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IJOPM
24,6 The role of risk in
environment-related supplier
initiatives
554
Paul D. Cousins
School of Management and Economics, The Queen’s University of Belfast,
Belfast, UK
Richard C. Lamming
School of Management, University of Southampton, Southampton, UK, and
Frances Bowen
Haskayne School of Business, University of Calgary, Calgary, Canada
Keywords Environmental management, Social responsibility, Supply chain management
Abstract This paper extends previous literature on the greening of supply chains by giving
explicit consideration to two main areas – the role of risk, and the motives for undertaking
different sorts of environment-related supplier initiatives. A model is presented which describes the
extent and type of environment-related supplier initiatives that may be undertaken by firms as a
result of the interaction of the perceived losses to the firm associated with inaction, and the actual
level of strategic purchasing in the firm.

International Journal of Operations &
Production Management
Vol. 24 No. 6, 2004
pp. 554-565
q Emerald Group Publishing Limited
0144-3577
DOI 10.1108/01443570410538104
Introduction
During the 1990s, firms have been called upon to comply with increasingly stringent
government based environmental[1] regulations and to develop comprehensive
environmental audits. In addition, consumer pressures for environmental
improvements have become increasingly successful in influencing and determining
the timing and direction of many firms’ responses to environmental issues. For some
firms, investments in a more proactive environmental strategy have yielded significant
commercial advantages, and as early as 1991, a survey by McKinsey showed that the
vast majority of surveyed chief executive officers of large corporations thought that
environmental issues would be “one of the central issues of the twenty-first21 century”
(Winsemius and Guntram, 1992, p. 12).
These trends have been recognised by researchers in supply, and there is a growing
literature on the greening of supply chains (Lamming and Hampson, 1996a; Green et al.,
1996; Lamming et al., 1996, Bowen et al., 1997; Noci, 1997). This has been spurred by
regulatory and legal changes which have directly impacted on the purchasing process
(e.g. the European Packaging Waste Directive), and by some well publicised cases (e.g.
The Body Shop, Volvo), where an environment-related supplier initiative has become a
crucial plank in the firm’s corporate strategy. However, current work on the greening
of supply chains suffers from two main weaknesses. Firstly, much of the discussion
has centred around the prescriptive need for these initiatives without a description of
The ESSCMo project is jointly funded by EPSRC Grant No GR/L23253 and London Underground
Ltd. as well as receiving support, both financial and in kind, from a number of other major
organisations through their commitment to the ESSCMo Club.
the incidence and types of initiatives seen in practice. Despite the academic interest in Environment-
the role and importance of environment-related supplier initiatives, the incidence of related supplier
such schemes beyond a few well-publicised cases seems to be limited (Business in the
Environment, 1996; US-AEP, 1997). There has as yet been no explicit consideration of initiatives
why environment-related supplier initiatives are undertaken in some firms and not in
others.
Secondly, some previous authors have mentioned the importance of risk[2] in 555
environment-related supplier initiatives (Schot, 1992; Lamming and Hampson, 1996b;
Bowen et al., 1997). However, no one has yet provided a comprehensive approach to
recognising, and subsequently managing, the risks involved in environment-related
supplier initiatives. This is surprising given the prominent position of risk in the
motivation for and the type of environment-related supplier initiatives. A recent report
on supply chain environmental management put risk in the centre of the debate
surrounding these issues by stating that “the objective of such initiatives is to mitigate
risk in the face of increasing environmental regulations and liability issues” (US-AEP,
1997, p. 5, emphasis added). We shall contribute to the debate on the greening of supply
chains by examining in particular detail the role of risk in environmentally sound[3]
supply chain management.
This paper aims to describe the mechanisms by which firms’ perceptions of
environmental threats and opportunities combine with the strategic level of the
purchasing function to predict the extent to which environment-related supplier
initiatives are undertaken. In a situation where there is relatively little pressure to
develop extensive environmental programmes, or where purchasing’s role as a
strategic function is not recognised, there may be little enthusiasm for
environment-related supplier initiatives. As environmental pressures intensify and
purchasing develops to a more strategic level, companies may begin to take the
opportunity to lessen their potential environmental losses by utilising their position in
the supply chain more effectively.
We will argue that it is important to understand and pay close attention to the
exposures that firms face, the way that managers perceive risk and the strategic level
of purchasing within the firm in order to derive a more empirically useful treatment of
environment-related supplier initiatives. Effective management of environmental risk
is often given as a motive for increased corporate engagement with environmental
issues (Hunt and Auster, 1990; Roome, 1992; Steger, 1993). By proactively undertaking
environmental risk management, firms can reap a wide array of benefits, including
decreased liability for environmental damage, lower susceptibility to media or pressure
group threats, and limited non-compliance fines (Newman and Breeden, 1992). Indeed,
the recognition and management of environmental risks can be a defining feature of a
proactive corporate environmental strategy (Hunt and Auster, 1990). We shall extend
this treatment of risk to a particular situation by focusing on environment-related
supplier initiatives.

