Introduction to Sustainable Supply Chain Development
Where does your company fall in the five phases of maturity?
Published: Monday, November 16, 2020 – 12:04
During the last decade, we’ve witnessed the emergence of sustainability issues among the most important business concerns in a firm’s supply chain. An increasing number of firms have re-examined their relations with suppliers and moved forward to build a more sustainable supply network, by not only monitoring their suppliers’ compliance, but also fostering their capabilities to properly address various environmental and social challenges.
FIBS, a Finnish organization that fosters sustainability, states as one of the key results of its Corporate Responsibility Survey 2017 Summary that sustainable and responsible supply chains have become strategic goals for Finnish companies. However, implementing this remains a challenging issue, as does the need for resources, systematic training, and learning from the best practices developed by others.
What is ‘sustainability?’
The most extended and accepted definition of sustainability was put forward in 1987 by the World Commission on Environment and Development. According to the commission, sustainability is ‘‘a development that meets the needs of the present without compromising the ability of future generations to meet their own needs.’’
At a broader level, sustainability consists of three components: the natural environment, society, and economic performance. This perspective corresponds to the idea of the triple bottom line (TBL), a concept developed by John Elkington that simultaneously considers economic, environmental, and social goals from a microeconomic perspective.
The triple bottom line suggests that at the intersection of social, environmental, and economic performance, there are activities that organizations can participate in that not only positively affect the natural environment and society, but also result in economic benefits and competitive advantage for the organizations. This is why managing environmental and social issues in the supply chain—in other words, sustainable supply chain management—has increasingly gained attention.
Benefits of a sustainable supply chain
The supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request. It includes not only the manufacturer and suppliers, but also transporters, warehouses, retailers, and even customers themselves. Supply chain functions include new product development, marketing, operations, distribution, finance, and customer service.
Supply chains have become so global and complex that maintaining their resiliency is a key success factor for business in a fast-changing world. Quality, cost, delivery, and reliability have been the focus of supply chain professionals for a long time, but during the past few years, sustainability has been added to procurement criteria for many companies.
Workforce health and safety incidents, labor disputes, geopolitical conflicts, environmental disasters, and new legislation in areas such as conflict minerals have contributed to the growing awareness of supply chain risks among stakeholders. By improving environmental, social, and governance (ESG) performance throughout their supply chains, companies can:
• Enhance processes
• Save costs
• Increase labor productivity
• Develop product innovation
• Achieve market differentiation
• Significantly impact society
Levels of sustainability development
Despite growing stakeholder pressure and evident advantages, many companies still don’t have a comprehensive understanding of the performance, risks, and sustainability impacts of their supply chains. Companies vary significantly in their approach to supply chain sustainability and can be categorized into different levels or development phases.
Basic: With minimum guidelines, these companies have a poor understanding of supplier risks and basic sustainability development.
Enhanced: These companies are characterized by a minimum level of expectations; they focus on risk and compliance, and basic auditing or assessment of high-risk suppliers.
Established: These companies set clear expectations for suppliers and develop processes to screen, select, and manage suppliers against those expectations.
Mature: These companies require suppliers to cascade the requirements further down in the supply chain and identify opportunities to improve supplier performance. Mature companies integrate these practices and processes with product design and development to explore opportunities for enhancing sustainability.
Leading: Companies at the leadership level of maturity create shared value with their suppliers and treat their suppliers as an extension of their business; they engage in meaningful two-way dialogue.
Current state of sustainability
Currently, companies are taking responsibility for their supply chain management to improve how their business affects the workforce, local communities, and the environment in the places where they procure their products and services.
Operational, financial, regulatory, and reputational risks continue to drive supply chain sustainability. A proliferation of regulations and standards have created significant challenges to business, such as increased time and effort dedicated to compliance issues. Moreover, supply chain programs are evolving beyond regulatory compliance to focus on creating shared value with stakeholders. As companies start to apply sustainability approaches to their processes, products, and services, these changes as well as their social and environmental conditions will come under growing scrutiny.
Most companies apply a cross-functional approach to managing supply chain sustainability, where sustainability requirements, key performance indicators (KPIs), and assessment criteria are integrated into business processes mainly managed by procurement and sourcing functions. The success of this approach depends on formalized channels of communication and reporting, and practices such as working groups that stimulate internal collaboration and knowledge exchange. Only a few companies have fully embedded sustainability into their business models, typically with strong support from executive leadership.
Companies with a mature level in their relationships with the supply chain are expanding their relationships significantly beyond auditing and monitoring, and are investing in training, capacity building, and incentives for top performers. They work with suppliers to build shared commitments, knowing that suppliers play an important role in achieving the company’s own sustainability goals.
Companies still don’t have a good understanding of the risks deeper in the supply chain. Therefore transparency and traceability, especially beyond tier one suppliers, have been identified as major challenges. Sustainability leaders encourage suppliers to adopt sustainability practices with their own suppliers and thus reach further into the supply chain.
In addition, the increased availability of advanced tracking technologies has led to the development of cloud-based software solutions focused on supply chain transparency. Technology can help companies gain a better understanding of supplier performance over time as well as make business decisions and, ultimately, improve processes. This can happen all while improving supplier relations.
Technology solutions are also evolving to include inputs not only from audits, but also from employees, government, nongovernmental organization (NGO) databases, and the local press to create a comprehensive performance profile for suppliers.
Technology will continue to play an increasing role in supply chain sustainability, offering modular, cloud-based, sector-specific solutions, with the potential for global cluster databases being created in the future.
And finally, companies have recognized that multi-stakeholder collaborations around a specific sector, geography, issues, and commodity will cost less, increase leverage with suppliers, facilitate knowledge exchange, and help enhance credibility.
According to our own research done in 2018, which assessed the development of sustainability in supply chains in leading industrial Finnish companies, we found that sustainability development is a continuous process that needs commitment from top management. Sustainable or responsible supply-chain development and maturity can be a low priority unless it is evaluated as relevant to stakeholder and business development. Companies with more mature sustainable supply chains are those that consider their suppliers as an extended part of the company and engage with them appropriately. These companies act as sustainability mentors and leaders, with transparent reporting practices.
An interesting finding is that innovation in sustainability doesn’t always go hand in hand with company size; medium-sized companies can have creative models, while big corporations may simply apply well-known techniques in supply chain management.
In terms of operational practices, the main findings show that risk assessment and the code of conduct are the very first stage of any sustainable supply chain. Stipulating clear supplier requirements, communicating these to suppliers, and ensuring that suppliers accept the requirements should be a first step with every new supplier. Internally, companies can struggle to integrate a sustainability ecosystem (including target, actions, and KPIs) in old-fashioned procurement processes, and this can be the case as well with training efforts and knowledge sharing.
Risk assessment based on different parameters and datasets can lead companies to additional activities such as audits. Self-assessment tools should help a supplier understand its weaknesses and become receptive to any improvement proposal. Corrective action plans and capacity-building programs—in other words, true collaboration with suppliers—are key to success.