Building Supply Chain for a Sustainable Future

A “traditional” supply chain in the forest products industry consists of a group of organizations and people (as well as information and technologies) that are involved in value-adding activities to transform forests, logs and lumber into finished products such as furniture and floors that are delivered to the end customer.  

As countries increasingly collaborate to combat illegal logging and to promote sustainable forestry worldwide, many forest products companies’ supply chains are not equipped to cope with this changing regulatory environment. Most were engineered to manage high-volume commodity production by capitalizing on low-cost production opportunities available in places with easy access to inexpensive labor, land and raw materials. But in a future when market demand for “green” and “responsible” forest products increases quickly — partly driven by trade regulations such as EU FLEGT regulations and the amended Lacey Act in U.S. — such traditional approaches can leave many forest products companies dangerously exposed. The importance of building a sustainable supply chain has been widely acknowledged as a tool to weather a range of risks. To gain more insights into this topic, we interviewed senior managers from environmental groups the Rainforest Alliance and WWF-GTFN, and global furniture retailer IKEA.

Expert Interviewed:

• Keri D. Hess, SmartSource Program Coordinator, the Rainforest Alliance.
• Jeanette Skjelmose, Supply Chain Sustainability Manager, IKEA
• Zhonghao Jin, GFTN-China Manager, WWF

Q: For those who are less familiar with your organization, please provide a short description of your organization and current activities:

The Rainforest Alliance provides customized services to companies, governments and organizations that want to improve their forest-product purchasing practices and establish a legal, traceable and sustainable supply chain. Through our SmartSource program, we help businesses analyze their supply chain, better understand their sourcing risks and develop solutions to address their specific challenges. As a result, companies can establish a responsible purchasing program that eliminates illegal and controversial sources and enables procurement of credibly-certified timber products. Businesses that purchase a variety of wood products from many suppliers, and rely on those suppliers to provide forest product source information to identify associated risks, will benefit from the following services:

SmartSource Legality Assessment and Monitoring: This assessment provides businesses with a framework to observe “due care” under the United States Lacey Act and meet European Union Due Diligence requirements. 

SmartSource Sustainable Sourcing Program: This comprehensive sustainable sourcing program helps companies go beyond legal compliance to fulfill a significant, long-term commitment to responsible sourcing and obtain market recognition for these achievements. This program enables companies to meet legislative requirements for Legality, but also to position themselves as leaders in sustainable sourcing. Program participants have access to premier tools, consultation and service. The Rainforest Alliance works with some of the world’s largest retailers whose supply chains include companies in the Asia-Pacific region.  We have performed trainings with staff and suppliers working in these supply chains to better assist our clients in meeting their goals of responsible sourcing.

IKEA is a global retailer and brand that features Scandinavian modern style furniture and accessories. Europe is its main market and sourcing destination which contributes to roughly 80% of the company’s total revenue and 70% of its supplies. IKEA is also sourcing from Asia region, from countries such as China, Vietnam, Thailand, India and Bangladesh, etc. China accounts for 22% of IKEA global supplies. Sales in domestic Chinese market is growing steadily, though it is relatively small compared to other major markets of IKEA.

The Global Forest and Trade Network (GFTN)（http://gftn.panda.org/）was launched by WWF, aimed at eliminating illegal logging worldwide, promoting credible forest certification, protecting bio-diversity, and contributing to the sustainable development of human beings and nature. GFTN-China, founded in 2005, is the Chinese chapter (including Hong Kong and Taiwan) of GFTN. GFTN-China provides a highly visible forum for Chinese companies to demonstrate their commitments to responsible production and purchasing of forest products. One of the key supports GFTN-China delivers to its participants and their suppliers is to develop and run the supply chain management system to lessen the risk of sourcing illegal and unsustainable timber and increase the purchasing of legal and credibly certified forest products.

Q: What does a sustainable supply chain mean to forest products companies today?

For companies that want to demonstrate a real commitment to responsible sourcing and obtain market advantage for these achievements, the Rainforest Alliance offers the SmartSource Sustainable Sourcing Program, a more comprehensive program that allows you to position yourself as a leader in sustainable sourcing.

This comprehensive sustainable sourcing program helps companies go beyond legal compliance to fulfill a significant, long-term commitment to responsible sourcing and obtain market recognition for these achievements. This program enables companies to meet legislative requirements for Legality, but also to position themselves as leaders in sustainable sourcing. By committing to the SmartSource framework and program participants have access to premier tools, service and experts to conduct a comprehensive supply chain risk assessment and assist with the development and implementation of an environmentally and socially responsible procurement plan for the full spectrum of forest products -- such as paper and packaging, lumber and finished wood products.

