Mark Romanelli
31 October 2022
Protecting your business through supply chain sustainability management
Like a vessel stuck in the Suez Canal, lack of sustainability management might seriously interrupt your supply chain in the future. In this article, our expert, Mark Romanelli, helps you keep your business afloat by following a tried-and-tested process.
After their fragility was exposed by the Covid-19 pandemic, supply chains are top of mind for nearly everyone. At the same time, sustainability is of peak concern for businesses due to a variety of pressures from customers, investors, regulators, and civil society. But efforts to improve sustainability will only continue to add to the focus on supply chains.
On average, two-thirds of sustainability impacts lie upstream of a company’s own operations. Despite the seemingly external nature, these impacts have real business/financial implications. We know already that environmental and social factors can create significant supply chain disruptions risks such as interruption of the flow of materials, delayed delivery times, increased cost of materials, reputational damage and more. These are the types of risks we saw materialize throughout the Covid-19 pandemic. They will only continue to grow if not mitigated and/or managed. And to the extent that a business has sustainability objectives, monitoring and management of the supply chain ensures that upstream impacts do not undermine these.
Supply chain sustainability as it relates to greenhouse gas (GHG) emissions (or, Scope 3 emissions) demands particular attention. Reports estimate that supply chain GHG emissions are 11.4 times greater than direct emissions (from Scope 1 and 2 emissions sources). With the ever-growing investor and regulator scrutiny of GHG emissions, and the myriad risks posed by climate change, this is a highly important topic for all companies.
Note: Companies are also beginning to think about the sustainability impacts influenced by their company but laying outside of their direct supply chain.
Read more on the concept of “avoided emissions” here.
Sustainability in a supply chain can encompass many topics. As mentioned above, GHG emissions are likely to be included in the discussion almost no matter what, but the first step of a comprehensive approach to managing supply chain sustainability is delineating the proper suite of topics within the supply chain that are most relevant and important to your specific business. In other words, identifying the topics that are most affected by your company’s suppliers and are most likely to affect your company’s sustainability, procurement, and overarching commercial goals.
This first step prioritizes a few key topics from the universe of relevant supply chain sustainability topics, which will inform forthcoming supplier engagement, at least in the near- to medium-term. An assessment to prioritize topics should be performed at least every few years to ensure that the most important are still central to the supply chain management strategy.
With the ever-growing investor and regulator scrutiny of GHG emissions, and the myriad of risks posed by climate change, this is a highly important topic for all companies.
The next step is to determine how to engage your suppliers to improve performance on the identified material sustainability topics and build resilience in your supply chain. There are several ways to do this. In our typical approach we suggest two key exercises to ensure that resources and effort will be directed at the suppliers where the highest impact can be achieved.
- Determine which suppliers to engage to proactively manage sustainability risks and opportunities through a supplier segmentation process
- Develop a differentiated supplier sustainability management strategy for strategic, emerging, and non-critical supplier segments
Within each supplier segment, engagement strategies should focus on influencing suppliers in a manner most likely to get the suppliers to improve their practices while strengthening the business partnership.
To provide a few examples, for suppliers rated highly under both ability to influence and strategic importance to the company, joint business planning and sustainability targets can drive innovation. Additionally, knowledge sharing can identify cost savings through resource efficiency and increased productivity, that enhances business value for both parties
For suppliers rated lower on both ability to influence and strategic importance to the company, simpler actions such as implementing a Supplier Code of Conduct updates and/or incentivizing sustainability performance through contractual mechanisms require lower levels of effort but still enhance supply chain transparency.
In between, there are other opportunities like incorporating sustainability metrics into the supplier auditing process or requiring suppliers to complete self-assessments and surveys, all of which can still bolster your company’s ability to access financing and reduce supply chain inefficiencies.
Just as your company has resource constraints, keep in mind that your suppliers likely have many different requests coming in from their customers. Your engagement strategy must take that into consideration. Communication regarding where efficiencies can be unlocked and where your data requests can integrate into existing reporting processes, etc., will be central to success.
In order to execute new supplier engagement strategies, companies need a roadmap for any additional resources or enhancements necessary to ensure clear governance and tracking. This will encompass:
- People – A supplier sustainability governance structure delineating roles and responsibilities across internal stakeholders
- Process – Integration of new processes across the procurement organization, including supplier criteria for bidding, bid evaluation, and contract management
- Technology – A sustainability performance management software system that can track compliance and progress accurately and automatically.
The focused approach outlined here – beginning with a prioritization exercise, then developing specific supplier engagement strategies, and finally creating a roadmap identifying gaps and next steps across people, process, and technology – provides a way to take the huge and amorphous idea of supply chain sustainability management and break it down to direct resources towards high impact opportunities for improvement.
Want to know more?
Mark Romanelli
Manager