Creating Sustainable Supply Chains to Respond to ESG Risks
Resilience in a supply chain is the ability of a system to respond and adapt to change with flexibility, without altering the underlying state or character of that system. Sustainability in a supply chain is the ability of that system to operate in a manner that maintains harmony between the needs of nature and our planet, and the desires of people. The combination of resilience and sustainability is frequently seen in nature. An example of this combination of properties can be seen in the willow family of trees. Willows have a strong interwoven network of roots, and long flexible (but ultimately breakable) branches. Willows can withstand heavy winds, yet require a good water source. Supply networks, like willows, need to maintain harmony with flexibility.
Until the recent decade, supply chain management viewed risk as simply the immediately tangible impact of an event on a business process.
Before 1900, product supply would typically come from local and regional markets. Advances in transportation allowed materials to be transported by road, and by rail. In the 1920s, the pallet allowed goods to be consolidated into shipments, and in the 1950s, the introduction of intermodal containerization made transportation by truck, rail, or ship easy and efficient. Computerization in the 1970s and 1980s streamlined logistics and improved warehouse management. The 1980s and 1990s saw advancements in supply chain management and material route planning.
The past two decades have witnessed a massive increase in material trade and product supply coming from China, Japan, South Korea, Taiwan, Indonesia, Malaysia, Thailand, and India, and going to new markets around the world. The supply chain is truly global, and highly complex. A finished product now could contain multiple components, coming from parts manufactured in multiple countries, made from materials sourced from yet other countries.
Supply Chain Resilience & Sustainability - From Cost Centre to Central Focus
For years, supply chain professionals measured success by how well they were able to drive down costs and drive up efficiency. Supply management was seen as a cost centre, and the role of the supply chain manager was to keep processes lean. Today supply chain management is much more strategic. McKinsey & Co. modeled the impact of a manufacturing shutdown lasting 100 days.The study premised that such a shutdown is probable once a decade. The study concluded that expected losses from supply chain disruptions equal 42 percent of one year’s EBITDA on average over the course of a decade.
Resilience and sustainability are now a direct preoccupation of senior management. The role of the supply chain manager is rapidly evolving from ‘operational’ to ‘strategic’, as global supply chain management now requires not only cross-domain internal expertise, but also collaboration, transparency, cultural respect, and the ability to quickly respond to unplanned events.
What are the major Sustainability risks?
Sustainability is usually discussed under three impact or risk themes: Environmental, Social, and Governance (ESG) These three themes are the focus for evaluating and managing an organization’s performance in the global marketplace. Proper ESG management helps to ensure long-term value.
Environmental risk refers to an organization’s environmental impact and includes concerns like resource use, pollution, waste, and climate change, among other things.
Social risk refers to an organization’s societal impact, and includes aspects such as human capital, health and safety, labor management, community relations and community support.
Governance risk addresses an organization’s leadership practices, and includes subjects like corporate structure, corporate practices, risk management, and stakeholder engagement.
Supply networks cross multiple regional, cultural and regulatory borders. Participants in this globalized economy may view conduct, risk, consequences, and accountability with quite different attitudes. The resilient sustainable supply networks will monitor a variety of ESG topics, will agree on a common set of metrics, and will work together to benefit from improvements in process, efficiency, and resilience.
What are the major supply network risks?
McKinsey found that 93 percent of CEOs see sustainability issues as being important for the future success of their business, and 54 percent expect sustainability to be embedded within the core business strategies of most companies in the next decade.
In a recent study by MIT, company executives identified these nine ESG issues to be their pressure points:
- Climate change mitigation
- Energy savings/renewable energy
- Water conservation
- End-of-life management/circularity
- Employee welfare & safety
- Human rights protection
- Local community impact
- Supplier diversity, equity & inclusion
- Fair pay/fair trade
There are an overabundance of risks to evaluate and potential metrics to monitor. To mitigate these risks, companies are working together and identifying the initial key metrics to follow in their supply networks. Their success will depend on resilience, sustainability and transparency of relationships with suppliers - a network effect.
Establishing a sustainable, resilient and transparent supply chain requires working closely with your suppliers, getting to know them, and explaining your corporate vision and purpose. As a result, your suppliers gain a clear view of your goals, and become invaluable partners to suggest mutually-beneficial improvements to products, services, and processes.
Three steps to the resilient and sustainable supply chain
1. Get your house in order
Revisit and clarify your governance policies and statements.
Have your policies up-to-date on:
- Legal Compliance;
- Business Integrity;
- Stakeholder Engagement;
- Business Relationships;
- Child Labor; Forced labor;
- Freedom of Association and Collective Bargaining;
Then review your agreements with your suppliers and engage their commitment to your responsible sourcing policies.