IKEA has taken a proactive approach in developing a sustainable supply chain. The IKEA Way on Purchasing Home Furnishing Products (IWAY) was first introduced about 10 years ago as IKEA's code of conduct. It defines what suppliers can expect from IKEA and specifies what IKEA requires from its suppliers.  IKEA has the same requirements for its suppliers - whether they are based in Europe, or in China. Within IWAY system, there is a start-up requirement for companies to be qualified to do business with IKEA, they need to comply with these basic requirements already before a business agreement is signed with IKEA. The full IWAY standard covers a range of criteria, including legality of raw material supplies, working conditions, and environmental pollution, etc. For those suppliers who cannot meet the full standard in the beginning, IKEA will allow them one year maximum to adapt and comply. During this process, IKEA may provide necessary support such as training. To ensure compliance, in addition to internal auditing by 70 IKEA staff auditors, IKEA also works with third-party certification bodies to verify its supply chain activities. Beyond these basic requirements, in the development stage, IKEA works together with suppliers to meet higher standards in areas such as energy efficiency, raw-material utilization, and water conservation, etc. It is necessary to work with other retailers, NGOs, and suppliers to contribute to change in society and encourage more sustainable practices to enable IKEA to find suppliers that meet requirement. The key to find good business partners is that they share the same vision with IKEA and are willing to move in the same direction. It does not have to be already established ones. IKEA can work with start-ups from the beginning, but they have to demonstrate a strong wish to improve their practices and develop together with IKEA. They have to make the commitment to improve their level of performance.

A sustainable supply chain means that the subject company works with all its principal business partners along the timber products supply chain effectively in identifying and minimizing illegal timber risk in the timber where it is harvested and securing the timber is from sustainable or well managed forests. This means the subject company has developed and implements a responsible timber sourcing policy, an origin tracking system, and a system of measures and procedures to analyze and minimize the risk of purchasing illegally harvested timber, and bring into the supply chain more and more credibly certified timber and timber products.

Q: How is the concept of sustainable supply chain different among companies that have different geographic focus (e.g., multinational firm vs. domestic firm) or sizes?  

The concept is the same no matter the size and complexity of a company’s supply chain.  

Generally speaking, multinational firms, with relatively more resources available, may find it easier to make actions and develop the supply chain through supplier training and auditing, compared to smaller ones with limited resources. Companies that have a big share of their business with IKEA, may give IKEA better leverage in development in line with the IWAY standard.  But the key is to have a right vision and a right way to make the change. Chinese market is growing fast, same are customer’s expectations. For IKEA, Chinese customers are expecting the same as EU customers, for example, responsible and sustainable sourcing practices. Many customers expect that you are doing the right thing, they will be disappointed if you are not. This compares to 10 years ago, when doing (environmentally and socially) good might give companies an extra credit, with marketing and public communication benefits. But now this has become a common expectation of customers as a must-do business practice, that’s the change.

Compared to domestic firms, multinational firms normally need to handle more complicated and difficult situations to track timber origin. The risk of illegal timber from import sources is much higher than the domestic one, especially from countries or regions like Russia, Indonesia, Amazon, and Congo basin. As one of the reasons of high risk of illegal timber is the institutional and governance deficiencies that are present in the forest sector in these countries and regions, it is suggested that collecting some of the legality documents only from these countries or regions is not enough. The export and import document may be a good evidence of the trade is not associated with smuggling, but not necessary means the timber is legally harvested and traded either.  An independent third party verification of legality is recommended as one of the effective due diligence or due care practices if the timber is soured from tropical forests or where illegal logging is a common practice.    

Q: Can you share any successful examples of forest products companies in greening up their supply chains?

All of our clients have seen progress in ‘greening up their supply chain’.  Success, in our view, is not only committing to, but implementing a responsible sourcing program that over time moves supply away from illegal and controversial sources and towards sustainable, credibly certified sources.  This requires a strong commitment by a company to invest the time and resources necessary to achieve real results.

Among IKEA’s 1,200 suppliers worldwide (300 in China), there are many, many successful examples – Since we started to work with the IWAY standard and requirements, we have together with our  suppliers achieved better working conditions, become more energy efficient, improved supply chain’s wood traceability, and responsible forestry practices, etc., with over 150,000 improvements over the last 10 years.

Nature Flooring is one of the successful examples in greening up their supply chain. Since they joint WWF GFTN-China in 2005, they have developed and implement sustainable supply chain management system. Their top directors have visited and talked to their principal timber suppliers in Indonesia, Amazon, and Congo Basin together with WWF GFTN staffs, to minimize the risk of sourcing illegal timber and getting more FSC certified timber there. Their positive exercising of sustainable supply chain management has encouraged their suppliers in Amazon applied FSC CoC and acquired FSC FM certification to operate their forest concessions.  Nature Flooring is also encouraging their partners in Congo Basin to manage their concessions in line with FSC principles.  

