Sustainable supply chains

Jeremy Hall explores effect of sustainable development considerations in the Brazilian energy industry.

A 2010 share listing which raised $72.8 billion confirmed oil and gas giant Petrobras as the fourth largest company in the world. However, research from the Beedie School of Business argues that Petrobras’ route to becoming the global giant it is today has not necessarily involved the organization following textbook management advice when it comes to sustainable supply chains.

The research argues that companies should include sustainable development considerations in supply chains as a means of improving social and environmental impacts of production systems, in addition to the financial impact. This may involve investment in areas which traditional thinking would suggest might not be profitable for the organization.

The study, “Understanding why firms should invest in sustainable supply chains: a complexity approach” was authored by Beedie School of Business professors Jeremy Hall, Stelvia Matos and Bruno Silvestre, and published in the International Journal of Production Research.

They argue that firms focusing on individual sustainable development elements are unlikely to find satisfactory solutions to their sustainable supply chain problems, and should be investing in multiple initiatives, even if it does not seem apparent that this investment would be of any benefit.

The study builds on past research undertaken by Hall, who has a long-standing interest in sustainable supply chains. In his previous research, he argued that sustainable development was not just about environmental impacts, but is about economic, environmental and social impacts, and how they interact.

“The logic behind sustainable supply chains is that you can’t look at firms in isolation when it comes to sustainability,” says Hall. “They can’t just subcontract their dirty work – they’re not really solving the problem if they just push it aside. You have to look at the situation from the entire supply chain, and look at the entire value being added or lost.”

Complexity in supply chains

The researchers applied complexity theory to the study, based on the principle that with so many interactive variables at play, there is no optimal solution to the problem. As sustainable supply chains involve multiple dimensions of complexity – the coordination of supply chain members, and the interactions among financial, environmental and social elements – managers need to look for satisfactory solutions to their problems, rather than look for the optimal solution.

The study focused on the Brazilian energy industry, due to the country having recently become self-sufficient through the discovery of offshore oil and gas and biofuels development, and also the recent introduction of several policies designed to advance social inclusion.

While Petrobras’ success is further confirmation of the Brazilian energy industry establishing itself as a world leader, the research argues that much of Brazil’s success in the industry comes as a result of it being willing to explore the complex interactions among financial, environmental and social elements.

The researchers argue that had the Brazilian energy industry only focused on financial performance, it is likely that it would not have enjoyed the rapid growth it has experienced. This demonstrates the opportunities and long-term benefits for organizations willing to incorporate sustainability within supply chains.

When multinational agricultural biotechnology corporation Monsanto introduced transgenic farming into Brazil, for example, the results were extremely rewarding from a financial sense, resulting in rapid expansion. However, as the organization bought up more farmland, it resulted in many small-scale farmers being pushed off their land.

As Monsanto had not adequately factored in social elements to their sustainable supply chain, they experienced a fierce backlash from locals to their expansion. The study found that companies therefore often find themselves under pressure to demonstrate social contributions, such as creating jobs in specific sectors, or ensuring that locals are not disadvantaged by new technologies.

In order for these companies to maintain their legitimacy, they can invest in areas that they may not have otherwise have done so, in order to spread their wealth around society.

In recent years Petrobras has invested in a governmental program to purchase castor beans, which can be used to create biodiesel, from local subsistence farmers. It would make more financial sense, however, for them to purchase from the highly efficient, large scale soybean agribusinesses common in the country, for example. In addition, many small-scale subsistence farmers distrust industry or government, and often fail to understand the benefits of long-term contracts over short term but unstable spot markets.

Yet despite all these drawbacks, Petrobras has continued to develop more sustainable energy supplies due to the attention paid to all elements of the supply chain.

“Petrobras’ history is rife with examples of where people said their schemes wouldn’t work, yet today they are considered one of the most sustainable companies in the world and, they remain a major industry player,” says Hall.

“Traditional management research would say they are mad to be involved in many of their deals. Petrobras is often faced with difficult situations, but it is able to maintain the legitimacy it has as a social provider by investing in various sustainable elements of the supply chain which are not purely for financial reasons.”