Driving sustainability into the supply chain

Creating a sustainable supply chain is not a new thing. We have been looking at building in safety, social and environmental issues as well as elements like plastic reduction and a move to more sustainable materials in products for many decades. However, the big shift this time is that whereas in the past companies would set objectives and pass those down the supply chain to then manage, the expectations of a new sustainable world are that a much more invasive approach will be required with retailers, etc taking on that responsibility.?

This can be seen in elements such as the European supply chain act and the US Uyghur forced labour prevention act where the expectation is that organisations both understand all elements of their supply chain and can trace products back to source. It is also starting to create the mechanisms by which end users of materials (e.g. the retailer) are now supporting with direct investment elements of their supply chain to drive their own sustainability performance.

The somewhat surprising misnomer about these changes to create sustainable supply chains is that they are and should be focused purely around sustainability. In fact creating transparency within the supply chain, as long as the information that creates is not abused, creates the opportunity for more effective supply chain delivery through dynamic management and optimization across the entire supply chain. Linking into these elements means that significant financial benefit can be achieved while also creating the core underpinning building blocks for a sustainable supply chain.

So how should sustainable supply chain strategies be developed. There are a number of stages that potentially need to be run through in order to meet both regulartory and longer term sustainable supply chain goals.?

The first of these is inevitably the need to meet regulatory reporting requirements both around supply chain visibility and social issues (forced labour, child labour, minimum wage violations, land rights, etc). Carbon requirements also form a part of this process with the need to incorporate scope 3 emissions particularly around purchase goods in core elements of reporting. This creates an interesting challenge. What organisations are being asked to do from an ESG reporting perspective is to provide the best data possible for all elements of their scope 3 emissions. In reality the first step on that journey inevitably requires the use of averages/carbon calculators to fill gaps in directly sourced primary data from the supply chain. We simply do not have the required understanding of the supply chain or the access to source data from all elements of it to be able to report actuals. This is recognised by the regulator with organisations being required to justify how they've calculated their scope 3 emissions without the requirement for primary sourced data for everything.

Once you get into elements such as the European supply chain act however, things get a lot harder. With the law stipulating that any social issues in the supply chain are the responsibility of the end purchasing organisation this suggests that full traceability of all elements of the supply chain will be required with the overlay of data on that supply chain. This is further complicated by the need for regular audits to prove that there are no issues as self-declaration in this area simply isn't a viable option. In this space interesting tools such as IBM's ethics platform are applying AI and potentially generative AI to this problem to be able to source data from NGOs, local newspapers/news feeds, company ownership data, etc, to provide a real time approached to understanding any social exposures. The use of generative AI in this area is particularly interesting as it gives the option to remove the need to do a full trace across the supply chain prior to being able to overlay data to look at exposures, with the tools simply being pointed at a particular brand, product or company and then prompts around identifying social issues being applied to look for exposures.

Thinking through how these solutions then also support supply chain optimization, from supply chain disruptions and rerouting through to streamlining the buying process, we can use the same approaches to add significant value to core operational management for what is otherwise primarily a sustainability cost. Options also exist to think through value-add elements from the sustainability visibility created to drive market penetration, customer sales, etc, through providing the sustainable back story to customers purchases.

While I'm all for labelling/QR coding of the sustainability characteristics, we are struggling with the proliferation of standards and customers simply don't understand how to compare and contrast - and to be honest simply don't engage with products enough in that way to make it worthwhile. We need to be thinking about how we make it as easy for customers to make the right choice on the sustainability issues - providing simple brand level stories that enable customers to choose the more sustainable options. A great example of this is while Patagonia does provide the detail around the sustainability characteristics of its clothing and the broader business, customers generally buy the brand knowing that they are making a sustainable choice without necessarily fully understanding what that choice is.

The next stage of the journey is to really drive the sustainability performance of the supply chain. This requires a number of different elements including education (i.e. Helping businesses to understand what they can change and how to do it), investment (many organisations simply don't have the financial wherewithal to make the substantial capital investments required to drive to more sustainable approaches) and the support of buyers in the procurement team as supply chain companies implement the changes to drive the sustainability performance which may well then impact their day-to-day operational delivery.

There is both a pull and a push in these changes. The pull will actually be delivered by the reporting elements that we mentioned previously combined with more stringent requirements being set by buyers. What this will look like is that greater supply chain visibility will highlight the good and bad performers creating effective competitive advantage. From a buyer's perspective being very clear about the sustainability characteristics of the products that they're willing to buy and potentially the prices including premiums that they're willing to offer to be able to source them will then drive supply chain conformance. The risk is that this creates supply chain inflation in a time where inflation is already globally rampant.?

This is where the push comes in and suggests the need for a more partnership based approach where it isn't simply a race to buy the most sustainable current performer but that lower performers are then partnering with buying organisations to drive sustainability performance improvement through longer term contracts linked to the creation of programmes of change that drive sustainability performance.

We have seen this already in a number of organisations, but the driver here hasn't necessarily been around price inflation it has been more around being able to guarantee sustainability improvements to bank as part of organisations net zero strategies. With very limited scope 3 data being provided by suppliers, procurement processes of two bids and a buy in order to reduce the sustainability intensity of your products is proving incredibly difficult as comparability across suppliers simply isn’t there yet and pricing of carbon (often shadow pricing) is complex. Creating a partnership with an organisation and locking in that sustainability improvement offers a guaranteed way of being able to bank real reductions. Also looking across categories and seeing where elements like substitution can play in, reducing carbon intensity as well as other sustainability issues and impacting (hopefully positively) financials can also be used as one of the tools in the procurement armoury.

What this is highlighting is the need for more systemic approaches to really drive sustainability in the supply chain. We've seen organisations take very proactive approaches to this at a brand level using sustainability as a key differentiator in order to both drive customer uptake and potentially premium price products. This however is not the route that will lead to mass market sustainability – it is simply earlier adopters using sustainability as a differentiator. We talked about partnership based approaches between buyers and sellers in the supply chain but partnership based approaches across whole categories and whole industries are also needed in order to reduce the cost of solutions around traceability and transparency and create the market spaces where suppliers are clear around expectations and can therefore invest at minimal risk in sustainability solutions with broad market support.