Building a sustainable supply chain the transition from reactive to proactive
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The document emphasizes the importance of supply chain sustainability as a key driver of business value and corporate responsibility. It discusses how proactive management of environmental, social, and economic impacts can lead to cost savings, improved market share, and stronger stakeholder relationships. Furthermore, it highlights the need for companies to integrate sustainability practices to mitigate risks, enhance operational efficiencies, and innovate within their supply chains.
Building a sustainable supply chain the transition from reactive to proactive
- 1. b Building A Sustainable Supply Chain - The Transition from Reactive to Proactive Zubin Poonawalla by 1
- 2. INTRODUCTION Supply chain sustainability is increasingly recognized as a key generator of business value & an important element of strong corporate responsibility performance. Since the 1990’s, when major consumer brands in the West faced scandals & campaigns highlighting poor working conditions in their supply chains, companies have begun to establish programs to address supply chain sustainability. As the field has grown, leading companies have increasingly recognized that these programs do more than deflect negative stakeholder attention—supply chain sustainability can create business value. SUPPLY CHAIN SUSTAINABILITY & BUSINESS VALUE Supply chain sustainability is the management of environmental, social & economic impacts, & the encouragement of good governance practices, throughout the lifecycles of goods & services.* The objective of supply chain sustainability is to create, protect, & grow long- term environmental, social & economic value for all stakeholders involved in bringing products & services to market. Figure 1: Environmental, Social, & Governance Impacts in the Supply Chain. At every stage in the life-cycle of specific products there are social & environmental impacts, or extemalities, on the environment & on people. In addition, governance, or the accountability of organizations to their stakeholders for their conduct, is important at every stage & throughout the supply chain. 2
- 3. There are many compelling business reasons to take action to improve social & environmental impacts throughout the supply chain. Often though, at a first glance, the connection between supply chain sustainability—generally perceived as a cost center in companies—& the total value of the business can seem weak. However, as depicted in Figure 2, it makes sense to understand the value of supply chain sustainability approaches through the impact they can have on value creation levers such as pricing power, cost savings, & market share. Such impacts may be significant. Further, while the business benefits that suppliers accrue through improved sustainability performance often aren’t passed directly to buyers, buyers may benefit through increased stability of supply and quality. Figure 2: The Link between Supply Chain Sustainability & Total Business Value. Supply Chain Sustainability Approaches Business Value Drivers •Managing Risks •Realizing Efficiencies •Creating Sustainable Products •Building a Culture of Responsibility Value Creation Levers •Pricing Power •Cost Savings •Market Share •New Market Entry •Risk Premiums Revenue & Margin Growth Profits Total Business Value 3
- 4. The Business Case for Supply Chain Sustainability The business case for supply chain sustainability for a particular company depends on a variety of issues including industry sector, region of operation, stakeholder expectations, business strategy, organizational culture, and past performance. In general though, there are a number of opportunities to use supply chain sustainability activities to enhance business value. While not mutually exclusive, the most commonly cited business value drivers impacted by supply chain sustainability are depicted in Figure 2. Figure 2: Building the Case for Supply Chain Sustainability. Managing Risks Realizing Efficiencies Creating Sustainable Products Building a Culture of Responsibility Examples of Creating Business Value through Supply Chain Sustainability Activities Managing Risks Partnering with suppliers to improve human resources management practices, such as minimum hiring age, contracts with workers, and health and safety conditions, to reduce the risk of poor quality or production disruptions. Realizing Efficiencies Setting targets with suppliers to reduce energy use and costs through training on identifying energy- saving opportunities, building systems for energy management, and emulating best practices. Creating Sustainable Products Sourcing raw materials with social and environmental impacts explicitly considered, such as biologically based plastics that emit relatively fewer greenhouse gases throughout their lifecycle. Building a Culture of Responsibility Setting objectives for supply management professionals related to supply chain sustainability—such as sourcing a certain percentage of total spend from suppliers that have participated in sustainability trainings— to encourage employees to take ownership for the positive impacts of the company. Legal Compliance, Governance, Management, Transparency » Attract and retain engaged employees » Build strong relationships with external stakeholders including government » Gain greater access to capital, financing, and insurance » Innovate to meet evolving customer and business partner requirements » Gain access to new markets » Increase pricing power » Improve customer loyalty » Reduce cost of material inputs, energy, transportation » Increase labor productivity » Develop strategic supplier relationships for optimization » Minimize business disruption from environmental or labor problems » Protect company’s reputation and brand value » Gain greater access to capital, financing, & insurance 4
- 5. MANAGING RISK By mitigating & responding to sustainability risks in the supply chain, companies can control costs, protect their market share, & reduce risk premiums.Management Companies can protect themselves from potential supply chain interruptions or delays associated with suppliers’ environmental, social or governance challenges by ensuring suppliers have robust management systems and regulatory compliance programs. For companies who have a single source for key inputs, reducing social and environmental risks is even more critical to ensuring access to those resources. For example, a supplier with ongoing labor challenges could create delivery delays due to labor stoppages or poor productivity. Similarly, a supplier with poor water management practices could face unexpected shortages and cause delays in sourcing. Managing these risks helps companies meet the demands of their customer bases, thereby protecting their market share, and control their costs. Some companies are also using sustainable procurement practices to ensure that their suppliers can adapt to anticipated