Conceptual model
A conceptual model is presented here which connects the types of exposures firms may
face when considering green issues in their supply activities, how risks are perceived
by managers, the strategic level of purchasing functions and the environment-related
supplier initiatives firms might undertake (see Figure 1). The intention of the
IJOPM framework is to describe the linkages between what motivates firms to act, and the
24,6 types of action the firm desires and is able to pursue. The model has been developed
from existing theory and recent discussions with managers in a variety of commercial
contexts. Each element of the conceptual framework will be examined in turn followed
by a discussion of the linkages between them.

556 Natural hazards, business exposures and risks

One of the aims of this paper is to bring an explicit consideration of risk into an
analysis of the development and use of different types of environment-related supplier
initiative. As has been argued above, risk is central to the motives for both firm level
environmental programmes, and environment-related supplier initiatives. Firms may
be exposed to hazards in the natural environment, or uncertainty in their business
surroundings. Both of these may give rise to potential specific occurrences of events
(i.e. risks), which may be managed by certain types of suppler-related environmental
initiatives.
The academic literature (e.g. Yates, 1992; Mitchell, 1995) and reports from practising
managers (e.g. Mackmurdo, 1993; Beauchamp, 1998) consider several types of
exposure and resultant risk in their activities arising out of the uncertainty in their
business surroundings. Financial exposures, such as exchange rate fluctuations, and
commercial exposures, such as demand fluctuations, are examples of this. These yield
potential risks which can be addressed using particular management tools and
techniques such as exchange rate hedging or demand estimation.
As a part of a broader supply chain, a firm can be subject to two particular types of
exposure – “technological exposure” and “strategic exposure” (Sadgrove, 1996).
Technological exposure arises from being over-reliant on a single or limited source of a
product, process, or technology. In contrast, strategic exposure reflects the danger of
being over-reliant on a single or limited number of suppliers[4]. Various techniques can
be used by the firm as a whole, or purchasing functions in particular, to manage the
potential risks arising from these exposures. A firm concerned about technological
exposure might aim to develop new technology in house to avoid being over-reliant on
external sources. Vertical integration of the sole supplier with the firm might be seen to
lessen strategic exposure, as might collaborative strategies with one or few suppliers.
It has been suggested that a third category of “environmental exposure” should be
added to these to reflect the exposures arising out of the firm’s interactions (as part of
the supply chain) with the natural environment (Madon, 1988). Closer examination,

Figure 1.
A model of risk in
environment-related
supplier initiatives
however, reveals that because the origins of environmental exposures lie in the natural Environment-
environment and not in the business surroundings, this need not be the case. Indeed, related supplier
environmental exposures can interact with other business exposures to yield a wide
variety of risks to the firm (see Table I). initiatives
Underlying hazards in the natural environment give rise to two main types of
exposure to the firm – “environmental impact exposures” and “institutional
exposures”. The firm is exposed to environmental impact exposures because of the 557
impacts of its activities on the bio-physical environment and it can attempt to manage
this exposure to environmental impact risks by altering its activities (e.g. introducing
cleaner technologies or pollution prevention equipment). Institutional exposures,
however, are rooted in an organisation’s interaction with the economic, social and
political environment. They are environmental in the sense that they arise out of the
“green” agenda in society, but do not specifically address impacts on the bio-physical
environment (e.g. exposure to media attack on environmental credentials). The firm
can manage these exposures by altering their activities, or by attempting to manipulate
the institutions themselves (e.g. mounting a publicity campaign).
Table I attempts to categorise the exposures faced when considering green issues in
a supply management context[5]. The framework identifies the primary exposures
faced by a firm in its consideration of environment-related supplier initiatives. It can be
used to generate examples of specific risks that might be faced in different
circumstances such as those given in Table I.

