BEST PRACTICES IN SUSTAINABLE GREEN PROCUREMENT / SUPPLY CHAIN RISK MANANAGEMENT: A NEW ARTICLE THAT I WROTE FOLLOWING LINKEDIN INVITATION .

Today I received the following Linkedin notification: "You’re one of a few experts invited to answer: Your key supplier declares bankruptcy out of the blue. How will you navigate this risky situation?"

Since the wordcount allocated by LinkedIn in the page dedicated to provide my answer to the respective question is rather small (750 words) I am posting here the detailed article that I wrote on this topic. Afterwards I will post a brief Executive Summary on the LinkedIn page dedicated to the answers related to the respective question.

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BEST PRACTICES IN THE AREA OF SUSTAINABLE PROCUREMENT AND SUPPLY CHAIN RISK MANAGEMENT

In managing sudden changes in your supply chain, particularly when a key supplier declares bankruptcy, implementing best sustainanle practices and standards can mitigate disruption and build resilience. Here’s some best practices recommendations aligned with the sustainable procurement and supplier risk management:

1. Activate Your Risk Response Plan

If you have a risk management plan, activate the contingency measures designed for supplier failures. Ideally, this would include a risk register that specifies the steps to take in such an event, which helps maintain operational continuity;

2. Analyzing the Causes of the Supplier's Bankruptcy

Understanding the causes behind a supplier's bankruptcy provides insights into risk factors and helps prevent similar future disruptions. Possible causes of a supplier’s financial failure can include:

a) Poor Management:

Ineffective leadership, inadequate financial planning, or operational inefficiencies can lead to insolvency. Signs of poor management include inconsistent delivery, uncompetitive pricing, or an inability to adapt to market changes.

b) Climate Risk:

Suppliers in regions vulnerable to climate impacts—such as floods, wildfires, or extreme temperatures—may face production disruptions, increased costs, or asset losses, leading to financial strain and potential bankruptcy.

c) Corruption:

Internal corruption, such as embezzlement or fraud, can drain resources and destabilize a company’s financial health. External corruption, involving bribery or illegal dealings, may lead to legal repercussions that disrupt business operations.

d) Market Volatility:

Fluctuations in commodity prices, interest rates, or currency values can erode profitability, particularly for suppliers operating on thin margins.

e). Supply Chain Disruptions:

External disruptions, like transportation bottlenecks or geopolitical instability, can limit a supplier’s ability to fulfill contracts, affecting cash flow and solvency.

By analyzing these causes, companies can identify early warning signs and adjust risk management practices accordingly.

3. Developing a Sustainable, Green, and Reliable Procurement Strategy, Policy, and Procedures

To mitigate the effects of supplier instability and align with sustainability goals, companies can develop a green, reliable procurement strategy that emphasizes resilience, environmental responsibility, and ethical standards.

Key best practices include:

a) Supplier Due Diligence:

Regularly assess supplier financial health, environmental practices, and compliance with ethical standards.

Implementing risk-based assessments can prevent partnerships with high-risk suppliers prone to instability or unsustainable practices.

b) Prioritize Sustainable Procurement:

Define criteria for selecting suppliers based on environmental impact, waste management, energy efficiency, and carbon footprint reduction.

Establish clear standards for sustainable procurement and communicate these expectations to suppliers.

c) Implement Green Supplier Programs:

Encourage suppliers to adopt green practices, such as reducing emissions, conserving resources, or adopting renewable energy.

Consider creating incentives for suppliers who achieve specific sustainability milestones.

d) Engage in Supplier Diversification:

Avoid dependency on single suppliers by diversifying sources across regions and establishing relationships with local suppliers when possible.

Diversification reduces vulnerability to regional disruptions and supports local economies.

Having multiple suppliers minimizes reliance on a single entity.

Regularly vet and establish relationships with alternative suppliers even if they’re secondary, allowing for rapid switches when primary suppliers fail.

Consider partnering with local suppliers where feasible to mitigate dependency on geographically distant vendors that may face additional logistical challenges.

e) Establish Transparent Policies and Procedures and Initiate Transparent Stakeholder Communication

Develop and enforce a procurement policy that outlines sustainability and resilience requirements.

Ensure transparency by documenting procurement procedures and making them accessible to stakeholders, fostering trust and accountability.

Inform internal stakeholders, including procurement, operations, and finance teams, of the situation immediately. They’ll need clear directives to realign operations if necessary.

Update external stakeholders, including customers and investors, to manage expectations.

Emphasize your commitment to maintaining supply continuity and outline your steps to address the impact.

f). Use Technology for Enhanced Visibility and for Data Analytics

Leverage digital tools to monitor supplier performance and environmental impact. Modern data analytics can help identify potential risks early, allowing for proactive decision-making.

Leverage supply chain management software to identify potential risks across your supply chain. Advanced analytics can also help you forecast disruptions and optimize the timeline for switching suppliers.

Consider implementing real-time monitoring tools for supplier financial health, allowing proactive responses to signs of instability.

g) Monitor and Report on Sustainable Procurement Goals:

Regularly track and report progress toward sustainable procurement targets. Communicate achievements and areas for improvement to stakeholders to demonstrate commitment to environmental responsibility.

These stages (2 and 3) ensure a comprehensive approach to managing supplier risks while fostering sustainability

Other important stages related to the supplier risk management are presented below:

4. Assess Contractual Protections

Thoroughly review the contracts in place with your suppliers, looking for clauses regarding termination, continuity, and indemnification. Ensure the contract addresses what happens in cases of insolvency or force majeure.

Consult legal counsel to explore options for recovering any prepayments or securing assets that may be affected by the supplier’s financial issues.

5. Optimize Inventory Management

If feasible, temporarily increase inventory levels for critical components to buffer against potential shortages. Strategic inventory management can cushion production while you finalize alternative supplier arrangements.

6. Document and Evaluate for Future Preparedness

After handling the situation, document the steps taken, lessons learned, and areas for improvement. This retrospective will strengthen your supply chain risk management and allow you to refine response strategies.

7. Strategies for Managing Sudden Changes in the Supply Chain

? Build Flexibility: Keep your supply chain agile by maintaining a mix of suppliers and regularly reviewing contracts.

? Invest in Supplier Relationships: Regular communication and relationship-building with suppliers can provide early warning signs of issues.

? Conduct Regular Risk Assessments: Review and update risk assessments frequently to ensure you’re prepared for potential disruptions.

By following these strategies, a company's supply chain will be better equipped to withstand unexpected disruptions and adapt swiftly to maintain business continuity.

By adopting these strategies, companies not only build a more resilient supply chain but also contribute to environmental sustainability and corporate social responsibility. This approach creates a balanced procurement strategy that prioritizes long-term success and minimizes environmental impact.