changes in environmental regulations and extended product responsibility legislation and to reduce potential future liability. Companies and their suppliers are facing more sustainability related regulations increase around the world —including REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) and the Illegal Timber Law in the EU and new regulations in the U.S. related to conflict minerals and human rights in the supply chain. Knowing the scope of their supply chains and potential exposures will help companies position themselves to respond to these and other regulations. In addition, strong management of social & environmental issues can help companies address reputational risks that could impact their market share. Companies that demonstrate a strong understanding & ability to manage potential risks in their supply chains—including social, environmental, & governance risks—may also have easier access to capital at a lower cost & to financing & insurance. Managing risks through supply chain sustainability is particularly important in companies that: » Serve customers (business and/or consumers) that attribute value to sustainability in their supply chain Have very short go-to-market or lead times for delivering products & services to customers Create products or services that are highly dependent on specialized inputs (rather than commodities) that are only available from a small number of suppliers Are structured with high volume, low margin business models that offer little ability to absorb significant, unexpected costs Operate in an industry generally perceived by the financial community to be high risk, such as oil and gas, mining, or pharmaceuticals Derive a significant part of their pricing power & market positioning from brand recognition & reputational trust Are consolidating & beginning to rationalize their supply chains » » » » » » Proactive v. Reactive Approaches to Supply Chain Risk Management Management of risk in the supply chain generally takes two forms: 1. Proactive management, or risk mitigation, to avoid potential risk events from occurring, & 2. Reactive management to respond to risk events that have already occurred to address consequences In regards to supply chain sustainability efforts, risk mitigation activities may include providing suppliers with training on sustainability issues, developing worker empowerment programs, or partnering with suppliers to develop sustainability management systems. Conversely, reactive risk management, or contingency strategies, typically focus on identifying & responding to risk events that have occurred, often through auditing suppliers’ sustainability performance & partnering with suppliers on corrective action plans to address audit findings. Contingency strategies are also useful for actively responding to sustainability events that are external to companies & their suppliers—such as new sustainability- related regulations or general labor unrest in a geography—but that shape the sustainability requirements for companies. 5
- 6. REALIZING EFFICIENCIES Through many supply chain sustainability activities, companies can create efficiencies in their supply chains and reduce sourcing costs. Responsible management of operational inputs, such as energy, water, natural and synthetic materials can greatly reduce companies’ procurement costs while simultaneously reducing the environmental footprint and impact on worker health of supply chains. Taking the time to understand these operational inputs frequently results in an increased understanding of supply chain functions, reductions in unnecessary purchasing of inputs, and improved risk management of potential disruptions (including those caused by environmental problems with suppliers). A number of leading companies offer suppliers technical assistance to implement energy and material use efficiency improvements that help them cut their costs and avoid price increases. Similarly, companies sourcing agricultural products can improve resource and cost efficiency by working with suppliers to adopt more sustainable farming practices—sustainable cotton growing for example reduces water consumption and pesticides that make up 30-40% of costs. Efforts to improve resource efficiency now may also help companies prepare for future carbon intensity product labeling. Strong labor and health and safety practices are also a key driver of cost efficiency. Many companies have created cost efficiencies by undertaking efforts to reduce accidents. Additionally, health promotion activities can improve productivity and reduce absenteeism and turnover and associated costs. Strong labor and health and safety practices can also help make suppliers employers of choice in regions experiencing labor shortages, such as China, thereby reducing turnover and keeping labor costs steady. Even when these savings aren’t passed on to buyers directly, companies can realize savings through more stable and often higher quality supply over time. Applying supply chain sustainability approaches to realize efficiency is particularly important in companies that: » Have products or services that are highly dependent on natural resource inputs (whether specialized or not) and therefore vulnerable to price fluctuations or scarcity in resources Operate with low margins and must constantly innovate to stay cost competitive Rely on skilled or semi-skilled labor in the supply chain, or have significant elements of their supply chains located in regions experiencing labor shortages Have supply chain labor characterized by high turnover and low productivity See downstream business value in developing more resource efficient upstream supply chains, e.g. more carbon-efficient products » » » » The ROI of Efficiency Studies have demonstrated that by investing in women’s health education and care suppliers, and hence buyers, can achieve savings through increased productivity and reduced absenteeism. For example, in a 2006 study in one Bangladesh factory, Extending Service Delivery found a US$3 to US$1 return on investment (ROI) for their women’s health education and clinic services improvement program. The ROI was in the form of reduced turnover and absenteeism tracked over 18 months. Similarly, investments in worker empowerment can improve employee engagement on the factory floor—leading to reduced turnover, improved productivity, and reductions in excessive overtime. For example, one factory its average reduced turnover rate by 3%. The factory’s “Worker Initiative Program”, a contest run in partnership with a local NGO where workers submitted ideas on improving factory processes, also improved the buyer’s confidence in the accuracy of the factory’s worker compensation and hours reports. 6