Q: What advice do you have for forest products companies to build a sustainable supply chain in the future?

Do not just focus your efforts on designing a responsible purchasing policy and then not put any effort into its implementation.  To be successful, you must work to communicate your policy with your suppliers, provide resources available to them for compliance, train your staff involved in purchasing and receiving, and perform baseline analysis of sources and conduct annual monitoring of implementation and progress against policy goals.

It is really important to select your business partners,, choose the right supplier from the beginning. Sharing same business philosophy and vision with IKEA is important. IKEA wants to work with suppliers who are running business in a sustainable way. If they cannot make this commitment in the beginning, it will be increasingly difficult for them to do so later. Company’s sourcing policy should be strategic.  Standards should be very clear and easy to understand, they should be specific about company’s expectations from suppliers in terms of what to deliver and what to accomplish. Don’t be vague or fluffy. The investments you do in time and money to help suppliers improve their production practices will pay off with a more secure, efficient and productive supply chain. This will help company stay ahead of legislations and eventually save company time and money to comply. It is also advised to form an alliance with businesses, NGOs, governments, and communities to solve supply chain challenges. In the forestry sector, IKEA is working closely with a group of organizations that include the Rainforest Alliance, WWF, etc. to train foresters on the ground. This also helps win support from policy makers by developing policies to increase the availability of sustainable raw materials and to help companies build up capacity to meet environmental standards such as FSC.

Responsible business should consult the risk of sourcing illegal timber with organizations like WWF GFTN-China, TFT, and Rainforest Alliance, etc. Map company timber supply chain and assess the risk. Manage the risk together with all the principal suppliers along the supply chain. Apply third party legality verification, such as VLO/VLC (Rainforest Alliance), TLTV (SGS), OLB (BV), and TFT where the risk is high and needs a transparency. Apply FSC certification if implement outstanding environmental and social responsibility to achieve long-term sustainable business development strategies.

Q: Tell us about your organization’s future strategy to help the Chinese forest products industry become more sustainable.

We will continue to partner with folks on the ground in China to help us train and assist suppliers working in our client’s supply chains.  We hope to use the leverage of some of our clients to encourage the Chinese government to require transparency required to adequately track products back to their source of extraction.  As Richard Donovan, Vice President and Chief of Forestry Division of the Rainforest Alliance pointed out in a previous interview: the Rainforest Alliance will continue to build upon our nearly 25 years of pioneering work to transform mainstream forest products companies, food and beverage companies, and tourism companies to sustainable sourcing, supporting the protection of critically endangered ecosystems, and supporting communities that depend on forests for their survival. We will continue to partner with companies and non-profit organizations focused on these same goals. Our work in China will continue to involve orientation around sustainability certification, legality verification, enhanced value chains and we will continue to seek synergies among the different with which we work. If a company is already buying sustainable coffee beans, we want them to start using certified paper for their cups and napkins. If a farm or community forest has a tourism operation, we want to make sure it‟s run sustainably. Because we work across so many types of supply chains, including coffee, cocoa, tea, bananas, paper, furniture, building materials and tourism, we see endless opportunities to improve sustainable business practices on all levels. 

After years of implementing IWAY standard, IKEA has developed many good suppliers with high level of environmental performance. This practice will continue as a long-term strategy in developing a sustainable supply chain. IKEA will continue to focus on improving energy efficiency, material saving, and productivity technologies in the supply chain. In addition, IKEA will increase wood traceability with a goal to rapidly increase the proportion of FSC certified wood in the supply chain. Over 98.5% of wood products are from known and legal origin, which meet basic requirements of Iway standard. Currently, 24% of IKEA wood volume is FSC certified, we aim to increase this share to 35% by the end of 2012. 

GFTN-China works together with its participants to establish and implement responsible sustainable supply chain management system as part of the key business strategies. Practicing these policy and system is what GFTN-China encourages our participants to do so as the effective exercising of due care or due diligence to keep in compliance with Lacey Act and EU Timber Regulation, and to minimize the risk of placing illegally harvested timber and timber products derived from such timber.  To achieve or realize higher environmental and social goals, GFTN-China works together with its participants to have more and more forests FSC certified so supply the market with more products from well managed forests. WWF and GFTN is also going to collaborate with forest industry associations, academic groups, and government on China’s in tackling illegal logging worldwide. WWF and GFTN is working with leading retailers, end users, and government to promote green consumption for products from well managed forests not only in the developed countries, but also in countries like China.  

(END of this Interview)