May 06, 2022 | Supply Chain Strategy
Typically, for companies producing goods, it is their supply chain that creates significant social and environmental costs. The supply chain accounts for the bulk of greenhouse gas emissions and the bulk of the negative impact on the environment and society. Firms can, therefore, reduce the negative impact by focusing on their supply chains.
Companies have begun to realize the potential SCM sustainability issues arising from their supply chains and work with their suppliers to manage these impacts. There is also increased pressure from investors for the businesses to change ESG goals.
In a 2021 survey by MIT and Council of Supply Chain Management Professionals (CSCMP), 59% of respondents said their firms had invested in increasing sustainability of their supply chain.
Although they have started to engage their suppliers in managing the sustainability risks of their supply chains, some challenges remain.
The biggest one is that companies are not in a position to directly engage with everyone in their supply chains. The primary suppliers subcontract portions of their orders to other firms. As long as companies engage with subcontractors loosely, it is difficult for them to oversee the environmental impact of their supply chain operations.
Companies, increasingly, recognize the challenges of managing supply chain sustainability and acknowledge their responsibility to influence their suppliers to adhere to sustainable supply-chain practices.
The evolution, in the manner in which firms manage sustainability, and also help their suppliers manage sustainability, has progressed along three approaches.
Companies have started by mapping the natural and human resources used at every step of the production process - both in the supply chain and in direct operations. This requires accounting for a wide range of environmental, social, and economic issues. The exact nature of these issues varies significantly between products.
Companies have designed frameworks and instruments to measure, identify, and address the most critical sustainability issues in their supply chains.
For example, The Sustainability Consortium (TSC), a nonprofit organization, focused on improving the sustainability of consumer products, created a set of performance indicators and a system of reporting that helped identify sustainability challenges, including managing supply chain water risk, for over 110 consumer-product categories.
Likewise, the World Wildlife Fund (WWF) also identified over 50 indicators for supply chain risks together with the probability and severity of these risks.
Once companies have identified and addressed their supply chain challenges, they set goals to lessen any adverse impacts of their operations. The goals for supply chain sustainability are aligned with the global sustainability agenda.
The Intergovernmental Panel on Climate Change (IPCC), a UN body, has laid down global targets for minimizing greenhouse gas emissions. Companies have aligned their supply chain goals with the IPCC goals. The goals mandate a reduction in greenhouse gasses of around 17% for customer-staple and 35-44% for consumer-discretionary industries.
Setting aggressive sustainability targets will be crucial to increasing the probability of the firms attaining net-zero emissions by 2050.
In the U.S., the Securities and Exchange Commission (SEC) has proposed that all publicly traded companies disclose their climate-related information and risks for investors, creating a challenge for the companies to measure and report Scope 3 emissions.
Companies are increasingly leveraging their purchasing power over their suppliers to influence business practices. Over the years, firms have evolved beyond laying down codes of conduct and performing audits, to helping suppliers design and implement sustainability programs to support the firm’s own goals. Firms are also leveraging technology to engage with a larger number of suppliers.
A multinational CPG company, for example, uses software tools to collect data on whether farmers in its supply chain are using sustainable practices. Firms set sustainability goals for their suppliers and stop doing business with them if they fail to comply - just as they would for non-compliance on cost, quality, or timely delivery.
Firms also offer incentives/rewards to their suppliers to improve their sustainability performance.
Another large retailer, for example, sources the goods that it sells only from suppliers that use the company’s sustainability index. On its e-commerce site, suppliers with higher sustainability index scores have their products tagged with the label ‘Made by sustainability leaders’ giving them greater visibility.
Also, quite often, supply chains overlap across industry sectors. In such instances, firms across sectors have begun collaborating in engaging their suppliers in the enforcement of sustainability programs.
The evolution in the state of supply chain sustainability reflects the increasing attention paid by firms to the social and environmental impact of their business activities.
Among the common approaches the respondents in the MIT-CSCMP survey listed for achieving supply chain sustainability were supplier development, supply chain visibility, and environmental impact reduction.
Firms are now more cognizant of the fact that poor sustainability management can negatively impact their growth and profitability.
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