- 7. CREATING SUSTAINABLE PRODUCTS Collaboration with suppliers on sustainability issues can also foster product innovation to meet (or create) market demand. With the rising awareness of environmental impacts of manufacturing such as greenhouse gas emissions and product toxicity, and the radical growth in transparency brought about by the internet, customers of all types are increasingly demanding more products created from more sustainable materials, processes, and working conditions. In response, companies are collaborating with suppliers to add new features and performance characteristics to existing products and even to generate new products. For example, sustainable products may be produced using fewer natural resource inputs, such as using dyes that require less water use for washing in fabric mills; with inputs that more environmentally and socially sustainable, such as using metals that are mined in conflict-free regions; or through processes that are less harmful for workers, such as growing agricultural products with organic pesticides. Sustainable products can also be designed to result in fewer reduced environmental impacts through their use than traditional products or to have improved end of life collection and disposal options. Similarly, many companies are beginning to respond to customer demand for more “local” products by shifting their supply chains to buy from suppliers who are located closer to the point of sale. This shift can reduce the environmental impacts of transporting products while meeting customer demands for agricultural products that are fresher and consumer products that support their local economies. By partnering with suppliers to improve the sustainability of the inputs and processes used to create goods, companies are maintaining market share— including existing customer loyalty and pricing power—and gaining access to new markets. Creating sustainable products through supply chain sustainability is particularly important in companies that: » Operate in mature or highly saturated markets in which differentiation from competitors is critical to the business model Aspire to serve market niches that can carry a price premium for more sustainable products Seek to enter or expand in emerging economies, where employees in the supply chain are increasingly brand customers Sell to other businesses and governments, which are increasingly including sustainability criteria in their requests for proposals and contracts Have marketing and other channels to communicate to customers about the attributes of products Seek to leverage the knowledge of their supply chain partners in finding, developing, or commercializing products, materials, or components » » » » » Meeting & Making the Market Many Companies have begun partnering with suppliers to develop products with specific sustainability characteristics: The e 7
- 8. BUILDING A CULTURE OF RESPONSIBILITY Finally, many companies have found that supply chain sustainability can create business value by contributing to a culture of responsibility. As issues like climate change & child labor have become more pervasive in mainstream society, employees are often keen to find opportunities to bring issues they are personally passionate about into their job responsibilities. Supply chain sustainabiliity gives employees that opportunity & can improve employee engagement & reduce the costs associated with recruitment & turnover. Leading companies are making their employees aware of their efforts in supply chain sustainability & also seeking to involve employees from a variety of functions that affect suppliers’ sustainability performance—such as procurement, product design, merchandising, & logistics—in supply chain sustainability strategy. These efforts, along with supporting supply chain sustainability objectives, can also improve the attractiveness of companies as employers. As a critical element of many companies’ overall corporate responsibility, supply chain sustainability can also help companies build trust & credibility with external stakeholders—including governments, nongovernmental organizations, activist groups, & investors. These relationships can in turn provide companies with crucial information about emerging regulatory trends, market forces, and other external influencers that could impact business. They also enhance companies’ abilities to secure business friendly outcomes from stakeholder decisions. Finally, companies that use their efforts in supply chain sustainability to demonstrate strong management, awareness of the importance of external trends, & focus on good governance can build a more positive perception of the company’s brand & gain easier access & better rates for capital, financing, & insurance. Applying supply chain sustainability approaches to build a culture of responsibility is particularly important in companies that: » Rely on skilled labor that has flexibility in choice of employer » Operate in a highly regulated or scrutinized industry that is vulnerable to rapid shifts in government policy or activist campaigns » Operate in an industry or in regions perceived by the financial community to be at risk for poor governance or corruption » Have significant equity tied up in brand or other intangible assets that are subject to both risk and changing consumer appetites Corporate Social Responsibility Instills Pride among Employees According to study, an organization’s reputation for social responsibility* was the third most influential driver of employee engagement, behind senior management’s concern for employee well- being and the company’s investment in skills- enhancement of its employees. The results of a 2013 study by the Center for Creative Leadership confirm the link: employees’ perceptions of their organizations’ concern for community and environment is linked to their level of organizational commitment. In fact, the higher an employee rates their organization’s corporate citizenship, the more committed they are to the organization.* As defined by the respondent but presumably including supply chain sustainability. 8
- 9. Conclusion As more companies build efforts in supply chain sustainability, our understanding of the business value of these efforts is expanding greatly. While the benefits described above are often overlapping & difficult to measure, there is growing evidence that supply chain sustainability contributions to business value are significant & multi-faceted. Why, after all, would the majority of the world’s leading business invest in improving the sustainability performance of their supply chains? Arguing that supply chain sustainability is just a ‘feel good’ exercise, doesn’t make sense anymore. Still, in order to make supply chain sustainability a more broadly adopted & more thoroughly implemented business practice, we need to continue our efforts to build a better understanding of the business value created, alongside continued implementation of supply chain sustainability practices, companies should look for opportunities to assess direct savings & model avoided costs associated with their supply chain sustainability efforts to advance practices that create value for their businesses as well as for society. 9
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