Perceived losses arising from the exposures

Given that the aim of the framework is to describe the way in which firms cope with
risk, the conceptual framework should take into account the way that risks are
perceived by managers. Although economic definitions portray risk, as we have here,
as a product of the probability of an event and its consequences (Mitchell, 1995), this
may differ from managerial conceptions of risk in practice. March and Shapira (1987,
p. 1407) note that “managers see risk in ways that are both less precise and different
from risk as it appears in decision theory”. They argue that risk is not primarily a
probability concept, but is often seen in terms of loss aversion. As their previous work
shows, “uncertainty is a factor in risk, but the magnitude of possible bad outcomes

Underlying environmental Business surroundings uncertainties

hazards Technological exposure Strategic exposure

Environmental impact Risk of over reliance on a single or
exposures restricted technological product or
process that may have harmful or
unforeseen effects on the physical or
biological environment
Economic, political and Risk of over reliance on a single or
social exposures restricted technological product or
process which may be outdated by a
more environmentally proactive
competitor, or leave the firm open to
institutional pressures, e.g. future
legislation
Risk of over reliance on one
supplier that may impact upon the
environment in a harmful way
Risk of over reliance on a single
supplier that may fall foul of
environmental legislation, Table I.
regulation or public opinion The main exposures in an
environmentally sound
supply chain
management context
IJOPM seemed more salient to [managers]” (March and Shapira, 1987, p. 1407). Miller and
24,6 Leiblein’s (1996) empirical examination of variability versus downside risk confirmed
this observation. It appears that it is avoidance of big losses that is important in risk
perception rather than avoidance of the occurrence of a probabilistic event. We give a
central role in our discussion to perceived losses which can arise from actual or
potential exposures either currently or future discounted.
558 The exposures described in Table I provide guidance on the losses perceived as
experienced by managers. Mitchell (1995) in his review of the literature on
organisational risk perception relies on Jacoby and Kaplan (1972) and Roselius (1971)
to derive a list of six types of potential loss: financial loss, performance loss, physical
loss, social loss, psychological loss and time loss. Mitchell questions the extent to
which an organisation as a whole can experience all these types of loss. However, we
argue that in an environmental context it is appropriate to take a broad conception of
the nature of the organisation and argue that organisations can experience more than
losses in terms of time and money. This is especially true when the discussion is
broadened to encompass perceived losses rather than merely actual ones. Social loss
(e.g. loss of reputation, see Russo and Fouts, 1997) and psychological loss (e.g. impact
on employee morale, see Ruiz-Quintanilla et al., 1996) can be powerful perceived losses
and motivators for action in an environmental context even if they only cause action
indirectly through their effect on the firm’s bottom line. It is therefore useful to keep the
classification of potential losses as a conceptual tool in the process of describing risk in
environment-related supplier initiatives. Table II further illustrates this by giving
examples (in a supply context) of all the different types of potential losses mentioned
by Mitchell (1995) which may be perceived by managers and are derived from the
exposures described in Table I.

Losses alone are not enough – strategic purchasing as an enabler of

environment-related supplier initiatives
As noted above, the effective management of environmental risk is often given as a
motive for increased corporate engagement with environmental issues. Roome (1992)

