supply chain. It’s really about once you have the customer’s needs, turning that customer’s need into a product or service that will satisfy it. So it deals with distribution, purchasing, flow of funds as well as the transformation process, so manufacturing operations.
As supply chains are managed and how they function today, are they set to change in the future? And what are the projections, especially in the context of digitalisation and the Fourth Industrial Revolution?
The digitalization of supply chains is huge. That’s one of the key ways that we can really reduce waste in the supply chain and be much more responsive. So right now, for example, and I’m sure it’s the same here, but in the US, if you’re getting materials from an Asian country, your supply chain can easily be a couple hundred days long. From the time that you place an order, there’s 200 days worth of inventory and processes and things going on until you actually would receive that. And with things changing so rapidly, we can’t afford that because you can’t respond quickly when things change, and you end up with things that you don’t need, a customer demand changes [for example].
So the digitalization does have the potential to really, really reduce that. The issue with it is in some areas, you really need to have trust in the relationships, because if you’re going out and telling other people in the supply chain “this is what we’re planning on doing” and maybe you’re sharing a higher level, or more detailed information with them. You don’t want them to have that and use that against you or give it to your competitors so your competitors can anticipate what you’re doing. So the information can be shared very quickly but potentially it can also be leaked very quickly.
Companies need to determine how they can protect themselves and who their supply chain partners are, what level of trust they can have with those supply chain partners. That’s really a concern and even within the US, it has slowed down digitalization progress. You can digitalize things but if you’re not really sharing the true information because you don’t trust the other party. It has a much more limited impact but just the potential to get the information quickly and then coupled with the artificial intelligence to respond to that information and to know what it means. They have huge potential.
What are the environmental concerns with supply chains and what is being done to meet the requirements of the Paris climate agreements?
Well, we could talk about that one for about a week probably! There are many, many companies that are very, very concerned about the environmental impact of their supply chains and their products, their manufacturing processes, end-of-life issues. It seems like it’s late in many ways but it’s really starting to get a lot more visibility. It’s so challenging in so many ways. If you’re a new company starting out, you’re at a huge advantage in terms of the environment because you don’t have all of these processes and all of this equipment and the supply chains in place that never considered those things. So it’s very challenging for existing companies.
I was just on Twitter this morning and there’s many, many tweets about Procter & Gamble and toilet paper. How long has Procter & Gamble been making toilet paper? Toilet paper comes from trees. The more trees you have, it helps reduce the carbon in the air. So there’s really getting to be big pressure being put on Procter & Gamble. You need to fix your supply chain. You need to find a different source of materials like bamboo or you need to use recycled paper. You need to do something.
Hundreds of millions of dollars [are] undoubtedly invested in their current processes. If they were starting from nothing, it’d be easier. They can say “okay, let me just take a blank piece of paper.” So I’m sure, knowing Procter & Gamble, they’re thinking about it now and they’re going to respond, but it’s not going to be as fast as people would like them to.
So it is a challenge. I think there are a lot of really good companies that are trying to do things about it but it takes some time. Now, as companies are designing new products, they’re thinking more about this. I wish it wasn’t as complicated as it is but when you’re designing a product, you have to think about all of the decisions about all of the ingredients, the packaging, and all the processes during the design phase.
When you’re designing a product, you need product designers who really are thinking holistically about the environment and not just thinking about our internal processes, but thinking about how the product is going to be used and how the product is going to be disposed of at the end of its life. We call that cradle-to-cradle, instead of saying cradle-to-grave on a product. Cradle-to-cradle because think about how you can get the materials out at the end of their life and reuse them. It’s a different mindset but companies need to be thinking about that mindset. They need to start with design and they need to look all through their supply chain and figure out “how can we change things?”
For example, picking on Procter & Gamble again, they were looking at laundry. Powdered laundry detergent is more efficient for the environment because it’s lighter. You don’t have as many processes. You don’t have the liquid, but when you ship it, it’s lighter and it doesn’t take up as much space.
Procter & Gamble actually worked with Walmart on this. They took the water out and made their laundry detergent more compact. That also had a huge environmental impact in terms of the amount of packaging that’s used, that plastic that’s just going into the ocean or landfill. Using a lot less of that, using a lot less weight so it’s better for the environment because it’s not as much pollution when you’re shipping it. It’s not as much shelf space so the store doesn’t need as much space.
