Insights

Supplier Sustainability: The New Frontier of Value in Supply Chain Management

March 10, 2020

A new study in the Harvard Business Review outlines the massive value companies gain from supplier sustainability programs – and the considerable challenges involved.  

Time was, Supply Chain Management was only about the logistical process of getting products to consumers. But over the past number of years, the rise of big data and increasing sophistication of skills has allowed Supply Chain to become a source of strategic value to organizations in a variety of ways: top companies like Amazon now rely on Supply Chain Managers to shepherd an exceptional customer experience. Companies rely on it to find more strategic relationships with suppliers and innovate on product, and they rely on it to keep costs low, which is a crucial part of margin evolution.

Increasingly, they rely on Supply Chain Managers to provide visibility into where products come from, ensuring that the company is working with ethical and sustainable suppliers. Customers’ demands for an exceptional experience are rising, but so are their demands for ethical products. More than ever, they want to support companies who have a deep understanding of where their products come from. They want companies to work with suppliers with sustainability and ethical labour practices.

It’s a difficult challenge for companies with complex, deep Supply Chains. If your product has 3 or 4 rungs in a production chain, it can be remarkably difficult to know gain a full insight into your entire Supply Chain from origin. But if you can achieve that clarity, and orient your supplier selection towards only using sustainable providers, you can present a different, confident face to the consumer.

It’s a huge opportunity, and one that’s made supplier sustainability one of the bigger emerging areas in the field as innovative companies realize the value that’s on the table.

But, as mentioned, it’s difficult.

A great new Harvard Business Review feature examines this push for supplier sustainability. Written by Veronica H. Villena and Dennis A. Gioia, the article delves into some of the key challenges by studying three large companies who have made significant efforts to up their supplier sustainability game.

For their study, Villena and Gioia looked at three large multinationals – one in the automotive space, one in pharmaceutical, and one in consumer goods, each considered a leader when it comes to sustainability. In every case, companies had made investments in their own internal sustainability, and decided to expand these efforts by instituting similar standards for suppliers along their supply network. The goal was to create a situation where not only first and second-tier suppliers met sustainability goals, but third and fourth-tier suppliers did as well.

The authors then visited these companies’ suppliers to see how well they conformed to the standards. They found that the challenges are considerable: lower-tiered suppliers they visited in Mexico lacked systems for dealing with social problems like harassment and hazardous labour conditions. 10 Suppliers visited in China and Taiwan had chronic overtime issues, dangerous working conditions and a lack of environmental programs. Suppliers in the U.S. had a lack of systemic accident reporting. A number of these suppliers lacked the ability to institute sustainable standards with their suppliers, multiplying the challenge when it comes to getting more sustainable two or three rungs up the chain.

Interestingly, the authors asked supplier representatives about why they weren’t meeting their clients’ sustainability goals, and the response was ironic: In short, the suppliers said that it was very difficult to meet their clients’ standards because their clients placed orders with tight deadlines, often over their capacity.

In our eyes, this difficulty exposes a fundamental tension in Supply Chain Management: companies outsource manufacturing to lower their labour and raw materials costs, often with suppliers in developing markets. The very thing that keeps these outsourced suppliers appealing is the thing preventing them from meeting the company’s high internal sustainability standards.

In short: it’s hard to subject a 3rd or 4th tier supplier to high, costly standards when their low cost is why you’re using them in the first place. That’s part of the reason why companies lack this visibility into their supply chains in the first place – a certain amount of opacity is baked into the pie, so to speak. Lots of the lower-tiered suppliers in the survey don’t have to answer to shareholders, and provide little information to the public in general, which makes them “almost invisible,” in the authors’ terms.

But consumers’ demands for sustainability are rising, and that means that Supply Chain professionals need to find a way to square the circle. There’s a tremendous amount of goodwill and value in the marketplace for companies that figure this out, and big risk – like a similar PR disaster to the Apple / Foxconn scandal a few years back – for companies who don’t.

It’s going to take a particular set of skills, as well as institutional will on the part of the companies setting supplier strategy. The HBR authors highlight a four-pronged approach to making these sustainability programs stick:

  • Establish long term sustainability goals for the organization.
  • Mandate that first-tier suppliers set their own aligned sustainability goals.
  • Make sure that lower-tiered suppliers are a core part of your sustainability strategy as these are often the highest risk.
  • Dedicate someone on your team to making sure first and lower-tier suppliers align with your sustainability goals.

Companies which are serious about supplier sustainability need to incorporate it into their talent management strategy. That means finding sustainability point people who have a very particular set of skills. Sustainability gurus need strong Procurement and supplier research skills, as well as Vendor Relationship Management and negotiation skills. The profile doesn’t differ much from a typical Procurement skill-set, but there’s a major emphasis on relationship-building skills – the person you bring on needs to have enough backbone to advocate for sustainability with both internal stakeholders and suppliers.

Supplier sustainability an admirable goal from an ethical standpoint, but it’s also one with tons of business value for companies. The challenges are considerable, but so are the opportunities. We encourage you to check out HBR’s article – it’s chock full of interesting approaches that companies are taking to tackle these supplier sustainability challenges, with some success stories along the way.

But we’re curious: what’s your take on this issue? How is your organization helping develop sustainability in your supply chain, and what are the major challenges? Let us know in the comments!

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