Are you worried that your customers will identify slavery, exploitation, water pollution or harmful chemicals in your supply chain before you do? You’re not alone. The UK Modern Slavery Act, increasingly stringent environmental regulations, hyper transparency and consumers’ increasing expectations of responsible corporate behavior are quickly making sustainable sourcing a near-term necessity. Poor social and environmental performance has meant real financial costs for Volkswagen, Uber, Costco, Google and many others in the past year alone. Few business can be totally confident they won’t be next on the list.
Businesses in Forum for the Future’s global network are increasingly looking for advice on how to embed long term sustainability to build more resilient supply chains. These four key tips should help you avoid some common pitfalls we’ve encountered across industries:
It’s as much about changing your behavior as it is about changing the behavior of your suppliers
Perhaps the most common mistake is to relegate the responsibility of building a sustainable supply chain to a small corporate social responsibility, sustainability, communications or team. Sustainable supply chains are not possible without the complete engagement of your procurement team, and often many other business functions, including human resources, marketing and communications. For the necessary mindset shift to occur, leadership must demonstrate sustainability as a company-wide value, dedicate resources to it and ensure all employees have a role to play.
Do your employees understand the growing pressures driving the shift to sustainable supply chains? Training your employees, and especially the procurement team, about the risks they face and new sourcing approaches is nearly always the critical first step towards building lasting change. What drives the performance of your procurement team? Attempts to change the behavior of individuals in your procurement team will be unsuccessful if their performance evaluation is primarily related to cost. New performance indicators could include the number of suppliers whose sustainability performance rating has improved or new opportunities identified. Does your team have the skills they need to engage with suppliers differently? The skill set you’ve attributed to a strong candidate for procurement is rapidly changing with a new emphasis on softer communications skills and the ability to spot and articulate partnership opportunities that fall outside of typical relationships.
Enable, don’t disable
Many businesses independently define and impose ethical and environmental standards, increase the frequency and intensity of audits and terminate relationships with those that don’t comply. Punishing suppliers with a risk of losing business for non-compliance weakens their financial position and ability to comply, leading them to “cheat” on audits. This approach increases your cost of monitoring and could ultimately increase the cost of inputs, as only a few empowered suppliers remain. For some industries, the narrowing supplier base has been a practical consequence of stricter environmental regulations in China, increasing the cost of inputs.
Enabling approaches to sustainable sourcing involves minimizing the burden of compliance and “audit fatigue”, usually through a platform like Sedex or Ecovadis. Many businesses incorporate willingness to collaborate in their assessment of sustainability performance to identify “shared-value” opportunities, going beyond typically transactional relationships. The enabling approach of global sports apparel company PUMA led them into an innovative partnership with the International Finance Corporation (IFC), allowing high-performing suppliers throughout Asia to leverage their relationships with a stable global brand in order to access short-term working capital for environmental and social improvements.
This approach works. A 2012 McKinsey survey of 100 global companies found less than 10 percent could demonstrate systematic efforts on supplier collaboration. Those that did had an EBIT (earnings before interest and taxes) of more than double their peers.
Don’t just transform your supply chain, transform your system
Who else could benefit from your sustainable supply chain? Who else faces the same challenge? Taking a systemic approach to sourcing unlocks opportunities to drive a transformation to the sustainable, ethical supply chains of the future. In its work with IFC, Puma demonstrates an understanding of the critical role its suppliers play in sustaining the communities from which it sources products, as well as a sense of corporate responsibility to those communities and countries on which its supply chain depends.
The systems perspective often leads to pre-competitive collaboration and partnership beyond industry boundaries. For example, Nike made its Sustainable Materials Index (SMI) public, jumpstarting the process for other sportswear companies. The SMI became the basis of the Sustainable Apparel Coalition’s industry-wide rating system, the Higg index. Through the LAUNCH initiative, Nike convened 150 experts, including NASA and USAID to explore the challenges and identify radical change needed to scale up sustainable materials.
Don’t keep your sustainability efforts to yourself.
Many businesses are afraid of communicating before they have absolute certainty of a 100% sustainable supply chain – a nearly impossible feat, at least in the short term. If your business does not communicate its efforts, collaborative opportunities will be missed.
To manage this risk, we often recommend that businesses work on a comprehensive assessment of sustainability risk across the supply chain while simultaneously embarking on pilot projects with their most collaborative strategic suppliers. The “quick-win” stories can be communicated to reinforce the value of sustainability to the business and help build internal buy-in. Another approach is to build narratives that communicate your conviction and showcase “quick-wins”, but note that you are on a journey, taking risks, and do not pretend to have all the answers.
Ultimately, building the sustainable supply chains of the future is about understanding a deeper shift in the way businesses create value for their customers and it therefore cannot be easy or rapid. These four tips will hopefully get you thinking beyond environmental audits and preparing your business for success in a low-carbon, slavery-free, hyper transparent future.
1. McKinsey (2012) “The power of successful supplier collaboration” Available at http://www.mckinsey.com/practice-clients/operations/the-power-of-successful-supplier-collaboration