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What is supply chain sustainability?

Every product or service involves a “behind the scenes” supply chain of companies that furnish raw materials, manufacture equipment, and provide energy, transport, and logistics. These interlocking supply chain networks are increasingly global and complex, and in recent decades have largely been taken for granted because of their seamless and cost-effective functioning. But global warming, the Covid-19 pandemic, and now geopolitical shifts are bringing these cross-border supply chains into sharper focus as their implications and hidden costs for businesses become clearer. A sustainable supply chain is part of a sustainable business and takes into account the human and environmental cost of a product’s end-to-end journey through the network, from the extraction of raw materials to manufacturing, storage and production, right up to the moment when it appears on the shelf. 

Sustainability in the supply chain goes beyond traditional criteria of profit and costs, and embraces environmental and social aspects such as:

  • Labor conditions
  • Corruption
  • Waste disposal
  • Carbon emissions
  • Impact on people and communities

in and around a company’s operations.

 

While addressing the supply chain and sustainability is a complex undertaking, it is also a business opportunity that can reduce costs and increase competitiveness.

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Benefits of supply chain sustainability

According to the UN Global Compact, there are three main business drivers for a sustainable supply chain.

  1. A reduction of sustainability-related risks, like supply chain interruptions or delays, which might be associated with suppliers’ practices with regards to human rights, labour standards, environment and anti-corruption, while protecting the company’s brand value and meeting investors’ expectations.
  2. A focus on sustainability-driven productivity in the supply chain creates efficiency and can save money by reducing waste in raw materials, transport, and energy. 
  3. A sustainable supply chain can lead to sustainability-advantaged growth, helping companies to foster innovation and meet changing customer demands.

 

Therefore, while sustainability in the supply chain can be difficult to achieve, a more sustainable supply chain helps improve productivity while saving money: when a business achieves visibility for the workings of its supply chain – a necessary prerequisite to improving its sustainability -- it can accomplish the optimization of practices and processes that improve the bottom line.

 

Here is a look at re some of the concrete, measurable benefits:

 

  • Lower costs: as energy prices soar, squeezing the waste from facilities and logistics makes sense not only for the environment but also for the bottom line.
  • Attracting investors: According to financial services firm Morningstar, Inc., investors poured nearly $600 billion into sustainability-linked equity funds in 2021, an increase of 53%. A sustainable supply chain is one of the things investors and bank lenders look for when assessing a company’s long-term viability.
  • Reduced regulatory risk: The extraction of raw materials, unfair labor practices, and corruption are often targeted by government regulations. A supply chain that is vulnerable to these kinds of risks is a potential hazard for a competitive business. 
  • Consumer appeal: Several studies show that consumers are increasingly aware of supply chain issues, and some are willing to pay more for responsibly-sourced products.
  • Compliance: Governments are taking a closer look at supply chain imports because of concerns about unfair labor practices and environmental pollution. The European Union has adopted a proposal for a Directive on Corporate Sustainability Due Diligence that would require sustainable supply chains, driven by its goal of achieving the United Nations' Sustainable Development Goals by 2030.

How can the supply chain become sustainable?

The first step in improving sustainability in the supply chain is to take a deep dive. Most businesses work directly only with their “Tier 1” largest suppliers or manufacturers. Top suppliers, in turn, rely on a myriad of smaller subcontractors. These smaller players may source raw materials from mines or farms halfway around the globe, in places where working conditions are not visible to the final buyer. This is why sustainability in the supply chain is so difficult. So can sustainability in the supply chain be improved? Gaining visibility is key. Mapping your supply chain is the first step. 
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Once mapped, it will be possible to identify risks, issues, priorities, and action areas by looking at procurement, operations, and waste. Many large companies screen their suppliers, asking them to meet specific ethical standards. Moreover, periodic assessments and audits of their networks help improve the sustainability of their supply chain, by removing suppliers that create sustainability risks. Additional support can come from organizations like the Carbon Disclosure Project (CDP), which help companies collect and analyze emissions data from their suppliers. Also supply chain management systems (SCM) can help create a sustainable supply chain by centralizing the management of the flow of goods and services, including the processes that transform raw materials into final products. This helps ensure, for example, that products travel the least distance. 

Why is sustainability important for the supply chain?

A sustainable supply chain is important because the supply chain’s environmental and social impact on a company and its surroundings is massive. The majority of carbon emissions from industrial sources are the so-called “Scope 3” emissions made by suppliers. These can come from energy needs for the production or transportation of goods across great distances, which is a common feature of today’s business practices. Research by Carbon Trust, a nonprofit group, shows that supplier emissions account for 65% to 95% of a company’s broader carbon impact. And it is precisely these indirect emissions that are the hardest for companies to track. So organizations that work to improve sustainability in their supply chain by reducing emissions are actually making a major contribution to achieving net-zero goals and improving the future of the planet, in addition to reducing their own waste and expenditure.
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