Sustainability of Supply Chains

The importance of managing the flow of goods or services from the supply market to meet fluctuating levels of demand has been emphasised in recent years. In particular, the economic downturn in 2009 highlighted the need for adaptable and agile supply chains that were able to react to market conditions and manage associated cost.

Greater scrutiny too had been placed on the management of business, specifically the models adopted for supply chains. Last year’s BP ‘Deepwater Horizon’ incident 2010 was one in a series of incidents that raised global awareness and concern on the negative impact of company activity on the environment.

Furthermore, recent reports of substandard pay conditions by Foxconn, the world’s largest contract manufacturer, whose customers include Apple, Dell and Sony, have introduced further socio-ethical pressures on how companies are selecting and managing suppliers in the chain.

These are just some examples of how the current management of sustainability is plaguing corporations who are striving to differentiate themselves from the competition in cost, ethical or environmental perspectives.

Supply chains have long been scrutinised for inconsistent delivery of the time, cost and quality inputs that drive business competitiveness. The information age, however, has introduced another level of transparency to the public that puts the reputation of brand at risk.

In the future, companies will need to balance the demand for information of how their business is performing, as well as the demand of the outputs of their operations.

Eco-challenges

The sustainability issues faced by corporations are brought about by an increased public awareness of business activities and demand from stakeholders that companies abide to a higher code of conduct.

Investors expect higher levels of transparency that assures that companies are addressing environmental, social and governance (ESG) commitments that might challenge future prosperity. This differs from traditional financial expectations such as earnings before interest, taxes, depreciation, and amortisation (EBITDA), price-to-earnings (PE) ratio, growth and strategy. Addressing sustainability in the supply chain and ensuring visibility thereof is in part managing the risk to those expectations.

Customers are another stakeholder group sensitive to socio-economic issues in addition to product pricing. Competition in the marketplace is fierce, giving customers more choice than ever in deciding their brand of choice. While some might query the value of incorporating sustainability in the management of the supply chain, few can argue with the negative impact that a breach of a corporation social ‘contract’ can have on company fortunes.

Further challenges to the corporate agenda include:

  • Measurement and reduction of greenhouse gas emissions across supply and value chains.
  • Increasing focus by governments on sustainable product development and packaging.
  • Scarcity of resources: human consumption of the earth’s natural resources has escalated to levels never previously seen. The reserves of oil and gas are often cited as examples of this exploitation but in recent times the availability of fresh water source levels has become a concern.

Incorporating Sustainability into the Supply Chain

While companies are increasingly incorporating sustainability into their corporate agenda, what are they doing to ensure the compliance and transparency of those programmes?

Corporates adopt comprehensive reporting of the implementation of sustainable policies through initiatives such as the Global Reporting Initiative (GRI). The exercise requires corporations to enforce sustainable policies from supply, manufacturing through to distributorship of goods to meet the various grades within the reporting structure.

The GRI is a gold standard in sustainable reporting and a graded report by them helps facilitate brand allure with investors and stakeholders. Corporations examine and leverage various ways in which they can reduce the environmental impact by examining and managing the carbon footprint of the business. They can leverage technology solutions, such as video conferencing to reduce air travel. They can also improve the use of consumption through projects such as the installation of energy saving lighting/heating and generating electricity from waste products such as steam and water.

It is commonly perceived that the service industries tend to address obvious opportunities like paper consumption. However, there several global banks have contracted the services of energy service companies (ESCO) to assess and install energy efficient solutions. The savings are often shared and used to pay back the capital investment of the project over a five to 20-year period.

Corporates can adopt policies and procedures while contracting with suppliers and procurement of goods through compliant, robust and sustainable measures. These include minimum wage criteria, working conditions that meet minimum health and safety considerations and the use of biodegradable/recycled raw material.

As companies are looking for further opportunities for growth and migrate to less-developed, more cost effective countries, the practice of building a sustainable and compliant supply chain becomes increasingly complex. Often, it is not merely a question of the availability of technology and infrastructure, but rather the mindset and culture of how business is conducted that needs to be addressed.

An evaluation of current supply chains and a review of product lifecycle often reveal significant waste. In the case of manufacturers of chemicals, waste can be hazardous and subject to stringent disposal rules which in itself present specific challenges.

In other scenarios, waste can result from inefficient planning and operations processes which result in a percentage of the inputs being discarded. This is counter-intuitive for organisations looking to build sustainability into their supply chains, and is cost ineffective.

A good example of this is found in industries where government environmental agencies impose strict regulations on waste packaging. Improving the overall planning and execution of initiatives related to the reduction and disposal of waste ensures compliance with regulation and manages public perception.

The Challenges of Implementation

While it is generally acknowledged that building sustainable practices into the supply chain is a positive thing to do, the reality is that changing the incumbent behaviour is not easy. There are a series of deep-rooted obstacles that are difficult to overcome particularly in developing countries.

There is goodwill and a willingness to listen to issues on sustainability. However, a fundamental lack of understanding and maturity on sustainable issues in developing countries means that as corporations migrate to these geographies, they have significantly more work to do in educating local business and consumers about the impact of sustainability.

A non-compliance story within the supply chain in the east can have a profound effect on the fortunes of a company in the west. Given also, that regulation on compliance and control of accepted practice differ in developing countries, corporations will need to take on the additional burden of self-regulation while educating key new stakeholders.

The information age presents significant social, environmental and governance challenges to corporations. When considering also the regulatory and legislative pressures imposed by governments and non-governmental organisations, corporations clearly have to take a more rounded view of how they manage their supply chains and business.

Sustainable supply chain and communication of initiatives in this area are clearly the key to survival. Despite the numerous challenges, it is imperative that companies are able to incorporate these into the way they carry out the business. Critically, they must also be able to communicate these initiatives to the broader market particularly where multinational corporations are working in less developed countries.

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