Only a few short months ago, back in the fall of 2019, the buzz around corporate board governance was the emerging consumer trend toward sustainability and social responsibility. Why the push? Because investors are increasingly looking to invest in companies that demonstrate behaviors that are viewed as ethical and responsible.
Bloomberg recently estimated that $30 trillion is being invested in what’s known as ESG-friendly funds. ESG stands for environmental, social and governance. Each of those elements contains its own list of sub-categories. They include the amount of carbon a company throws into the atmosphere, its water use, employee diversity initiatives, and community contributions.
On the buy side, consumers are likewise demanding products from companies that support sustainability measures and generate a smaller carbon footprint. Now add to that the impact of the global pandemic. All of these concerns are beginning to find their way into corporate lexicons as requirements for their supply base. Phrases such as supply-base risk, multi-level visibility, and continuity of supply are no longer obscure terms. They have become part of the daily media barrage of “things that will be different” after we’ve recovered from the COVID-19 outbreak.
For procurement and supply-chain professionals, whose responsibilities includes selecting and managing the right suppliers, these new issues have become intertwined with traditional measures. Supplier selection involves a number of longstanding factors, such as price, quality, support and product fit. Now we add ESG and supply-chain risk to the menu. But those ingredients can’t be treated separately. Sourcing criteria, although broad, are linked. We can’t individually select for product innovation, quality ethos, social character or sustainability programs when we buy a product or a share of stock. Historically, companies knew how to evaluate traditional measures, but social and risk factors have yet to become a natural part of the discussion.
The coronavirus pandemic is just the most recent example of how supply-chain risk management must be factored into procurement choices. Notwithstanding the recent dialogue around reducing our dependency on China and making supply lines shorter and more reliable, procurement team members were already feeling the pressure from customers to know what’s happening inside their supply chains.
As artificial intelligence and machine learning tools become more prolific, instant access to news from anywhere in the world about a sub-tier supplier means we can assess its impact on products. These new capabilities give rise to higher expectations for real-time assessments of supply continuity. Over the long term, selecting suppliers with lower risk profiles is an ever-evolving exercise. At minimum, each year’s sourcing-strategy review needs to include a risk analysis. And new-product developers need to integrate risk data into their approval practices.
Fortunately, new tools abound in this fight for clarity. Software companies that employ AI and tap into vast databases have emerged to help with statistical analysis. On the ESG side, a handful of companies have come into the market that can survey a large supply base, then evaluate the true content of its sustainability efforts and ethical behavior. The same is true for supply-chain risk. Several vendors tie supply base data to actual incidents, while others cleanse the data and extend the reach of the buyer’s insights. They can be of help to supply-chain teams that don’t know how to start measuring progress in any of those domains.
For many companies, assessing multiple suppliers through traditional measures as well as inherent risk and ESG factors is a massive undertaking. As sourcing strategies grow more complex, the problem of assessing each supplier’s actual implemented programs grows exponentially. Absent a single framework, procurement teams can’t fairly evaluate a supply base consisting of hundreds if not thousands of suppliers, each which might have selected its own methods, or might be relying on human capital instead of technology. Until companies demand that all their suppliers use the same software metric, there can be is no standard way of comparing different supplier choices. A single framework for evaluating these various methods would allow for fair evaluations and metrics across the entire supply base.
A combined ESG and risk framework can help companies that are just starting to establish a cornerstone based on established guidelines. With COVID-19, a surprisingly large percentage of companies weren’t just caught unprepared to deal with the complexities of multi-tier supply chains, but also to organize the network of internal and external stakeholders. Likewise, a typical supply base’s ESG performance isn’t singularly defined and standardized.
It takes cross-company leadership and commitment to respond to end-markets’ desire for risk-mitigated and ESG-exemplary suppliers. Sales and marketing has the responsibility to face customers and deliver the company’s most advantageous message. Corporate compliance team members report status, but aren’t the drivers of implementation. Supply chain has had to create an operational risk and compliance program from scratch. Galvanizing around a single framework would give each stakeholder an agreed-upon outcome.
The Pure Food and Drug Act of 1906 was the first consumer protection law to ban the mislabeling of products and raise standards across the food and drug industries. Now, 114 years later, we consider it natural to check labels before we buy foods that our families consume. The time has come to do the same with other elements of our economy with respect to ESG and risk management. We need to understand how our suppliers are managing the risk of their deliveries, how real are their sustainability measures, and whether they have invested in the proper governance and care. It’s a topic worthy of more discussion, and inclusion in the next evolution of supply-chain strategy.