Supply chain sustainability

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Supply-chain sustainability is the management of environmental, social and economic impacts and the encouragement of good governance practices, throughout the lifecycles of goods and services. [1] There is a growing need for integrating sustainable choices into supply-chain management. An increasing concern for sustainability is transforming how companies approach business. Whether motivated by their customers, corporate values or business opportunity, traditional priorities such as quality, efficiency and cost regularly compete for attention with concerns such as working conditions and environmental impact. [2] A sustainable supply chain seizes value chain opportunities and offers significant competitive advantages for early adopters and process innovators. [3]

Contents

Background

Supply chains are critical links that connect an organization’s inputs to its outputs. Traditional challenges have included lowering costs, ensuring just-in-time delivery, and shrinking transportation times to allow better reaction to business challenges. However, the increasing environmental, social and economic costs of these networks and growing consumer pressure for eco-friendly products has led many organizations to look at supply chain sustainability as a new measure of profitable logistics management. [4] This shift is reflected by an understanding that sustainable supply chains mean profitable supply chains. [5]

Many companies are limited to measuring the sustainability of their own business operations and are unable to extend this evaluation to their suppliers and customers. This makes determining their true environmental and social costs highly challenging. However much progress has been made in defining supply chain sustainability and benchmarking tools are now available that enable sustainability action plans to be developed and implemented. [6] A study conducted in 2017 researched the correlation between supply chain position (how close or far the firm is from the end user in the supply chain) and firm performance. The study findings concluded that suppliers located farther upstream in the supply chain (farther from the end user), had the most to gain financially from sustainable supply chain management. [7]

Environmental impact

Climate change poses a new risk to supply chains and a need to increase their resilience. As companies are setting carbon footprint targets, suppliers’ operations are responsible for 65% to 95% of a company’s total emissions. [8] These environmental impacts are evident across industries, for example, food and beverage companies are particularly vulnerable to the impacts of climate change as changing weather patterns can disrupt agricultural production. Measuring supply chain resilience on factors such as natural resource availability, infrastructure, financial resources, and social safety networks among others, can help them respond to challenges and create better supply chains in the process. [9]

Social impact

Besides sustainability and resilience, an ethical supply chain is imperative to ensure corporate social responsibility and adhere to a supplier code of conduct. The work environment for the workers should be congenial and must not violate the basic human rights. For instance, companies like Nike and Apple, which outsource manufacturing of their products to other countries like China, have been under the scanner for workplace conditions and wages of their workers. [10] Consumers increasingly demand transparency and traceability in supply chains, especially where disturbing social breakdowns occur, such as with forced labour and child labour for globally traded goods. [11] [12]

Forced labor, understood as work that is performed involuntarily or under coercion, [13] occurs in different industries, often upstream in the supply chain with limited visibility to buyers, customers, and end-users. [14]

For example, in the United States, the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act requires manufacturers to audit their supply chains and report use of conflict minerals to the Securities and Exchange Commission. [15]

Governance impact

Governance practices in global supply chains can pose risks to supply chain sustainability, alongside social and environmental factors. Governance factors include guidelines and procedures for countries and corporations. Buyers screen their supply chains for appropriate governance practices such as a company’s purpose, the role and makeup of boards of directors, shareholder rights and how corporate performance is measured. [16]

Stakeholders

The purchasing power held by buyers, gives them significant influence over their vendors or suppliers’ business practices. Companies in the role of buyers acquire goods or services through organizational functions such as purchasing, procurement, or sourcing, typically for use or consumption in their own organization. [17] Suppliers or vendors typically sell their goods or services to the next link in the supply chain. Buyers might thus interface with only one tier of their suppliers, while their supply chain spans across complex tiers of suppliers upstream. Progress has been made in the sustainable procurement space as companies help suppliers design and implement sustainability programs that directly support the companies’ own goals. Buyers are working to achieve sustainability goals by setting standards for their suppliers’ performance and treating sustainability performance similar to other business considerations such as cost, quality, and timeliness. [18]

One of the key requirements of successful sustainable supply chains is collaboration. The practice of collaboration — such as sharing distribution to reduce waste by ensuring that half-empty vehicles do not get sent out and that deliveries to the same address are on the same truck — is not widespread because many companies fear a loss of commercial control by working with others. Investment in alternative modes of transportation — such as use of canals and airships — can play an important role in helping companies reduce the cost and environmental impact of their deliveries. [19]

