08 Oct 2019
Supplying the demand for sustainable supply chains
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The demand for global supply chains to improve their sustainability records has never been greater. How are companies reacting?
As the world’s biggest companies strive to hit sustainability targets, they are increasingly looking beyond in-house activities and putting their suppliers under the spotlight.
This is because a company’s supply chain averages 5.5 times the carbon emissions of its own operations, according to research published this year by CDP, an environmental disclosure platform.
In 2018, says CDP, 115 organizations with a combined purchasing power of US$3.3 trillion, requested environmental information from 5,500 key suppliers. Those suppliers reported emissions reductions of 633 million metric tonnes of carbon dioxide – greater than South Korea’s emissions in 2017 – leading to collective cost savings of US$ 19.3 billion. When CDP started monitoring supply chain disclosure 10 years ago, just 14 companies took part.
United Nations Global Compact
As striking as these figures appear, the supply chain still offers considerable room for improvement. Particularly when organizations extend their sustainability criteria to include labor, human rights, and anti-corruption, as well as the environment. This broader definition of sustainability was enshrined in the 1999 United Nations Global Compact.
Today, over 13,600 organizations across 170 countries have signed up to the UN Global Compact. Yet only 38-45% of them apply its sustainability principles throughout their supply chains, according to a study by EcoVadis, an independent business sustainability rating source.
The supply chain represents “a tremendous opportunity” for improving sustainability performance despite the evident difficulty companies have in engaging suppliers in the process.
The difficulty is even greater when supply chains are large, complex and spread across many countries, each with its own regulatory regime. Cross-border consistency is certainly one of the challenges facing Nestlé, one of the world’s largest food and drinks conglomerates. It deals with over 150,000 suppliers while marketing 2,000 brands across 190 countries.
But Vineet Khanna, the company’s Senior Vice President, Global Head Supply Chain, insists: “We have developed standards for all our suppliers to adhere to. Where there are improvements to be made, our approach is to engage in a dialogue and identify together actions that can be taken to improve performance. We have also taken decisions to remove suppliers from our supply chain when there is no willingness for change.”
In some respects, this supply chain challenge dovetails with the long-term trend towards outsourcing of one-time core operations. The twist is that on sustainability issues, consumers do not always distinguish between the direct actions of a company and ethical breaches by a supplier thousands of miles away. There is, therefore, huge pressure on the major multinationals to exert a positive influence right to the end of the supply chain.
“We need to source our raw materials sustainably, ensuring they are economically, socially and environmentally viable. This requires the involvement of not only our tier-one suppliers but also sub-suppliers, such as mills and farms, in addressing social, economic and environmental challenges,” says Khanna. He adds that Nestlé works directly with more than 710,000 farmers.
Held to account by consumers
“Consumer brands, in particular, are being held to account by their customers,” says Lucy Harding, Partner and Global Head of the Procurement and Supply Chain Practice at Odgers Berndtson in London. “Part of the customer choice is about the sustainability and the ethics surrounding their supply chain. They no longer want to buy a product from a company where potentially child labor has been used or working conditions are shocking or it is the cause of deforestation in certain parts of the world.”
“There’s now an expectation from consumers for transparency all the way down the supply chain. They want to know who has made products, and are they made in a way that they’d be happy to endorse?”
“The whole explosion of social media over the last 10 years has increased visibility and awareness of that end-to-end supply chain.”
Balancing the costs of sustainability
Though greater accountability is a given for the good of the environment, companies must still assess sustainable supply chains in monetary terms. The financial savings from cutting carbon emissions are clear enough, and there is wide acceptance of the ‘shared value’ created by greening the supply chain.
A cost-benefit analysis of everything else done in the name of sustainability is far more difficult, but not insurmountable, according to Simon Hodgson, a Senior Partner at management consultancy Carnstone Partners.
Hodgson has over 20 years’ experience advising global businesses on the need for “a much more holistic blending of the commercial and the sustainability strategy”. As he says, that argument remains as pertinent to business as ever. “There’s no point in having ethical codes of practice and ethical auditors if your buying strategy is to pile it high, drive down margins and shorten lead times with suppliers. In the end, you’re not going to manage it.”
The question at the heart of the supply chain challenge is whether the objectives for ethical business on the one hand and profits on the other should be seen as mutually exclusive at all?
There is no easy answer, says Hodgson. To take one example, a big problem facing suppliers in maintaining labor standards lies with the lack of predictability of orders, which means they must run hire-and-fire workforce models – flexible but costly.
Hodgson argues that its shortcomings in forecasting is costly for the buying company, too. “There’s a common failure here,” he says. “If you could fix your forecasting, you could improve the ethical conditions in the supply chain, you’d have fewer workers on flexible contracts. And you could probably reduce your costs.”
Hodgson adds: “In the short term, most supply chains could make both ethical and commercial wins consistently. In the long term, there will be choices. Once you have made your supply chain run efficiently, and you remove all those unintentional ethical problems, ultimately, you will have to decide whether you’re going to pay more or re-engineer business models.”
Genuine supply-chain innovation
This incongruous combination of the ethical and the commercial has conjured up some genuine innovation. Perhaps most surprising is Anheuser-Busch InBev’s use of blockchain to help farmers in its supply chain.
The brewing giant has adopted BanQu, a non-cryptocurrency blockchain platform. This allows farmers to use a simple SMS phone to record their output – which is shared with AB InBev – and gain access to financial services for the first time. Previously, the farmers had no way of proving to local banks that they were part of AB InBev’s supply chain.
Following a successful trial in Zambia, Katie Hoard, Global Director of agricultural innovation and sustainability at AB InBev, says the aim is to have all 20,000 smallholder farmers in its supply chain “skilled, connected and financially empowered” by 2025.
“Through our work with BanQu, the blockchain technology has given AB InBev visibility and transparency within our smallholder supply chain and has given farmers an increased voice within this chain,” says Hoard.
Read the interview with Unilever's Chief Procurement Officer, Dave Ingram, about the challenges and principles behind running a sustainable supply chain for a global company with 400 brands spending €35 billion.