Type of loss Example

Financial loss Having to buy from or sell to alternative sources because a firm’s product or
process fails to reach environmental standards expected
Performance loss Being forced to use environmentally inferior technology because of inability in
customer/supplier to provide correct complementary inputs, processes or
products to use cleaner technologies
Physical loss Environmental accident (e.g. spill, fire) causing damage to a customer/supplier’s
equipment, or own equipment on customer/supplier’s premises
Social loss Loss in reputation in society at large because of association with poor
environmental practices of a customer/supplier
Psychological loss Damage to organisation’s self-perception because of association with a
customer/supplier which has an environmental accident
Table II. Time loss Customer/supplier experiencing an environmental problem with its operations,
Types of perceived loss in and causing an order or delivery delay
an environmental supply
chain context Source: “Type of loss” from Mitchell (1995); “Example” from the authors
and Hunt and Auster (1990) provide descriptive schemes of environmental strategy Environment-
choices. In the broadest sense, companies can choose to adhere strictly to related supplier
environmental legislation (“compliance”), or to engage voluntarily in corporate
environmental management to a level beyond that required for compliance with initiatives
regulations and laws (“compliance-plus”). Some environmental leaders may choose a
niche strategy, where their environmental credentials differentiate them from their
competitors. 559
High perceived losses may in themselves motivate action by the firm to attempt to
manage the environmental risks. However, given equivalent perceived losses, firms
may still differ in their environment-related supply strategy choice. It is contended here
that this is due to the strategic perspective of the firm as a whole, and in particular, the
level of strategic maturity of the purchasing function (Reck and Long, 1988; Farmer,
1985). Several authors have examined the corporate environmental strategy choice as
derived from resource-based theory (Hart, 1995, 1997; Russo and Fouts, 1997). Russo
and Fouts (1997), for example, contend that “firms that tend toward the compliance
mode will differ in their resource bases from those that tend toward prevention”[6].
Here the argument is more specific to purchasing – firms undertaking proactive
environment-related supplier initiatives will have different resource bases in their
purchasing functions from those which do not. We argue that they will also differ in
the extent to which they are strategic. Russo and Fouts’ (1997) observation may be
particularly true in a supply chain context because purchasing functions vary
dramatically in the extent to which they are tactically or strategically focused (Reck
and Long, 1988). Firms with close organisational links with their suppliers, or a
tradition of providing support for suppliers through, for example, supplier
development programmes, tend to be more likely to involve them in environmental
initiatives, as might a firm where the purchasing function has evolved to a level of
strategic importance within the firm.
In a recent study, Carr and Smeltzer discussed and operationalised strategic
purchasing (Carr and Smeltzer, 1997). They argued that strategic purchasing includes
four underlying characteristics – status of the purchasing function, purchasing
knowledge and skills, purchasing’s willingness to take risks (purchasing foresight)[7]
and purchasing resources. Any of these characteristics might motivate
environment-related supplier initiatives. Environmental initiatives driven from a
purchasing function which is seen as important and high status within the
organisation may be taken more seriously by other internal decision-makers than from
a function working more in a passive or supportive role (as defined by Reck and Long,
1988). The available skills and knowledge of the people within the organisation to react
to change may be important. There have been a number of studies (Cousins, 1992;
Cousins and Rutter, 1997) that indicated that whilst the level of competence is
improving, the overall level is less than that enjoyed by the other main functional areas
within organisations. Purchasing foresight may encompass the reaction to change and
application of “new” techniques such as partnering, supplier development or value
engineering. This might become difficult if the personnel do not have the level of
requisite skills. Finally, if there are already tangible resources such as information
systems used in purchasing, incorporating environmental characteristics into supply
strategy may be easier than if such resources are absent.
IJOPM We combine these four features of a strategically focused purchasing function and
24,6 argue that the more “advanced” strategic purchasing is within the firm, the more likely
it is to undertake environment-related supplier initiatives. Conversely, “basic”
purchasing functions may be constrained by their skills and resources, and unable to
undertake such initiatives effectively.

560 A classification of environment-related supplier initiatives

Initial observations from our ongoing research suggest that organisations may tend to
form into four generic categories. For the purposes of this discussion we have defined
these as: “why bother”; “no choice”; “go first”; and “enthusiasts”. Table III outlines how
the perceived losses interact with the available resources of the purchasing function to
generate different levels and types of environment-related supplier actions. The firms
are divided into those which perceive losses to be high or low[8]. They can be
subdivided into firms where purchasing has evolved to a strategic level, and those
where it has not. Table III gives examples of the sorts of environment-related supplier
initiatives that each type might introduce.
Our model assumes that the greater the level of perceived loss to the firm the greater
the chance that the firm will react in some way to minimise the expectation of loss. In
addition to this causal relationship, we have also found examples of firms that react to
their environment even when the pressure to do so is low. These firms, we have termed
as “enthusiasts”, they attempt to attain competitive advantage from become market
leaders.
The “enthusiasts” cell occurs when there is low perceived losses, but the purchasing
function has the tangible or intangible resources, the skills or the outward risk-taking
perspective to undertake an environment-related supplier initiative. If the firm invests
in such an initiative, it may be able to raise the level of debate within an industry and