Drivers for supply chain sustainability

As of 2021, a growing number of companies see supply chain sustainability as a strategic business matter. A business strategy for supply chain environmental performance can deliver measurable environmental benefits for the company and its stakeholders. [20] A sustainable sourcing strategy positions the company for increasing demands of higher disclosure and investor scrutiny, more environmentally focused consumers, and scarce resources. Sustainable procurement is a key concern for investors, through movements such as socially responsible investing. Leading investment firms such as BlackRock use their influence to bring supply chain sustainability on the agenda. [21] Customers and consumers also demand supply chain responsibility and sustainability as part of a company’s value proposition under a growing ethical consumerism movement. [22] Consumers’ purchasing behaviors reflect this trend as 70% say they are willing to pay a 5% price premium for products produced by more-sustainable means. [23] During global supply chain disruptions following the COVID-19 pandemic, sustainable supply chains have been shown to be more resilient and have lower supplier risk. [24]

Recent research in the Indian manufacturing sector underscores the importance of sustainable innovation in supply chains, highlighting 'financial availability for innovation' and 'technical expertise availability and investment in R&D for green practices' as key factors. This study emphasizes the need for broader, empirical research to understand the evolving role of sustainable innovation in enhancing supply chain sustainability, especially in emerging economies. [25]

Application of supply chain sustainability

Companies looking to implement sustainable strategies down its supply chain should also look upstream. To elaborate, if a company is able to choose between various suppliers, it can for example use its purchasing power to get its suppliers in compliance with its green supply chain standards. In managing suppliers, companies must measure that inputs from suppliers are of high quality, and the usage of water and energy is minimized leading to less pollution, defects and over production. They also must audit their supplier base and make sure that they are improving the supply chain metrics [26] Additionally, fostering collaborative partnerships with suppliers to promote transparency and innovation can further enhance sustainability efforts throughout the supply chain. [27]

When measuring sustainability in supply chains, consistent measurements which can be replicated and compared are crucial to encourage consumer trust. Environmental and social change often takes time to measure and must be considered by private companies or governments over a long term period to accurately assess the results. [28] Some companies utilize supplier scorecards to determine suppliers’ sustainability performance.  This can be accomplished by conducting life-cycle assessments or surveys to help determine their sustainability practices. Another strategy is to award suppliers for their improvement on their sustainability performance, for instance, by developing new materials sourced from waste or by making operations more energy efficient. [29]

Software

Digital technology has increased companies’ capability to collaborate with large numbers of suppliers. [30] As supply-chain sustainability becomes a more critical business issue, the need for reliable and robust data from suppliers increases. [31] Whilst some existing business systems can collect some sustainability data,[ citation needed ] most large businesses will look to dedicated software providers for more specific sustainability functionality.[ citation needed ]

In order for businesses to determine the degree of sustainability impact of their business model, they must have the data to support it. Harvard Business School created the Impact-Weighted Accounts Initiative (IWAI) [32] to assess the degree of impact that many large companies have on social, environmental, and economic areas. Impact data comes from long term research on specific, measurable topics that can be applied to future changes within a company or system. Impact data is often more sparse or inaccessible than it should be, which allows institutions such as HBS to hold companies accountable in their supply chains and encourage greater transparency. Transparency in the supply chain influences how consumers view and support companies, so improving data driven sustainability efforts can positively affect supply chain business. A company’s negative impact on environmental or social areas may show in their stock market value, exposing their true values to investors. While impact data is probably one of the better ways of assessing a company’s long term impacts, it is important to note that data collection for impact assessment is a lengthy process and not all companies can spend long periods of time measuring their impact without making changes. Because of this, simple, credible alternatives to long term impact assessments are necessary for some businesses.

On-site audits

In addition to digital tools, on-site audits can be an effective tool to verify social and environmental compliance at supplier sites. On-site audits can certify a supplier’s compliance with an external standard, such as SA8000, ISO 14001, SMETA 4-Pillar, and others. Audits can also assess compliance with internal policies and guidelines set by a business partner, for example through a supplier code of conduct. Depending on the auditing standard, buyers might choose to audit their suppliers directly, or send auditors from a third-party auditing firm to supplier sites.