There’s just so many things like that. We look at all those different supply chain impacts that a company really has to think about. I think companies are thinking about these things but it is complex and they need good people to help them. That’s one of the things that I think today’s students can add value because today’s students, I find, to be much more environmentally conscious and many of the students want to work for companies that are thinking about how [we can have] a better environment in the future. [Believing] in the Paris Climate Accord and getting those students in and listen to their ideas and having new, fresh thoughts about how all these things fit together.
So yes, there’s some good technical expertise that the companies need to have but they also need people who can think holistically and say “well, wait a second, if we do this here, what are going to be the effects down here or down here?” For students, I think it’s a great time to be able to have an impact on the environment and I do think people are putting pressure on companies. They are doing things. Even in the US where our current president has said that we aren’t going to support the Paris Climate Treaty, most big companies are supporting it anyway. They’re doing it voluntarily. They said “it’s the right thing to do. We don’t have to be forced to do this. We know we need to do this.”
Recently, The Guardian newspaper did an investigation which revealed that the world’s biggest fossil fuel companies have not divested from fossil fuels. In fact, they’ve invested and are investing even more and more into fossil fuel extraction, and they’re responsible for the majority of the world’s carbon emissions. Is that relevant at all to supply chains of energy and fuel sources?
It’s very relevant. Second order absolutely. There’s a lot going on in the world right now. There is the old order. The old order is desperately fighting to keep the way that they know, being fossil fuels.
What’s happening at the same time, [and] this is really, really important, a lot of companies are starting to want to report their environmental impact. [There’s] Scope One, Scope Two, [and] Scope Three. So Scope One is everything you do internally. Scope Two, that’s the impact of your company from purchased energy. That’s the only thing that’s in there. So the logical thing is you start reporting Scope One, then you add Scope Two, then you get to Scope Three which is all the supply chain stuff. It’s what your suppliers do. It’s [how] consumers use your product, end-of-life. It’s huge.
As you start getting into Scope Two, companies like Honda, who have manufacturing facilities in Ohio, they say “wait a second, we don’t want coal. We don’t want nuclear. Even though it doesn’t have a carbon footprint. We don’t want these.” So you’ve got companies saying “no. If you have really dirty energy in your state, we’re not going to build here.” There’s many, many factors to think about. Looking at Indiana, which is the next state to us, and Indiana has all this wind energy and you don’t, that could be the tipping point, that we’re going to build our factory in Indiana. That’s where the companies come in. The corporates, they say “it matters to us and we don’t want this energy.” Honda, in the plant they have in Ohio, they were pushing back because we had so much coal energy and they built their own windmill. They’re doing all these things themselves but it’d be a lot easier if they could just get clean energy off the grid, so companies can make a difference.
It’s very interesting from state to state. Indiana are way ahead of schedule for getting off of coal and switching to wind and things like that. It’s going to hurt business in Ohio, and we have a lot of companies who are involved in the solar and wind energy industry and they’ll just move to Indiana.
It doesn’t make sense to me. Like when there’s the end of a dynasty and you don’t want to admit it. That’s really the sort of magnitude it is. They [the oil companies] have had an ample opportunity to invest. They’ve had ample opportunity to get in the ground floor. You know, one of the interesting things that I learned about the energy industry when I’ve been doing some completely unrelated research, that many of the suppliers of oil rigs and equipment, things like that, they’re the same suppliers who do wind turbines because they have all this giant equipment.
There’s so much logic to the traditional oil companies being the leaders and playing a key role. But it appears, as you said from that article, there’s a lot more talk than there is action.
There’s a lot of debate around the world today and even billionaires are talking about this, and it’s with regards to international taxation and the issue of tax havens. MNCs (multinational corporations) and TNCs (transnational corporations) are not paying the taxes that they should be through tax evasion and tax avoidance. What can be said about that with regards to international supply chains?
I don’t think we can underestimate the impact that these tax differentials have on supply chain design. It’s absolutely huge. One of the most visible examples of that is in the pharmaceutical industry. They have very, very carefully tax engineered their supply chains. They basically looked throughout the world, what the different tax rules are, what the capabilities are in different countries, and they have specifically put different aspects of their businesses in different parts of the world in order to shelter themselves from taxes.