Perceived Available resources

losses Basic Advanced

High “No choice!” “Go first”

Information gathering
Highly structured purchasing
procedures
Vendor assessment (one-way)
Quality procedures (e.g. BS 7750)
Performance guarantees and penalty
clauses
Low “Why bother?”
No action beyond that required for
compliance with relevant laws and
Table III. regulations
Environment-related
supplier actions
Partnership/alliances
Joint development programmes, e.g. clean
technology development
Two-way vendor assessment
Internal and external measurement
Approved supplier list
Structure: strategic supply and tactical buying
Training programmes
Reward/incentive schemes
Purchasing environmental champion
Management information systems for tracking
data
“Enthusiasts”
Approved supplier list
Training programmes
Purchasing environmental champion
Structure: strategic supply and tactical buying
Vendor assessment (one-way)
cause pressure to increase on other firms – leaving the “enthusiast” firm in a market Environment-
lead position. Over time, perceived environmental losses might increase and the related supplier
“enthusiast” might become a “go first”. If environmental pressures do not increase and
the industry remains concerned but apathetic about the situation the firm may be able initiatives
to maintain an “enthusiast” strategic position.
The other strategy that a firm could adopt when the losses are perceived to be low is
the “why bother” approach. Here a firm perceives little threat and the purchasing 561
function does not have the strategic sophistication to be able to change or react, so they
do not follow any action. These firms gain no benefits – they do not focus on
operational efficiency improvements such as cheaper packaging or waste reduction as
they see the costs outweighing the benefits. These organisations may be influenced by
the “enthusiasts”. If the level of pressure suddenly begins to rise, due to economic,
political or social exposures, or the proactive stance of other firms in the industry, the
“why bother” firms may begin to perceive higher losses associated with inaction, and
be forced into the “no choice” position.
When the perceived losses to an organisation are high, but the strategic level of
purchasing is low, firms are forced into a “no choice” scenario. They follow basic
actions such as information gathering or building environmental quality specifications
into their purchasing procedures in order to manage some of the exposures, but they
are constrained by their resources. The best that they can hope for is to capture some
compliance-plus operational efficiency gains, as they do not have the strategic
capability in the purchasing function to implement advanced initiatives designed to
yield strategic competitive advantages. This may represent a cost to firms, at least in
the short term, as they will have to change established procedures, build new tracking
mechanisms and invest in training and development to improve the level skills
required.
The “go first” scenario is the most proactive of all of the available options. These are
firms that posses a strategic and proactive purchasing function and where managers
perceive high losses from inaction. Such a firm may react in a twofold manner. If
focuses on attaining the maximum operational efficiencies possible and combines this
with efforts to attain the highest level of strategic competitive advantage. In this
scenario, the most advanced types of environment-related supplier initiatives are
undertaken, with a view to both operational effectiveness improvements and
leveraging organisational capabilities.