Challenges in achieving supply chain sustainability goals

Despite companies being increasingly focused on working with suppliers that help them achieve their sustainability goals, challenges continue to persist. [33] Suppliers further up the supply chain generally lack the maturity, tools, and capabilities to manage and drive environmental and social improvements. [33] [34] When faced with workplace issues such as sexual harassment, retaliation by superiors, and a hazardous environment, lower tiered suppliers typically have a poor response plan, or no plan at all. In cases where a plan is established, suppliers are unable to implement it and train their employees accordingly due to a workforce consisting of nearly 50% temporary workers. As you move further upstream in the supply chain, a company loses more oversight over suppliers. Companies do not directly operate with lower tiered suppliers, and there is generally no contractual relationship in place between the two. This makes it increasingly difficult for companies to manage sustainability upstream. Additionally, lower tiered suppliers operate in relative obscurity compared to the companies they supply, so they tend not to face the same level of scrutiny if failing to meet sustainability standards. [33]  

Many companies have thousands of suppliers, making it difficult for those in charge of driving supply chain sustainability to know where to begin and focus their efforts. They may not have access to the right data or may lack the authority to effect real change. Additionally, in striving to be more socially responsible, a company can inadvertently make it harder for smaller, diverse suppliers to compete with the larger, more established ones. Generally, the larger suppliers are better equipped to drive sustainability improvements compared with smaller ones. In rewarding the larger suppliers with larger contracts and reducing business or even severing ties with the smaller ones to achieve sustainability goals, companies make their supplier base less diverse and put the smaller suppliers at a disadvantage. [34]

See also

Related Research Articles

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In commerce, supply chain management (SCM) deals with a system of procurement, operations management, logistics and marketing channels, through which raw materials can be developed into finished products and delivered to their end customers. A more narrow definition of supply chain management is the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronising supply with demand and measuring performance globally". This can include the movement and storage of raw materials, work-in-process inventory, finished goods, and end to end order fulfilment from the point of origin to the point of consumption. Interconnected, interrelated or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain.

<span class="mw-page-title-main">Business continuity planning</span> Prevention and recovery from threats that might affect a company

Business continuity may be defined as "the capability of an organization to continue the delivery of products or services at pre-defined acceptable levels following a disruptive incident", and business continuity planning is the process of creating systems of prevention and recovery to deal with potential threats to a company. In addition to prevention, the goal is to enable ongoing operations before and during execution of disaster recovery. Business continuity is the intended outcome of proper execution of both business continuity planning and disaster recovery.

<span class="mw-page-title-main">Supply chain</span> System involved in supplying a product or service to a consumer

A supply chain, sometimes expressed as a "supply-chain", is a complex logistics system that consists of facilities that convert raw materials into finished products and distribute them to end consumers or end customers. Meanwhile, supply chain management deals with the flow of goods within the supply chain in the most efficient manner.

<span class="mw-page-title-main">Product (business)</span> Anything that can be offered to a market

In marketing, a product is an object, or system, or service made available for consumer use as of the consumer demand; it is anything that can be offered to a market to satisfy the desire or need of a customer. In retailing, products are often referred to as merchandise, and in manufacturing, products are bought as raw materials and then sold as finished goods. A service is also regarded as a type of product.

<span class="mw-page-title-main">Corporate social responsibility</span> Form of corporate self-regulation aimed at contributing to social or charitable goals

Corporate social responsibility (CSR) or corporate social impact is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in, with, or supporting professional service volunteering through pro bono programs, community development, administering monetary grants to non-profit organizations for the public benefit, or to conduct ethically oriented business and investment practices. While once it was possible to describe CSR as an internal organizational policy or a corporate ethic strategy similar to what is now known today as Environmental, Social, Governance (ESG); that time has passed as various companies have pledged to go beyond that or have been mandated or incentivized by governments to have a better impact on the surrounding community. In addition, national and international standards, laws, and business models have been developed to facilitate and incentivize this phenomenon. Various organizations have used their authority to push it beyond individual or industry-wide initiatives. In contrast, it has been considered a form of corporate self-regulation for some time, over the last decade or so it has moved considerably from voluntary decisions at the level of individual organizations to mandatory schemes at regional, national, and international levels. Moreover, scholars and firms are using the term "creating shared value", an extension of corporate social responsibility, to explain ways of doing business in a socially responsible way while making profits.

Procurement is the process of locating and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. The term may also refer to a contractual obligation to "procure", i.e. to "ensure" that something is done. When a government agency buys goods or services through this practice, it is referred to as government procurement or public procurement.

Purchasing is the procurement process a business or organization uses to acquire goods or services to accomplish its goals. Although there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations.

E-procurement is the business-to-business or business-to-consumer or business-to-government purchase and sale of supplies, work, and services through the Internet as well as other information and networking systems, such as electronic data interchange and enterprise resource planning.

