Rising geopolitical tensions and a global pandemic have decayed trust in globalized trade flows and sparked debates among business executives around the world on “strategic dependencies.” In this environment, supply networks have become more vulnerable to a range of risks, with more potential points of failure and less buffer to absorb disruptions.
Companies must review their supply chain strategies to account for these new realities. To some extent, they are doing just that: 64% of European CEOs say they’re reorganizing their supply chains in response to the pandemic, according to a 2021 survey by The Conference Board. In this context, “resilience” has risen to top of mind for supply chain executives, who must prepare for unforeseen disruptions and ensure speedy recoveries. Companies also face increased expectations from legislators and consumers to address environmental and social responsibilities. In this respect, supply chain sustainability is inseparable from the drive for resilience.
The priorities of managers and C-suite executives linked to the procurement function demonstrate sustainability’s importance as a resilience driver. Improving sustainability performance is among the top three factors that will influence future supply chain design, according to another survey of those executives by The Conference Board. Yet companies still have deeper inroads to make when it comes to properly engaging in sustainable supply chain practices: Just 6% of S&P 500 companies disclose the share of new suppliers they screen using social criteria, and only 5% disclose the share of new suppliers they screen using environmental criteria.
Future supply chains will need to be efficient, resilient and mindful of ESG criteria. Here are three steps executives can take toward achieving these goals:
Define your appetite for responsible sourcing. A robust sustainable supply chain program requires top-level organizational commitment. External stakeholders may demand specific criteria, but without a push from investors or customers willing to accept the investment, anything beyond minimal compliance is unlikely. Companies should shift the focus of their program from what is required of them to what they would like to achieve. For example: BT Group, a British multinational telecommunications company, focused on achieving quantifiable emissions reduction during the life cycle of a contract.
Build partnerships that drive change. Process checks are foundational and should not be seen as the destination. As one executive explained, “What we want to do is to help. It will not be to punish; it will help our suppliers to be greener.”
Look to build partnerships by identifying those key suppliers with whom you can collaborate to drive joint sustainability initiatives. For example: CNH Industrial, one of the world’s largest capital goods companies, is leveraging digital tools to engage and partner with its key suppliers on specific joint innovation programs.
Shift cost focus to overall price of ownership. Supply chain and procurement executives are often under immense pressure to lower costs. As one procurement executive put it, “Cost pressure exists everywhere, even in the luxury goods supply chain.” Moving the narrative from contract cost to total cost of ownership is essential to engaging the business on the benefits of sustainability.
Executives will need to carefully balance the trade-off between achieving cost savings and building and maintaining a sustainable supply chain. In some instances, discussing the intangible organizational costs of working with less sustainable suppliers — reputational harm, for example — can move the dialogue away from the cheapest contract price to the lowest overall cost throughout the supplier relationship.
Stakeholders’ expectations change, and so do the operating ecosystems for companies. Companies that proactively invest in reconfiguring their supply chains and engage their executive team on the benefits of sustainability will be better placed to navigate the evolving global environment and enhance their company’s competitive advantage.
Read more of SupplyChainBrain's 2022 Supply Chain ESG Guide here.
Timely, incisive articles delivered directly to your inbox.