Creating a sustainable supply chain

The issue of climate change is reaching critical mass in the public psyche, with consumers more focused than ever on understanding where specific products come from and how they are produced. Creating a more sustainable supply chain is a way to meet these consumer needs, while also reducing your company’s ecological effect on the planet.

More than 80% of the environmental impact of a company typically comes from its supply chain, so striving for a more sustainable supply chain is one of the most consequential moves you can make when trying to lessen environmental impact. Building a sustainable supply chain that is both more ethical and eco-friendlier doesn’t just help the planet though, it can also have tangible benefits on the company itself. Read on for more about how you can build sustainability into your supply chain, reduce your impact on the planet, and meet consumers’ ethical demands.

What is sustainability?

While sustainability means different things to different people, it can be defined as meeting present needs without having an adverse impact on the needs of future generations. The three-pillar concept of sustainability incorporates the three key areas of economic, environmental, and social impact – also known as ‘people, planet, and profit’.

Where companies are concerned, sustainability means not only focusing on profitability, but also reducing the environmental and social impact of a company’s operations. This can be achieved through actions such as reducing energy, waste, the consumption of raw materials, eliminating greenhouse gas emissions, and adopting ethical labor practices.

Companies that fail to embrace sustainability goals run the risk of falling foul of regulatory requirements, or incurring reputational damage. The latter can, in turn, result in financial losses. What’s more, a company with a good record on sustainability may be better placed to win new business and attract the interest of ethically minded investors.

Sustainability in supply chain management

Research by McKinsey found that for a typical consumer company, the social and environmental cost of its supply chain far outweighs the impact of its own operations. Supply chains accounted for over 80% of greenhouse gas emissions, and more than 90% of the impact on natural capital, meaning air, land, water, biodiversity, and geological resources.

Consequently, there is plenty of scope for companies to improve their own sustainability performance by building a green supply chain. Above all, this means engaging with suppliers on this topic in a productive way. To do this, companies first need to pinpoint where the sustainability issues are within their supply chains – for example, by identifying which suppliers generate the most greenhouse gas emissions.

Companies will then be better placed to set sustainability goals for their supply chains and work collaboratively with suppliers to reduce their sustainability impact. This might involve asking suppliers to commit to specific objectives or adapt their practices. It might also mean requiring suppliers to commit to codes of conduct that cover topics including:

• Measurement and monitoring of environmental performance
• Safe handling of waste products
• Compliance with relevant laws and health and safety standards
• Ethical practices around areas such as fair competition and animal welfare
• Human rights and the fair treatment of employees
• Safe and healthy working environments for employees
• Commitment to diversity and inclusion principles
• Communicating the same principles to suppliers further down the supply chain.

In some cases, companies may choose to end their relationships with suppliers which fail to meet environmental or social standards.

When it comes to selecting new suppliers, there may be opportunities to improve the company’s sustainability credentials by choosing suppliers that more closely align with the buyer’s sustainability goals. This should include determining the environmental impact of a supplier’s activities, seeking information on their social responsibility policy and practices, and asking about the supplier’s own purchasing practices.

Companies can also improve the environmental sustainability of their supply chains by reducing the use of paper for supply chain-related processes. For example, by promoting the adoption of electronic invoicing, companies can reduce or eliminate the use of paper in the invoicing processes.

Benefits of a sustainable supply chain

Moving towards a more sustainable supply chain management approach offers many benefits, not only for the planet at large but also for the company that’s undertaking the move. Some of the specific benefits of a sustainable supply chain include:

Reduced environmental impact

The most implicit benefit of sustainable supply chains is the reduction that can be made to net negative environmental impact. Whether it’s cutting paper from your invoicing process to decrease your impact on deforestation, or choosing new suppliers with better adherence to carbon emissions standards, striving for sustainability can make a real difference to your carbon footprint.

Improved supply chain resilience

Sustainability in the supply chain often comes in the form of changes to existing suppliers’ negative practices or the selection of brand-new sustainably minded suppliers. Both of these changes help to diversify the supply chain, minimizing reliance on weak links and improving future supply chain performance, particularly in times of crisis.

Protection against reputational damage

Consumers care more about ESG principles now than ever before, meaning that there are many largely intangible reputational benefits when improving your supply chain’s sustainability, and therefore the sustainability of your company as a whole. From avoidance of ESG-related public lawsuits to improved brand image, sustainable practices can impact the bottom line.

Potential for new business

As well as protecting against reputational damage resulting in lost business, improving your supply chain sustainability can help you to win more business. Adhering to standards like ISO 14001 can enable you to broadcast your certification publicly with a recognizable badge, potentially improving your chances of winning tenders or attracting/retaining consumers’ custom.

Using supply chain finance to promote sustainability

As well as building a sustainable supply chain through procurement and supplier management practices, companies may be able to use solutions like supply chain finance as a means of improving sustainability – particularly where economic sustainability is concerned. In difficult times, companies may be particularly tempted to preserve cash by extending supplier payment terms, or by paying invoices later than agreed. But this approach can have serious economic repercussions for suppliers, which may struggle to meet orders if their DSO is extended.

By offering suppliers access to early payments via dynamic discounting or supply chain finance solutions, companies can build a more economically sustainable supply chain. Suppliers can receive payment early in exchange for a small fee, thereby freeing up cash and reducing pressure on their working capital. And buyers can also benefit by reducing the risk of disruptions to their supply chains during challenging times. At the same time, by enabling both buyers and suppliers to free up their cash flow, supply chain finance can help companies invest in sustainability initiatives.

Sustainable supply chain finance

Last but by no means least, the concept of sustainable supply chain finance is also beginning to gain some traction. Sustainable supply chain finance is a version of supply chain finance in which a program is used as a means of incentivizing and rewarding ethical and sustainable practices by suppliers.

To achieve this, companies first rate the sustainability of their suppliers using a chosen methodology. Different companies will prioritize different factors in accordance with their own sustainability goals, but considerations could include environmental, ethical or health and safety performance. Suppliers which receive higher sustainability scores can then be offered supply chain finance at a lower or more favorable interest rate, as a reward for their more ethical practices.

By using this approach, buyers can not only provide suppliers with the usual benefits of a supply chain finance program but can also give suppliers financial incentives to improve their sustainability performance. PUMA, for example, launched a sustainable SCF program in 2016 after discovering that 94% of the company’s environmental impact took place in its supply chain. In the first year, the company provided over $100m in lower financing costs to its highest rated suppliers.

In conclusion, embracing sustainability doesn’t simply mean that a business needs to adopt ethical and sustainable practices itself. Beyond this, it’s also important to build sustainability into the supply chain – both through including sustainability considerations in supplier management processes, and by incorporating sustainability into solutions like supply chain finance.