For example, many of the big pharmaceuticals that are US-based have huge research and development activities in the United States, but all of their manufacturing might take place in a country like Singapore that has a 10 or 15 percent tax rate. The value added for the product, the manufacturing piece, that all occurs in Singapore. When that product leaves Singapore, it’s actually sold to a company in the United States, like the sister company, and the profit occurs in Singapore. So you’ve got the r&d going on in the US [and] the company in Singapore buys the r&d to support [it]. They’re paying how much that r&d is and they try to not make profit on it. They do get the money back into the US by covering the r&d costs by having the money transferred, but that money has been taxed at a significantly lower rate and it’s not going to get taxed when it comes into the US very much at all because it’s only covering the costs and not making a profit on their r&d.
That’s a very simplistic explanation of how companies do it but it is huge. It is probably one of, if not the most important, factors in supply chain design. In the US, we’ve lowered the corporate tax rate to try to help with some of that but there’s still all the incentives and there’s all these artificial things that go on to try to get people to locate in a specific area. So it is a distortion of the natural, logical way that a supply chain would be designed and it definitely significantly alters the competitive environment.
It’s such a big factor that if it changes, like your whole supply chain, you might need to “like okay, we got to get out of this country because [of] the tax laws” and depending on the government of the country, it can be like that. It’s a fairly risky proposition and also because of the visibility it has. Countries are changing their laws and saying you can’t do this. The EU going after a bunch of US companies that they said “hey you, you came in, you located in Ireland and you didn’t pay your fair share of taxes to the EU.” Maybe Ireland said this is okay but they can’t, that’s not fair to the whole EU. You have to be very strategic. It looks like a good decision but are there other risks that are going to come into play?
We have [this problem] even within the US. Like you’ll have, as I mentioned, Ohio and Indiana for example, if Honda was going to say “okay, we’re going to build a new plant,” Indiana will go “okay! Build it here! We’ll give you this land for free! We’ll do this! We’ll do that! Build it here! Build it here!” We’ve got tax wars going on in the United States. “We’ll get rid of your taxes for this long and we’ll do this!” And the problem is, depending on the package that they develop, the local people might actually be the ones that suffer because you’re telling these [businesses] they don’t have to pay taxes. Well, who’s going to pay for the roads? Who’s going to pay for the schools? Who’s going to pay for all those things? It’s going to be the local people and their taxes are going to subsidise this business and the business isn’t giving back at least in the short to medium range.
What has been done, if anything, to protect workers’ rights and to stop companies and corporations from racing to the bottom with regards to labour costs, health and safety, protections, and working conditions?
Now most good companies, the Big Fortune 500 or 600, US, global companies, they have in place supplier ethics agreements. All of their suppliers have to sign up on these agreements about the way that their employees are treated. That’s the first-tier suppliers. It deals with everything from working conditions to treating pregnant women fairly to hours of work, overtime. All of those types of things.
For the first-tier suppliers, those are in place. Problem is how well are they enforced? Most companies belong to some sort of an audit programme. They have supposedly independent auditors that go out and spot check and see what’s going on in the facilities. But you can bypass, you can get away with things. I would say it has definitely helped because you can’t be completely blatant. You can’t have really horrible things that you couldn’t cover up quickly but there still are ways to get around those.
Companies, when they find those violations, they need to take action and the preferred action is to help the company change because sometimes its cultural. The people who are working in these bad conditions, you don’t necessarily want to fire the supplier. You want the supplier to change because the people who are working there ultimately could be the ones who suffer because financially, even though they have bad working conditions, they have a job and they can eat. So you want that to improve. You want to figure out a way to have a win-win.
Where it really gets hard though is beyond that first-tier. A lot of these first-tier suppliers outsource and that’s where you see the videos, like on YouTube or from Greenpeace, of the people sitting in little dark rooms and eight year olds sewing with little teeny needles and 10 of them in a room. We don’t have a good way, I don’t think, in any industry, of really getting down into the tiers of the supplier without having the companies who are doing the buying [having an] army of people constantly looking, constantly monitoring. It would be a massive and continuous effort. It’s possible that maybe that’s what needs to be done. It’s not being done. I don’t think that companies are getting down at that level.
