The building blocks of product and supply chain sustainability

1. The building blocks of product and supply chain sustainability Adam Hyde Blue Tree Strategies Northwest Food Processors Association Sustainability Summit April 18, 2012

2. Contents Target: be convinced that sustainability is the single greatest source of competitive advantage in the 21st Century Objectives: Provide context for a strategic sustainability approach Help suppliers think like a retailer (or large customer) Make the case for collaboration

3. The defining challenge of the 21st Century LIFE SUPPORT SYSTEMS DECLINING POPULATION & GDP RISING

4. Meet the challenge • Underlying trends are not going away • Requires radical reductions in resources and waste per unit of GDP • Implications for business • Risk – Disruptive change • Opportunity – Innovating to create new products and processes

5. “Every single pressing social and global issue of our time is a business opportunity” - Peter Drucker 5

6. Strategic sustainability Compelling business proposition Be a good corporate citizen Business Value from Smaller Footprint and Solving World’s Challenges Don’t get in legal trouble CSR, Environmental Protection, Philanthropy Driven from the top Led by line management Integrated into the business Legal Compliance Led by staff (e.g. CSR, PR) Separate from the business DuPont, GE, IKEA, Interface Carpets Led by Legal Most Multinationals Home Depot, Starbucks Most Companies Social Responsibility Strategic Sustainability Traditional Business

7. Strategic sustainability can deliver three types of value • Cost - do more with less (energy, waste, materials, water, pollution • Revenue – new products, new markets • Shared / Amplifier – policies, practices and initiatives that advance conditions for economic and social progress through engagement • Within supply chains • Across silos • Among stakeholder communities

8. Contents Target: be convinced that sustainability is the single greatest source of competitive advantage in the 21st Century Objectives: Provide context for a strategic sustainability approach Help suppliers think like a retailer (or large customer) Make the case for collaboration

9. Think like a retailer or large customer The majority of impacts are not under a retailer’s direct control. Illustrative Environmental Footprint The vast majority of environmental impacts related to Wal-Mart’s The • Reducing the retail footprint of products and supply chains demands collaboration with suppliers, to understand impacts and then identify and implement innovative reduction strategies. 9

10. DECISIVE EXPANSIVE Explore Expand Distinguish Decide Define Engage CONVERGENT DIVERGENT Strategy development • Understand risks and opportunities • Prioritize areas for action • Set goals for improvement • Engage suppliers to move the needle

11. Factory / facility audits • Assess environmental and social performance at facility level • Establish performance baseline • Benchmark against standards and peers

12. Footprinting • Determine lifecycle approach and boundaries • Apply lifecycle lens to products • Identify “hot spots” • Identify levers / strategies for reducing impacts • Concentrations of impact = opportunities for innovation !

13. Understanding what matters 2006 food footprint, based on Wal-Mart’s total footprint Example Type of Footprint 1 Oils Meat Dairy Alcohol Seafood Produce Beverages Coffee/Tea Baked Goods Frozen Foods Dry Groceries Café Snack Bar Cereal/Breakfast Tobacco/Cigarettes 1Excludes some dry groceries such as beverages which have been analyzed separately Note: Based on order-of-magnitude environmental impact model that uses footprint intensity factors developed by the Union of Concerned Scientists. Model has many limitations but is suitable for providing directional guidance and strategic perspective. 13

14. Understanding what matters GHG footprint of the U.S. Diary Industry (Fluid Milk) Example 14

15. Lifecycle impacts of an egg Example Egg Production & Processing Packaging Transport / Distribution Retail Crop Production & Processing

16. Carbon footprint of bagasse compostable tableware Results: Gained third-party certification Demonstrated commitment to lowering carbon footprint Identified carbon “hotspots” in product lifecycle Became empowered to collaborate with suppliers Learned a lot about bagasse products Example

17. Supplier scorecarding • Establish common measurement system & standards, often aligned with retailer’s priorities and goals • Measure and track sustainability performance of supplier companies • Integrate sustainability metrics into existing supplier scorecards

18. Purchasing / sourcing policies • Identify sustainability criteria / standards / certifications to address life cycle areas of concern • Integrate into product specifications, sourcing practices, supplier evaluation • Drive continuous improvement in key impact areas throughout the value chain

19. “Democratization” process underway Step 3 – Merchant and Customer Engagement Step 2 – Product Life Cycle Analysis Database – The Sustainability Consortium Step 1 – Wal-Mart’s “The 15 Questions”

20. Supplier implementation: Organize around a tiered set of actions Sustainable Business Practices Sustainable Pathway System Change Today’s Business Practices A “bigger win” for business and a “win” for society Innovation Projects Quick Wins Focused on a “win” for business Engaging with stakeholders and partners of all types 20

21. Quick wins and innovation projects • Operations • Work with distribution network to optimize logistics efficiency • Streamline materials management & recycling (sandwich bales) • Organics diversion & conversion (compost & energy) • Conduct energy and water audits and invest in conservation measures / process improvements • Source renewable energy (onsite generation, utility programs) • Build high efficiency facilities (e.g. Kettle’s LEED Gold facility) • Product • Packaging reductions (ripple effect) • Packaging material innovations (e.g. commercial compostability) • Product reformulation (concentrated detergents, toxics elimination) • Certifications (e.g. Organic, Salmon Safe, Food Alliance, etc.) • Product traceability (e.g. Patagonia Footprint Chronicles)

22. Contents Target: be convinced that sustainability is the single greatest source of competitive advantage in the 21st Century Objectives: Provide context for a strategic sustainability approach Help suppliers think like a retailer (or large customer) Make the case for collaboration

23. Supplier / value chain collaboration Business transformation • Demonstrate sustainability leadership • Differentiate your company & product with key customers • Drive product innovation • Reduce life cycle impacts • Create shared value

24. Industry collaboration System change = major opportunity • Address complex challenges that individual companies can not do alone • Often about changing the rules of the game of the economic system • Intensive & pre-competitive, within and across industries • Involves NGO’s, GO’s, academics, experts • “System Innovation” examples include: • Magazine industry waste reduction • Dairy industry carbon reduction • Sustainable cotton sourcing

25. Summary • Increasing pressures on business • Address society’s challenges • Eliminate negative impacts • These expectations can be a source of innovation and competitive advantage • Leading companies will seek to understand societal challenges and trends, integrate sustainability into their strategies, and creatively collaborate with stakeholders to: • Identify and manage risks • Improve operations • Reduce costs • Develop new products • Enter new markets • Foster systemic change 25