Building an ethical supply chain

Because we buy products in stores, we tend to hold retailers responsible for what they sell. And of course, retailers are responsible - but sometimes we assume they have more control over product manufacturing and their environmental footprint than they truly do. The consequence? Without an understanding of how the current system leads to environmental hazard and human suffering, it is impossible to re-design a future with better outcomes.

Let's focus on everyone's favorite villain, Wal-Mart. The average Wal-Mart store carries products from over 60,000 suppliers worldwide. The Center for American Progress mapped out where these goods come from:



This collection of products and suppliers (along with all the cargo ships, warehouses, railroad lines, and everything else it takes to get stuff from factory to store) is known as a supply chain.

This unwieldy quantity of stuff creates huge problems for companies that want to ensure they are selling ethically-produced goods. (Whether Wal-Mart belongs in this group of concerned companies I leave to the reader to decide.) Regardless of your views on this question, Wal-Mart's efforts to build an ethical supply chain are fascinating to track because:

1. Wal-Mart is far and away the biggest US retail chain by sales. This gives the company more power with suppliers than any other outlet.

2. Wal-Mart has taken so much hot water for being unethical that they have put forth more effort (and press releases) on ethical sourcing than any other company.

3. For all the fair criticism of how Wal-Mart stores create waste, the majority of environmental impact comes "upstream" - before a product gets dropped off at the store.

Suppliers are the David to Wal-Mart's Goliath. What's shocking, then, is the extent to which suppliers have defied Wal-Mart's dictates.

First, there was the ID tag fiasco. In 2003, Wal-Mart mandated that all suppliers stick an ID tag on shipping crates by 2005. Now it's 2008 and the great majority of suppliers still don't do it.

Why did suppliers rebel? Basically, the benefit of ID tags (superior inventory management) accrued to Wal-Mart, while the cost (buying equipment and setting up processes to tag everything) accrued to the supplier.

Now, the same story is playing out again with Wal-Mart's latest effort to reduce the quantity of packaging in a product. (Hat tip: Watching Wal-Mart at Green Options.)

Suppliers are perfecting the art of the hold-out. On the one hand, go David! But on the other... what are the implications for companies passionate about building an ethical supply chain?

As these issues continue to gain attention, look for more manufacturers in China, Vietnam, etc. to specialize in eco-friendly production. I'm sure some must do so already. There's simply too much money in green products for it not to be in many manufacturers' business interest to be known as a green supplier.

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Lending for the Long Tail

The future belongs to businesses serving tiny consumer niches, it is said. Take, for example, the toilet decal market -- the brainchild of Etsy seller vital. Totally brilliant idea? Yes. On tap to become a market with sales like Coca-Cola? No.. but of course, that is not a problem.

Many of the businesses creating and supplying a niche market are tiny organizations themselves.

Yet our institutions that support small business - banks, the government's Small Business Administration, local community organizations, and so on -- are not well-configured to support entrepreneurs with low startup capital requirements, especially young people.

What's the next step in the Niche Revolution? Improving very small businesses' access to very small amounts of credit.

Small businesses built on their Internet presence are often cheap to start. Many entrepreneurs still need an infusion of capital, however, if for no other reason than they need to pay rent. Early part-time employees or lawyers, accountants, and other professionals paid by the hour may also need to be hired.

As a result, loans -- in the form of credit cards, money from family and friends, home equity lines of credit, etc -- very often figure into a small business person's strategy.

I think it is self-evident that credit cards and family loans can be a less than ideal source of funds for a business. High interest rates? Interpersonal complications? Yup, it's a messy source of capital. (And don't even get me started on the virtual impossibility of young people ever buying real estate in places like San Francisco.)

The idea of lending to small business people on the Long Tail has not been fully explored.

This is odd, because we have a well-developed existing theory and organizational structure for funding entrepreneurs with modest capital needs and minimal assets or credit history.

Microcredit -- small loans to entrepreneurs, for the most part in developing economies -- is becoming widespread around the world. To some extent, microcredit also exists in the United States. One organization I interned with in college is Washington CASH, which lends to low-income women and people with disabilities. For the most part, microloans are offered by nonprofit organizations, though some for-profit companies exist. Indeed, Compartamos in Mexico recently issued the first IPO in the microcredit industry.

Here in the US, though, we still do not have a good financial system for "pre-bank" niche businesses. By pre-bank, I mean small companies that do not yet have the proven cash flow or assets required by a bank to get a standard small business line of credit or loan. (I also refer to companies that do not require or aspire to large scale -- because if they did, they would most likely look to venture capital or other sources of bigger loans.)

While niche entrepreneurs often lack access to bank lending, nonprofit organizations seldom fill the void. Many Americans starting these microbusinesses are young and well-educated, but with low current income and net worth. Some of them are even male -- a big no-no in the world of traditional microcredit. Nonprofits often do not consider these types of entrepreneurs as their target demographic.

What to do? Perhaps not surprisingly, new Internet-based businesses are springing up to fill the void. In my next post, I'd like to share some resources for entrepreneurs looking to take their capital raising from the "Dad and MasterCard" route to the next level.

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Will petitioning for green products work?

In a comment on the truly green crafting article mentioned yesterday, I suggested that petitioning craft stores may not be the way to go:

A petition approach targeted to a store or type of owner could be less effective than sales-oriented approaches targeted to specific products we want to see more of.

What might a sales-oriented approach mean in practice?

