Finding your next steps to improve supply chain sustainability

As we presented in a previous article, supply chains are a critical focus area for corporate sustainability efforts as supply chains often account for a substantial portion of a company’s sustainability impact (as often cited, on average, two-thirds of sustainability impacts lie upstream of a company’s own operations).

By their nature, supply chains often involve energy-intensive production practices, long transportation routes, human and labor rights considerations, and more. With greater sustainability performance comes, among other benefits, cost reductions through reduced energy consumption, enhanced transparency, and reputational and regulatory risk reduction.

However, creating sustainable supply chain operations is a complex and daunting undertaking, as suppliers have vastly differing baseline levels of performance and capacity. Fortunately, there are proven approaches. Three key pillars for establishing and maintaining supplier sustainability are: Creating Motivation, Measuring Progress, and Building Capacity. Through the rest of this article, we describe potential tactics you can use for each.

Creating Motivation

Contract Clauses and Codes of Conduct

When forming a relationship with a new supplier or renegotiating agreements, companies can try to add a clause to the contract detailing sustainability performance expectations above and beyond regulatory compliance, such as mandating the measurement and reporting of company emissions, the obligation to adhere to fair labor rates, and/or require visibility in the sourcing of materials.

Continuance of the relationship thus depends on strong sustainability performance. In a similar vein, companies can develop supplier codes of conduct with robust sustainability expectations and with contract continuation dependent upon satisfactory adherence to the code of conduct.

Nestlé created its Responsible Sourcing Standard to apply requirements to upstream supply chain third-party partners to promote sustainable long-term supply and reduce the company-wide impact on the planet’s resources.

This overarching standard replaced their previous Supplier Code, Responsible Sourcing Guideline, and Commitment on the Responsible Use of Materials. Within the new Responsible Sourcing Standard, in addition to legal and regulatory compliance, Nestlé has added safeguards to product authenticity through elaborate record keeping and traceability and has laid out specific contractual specifications relating to product service and delivery to address sustainability issues. Further, Nestlé imposes three duties on its Tier 1 Supplier network: the Duty of Transparency, the Duty of Care by Labour Brokers, and the Duty of Care in Transportation. These standards are set forth as non-negotiable and encouraged to be adhered to during all business transactions.

Commercial Incentives

Financial rewards are very effective in motivating supply chain partners to achieve specific targets. Financial incentives can include preferential payment terms and procurement, contract extensions, and/or contract expansion into additional business opportunities including joint business planning opportunities.

Knorr-Bremse AG, with the support of Deutsche Bank, is driving supplier sustainability efforts through its Supply Chain Finance Program. Suppliers of Knorr-Bremse can benefit from this program in multiple ways, including expedited payment due to pre-financing and reduction of financing costs on behalf of the Knorr-Bremse suppliers. Additionally, suppliers who operate in a more sustainable manner are rewarded with better payment terms, encouraging more suppliers to improve Environmental, Social, and Governance (ESG) measures.

Indirect Commercial Incentives

Indirect commercial incentives can supplement commercial (i.e. financial) rewards, and for some suppliers, be quite compelling. Some examples of these non-financial incentives include public recognition, sharing learnings and resources, or contract flexibility.

The World Wildlife Fund (WWF) recognizes farmers and/or ranchers with exemplary performance to share lessons learned with other suppliers. One of the projects associated with WWF is McCormick and Company aligning its climate commitments with the Paris Agreement and partnering with Guidehouse, Mars, and PepsiCo to establish the Supplier Leadership on Climate Transition collaborative (S-LoCT).

The program mobilizes collective climate action by providing suppliers with resources, tools, and knowledge to support their respective climate journeys. Through S-LoCT, suppliers receive training and mentorship on how to develop science-based targets and implement GHG emissions reduction strategies while providing recognition for milestone achievements.

Punitive Measures

In cases where suppliers fail to meet the established sustainability standards, companies can initiate punitive measures. This could involve fines or, in extreme cases, the termination of contracts. The threat of such penalties can be a strong motivator for suppliers to meet sustainability criteria.

Measuring Progress

KPIs and Scorecards

Key Performance Indicators (KPIs) and targets provide a tangible way to measure and communicate sustainability progress. There is an opportunity to create a scorecard from these KPIs for suppliers to track their “sustainability score” and benchmark it against other suppliers within the same value chain for the purpose of ongoing contract management and to incentivize suppliers to perform competitively and seek strategies to improve their score, if necessary.

Nike has an explicit focus on improving supplier sustainability performance, demonstrated by mapping an assessment of supplier performance on quality, delivery, cost, and sustainability on a scorecard. The sustainability score reflects Nike’s Materials Sustainability Index (MSI) which is an evaluation tool to measure the environmental impact of its products.