I think we’re making improvement but how do you move that first-tier? How do you get them to really take those agreements and force them down to the next level? And part of it is cultural. This is the way we work here. We need to have some compromise as long as it’s not a health and safety issue, but in the US, people think it’s just horrible that kids are working. They should be in school, but the issue is [with] a lot of those kids, if they weren’t working in that factory, they’d be doing something worse, and they would not be in school. The choice is not work or school, which we assume. That’s not it. The choice is working in this horrible place are working in this even worse place. What we need to do if the kids are going to work is make those better conditions. Some companies, when they have kids, they do acknowledge that they have kids working. They will have half-day school and the kid wouldn’t have school at all if it wasn’t for working for that company.
There are things to do but you have to pay attention. You have to put resources into it. All this money that you’re saving by going to these places, you can’t just take that money and keep it. You have to invest some of it in fixing the conditions. They can still be a lower cost but you can help the people as well.
I’d like to bring your attention to some massive concerns within the electronics industry, especially with tablets, laptops, and smartphones. They all have precious metals inside them. They found that the biggest companies such as Apple, Samsung, and Google are sourcing these metals from mines in central Africa, one of the country’s being the Democratic Republic of Congo. A lot of these mines are conflict means that fund several conflicts taking place in these countries. They employ child labour, forced labour, and at best, exploited labour. Overworked, underpaid. Of course, there are environmental concerns with the industrial activities [of these mines] and then the assembly takes place in the Far East. In factories where working conditions are horrible. I haven’t seen anything being done in Western countries to address this or to bring attention to this. Usually it’s NGOs and other organisations which focus on these things to bring attention to them. What’s your comment on that?
Well, I’m not sure if you’re aware this law. It hasn’t been the most effective. It passed in the US, the Conflict Minerals Act, and it requires that companies who use any [of] a whole list of [what] could potentially be conflict minerals [to be] able to trace the origin. Companies like Intel have worked very, very hard and they’ve really tried to get to their sources and try to understand. This is all about getting down in those tiers of the supply chain and the companies have just not really been able to effectively do that. That was one effort that was made to say “we need to have this transparency of exactly where this is coming from, everything that’s passing through.”
I think that would help if you could do it but they haven’t been able to. The deadline for that law has come and gone and companies are continuing to try to do this. There’s also a lot of issues on the other end of the lifecycle of those products with the disassembly. They go back to the countries that don’t have good conditions and you’ve got people trying to extract those minerals for resale and the conditions being really, really dangerous and health and life threatening.
This is very idealistic but what we need to do, and I’m sure it’s possible, we need to find some different materials. We need to figure out a way to not use those types of things. Yes, they’re great for conducting things, but there’s got to be other things and it probably will be more expensive initially, and we don’t like that. But this is the sort of thing that the UN and organisations like that, who can bring countries together, to get countries to start talking about these things. Let’s say globally “we cannot allow this.”
But yet those supply chains are absolutely terrible. It’s a sad statement about commerce versus humane treatment. And when it’s not in our backyard, none of us would stand for that in our own country. But when it gets to be a certain distance and you don’t really know what’s going on, it’s just too easy to ignore it. It’s the sort of thing that I think takes a concerted effort when it could be the effort of these industries or the EU or something. If the EU would say “this is the way it has to be,” companies would have to figure out how to do that because they want to do business with the EU, and then they would have the ability to change for everyone.
Some of the things that the EU has done in terms of the environment, like some of the take-back laws, have been influential globally. They’ve had their issues but they have changed behaviours, and they’ve changed the way that products are designed throughout the world because you’re designing a product, it’s got to be this way for Europe. Why would you do it differently for the Middle East or for the US or South America? It’s just not efficient.
One way of making supply chains more environmentally sustainable is to reduce the distance between where the raw materials come from and where they are finally consumed. Is that economically feasible in the context of how the global economy and how global capitalism works?
Is it economically feasible? It would be definitely more expensive and then you would also have to make choices. I grew up in Minnesota which is a northern state by Canada and in the winter, we had apples. If you were wealthy, you can get a berry. You get berries from California or South America or something. But you just ate, and we [didn’t] want to do that, but you ate locally and you ate seasonally. And that was just what we did because we didn’t have good imports and good transportation and good storage of all these exotic fruits and vegetables and things that we’ve gotten used to.