1. Recognize the value we bring. Craft chains are suffering from falling sales and traffic. (Stay tuned for some numbers and analysis around the industry in coming days.) At the same time, young people love crafts. Making things yourself is a defining form of personal -- and even spiritual -- expression for our generation.

So what's going on? This is an existential problem for major craft stores. Passionate eco-crafters have insight that can help a savvy craft chain redefine its brand and attract young customers. This is a gift, not a political attack.

2. Big-picture value: A spiffed-up brand and growing market share. In an age when even Wal-Mart is trying to go green, this argument is not a hard sell. Young urban craftistas and 'mainstream' crafters alike are attracted to environmentally conscious products. (If executed correctly, and not greenwashed). Just imagine: If one of the big craft chains started stocking and promoting a lot more green products than its competitors, wouldn't you drive a little further to buy from them?

3. Next layer of value: Product sales and profitability. Across many consumer products, green is the little engine that could. Such products make up a small but rapidly growing share of current sales, and a diverse group of consumers expresses interest in eco-friendly products.

For example, take Clorox's new line of green cleaning products. In Clorox's initial research, they found that less than 2% of sales of all purpose cleaners in 2007 went to natural products. Yet sales of this niche grew 23% from 2006 to 2007. And Clorox found that nearly 50% of their customers would be interested in a green option, if such cleaners were readily available at local stores and of a similar effectiveness as traditional cleaners. Read more in the San Francisco Chronicle.

4. Champion codified standards or brands. Take out the guesswork. When Clorox wanted to establish green products, they relied on the Sierra Club's guidance and the EPA's Design for the Environment certification process, as is noted in the Chronicle article mentioned above. It's tricky for firms to get involved in defining what's green or not because they often don't have knowledgeable staff on hand to deal with these questions, and also because it opens them to charges of greenwashing. Advocates should have on hand a definition of what makes something green, and ideally, a certification process. Certification has been very successful at jumpstarting green commercial real estate construction, for example.

Some examples of this in the craft community are the Organic Trade Association's organic cotton standards and GreenBlue's Sustainable Textile Standard for all fabrics. Hopefully there are more out there!

5. Name-drop: Promote affordable and awesome products. Stores can only sell what their suppliers have on hand. In the longer term, of course, suppliers will make more green products if demand is proven out (as I think it will be). But in the short term, stores and consumers alike are constrained by what is available today. Know of a great glue, fabric line, etc? Talk it up. And when it sells out at a chain store, they will order more.

6. Build consumer coalitions. Three key goals promoted on Crafting a Green World include: transparency in manufacturing, invest in the development of innovative tools, and eco-friendly non-toxic products. The latter goal especially is just as appealing to teachers, Girl Scout leaders and grandmothers as it is to green lovers. What if school districts or a teachers' union committed to only buy green craft supplies by 2010? These big buyer blocks are natural allies. How can we get creative about working together to get the non-toxic supplies we all want?

There are probably more great ideas than those listed here. Imagining a win-win situation for craft retailers and the environment alike is the place to begin.

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Private equity: Scheming, or blind?

There's a great two-part series of on truly green crafting at the Storque on Etsy, by Autumn Wiggins and based on her knockout presentation at Craft Con. She begins:

There is general consensus within the DIY community that what we do has a uniquely positive effect on the world. Our universal philosophy suggests that embracing methods to handmake your own belongings is fulfilling and thought provoking. Yet, quiet debate continues as to the long-term advantages of buying handmade.

(read the full articles here, and here).

She continues to critique the practices in place at your local Michaels or JoAnn's (or a store that apparently exists in the Midwest that I'd never heard of, Hobby Lobby!)

Our rapidly growing sub-culture is spending large chunks of cash at retail stores that barely cater to our interests, contribute little to our community projects, and carelessly market unsafe products.... For most of us, craft stores offer little to no innovation of their merchandise, and aren't held accountable for pollution.

There is often a perception that corporations and private equity firms know about eco-conscious products, but choose to withhold them because this is better for the bottom line. To be honest, I think this is more a result of ignorance, inertia and limited green product availability than any villainous agenda.

Let's take the Michaels deal as a case in point. Here's how a higher-up at Bain Capital, one of the private equity firms that bought Michaels, perceived the company:

"Our deep experience in the retail sector reinforces our conviction that Michaels has the best store locations, a broad assortment of products for crafters and a sustainable competitive advantage.

Business speak aside, look at what he loves about Michaels -- a broad assortment of products and a sustainable competitive advantage. What young people value is always important to retailers because our preferences will shape what gains market share going forward. Being the first national craft retailer to commit to expanding their line of truly green products could allow Michaels (or any store) to build their brand and sales to young people. That's just good business. So why don't they do it? Honestly, the powers that be probably don't have a passion for crafting and so don't understand the communities they sell to. Is there someone at Bain or Blackstone tracking Etsy, Craft magazine and all things Maker, etc? If they were, they'd probably get their keisters in gear targeting this demographic ASAP. The fact that they're not just suggests they're clueless, not evil.

But there are some logistical issues: Supply chains for major national stores depend on suppliers being able to deliver at a certain quantity, speed, consistency, and of course, price. I would wager that most of the awesome products at sites like Crafting a Green World are simply not available (yet) in ways that any major chain can reasonably purchase. With lack of mass production comes high prices. Is it possible to create a green product that's the same price or 20% more expensive, not 2 or 3 times more expensive?

All of this isn't a travesty -- at least in the long term. It's a business opportunity. And I guess that's the central point of this blog.

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