The goal of the scorecard is to guide Nike in selecting suppliers as well as utilizing materials that have low environmental impacts. The scoring framework examines materials as they travel through the value chain, considers the sourcing of materials, and delivers a score based on four equally weighted environmental impact areas, including chemistry, energy and GHG intensity, water and land use intensity, and physical waste.

Supply Chain Audits

Conducting regular supply chain audits serves as a mechanism to ensure suppliers are adhering to a supplier code of conduct, which should include sustainability considerations, put forth by the company in addition to baseline standards such as governmental regulations, international labor laws, etc. Audits are often performed by a third-party firm to ensure an unbiased assessment. Through supplier audits, companies can identify deviations, nonconformance's, or potential vulnerabilities within suppliers’ operations and processes before they become larger issues.

It is critical to ensure that audits are credible. In Brazil, JBS, a leading global meat packer, faced criticism for alleged false claims that its operations in the Amazon region are deforestation-free. The company’s former auditor noted that JBS uses its audits to conceal the fact that JBS fails to monitor its entire supply chain. For example, the audits conducted only monitored the final farms cattle are bought from but does not examine where the cattle grazed beforehand, which is noted by Amnesty International to include grazing on illegal farms built on deforested areas of the protected Amazon Rainforest.

Building Capacity for Change

Trainings and workshops

Companies can play a pivotal role in enhancing supplier capacity through training programs and workshops. By investing in their suppliers’ knowledge and skills, companies enable sustainability improvements.

For example, Apple offers education and training opportunities including technical assistance and connection to funding for energy efficiency projects through its Supplier Energy Efficiency Program. In 2022, the program helped avoid more than 1.3 million annual metric tons of carbon, the equivalent of the average annual emissions of >160,000 homes in the US.

Supplier collaboration platforms

Developing an easily accessible platform for different suppliers to share strategies and procedures that have been effective in their operations can lead to significant improvements across the value chain. Ford Motor Company has been recognized for its pioneering Partnership for A Cleaner Environment (PACE) program that brings together suppliers across the world to drive increased supplier capacity and ability to implement sustainable projects. The ripple effects magnify as Ford encourages its suppliers to implement PACE within their own support networks, sharing best practices continually further up the chain, by providing all suppliers with a PACE toolkit which includes 350 leading industry practices across energy, water, air emissions, and waste categories.

Joint business planning, collaboration, and pilot projects

Working with suppliers to collaborate on innovative joint business planning can create shared benefits through innovation and operational enhancement. Joint planning starts by establishing shared goals, which likely already exist but need to be stated as such. Then, bringing together financial and technical expertise from both sides can unlock new solutions. Further, both sides hear in real time what possible challenges are before asking for investments from the other. And with a two-sides approach like this, both the company and their supplier are mutually accountable and incentivized to drive real positive change, with the investment patience necessary to think long-term.

In terms of sustainability, pilot projects can play an essential role by enabling you to start small with low costs and minimal risk, correct and improve operations as you go, eliminate ineffective projects and redirect resources to more effective ones, build confidence and support, and communicate the progress to stakeholders. Pilot projects that prove to be good ideas can enhance supply chain competitive advantage and resiliency through exploring and experimenting with methods to enhance operations, identify gaps, and maximize responsiveness.

Partnering with NGOs

Partnering with Non-Governmental Organizations (NGOs) can improve organizational impact and drive new market opportunities. NGOs have a vast and specific set of knowledge and capabilities that can complement those of a company, expanding the capabilities of both entities and, therefore, the entire value chain. NGOs can contribute expertise, resources, and/or funding, enhancing organizational reach and resilience.

These partnerships can also allow for more efficient implementation of some of the strategies mentioned earlier, such as workshops and pilot projects. Further, NGOs can effectively bring multiple parties to the table to determine solutions which can prove to be an onerous task that may not be possible otherwise.

For example, Walmart partnered with The Sustainability Consortium to create The Sustainability Insight System (THESIS) Index, a tool that enables suppliers to understand the sustainability impact of their products. Suppliers have access to the score they receive through the Index, benchmark their score against other suppliers in their field, and gain insight into ways their operations can improve throughout each of the categories.

Taking the First Step

Creating a more sustainable supply chain is a multifaceted endeavor that involves motivation, measurement, and capacity building. There is no single best practice for any stage, but rather each company requires an individualized assessment and approach and needs to employ a variety of strategies.

To begin, companies must still assess their baseline or current performance, as described in our previous article. From here, you can determine which of the “menu” of options such as those presented in this article represent the most feasible progression towards improved sustainability performance.

To execute these strategies, companies need a roadmap with clear governance and tracking mechanisms, and to always be prepared to be flexible according to what is proving effective for a given purpose or not.