So because governments and corporations aren’t doing enough, it’s on us as individuals, as consumers to make lifestyle changes and to make conscious decisions when it comes to consumption? Maybe we have to forgo these fruits and vegetables that are off season and just accept that this is what’s growing locally at this time of the year?
That is something to think about. We’ll be happy to take these in a different form. They don’t have to be fresh. We’re thinking of different ways when the harvest comes in, we’ll package it and we’ll use it later. We don’t have to get everything that’s fresh. I don’t think that the impact of consumers on companies can be overestimated. Getting the consumers to really start making noise, there’s nothing that produces change for these companies like that. Because this is the ultimate customer and if we’re going to change our behaviour, we’re going to say “we don’t think what you’re doing is okay and we’re not going to buy from you,” they will definitely change. But you have to actually then say “I’m willing to make the sacrifice.” I’ve seen it time and time again.
I study some transportation freight. This is how companies focus on it. When I talk to companies and they say “yeah, we’re looking at other things now. That’s on the list but we’re looking at other things now,” and I’ll say “why not?” and they said “nobody asks us. No customer has ever asked [or said] they care about how we ship things.” So that has a huge impact.
There’s a big change that we hope is taking place during 2020. The International Maritime Organisation (IMO), they’re the ones who regulate the ocean, shipping, all different aspects of it. Anything to do with international boats. Nobody owns the pollution of the ships. The fuel that’s used in ships is called bunker fuel. It’s this nasty, black, sludgy stuff that’s basically left over when you’re done processing other fuel that you use and this is what they use in ships. It is so bad. The carbon impact isn’t that bad so it doesn’t get on the radar screen for that but it’s got this sulphur and this black carbon that’s just absolutely horrible for the environment. It’s cheap because it’s a by-product.
They’ve been trying to get something done about this for years. Many countries have a zone around their country that you have to have low sulphur fuel. They’ve got that in place by the US and the Baltic Sea and Hong Kong and a few places like that. Now, they’ve mandated that you have to change over to this different type of fuel that’s going to be more expensive. There have been all these [claims] “oh, the price of shipping is going to double.” Well, number one, it shouldn’t double because the price of the fuel isn’t going to double. And even if the price of the fuel doubled, fuel is not 100 percent of the cost of shipping. Let’s do some simple math here. Even if it does, you know how much it costs to ship on a boat a t-shirt from China to the US? Like five cents. So what if it doubles? It costs like $1 to ship a refrigerator. There’s all the spin on stuff.
I can only educate like a certain number of people. I think I will write these articles that people will actually read that show up somewhere like the Wall Street Journal and say “listen, you’re positioning this in this dramatic way and yeah, you can say shipping costs will go up, will double but you know what? It’s only going to be five cents more on a $4 item or $2 more on an $800 item. So let’s not get excited here people.
So what needs to be done to ensure that supply chains are sustainable for the foreseeable future?
Ensure. I wish we could use that word. What needs to be done? There’s probably a few different things that have to work together. One is requiring more transparency. This is just starting and this goes back to information technology and digitalization. It can provide a beautiful way, not just in terms of sustainability, but in terms of product safety, traceability, that sort of thing. Getting that visibility is going to be key. I think that’s one thing.
[Additionally], I think creating a greater understanding of what sustainability really means. The best way to be sustainable is not to recycle. The best way to be sustainable is to use less stuff. That is not a concept that fits well with the consumer world. We need to educate people, especially the young people who already get that but who are coming into the workforce, who are going to start having more and more impact, to really get them to see that this is an issue.
There has to be also a higher level of accountability. A problem that we have in the US that I think is true globally, is that oftentimes it’s less expensive to break the environmental laws than it is to fix the root cause. So we have to show that we really do take this seriously and we have to be willing to pay for it. As consumers, we have to be willing to pay for it and not sacrifice the long-term for our short-term benefits. It’s about consumers being educated, demanding things, [and] when the information is available, looking at it. It takes some effort but it’s effort that’s well worthwhile. I wish that we could ensure. We’re moving there. It just needs to be faster.
Any concluding remarks?
I think supply chain management is a very, very useful way to look at the world. It’s really all about how things fit together and seeing things holistically and looking at relationships. I think that if you really understand and embrace the supply chain, it will help you a lot with improving sustainability and environment.