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Supply chain sustainability

Supply chains are critical links that connect an organization’s inputs to its outputs. Traditional challenges have included lowering costs, ensuring just-in-time delivery, and shrinking transportation times to allow better reaction to business challenges. However, the increasing environmental, social and economic costs of these networks and growing consumer pressure for eco-friendly products has led many organizations to look at supply chain sustainability as a new measure of profitable logistics management.^[3] This shift is reflected by an understanding that sustainable supply chains mean profitable supply chains.^[4]

Many companies are limited to measuring the sustainability of their own business operations and are unable to extend this evaluation to their suppliers and customers. This makes determining their true environmental, social and costs highly challenging. However much progress has been made in defining supply chain sustainability and benchmarking tools are now available that enable sustainability action plans to be developed and implemented.^[5]

Climate change poses a new risk to supply chains and a need to increase their resilience. As companies are setting carbon footprint targets, suppliers’ operations are responsible for 65% to 95% of a company’s total emissions^[6]. These environmental impacts are evident across industries, for example, food and beverage companies are particularly vulnerable to the impacts of climate change as changing weather patterns can disrupt agricultural production. Measuring supply chain resilience on factors such as natural resource availability, infrastructure, financial resources, and social safety networks among others, can help them respond to challenges and create better supply chains in the process. ^[7]

Besides sustainability and resilience, an ethical supply chain is imperative to ensure corporate social responsibility and adhere to a supplier code of conduct. The work environment for the workers should be congenial and must not violate the basic human rights. For instance, companies like Nike and Apple, which outsource manufacturing of their products to other countries like China, have been under the scanner for workplace conditions and wages of their workers.^[8] Consumers increasingly demand transparency and traceability in supply chains, especially where disturbing social breakdowns occur, such as with forced labour and child labour for globally traded goods.^{[9] [10]}

Forced labor, understood as work that is performed involuntarily or under coercion^[11], occurs in different industries, often upstream in the supply chain with limited visibility to buyers, customers, and end-users^[12].

For example, in the United States, the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act requires manufacturers to audit their supply chains and report use of conflict minerals to the Securities and Exchange Commission.^[13]

Governance practices in global supply chains can pose risks to supply chain sustainability, alongside social and environmental factors. Governance factors include guidelines and procedures for countries and corporations. Buyers screen their supply chains for appropriate governance practices such as a company’s purpose, the role and makeup of boards of directors, shareholder rights and how corporate performance is measured.^[14]

One of the key requirements of successful sustainable supply chains is collaboration. The practice of collaboration — such as sharing distribution to reduce waste by ensuring that half-empty vehicles do not get sent out and that deliveries to the same address are on the same truck — is not widespread because many companies fear a loss of commercial control by working with others. Investment in alternative modes of transportation — such as use of canals and airships — can play an important role in helping companies reduce the cost and environmental impact of their deliveries.^[15]

As of 2021, a growing number of companies see supply chain sustainability as a strategic business matter. A business strategy for supply chain environmental performance can deliver measurable environmental benefits for the company and its stakeholders.^[16] A sustainable sourcing strategy positions the company for increasing demands of higher disclosure and investor scrutiny, more environmentally focused consumers, and scarce resources. Sustainable procurement is a key concern for investors, through movements such as socially responsible investing. Leading investment firms such as BlackRock use their influence to bring supply chain sustainability on the agenda.^[17] Customers and consumers also demand supply chain responsibility and sustainability as part of a company’s value proposition under a growing ethical consumerism movement.^[18] Consumers’ purchasing behaviors reflect this trend as 70% say they are willing to pay a 5% price premium for products produced by more-sustainable means.^[19] During global supply chain disruptions following the Covid-19 pandemic, sustainable supply chains have been shown to be more resilient and have lower supplier risk.^[20]

In 2008, The Future Laboratory produced a ranking system for the different levels of sustainability being achieved by organization. This was called the Three Tiers of Sustainability:

This is the base level and is the stage in which the majority of organizations are at. Companies employ simple measures such as switching lights and PCs off when left idle, recycling paper, and using greener forms of travel with the purpose of reducing the day-to-day carbon footprint. Some companies also employ self-service technologies such as centralized procurement and teleconferencing.

