By Dr Marcell Vollmer, Daniel Weise, Wolfgang Schnellbächer, Michael Jonas and Ann-Kathrin Merz (all professionals at Boston Consulting Group)
Growing momentum on bringing sustainability into supply chains
Companies are shining a spotlight on the environmental dimension of sustainability. This is evident especially in the automotive industry. With a small share of a car’s parts responsible for most of the environmental harm, automakers have homed in on these categories and their suppliers to drive impact. With some suppliers, such as battery producers, renewable energy commitments are expected to yield an improved carbon footprint. For more difficult to decarbonise materials, such as aluminium and steel, automakers are leveraging design to use more recycled materials and make the cars themselves recyclable. However, there is more to it. The importance of actions like these to address Scope 3 emissions upstream will only rise with the growth of electric cars. Also, over-arching design and architectural levers play a role. While automakers have responded to sustainability challenges with innovation, the true test lies in whether they can sustain this momentum to meet their ambitious targets. Comprehensive ways to measure emissions and to track the progress of abatement initiatives are first and important steps.
Despite the pre-eminence of the environmental dimension, corporations are increasingly focussed on preventing human rights abuses such as child labour. This requires systematically keeping all suppliers along a supply chain in view. Monitoring efforts can be improved by first assessing the level of risk associated with suppliers based on their geographic location. Once high-risk zones are identified, companies need comprehensive programmes to identify and address human rights violations. With this aim, Nestlé launched the Child Labour Monitoring and Remediation System to tackle child labour in cocoa communities in West Africa. With careful tracking, Nestlé is uncovering more cases of child labour and collecting data on the effectiveness of policies to prevent it. This transparency allows for continuous improvement on the road to eradicating human rights abuses.
Challenges with lower tier suppliers, costs and balanced target setting
Companies face several challenges on the journey to creating a sustainable supply chain. First, lower tier suppliers often lack the resources and capabilities to improve their sustainability performance. Large corporations consequently need to create systems that go beyond their Tier 1 suppliers to improve supplier sustainability. By sharing best practices and pragmatic tools, large corporations can have a dramatic impact. In pursuit of this goal, 11 German companies came together to create econchain, which provides training on sustainable business practices. These types of initiatives facilitate the much-needed knowledge transfer across supply chains. Lower tier suppliers would also benefit from industry-wide standards. If companies’ varying priorities are harmonised, it would create a clear focus for more rigorous supplier development.
Another challenge for creating a sustainable supply chain is securing management support, owing to the perception that sustainability initiatives are too expensive. On the contrary, recent sustainability initiatives show how sustainability and cost targets do not contradict but rather support each other. For example, improved product design at Persil reduced required plastic by 30% while allowing 40% more washing liquid bottles to fit on a single pallet, reducing resource and transportation costs. Cost savings can also be achieved by working with other companies to optimise delivery routes and loads. Germany’s hypermarket chain, Kaufland, and the international beverage company, Eckes-Granini, have partnered to avoid empty delivery runs and to reduce idle time in logistics. This initiative reduces costs and cuts CO2 emissions by 25 tons per year. Through clever design and industry collaboration, sustainability goes hand in hand with efficiency and quality, transforming it into a source of competitive advantage.
While the urgent need to cultivate smaller suppliers has benefitted from growing recognition, it may clash with category management strategies that favour larger suppliers owing to cost or reliability concerns. Yet, supporting smaller suppliers can produce tremendous benefits for society and the company. For one, the supply chain can empower disadvantaged groups while improving reliability and maintaining financial performance. The Swedish vegetable oil and fats producer, AAK, uses its sourcing of shea butter in West Africa to support a network of independent female farmers. The sourcing programme was designed with local needs in mind, including training and a staggered payment system. Meanwhile, AAK benefits from a higher quality product, a more reliable supply chain and a strong reputation that has made it a desirable partner in the industry. The same spirit of using the supply chain for social impact has taken root at SAP, which has committed to using 5% of its addressable spend with social enterprises and diverse businesses by 2025. Through balanced targets, companies recognise the unique position they have in supporting a network of smaller, social enterprises to give back to society. This will, in the long-term, nurture a more dynamic supply market.
Innovation and partnerships create future opportunities
Sustainability in procurement is on the move across industries. As environmental and social issues become more pressing, data processes improve transparency, and growing public expectations cast a spotlight on corporate actions, sustainability will remain a focal point for supply chain and procurement professionals. This is a good thing. Amidst the many challenges, creative innovation and partnerships are creating exciting opportunities that far exceed what was once thought possible.
Companies are upgrading the level of sustainability in their supply chain. In the face of challenges produced by the sheer quantity of suppliers and concerns over costs and competitiveness, procurement officers have launched initiatives to reduce carbon emissions, protect human rights and optimise resource use. Here, innovation and industry co-operation are transforming sustainability into a source of competitive advantage and a force for good. As investors reward sustainable companies with higher valuations, sustainability in the supply chain is transforming from something that is nice to have into the cornerstone of a successful supply chain strategy.