The direction of future research on environment-related supplier

initiatives
Further investigation is required to determine the effects of environment-related
supplier initiatives over time. The primary effect of these initiatives should indeed be
to lessen the exposures faced by a firm when considering green issues and its supply
management. However, we suggest that environment-related supplier initiatives can
have broader effects than simply mitigating risk in the face of increasing
environmental regulations and liability issues as was suggested by the US-AEP.
Actions on environmental supply issues can lead to at least three affects: changes in
the exposures faced, changes to the losses perceived by managers and changes to the
strategic level of the purchasing function (see Figure 1).
IJOPM Changes in the exposures faced are often the most direct and desirable result of the
24,6 environment-related supplier action. Environmental information gathering on
suppliers, drawing an approved supplier list based on environmental criteria or
introducing a management information system for tracking environmental data, for
example, can all act to limit the exposure of the firm to the types of risks illustrated in
Tables I and II. This should be the main predictable benefit to the firm from
562 undertaking the initiatives, and can form part of a broader, corporate environmental
risk management programme.
Environment-related supplier initiatives can also impact on the perceived losses to
the firm. This may be seen as a consequence of the management of exposures and risks
described above. However, such an assumption can be dangerous where there is
inadequate identification of the actual exposures before the initiative is implemented or
insufficient follow-up monitoring of the effect of the initiative on the exposures. Whilst
some actions might lead to a reduction in both exposure and perceived losses, some
poorly considered or executed initiatives might lessen the perceived losses but not
affect actual exposure. For example, de-listing suppliers, which fail to meet certain
environmental criteria, may help in terms of limiting environmental liability, but could
also limit the pool of potential suppliers or create higher dependency relationships if
careful consideration is not given to the other aspects of supply strategy (Welford,
1994). The very implementation of a environment-related supplier initiative, then, may
leave firms open to different sorts of exposure. A lesson for practice is that it is crucial
to assess the exposures the firm faces adequately before undertaking an initiative, and
to monitor its actual effect on exposure once in place.
The final effect of the introduction of environment-related supplier initiatives is that
they might allow a development in the resources of the purchasing function. The
training of personnel on environmental measurement of suppliers, the development of
management information systems on environmental data, or the undertaking of a joint
clean technology project with a supplier may in itself generate new skills and ways of
working within purchasing. A successfully implemented environment-related supplier
initiative may even raise the profile of purchasing throughout the organisation, and
thus contribute to its status and rise to a strategic level within the firm.

Conclusion
This paper has aimed to illuminate an area both of importance to practitioners, and
under-explored by academics. Its contribution lies in its explicit consideration of the
risks that are experienced in a crucial area of environmental management, and the
appropriate resources required to undertake them. Our study has identified the main
exposures faced by firms when considering green issues and supply management, the
perceived losses to the firm from inaction and the resources available and required for
different environment-related supplier actions. We also considered which sort of
environmental initiatives would be expected given different perceived loss and
strategic levels of purchasing. Further work should test our framework and extend the
analysis into the consequences of undertaking these initiatives. Such a comprehensive
and coherent treatment is required if we are to aim to provide useful tools for
strategically oriented procurement departments to manage environmental and
supplier-related risks in their supply chains. Only when companies can understand
and manage the risks of environment-related supplier initiatives will they feel
comfortable implementing the policies necessary to limit the environmental impacts of Environment-
their activities not only within the boundaries of their own organisation, but across the related supplier
whole supply chain.
initiatives
Notes
1. The word “environmental” is always used with a “green” connotation in this paper unless
otherwise marked. This is not to be confused with the “business environment” used to
563
describe the institutional surroundings of the firm, which is here termed “business
surroundings”.
2. We follow Mitchell’s (1995) definition of risk – risk is the product of the probability of loss
and the significance of that loss to the organisation or individual.
3. For further discussion of the use of the term “environmentally sound”, see Faruk (1997).
4. Here we define “strategic exposure” assuming adversarial relations, and recognise that a
small number of suppliers does not necessarily expose the firm when there are not
adversarial relations. Collaborative strategies, for example, may actually decrease exposure
if there is mutual dependency between a buyer and supplier (e.g. Carlisle and Parker, 1989).
5. It is accepted that the firm might be subject to other exposures (e.g. financial exposures), but
for simplicity this discussion concentrates only on the most relevant and direct exposures
experienced when considering environment-related supplier initiatives.
6. “Prevention” in Russo and Fouts (1997) is equivalent to “compliance-plus” here.
7. Carr and Smeltzer’s (1997) definition of risk differs from ours in that it captures
“purchasing’s willingness to identify and take advantage of new opportunities; purchasing
foresight”.
8. To follow in the spirit of much of the environmental management literature, the perceived
losses can be considered “environmental threats”. “Environmental opportunities” are
presented to those firms which have the appropriate resources for proactive environmental
strategies.

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Study Group, The Royal Society, London.