Size Wise: Where Small Suppliers Fit Into a Sustainable Supply Chain

Authors

• Laura Ediger

  Former Associate Director, BSR

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Sometimes, small is better.

The growth of global businesses has often supported the growth of their suppliers, from original equipment manufacturers to firms that provide accounting, legal, or travel services. For companies entering new markets with smaller economies or for companies aiming to contribute to local economic growth, smaller suppliers are critical.

So how can global companies with a commitment to sustainability engage suppliers whose budgets and resources may be tight?

When Size Matters

Some industries, and some governments, require that companies work with smaller businesses as suppliers.

Extractives and energy companies operating in countries including Brazil, Indonesia, and Nigeria face specific regulatory requirements related to supporting “local content”—the goods and services (including labor) procured within the country—often as a percentage of their total project spend. Meeting these requirements means developing supplier relationships with small- and medium-sized local companies in sectors like construction, transportation, or food service.

U.S. companies often have supplier diversity programs linked to government guidelines, which prioritize suppliers based on characteristics such as ethnicity, gender, and size. Similar regulatory support in countries like the U.K. and Australia provide incentives or requirements for companies to monitor and promote diversity in their supplier pool.

Beyond compliance, smaller suppliers can make a company’s supply chain stronger. A more diverse supplier base can help a company weather business interruptions, and smaller firms are often able to be more flexible and respond quickly to ad hoc or specialized requests. Working with diverse suppliers is also becoming a hallmark of corporate responsibility (see, for example, Johnson & Johnson’s commitment), and a valuable tool for demonstrating economic benefit to local communities.

In the case of food production, small suppliers are often an integral part of local communities and landscapes. The purchase of agricultural products from small-scale growers directly supports rural livelihoods, and several companies have made ambitious commitments to supporting them through sourcing: Walmart plans to buy US$1 billion of food from small- and medium-sized farms in emerging markets, and Unilever wants to improve the livelihood of 500,000 smallholders in its supply chain. This places such companies squarely in the middle of debates over the future of global food production—including concerns over food security, optimal land use, and what kind of production systems can best feed the world. Nonetheless, companies seem to agree that buying from small farms—whether it be onions in Azerbaijan, milk in Colombia, or mangoes in Kenya—is a positive development.

How to Right-Size Sustainability

While working with small suppliers may be preferred or even necessary, effectively engaging them in supply chain sustainability programs takes additional work. Most companies’ systems were designed with a relatively sophisticated, large-scale supplier in mind.

For example, suppliers may be asked to go through a formal audit or evaluation process involving questions about systems and policies for managing risk, health and safety, or environmental impacts. Such surveys often require that the companies have familiarity and access to computers and the internet, which might not be the case for a small company in the developing world. Moreover, the paperwork required by a buyer’s procurement teams can be overwhelming for small suppliers with limited resources and management systems.

Working with suppliers that have no formal management systems and limited computer skills requires buyers to make a choice: outsource or adapt. Outsourcing means hiring an intermediary to communicate, translate, and monitor sustainability expectations and performance. This might be done via a farmer’s cooperative or through an integrated service provider that manages production, sales, and transport.

The other option is to adapt, which most companies will have to do to some degree. For example, sustainable agriculture standards written for large farms in the U.S. context must be reimagined for a small Indian cucumber farmer: What expectations are meaningful and realistic? Adapting to the realities of working with small suppliers requires thinking about the additional support they may need to survive and thrive. Walmart’s "Una Mano para Crecer" (A Hand to Grow) program in Central America is one such project that provides training to small farmers and businesses.

Small businesses may also need better access to financial resources. PepsiCo worked with small growers of sunflower oil in Mexico, providing a seven-year agreement to purchase all of the crop, and formed a partnership with IDB and Agrofinanzas to make US$40 million available for microloans to the growers. HP has offered its suppliers access to its own security and compliance tools to help them compete for government tenders.

Governments, which see the success of small suppliers as a way to broaden economic development, can be strong supporters of small businesses as well. In late 2012, the U.K. government announced an agreement with nearly 40 companies (including Boeing, Dell, EDF, GSK, Marks & Spencer, and Siemens) to help their suppliers more easily access credit based on invoices.

In the case of local content requirements, sometimes small businesses need much more than a hand up or a microloan to become successful suppliers. By now, world-class extractives companies have learned that it can take years of advance planning to build the capacity of technical institutes and local businesses to be able to provide the needed goods and services. In some places, farmers also need significant investment in new varieties, irrigation systems, and production techniques.

In the long term, these investments and relationships may ultimately mean suppliers grow to be much larger businesses. And if that happens, it’s also likely they will grow into medium or large businesses that prioritize sustainable supply chain expectations with small suppliers of their own.