Make sure your management team is on the same page.
Revise the strategic participation and collaboration of your legal, procurement, process, human resource, and HSE (Health, Safety and Environment) functions, to focus on a new non-siloed approach to your sustainability strategy.
Re-focus the ‘Procurement’ value proposition.
Many of the activities needed for resilience and sustainability in a supply network require an expanded competency from the procurement arm of the company. The procurement function takes on a strategic function, and includes actions covering new subjects, including:
- Supplier regulatory compliance;
- Supplier risk management;
- Internal and supplier ESG sustainability;
- Supply network innovation;
- Future proofing and strategic direction.
Select good internal metrics.
There is a smorgasbord of choice of metrics for managing resilience and sustainability in a supply network. The most valuable metrics are those that reduce process impact, that reduce risk, and that add to business efficiency. A suggested starter list of valuable ESG metrics for the metals and mining sector is available here.
2. Know who your vendors are and where their activities are located
Map and monitor upstream tiers.
Create a comprehensive view of the supply chain through detailed sub-tier mapping. This process can identify hidden relationships that invite vulnerability. Most firms have only a murky view beyond their tier-one and perhaps some large tier-two suppliers.
- Review each product’s bill of materials.
- Are critical inputs sourced from high-risk areas?
- Are there ready substitutes?
- After mapping upstream suppliers, downstream companies need to understand their suppliers’ production footprints, financial stability, and business continuity plans.
Improve resilience by re-evaluating your supply processes.
93 percent of supply chain executives in a 2020 McKinsey survey indicated that they plan to take steps to make their supply chains more resilient. These steps included:
- Diversifying sourcing,
- Identify multiple suppliers for goods and services, across different geographic locations,
- Building in redundancy across suppliers,
- Regionalizing supply chains and nearshoring,
- Reducing the number of unique parts. In the face of the pandemic, Hershey rationalized SKUs and fewer SKUs on shelves. Despite offering less variety, the strategy increased shelf space, freed up capacity and reduced complexity.
- Finding a balance between just-in-time and just-in-case production, to buffer the impact of disrupted suppliers and anticipate sudden changes in demand. View rebalancing as a win-win rather than a trade-off between efficiency and resilience.
3. Apply resilience to your supply network
Strengthen your supplier relationships to become collaborative partnerships.
Cooperation among partners allows your supply network to gain creativity and flexibility. The partners set targets and measurables, and rectify and improve performance.
Identify opportunities for network improvement.
- Establish goals and deliverables for your business and your network
- Respond to shocks quickly
- Establish a shock-recovery team before the next event
It’s hard to be agile if you’re relying on manual forms, fax and email for business transactions. Real-time data analysis can identify evolving risk and allow a faster pre-planned response. The management of a disruption is quickly evolving from short-term decisions based on immediate cost, to planned, coordinated, and communicated response along the supply chain.
Monitor, analyze, and communicate.
New technologies like satellite monitoring and drone surveying can track real-time changes in terrestrial activity in mining, forestry and agriculture. The complexity in a supply network requires the integration of many data sources, and the sharing of that data along the supply network, often with tools such as blockchain applications.
Break down the silos.
The decision to look past the short term and develop resilience and sustainability demands sharing data and collective decisions across multiple departments in your company as well as across your extended supplier and partner ecosystem.
Plan for the long game.
Build resiliency training into the existing functional teams in your supply chain.
Innovate product and process.
Product innovation has the biggest impact on building a resilient and sustainable supply chain.
- 80% of supply chain and sustainability cost is predetermined by:
- The materials being used
- The packaging required
- The product source
- The production process and energy use
The remaining 20% is determined by the supply, distribution, recycling and return processes.
Cooperation and collaboration can definitely be productive and successful without being anti-competitive or infringing on business confidentiality. The product registration process for REACH chemical regulation is proof that collaboration in a consortium works. Collaboration does however require the definition of a common goal - in this case the goal is continuous improvement in the ESG performance of your supply network.
Sustainability in supply chain management requires each piece of the supply chain to collaborate and work jointly. It requires all players to align on longer-term goals — not just cutting costs on the very next purchase order. All stakeholders have to align on the actions that make their supply network innovative, efficient, and resilient. In doing so your supply network adds another needed contribution to the United Nations Sustainable Development Goals, helping people, the planet, and prosperity.
Do you want to find out more about building a truly sustainable and resilient supply chain? Our team is always happy to discuss it and tell how Product Passports can help your suppliers communicate the most important data. Get in touch here.
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