Abb Power and Automation

Introduction

ABB is one of the pioneering companies in power and automation which considers sustainability as an important part of its strategy and success. RobecoSam (2014) rated ABB as one of sustainability leaders in machinery and electrical equipment in its Dow Jones Sustainability Index (DJSI). The Group sustainability objectives 2014-2020 covers all aspects of ABB’s business, from improving safety for employees and contractors, utilizing resources efficiently to responsible sourcing (ABB, 2016).

As ABB claims “In the 21st century, it is no longer just companies but supply chains that compete.”, designing a supply chain which is not only competitive but also aligns with the group strategy of sustainability plays a vital role in ABB’s success.

This report aims to determine whether ABB should design its supply chain to maximize its profit or creating economic and social value simultaneously.

Analysis of current situation

ABB’ supply chain has over 3000 employees working in approximately 100 countries, utilizing millions of products and services from nearly 70,000 suppliers (ABB, 2016). The large scale supply chain network, coupled with the volatility in foreign currency exchange rates have triggered considerable fluctuation in material’s cost over the last years (ABB, 2016). Additionally, ensuring quality performance of its materials is challenging. Thus, the first challenge which ABB’s supply chain needs to overcome is mitigating risk of materials in term of price and quality.

Furthermore, developing sustainability for supply chain requires ABB to understand its suppliers’ operations. Apparently, it will not be sustainable if ABB sells energy efficiency – related products which consume materials manufactured by child or forced labor. “Controlling the social and environmental responsibility of extended supply chains has become one of the most challenging issues in modern management” (Ruixue Guo, Hau L. Lee, Robert Swinney, 2016). Responsible sourcing, thus, is the second challenge for ABB’s supply chain.

Evaluation of alternatives

Whether ABB should only focus on economic aspect to maximize its shareholders’ benefit or it should also consider social and environmental impacts in designing its supply chain? The group can pursue sustainable supply chain by engaging stakeholders in seeking the optimal solutions for all parties in coping with its challenges. ABB can alternatively use its power to marginalize suppliers to minimize procurement risk to achieve more attractive figures in its annual financial report. 

Long term sustainable pursue:

ABB can develop its collaborative relationship with its suppliers for a win – win situation. To minimize the risk of commodity cost fluctuation, ABB can sign long term contracts or enter into hedges. Additionally, ABB should share with their suppliers forecast demand, particularly when demand tend to reach a peak or hit a bottom. The more precise prediction of ABB’s demand is, the better its suppliers plan ahead. ABB would decrease risk of materials shortage or poor quality. If ABB’s suppliers have some obstacles in supplying, ABB would be aware quite soon to take alternative actions to minimize negative impacts on its business. From suppliers’ point of view, they can plan their production and forecast demand in advance. As a result, they would have similar advantages as those of ABB since they might also source from a large number of their suppliers worldwide.

To make sure that materials feeding ABB’s production come from responsible sources, ABB would take into account social and environmental impacts of its suppliers’ activities. Although internal activities of the suppliers do not relate directly to ABB’s operations, they affect in some extend. International Chamber of Commerce (2008) claims that company’s reputation might be damaged only by one bad incident with one supplier. For a publicly held organization, this may result in a reduction in its share price, decreasing benefit for shareholders. ABB has provided training on sustainability priority for high-risk commodity suppliers in high-risk countries (ABB, 2016). Moreover, ABB also can support its suppliers to develop their own activities moving toward social and environmental responsibility. However, ABB needs to be conscious that these activities are “fraught with difficulty even where intentions are good” (Crane et al., 2014) and also require investment in term of human resources and infrastructure while the results hardly can be seen in short-term.

This alternative leads to economic, social and environmental achievement simultaneously but it also requires active collaboration among stakeholders as well as long term investment.

Economic objectives pursue:

Since ABB is a large group, it can use its purchasing power in negotiation to stabilize commodity price when market price goes up. A lot of suppliers, especially small ones have to agree with the request from ABB to maintain market share and its reputation in supplying to a world leader. Although this strategy can help ABB mitigate cost increase and does not require any investment, there are some doubts about materials’ quality since the action puts suppliers in situations of finding “short cut” for their products. They may manufacture products at the lower quality or deliver them late as a consequence of prioritizing other purchase orders.