<span class="mw-page-title-main">Business-to-business</span> Commercial transaction between businesses

Business-to-business is a situation where one business makes a commercial transaction with another. This typically occurs when:

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  1. It incorporates principles of sustainability into each of its business decisions.
  2. It supplies environmentally friendly products or services that replace demand for nongreen products and/or services.
  3. It is greener than traditional competition.
  4. It has made an enduring commitment to environmental principles in its business operations.

Sustainability reporting refers to the disclosure, whether voluntary, solicited, or required, of non-financial performance information to outsiders of the organization. Generally speaking, sustainability reporting deals with information concerning environmental, social, economic and governance issues in the broadest sense. These are the criteria gathered under the acronym ESG.

Military supply-chain management is a cross-functional approach to procuring, producing and delivering products and services for military materiel applications. Military supply chain management includes sub-suppliers, suppliers, internal information and funds flow.

Sustainable procurement or green procurement is a process whereby organizations meet their needs for goods, services, works and utilities in a way that achieves value for money on a life-cycle basis while addressing equity principles for sustainable development, therefore benefiting societies and the environment across time and geographies. Procurement is often conducted via a tendering or competitive bidding process. The process is used to ensure the buyer receives goods, services or works for the best possible price, when aspects such as quality, quantity, time, and location are compared. Procurement is considered sustainable when organizations broadens this framework by meeting their needs for goods, services, works, and utilities in a way that achieves value for money and promotes positive outcomes not only for the organization itself but for the economy, environment, and society. This framework is also known as the triple bottom line, which is a business accounting framework. The concept of TBL is narrowly prescribed, and even John Elkington, who coined the term in the 1990s, now advocates its recall. Indeed, procurement practitioners have drawn attention to the fact that buying from smaller firms, locally, is an important aspect of sustainable procurement in the public sector. Ethics, culture, safety, diversity, inclusion, justice, human rights and the environment are additionally listed as important aspects of SPP.

<span class="mw-page-title-main">UTZ Certified</span> Program for sustainable farming, now merged with the Rainforest Alliance

UTZ, formerly called UTZ Certified, is a program and a label for sustainable farming. The organization was founded as a non-profit in the Netherlands in 2002. The UTZ label is featured on more than 10,000 product packages in over 116 countries. In 2014, UTZ was reported to be the largest program for sustainable farming of coffee and cocoa in the world. The UTZ program addresses agricultural practices, social and living conditions, farm management, and the environment. In January 2018, UTZ officially merged with the Rainforest Alliance in response to the increasing challenges of deforestation, climate change, systemic poverty, and social inequity.

<span class="mw-page-title-main">Supply chain risk management</span> Preventing failures in logistics

Supply chain risk management (SCRM) is "the implementation of strategies to manage both everyday and exceptional risks along the supply chain based on continuous risk assessment with the objective of reducing vulnerability and ensuring continuity".

Green logistics describes all attempts to measure and minimize the ecological impact of logistics activities. This includes all activities of the forward and reverse flows of products, information and services between the point of origin and the point of consumption. It is the aim to create a sustainable company value using a balance of economic and environmental efficiency. Green logistics has its origin in the mid-1980s and was a concept to characterize logistics systems and approaches that use advanced technology and equipment to minimize environmental damage during operations.

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Green supply chain management (GSCM) is the consideration of environmental issues in supply chain management.

Globalization of supply chains and pressure to lower production costs have negatively impacted environments and communities around the world, especially in developing nations where production of high demand goods is increasingly taking place. Since the 1990s, awareness of these negative impacts has grown, leading stakeholders to push companies to take responsibility and actively work to improve the sustainability of their supply chains. It has come to be understood that a company is only as sustainable as the start of its supply chain, bringing about the need for sustainable sourcing. Sustainable sourcing refers to the inclusion of social, environmental, and economic criteria in the sourcing process.

At around £290 billion every year, public sector procurement accounts for around a third of all public expenditure in the UK. EU-based laws continue to apply to government procurement: procurement is governed by the Public Contracts Regulations 2015, Part 3 of the Small Business, Enterprise and Employment Act 2015, and the Public Contracts (Scotland) Regulations of 2015 and 2016. These regulations implement EU law, which applied in the UK prior to Brexit, and also contain rules known as the "Lord Young Rules" promoting access for small and medium enterprise (SMEs) to public sector contracts, based on Lord Young's Review Growing Your Business, published in 2013.

References

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