This is the second level, where companies begin to realize the need to embed sustainability into supply chain operations. Companies tend to achieve this level when they assess their impact across a local range of operations. In terms of the supply chain, this could involve supplier management, product design, manufacturing rationalization, and distribution optimization.

Shortening supply chains can be part of a sustainable supply chain strategy. Some of the benefits include building direct relationships with producers, promoting regionally specific production, increasing profits for producers that would otherwise be split among intermediaries, and adding value to the products by sharing information about the quality, context and uniqueness of each source. For example, single origin coffee beans are part of a niche market that benefits producers who can earn a higher wage for high quality products. In some cases, single origin producers can earn three times as much as producers who are part of the conventional global coffee market, where there are more participants in the chain who are not necessarily adding value that would benefit the producer. ^[21]

The third tier of supply chain sustainability uses auditing and benchmarks to provide a framework for governing sustainable supply chain operations. This gives clarity around the environmental impact of adjustments to supply chain agility, flexibility, and cost in the supply chain network.^[22] Moving towards this level means being driven by the current climate (in which companies recognize cost savings through green operations as being significant) as well as pushing emerging regulations and standards at both an industry and governmental level.

In some sectors there are many Voluntary Sustainability Standards that indicate sustainable practices, however the impact of these practices is not always determined or in alignment with the initial sustainable supply chain goals. Using consistent metrics to manage and understand supply chain sustainability would add validity to Voluntary Sustainability Standards and allow for more transparent comparison across different ecolabels. Sustainability measurement which can be replicated across sectors and throughout different locations improves knowledge and accountability within supply chain management. ^[23]

Companies looking to implement sustainable strategies down its supply chain should also look upstream. To elaborate, if a company is able to choose between various suppliers, it can for example use its purchasing power to get its suppliers in compliance with its green supply chain standards. In managing suppliers, companies must measure that inputs from suppliers are of high quality, and the usage of water and energy is minimised leading to less pollution, defects and over production. They also must audit their supplier base and make sure that they are improving the supply chain metrics^[24]

When measuring sustainability in supply chains, consistent measurements which can be replicated and compared are crucial to encourage consumer trust. Environmental and social change often takes time to measure and must be considered by private companies or governments over a long term period to accurately assess the results.^[25] Some companies utilize supplier scorecards to determine suppliers’ sustainability performance.  This can be accomplished by conducting life-cycle assessments or surveys to help determine their sustainability practices. Another strategy is to award suppliers for their improvement on their sustainability performance, for instance, by developing new materials sourced from waste or by making operations more energy efficient.^[26]

Digital technology has increased companies’ capability to collaborate with large numbers of suppliers.^[27] As supply-chain sustainability becomes a more critical business issue, the need for reliable and robust data from suppliers increases^[28] Whilst some existing business systems can collect some sustainability data,^{[citation needed]} most large businesses will look to dedicated software providers for more specific sustainability functionality.^{[citation needed]}

In order for businesses to determine the degree of sustainability impact of their business model, they must have the data to support it. Harvard Business School created the Impact-Weighted Accounts Initiative (IWAI)^[29] to assess the degree of impact that many large companies have on social, environmental, and economic areas. Impact data comes from long term research on specific, measurable topics that can be applied to future changes within a company or system. Impact data is often more sparse or inaccessible than it should be, which allows institutions such as HBS to hold companies accountable in their supply chains and encourage greater transparency. Transparency in the supply chain influences how consumers view and support companies, so improving data driven sustainability efforts can positively affect supply chain business. A company’s negative impact on environmental or social areas may show in their stock market value, exposing their true values to investors. While impact data is probably one of the better ways of assessing a company’s long term impacts, it is important to note that data collection for impact assessment is a lengthy process and not all companies can spend long periods of time measuring their impact without making changes. Because of this, simple, credible alternatives to long term impact assessments are necessary for some businesses.

In addition to digital tools, on-site audits can be an effective tool to verify social and environmental compliance at supplier sites. On-site audits can certify a supplier’s compliance with an external standard, such as SA8000, ISO 14001, SMETA 4-Pillar, and others. Audits can also assess compliance with internal policies and guidelines set by a business partner, for example through a supplier code of conduct. Depending on the auditing standard, buyers might choose to audit their suppliers directly, or send auditors from a third-party auditing firm to supplier sites.

• Fair Stone standard
• Sustainable procurement

Look up supply chain sustainability in Wiktionary, the free dictionary.