Needs for Sustainability and Resilience Present Opportunities for Supply Chain Action

Analyst Insight: To remain competitive in future markets, supply chain partners must focus on and invest in sustainability and resilience efforts. 

The Time is Now 

Over a third of global consumers are willing to pay up to 25% more for more sustainable products, according to a recent global sustainability study. That number was negligible just a decade ago. As younger generations more conscious of the environment enter the economy, sustainability will grow to become a dominant factor in consumer and business decision-making. Businesses will lose market share to competitors who are seen as more sustainable, and produce more sustainable products. More importantly, they will lose market share in the high-end segments where profit margins are much higher. With 100+ product regulations becoming active globally each day, some of them related to climate change, there is a growing risk that businesses will lose positioning; they may lose access to certain markets entirely. 

Another key driver for action is resilience — almost any company can survive when markets and supply chains function perfectly. Great companies know how to deliver in rough times. Climate change poses a significant risk to global supply chains in the mid to long term, which would result in businesses losing revenue when they cannot deliver products, as has become abundantly clear in the recent past. 

Extreme weather events, such as hurricanes, floods and droughts, can disrupt supply chains, causing an economic loss of assets, delays, and shortages of critical inputs. Rising temperatures and changing weather patterns can also impact the production and availability of crops and other natural resources, further exacerbating supply chain disruptions. In addition, sea-level rise and coastal erosion can threaten ports and other critical infrastructure, creating even more damage to how companies do business. 

While these may seem far off in the future, immediate action is necessary because changes to supply chains for mass-produced products take several years to implement. For other products, growing geopolitical threats, rebalancing of the power dynamic between East and West, and the resulting “glocalization” of supply chains are more near-term causes of disruption. Businesses will have to adapt quickly or fail. They can mitigate these risks by investing in transparency, diversifying their supply chains, investing in climate resilience, and adopting sustainable practices that reduce their exposure.

It's no surprise that, according to Gartner research, 87% of business leaders have ramped up investments into sustainability and resilience programs, with aggressive timelines for completion within the next two years.  

What Does The Supply Chain Have to Do With Any of This?

Supply chains often account for up to 90% of manufacturers’ carbon emissions. This goes beyond just logistics, and extends all the way back to resource extraction. Costs, risks and other aspects that determine a company’s competitiveness are today strongly correlated with fossil fuel consumption. The biggest levers companies have to reduce their carbon footprint are to change either their products (what they make) or their inbound supply chains (where they make and buy). Consequently, company leaders are leaning more heavily on supply chain teams for carbon reduction, risk mitigation and cost reductions in recent years. There are three main drivers for this: 

• a greater focus on resilience 
• government incentives to produce and source locally
• shifting the focus to the supply chain is easier than redesigning and homologating products

This has made procurement sexy again. Supplier relationships are key to achieving any of the desired outcomes of cost efficiency, carbon reduction or supply-risk mitigation. The most successful professionals will be equipped with tools and know-how to support companies to move quickly. Here are some initiatives that have the biggest impact:

1. Supply chain mapping: According to the Deloitte CPO survey, a staggering 65% of respondents said they have limited to no visibility beyond tier 1 suppliers, and only 6% indicated they have full supply chain transparency. If one wants to predict the next chip crisis, one would have to look upstream, beyond chip manufacturers. None of that is possible without some level of deep-tier mapping. Procurement professionals very often think of “supplier mapping” when what is most important is “supply chain mapping,” which focuses on materials and how they enter a product's supply chain. Mapping by itself creates a basis for discussion among engineers, suppliers and procurement professionals, about where hotspots are, and what measures can be taken to mitigate risk and reduce impact.
2. Develop an actionable strategy: Procurement is about trade-offs, and having a framework in place that is clear and measurable is crucial to any action plan. This includes the evaluation criteria (cost, carbon, non-compliances, circularity, quality, etc.), a strategic objective (the relative importance given to each of these criteria), and the data that is needed to enable all of this. The more KPIs included in an evaluation, the more work it is to gather and calculate them. A focus on clarity and speed over perfection is particularly crucial in procurement, which typically has to deal quickly with a host of unknowns. One approach that works particularly well is separating “Change” KPIs (like carbon, cost, etc.) where you want to see a change in performance and “Standard of Performance” KPIs that are minimum cut-off criteria. Focusing aggressively on change KPIs allows the development of simpler trade-off rules for procurement teams, so they can be fast and effective in driving outcomes. 
3. Collaborate with product development and operations: There is a lot of focus on the need for more supplier transparency and collaboration. While this is incredibly important, what is typically overlooked is the need for an increase in collaboration with product development and operations. A lot of the information needed to understand deep-tier supply chains and potential risks and opportunities actually sits with product teams that have detailed bills of materials/specifications. On the other hand, a lot of the information needed in development (e.g., supplier-specific data) comes from procurement. However, recording systems differ between organizations, and decision criteria are not available consistently across systems. Staff in the procurement department very often have to buy raw materials without a proper understanding of the product or what tradeoffs can be made, while product development never receives “real-world” feedback on opportunities and risks. This creates a lot of friction. Focusing on improving data-based collaboration between “makers” and “buyers” will enable faster progress against any strategy. 

Good things come in threes, but there’s one more key point: It's important to provide context when asking people to make decisions. A 1% savings on 50% of your impact is the same as 50% savings on 1% of the total impact. Too often, high-profile pilot circular projects and material substitution experiments are implemented that could never create a significant impact. These projects distract teams from identifying and pursuing initiatives that have the potential to create meaningful impact. Benchmarking the impact an initiative could have against the overall company’s performance will help prioritize meaningful action and create internal champions.