Recognize the Risk in Your Supply Chain

Tsunamis in Japan and Thailand shuttered factories and hurt profits in automotive and electronics companies half way around the world; protesters dressed as Ken and Barbie stalked Mattel’s headquarters, saying the company’s toy packaging was promoting the destruction of rainforests; accusations flew online that Apple was funding rape in Eastern Congo by sourcing components containing minerals from mines controlled by warlords. These are just a few examples of how unsustainable supply chain practices can create unacceptable risks for companies.

Increasingly, companies are focusing on sustainability in their supply chains to manage risk. Corporate sustainability is the idea of operating a firm in a way that allows the firm to create value for its stakeholders over the long term, without sacrificing the interests of future stakeholders in the pursuit of near-term gain. Companies that maintain positive relations with their workers and with communities in which they operate; that do not depend on the use of non-renewable resources; that minimize their environmental impacts; that cultivate the ability to innovate in order to successfully navigate a constantly changing marketplace; and that do so while generating attractive financial returns – these companies are sustainable. Firms that don’t do all these things face risks that threaten their long-term viability.

In a recent survey of supply chain experts by professional services firm PwC, the connection between supply chain sustainability and risk management is clear. According to the survey, experts see four main reasons for investing in sustainable supply chain management:

  • To manage the risk of unintended environmental or social damage.
  • To manage their company’s reputation and the expectations of its shareholders.
  • To reduce costs and realize productivity improvements.
  • To create sustainable products, thereby increasing revenues and enhancing the corporate brand.

Business Case Tough but Real

Companies increasingly see the risk and reputational implications of supply chain sustainability, but many have yet to make a case for supply chain sustainability on cost-savings or revenue-enhancement grounds. After all, supplier efficiency improvements and cost savings don’t automatically benefit customers. Nonetheless, some leading firms have been successful at demonstrating that by helping suppliers to reduce costs, such as energy expenses, some share of the savings will flow to them as well. For instance, making the supply chain more sustainable has been “an easy sell” at Procter & Gamble, according to Huw Waters, product supply director at the P&G. “It takes cost out of our supply chain and the retailer’s supply chain. Why would you not want to do this?”

Even if companies are not always able to see a route to hard financial benefits by improving supply chain sustainability, the benefits in risk management are becoming clear, and most believe it is possible to improve sustainability without compromising their business goals. Last year Green Research surveyed 30 senior sustainability executives at large companies globally. Two-thirds said their companies can have moderate to high influence over their suppliers’ environmental sustainability performance. The vast majority felt their companies could obtain significant performance improvements without compromising the company’s business goals.

Despite this, so far companies have made limited progress in improving the sustainability of their supply chains. The latest report from the Carbon Disclosure Project supply chain initiative, for instance, shows that companies were around twice as likely as their suppliers to have a carbon emissions reduction target or to have invested in reducing carbon emissions.

What are the obstacles to improving sustainability in the supply chain? There several. A few of the main ones:

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