The engine that powers sustainable organisations
Sustainability in the supply chain is a hot-button topic for supply chain managers, procurement teams, sustainability leads, investors, and regulators. In this article, we find out what it means for a supply chain to be ‘sustainable’, what it entails, why it is becoming the subject of increasing focus these days, and where to begin.
Supply chain sustainability is the act of managing environmental, social, and governance (ESG) aspects that are found within and along global supply chains. A sustainable supply chain is simply one that manages its ESG impacts in a manner that reduces negative impacts while possibly creating positive impacts. Sustainable supply chain management entails monitoring and managing impacts upstream and downstream of a company’s operations.
ESG impacts along the supply chain range from environmental impacts such as pollution, greenhouse gas emissions, and extraction of raw materials to labour practices like hiring processes, the welfare of workers and their working/living conditions, to governance issues such as poor risk management.
Perhaps one of the worst examples of unsustainable supply chains is the 2012 garment factory fire incident in Bangladesh, which prompted more than 200 global companies including H&M and Inditex to improve efforts for a safe working environment.
Companies rarely manage sustainability in their supply chains for corporate social responsibility. Most do it for business continuity.
Procurement teams are traditionally not trained to look deep into the supply chain for ESG factors. Neither are sustainability teams, which is a relatively recent addition to corporate team structures. Internal training is a precursor to any supply chain sustainability programme. Ensure ownership of the programme falls to a well-trained team.
Plan a sustainability programme for your supply chain. A full-fledged programme is necessary to achieve the momentum and scale that such an operation would require.
This programme should outline your objectives and goals, targets and metrics, timelines, and communication strategy. This programme can be shared internally as well as with your supply chain. While designing the programme, ensure you include all aspects required by law, such as a whistleblower channel that your suppliers should have for their own workers.
Engage your suppliers to help them understand what you need and why. Communication is important to set clear expectations and should be maintained consistently throughout the year. Also, give your suppliers the chance to voice any concerns.
Design incentives that motivate your suppliers to come fully on board. Incorporate sustainability KPIs into their reviews and ESG requirements into procurement criteria. When ESG is integrated with reward structures, people tend to take it more seriously. The same goes for team leads – sustainability KPIs necessitate concrete targets to be met.
Offer resources to your supply chain. Empower them with the knowledge and skills to make incremental changes. Training for both your internal team and suppliers can help everyone to achieve shared goals.
Companies such as The Body Shop and Patagonia have made a brand out of supply chain sustainability. They leverage the elements of fair trade, community empowerment, poverty alleviation, socioeconomic development, and environmental sustainability as selling points to market their products to the conscious consumer crowd.
And it works.
Both are immensely successful global brands with high valuations and stellar public reputations. They cash in on their target markets – consumers that are willing to pay a premium for sustainably designed, sourced, and produced products. This is a high-potential target market that is growing fast. The consumer base for sustainable products and services coincides with rising global awareness of sustainability and climate issues, as well as the timeliness of a generation of Gen Z and millennial consumers that are just now acquiring purchasing power.
Consumer preferences aside, the other major benefit of maintaining a sustainable supply chain is regulatory compliance. Laws such as the French Duty of Vigilance Law (Loi de Vigilance), German Supply Chain Act (Lieferkettengesetz), and the EU Supply Chain Due Diligence Directive target environmental and human rights violations of companies in those regions. Regulators are coming after supply chains and companies would do well to prepare their supply chains for the coming transformations that are bound to take place once more laws are proposed and adopted.
From a risk-based perspective, a sustainable supply chain is a good business. At the end of the day, managing risks such as supply disruptions due to climate-related weather events or labour abuse is a business imperative. ESG impacts have a direct consequence on business.
As you can imagine, this is a sprawling endeavour that involves multiple stakeholders, time zones, locations, coordination, communication, tracing, and auditing. The scale in itself is a challenge, particularly if you have multiple tiers of suppliers (suppliers that source from other suppliers). It can be difficult to tell where to draw the line, and most companies decide to stop at the first tier i.e. their direct supplier.
Like any business, suppliers may be resistant to change. Getting buy-in from your suppliers to cooperate with your sustainability programme will be a journey, and occasionally it may call into question your supplier relationships. You may even have to bid farewell to those that cannot or will not meet your sustainable procurement policies.
Data is a huge challenge in the supply chain due to poor visibility of processes and on-ground practices. There is often a disconnect between blanket policies or commitments and actual implementation. A supplier with a modern slavery statement could still be employing child labour or sourcing labour from a third-party agent that is withholding their workers’ travel documents. To verify the data, resources must be invested to trace and audit data and hold data owners accountable.
The United Nations Global Compact has developed the following guidance material for sustainability in supply chains: