Supply chain management

Overview

Organizations used to manage only within their own four walls of operations. Over the past few decades, supply chain management (SCM) has become a critical component of business management.

For many companies, a majority of adverse environmental, social, and governance (ESG) impacts are associated with their product-based supply chains. For other companies, ESG impacts are associated with the products they buy to operate their business. Whether a company is focused on its manufacturing or product delivery supply chain or its day-to-day procurement practices, ESG impacts occur all along the value chain.

Working with suppliers to manage and reduce these impacts often requires a degree of understanding of a supplier’s processes, input-output materials, business model, political environment, and industry. Many companies work collaboratively with suppliers, using a combination of a supplier code of conduct, together with periodic compliance audits and enforcement actions, to set standards and expectations and manage supply chain risk.

Elements of supply chain management

Several core elements of SCM are:

To integrate management of product supply and customer demand across all participants in a supply chain.
To require supply chain participants to coordinate and collaborate across major business functions such as product design, finance, human resources, information technology, marketing, procurement, logistics, and sales.
To streamline and inform business processes throughout the supply chain.
To make sure that all relevant information about the product market, for both supply and demand, is communicated throughout the supply chain.

Ethical business relationships and honest dealings are at the heart of strong, healthy, and durable supply chain partnerships. Deficiencies in the governance systems that define and regulate business ethics and culture are often difficult to uncover within one’s own company, and even more so within supply chain businesses. Good governance provides the infrastructure for achieving better environmental and social outcomes.

When done well, SCM delivers a cohesive, highly functional, and efficient business model. Integration and broader access to information improves each supplier’s ability to go beyond self-interest and collaborate to create an optimal, more competitive supply chain for the benefit of all. This enables competition in a globalized economy, where competition is increasingly international and based on the overall value delivered by a company’s supply chain.

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The Sustainable Supply Chain

Business risks

Resilient, ethical, and well-managed supply chains are inherently good for business. Today’s global macro trends and business drivers create an even greater sense of urgency around implementing good SCM. Supply chain risks that emerge from issues like climate change, increasing consumption, and complex business interdependencies can have significant implications for a company’s profitability and reputation.

Reputation protection in an age of instant communications elevates the need to scrutinize a company’s supply chain and purchasing priorities and habits. More companies are avoiding or working to improve suppliers with poor environmental, social, or ethical practices because these sustainability risks affect the bottom line. They are encouraging or requiring suppliers to integrate environmental, social, and ethical standards, codes, and audits into their operations and decision-making processes. And they are putting teeth in these demands with regular audits to confirm compliance with required standards. Having diversified suppliers, as well as alternative transportation modes and routes, is for many an imperative of survival.

Increased demand for sustainability reporting is also driving attention to supply chains and bringing greater transparency to how companies procure goods and create products and services. SCM, with its emphasis on information sharing, optimization, and continual improvement, is a central component to being able to provide meaningful and decision-useful reporting on a company’s supply chain.

Sustainable purchasing

Every product that an organization purchases contains embedded impacts that occur throughout a product’s life cycle, from resource extraction through disposal. Organizations that understand impacts like environmental damage and violations of workers’ rights can use their purchasing dollars to reduce, minimize, or work toward eliminating such negative effects. By integrating environmental and social considerations, including human health, into the procurement process, product selection can be used to protect society and the environment.

A sustainable purchasing program facilitates setting goals and redirecting purchasing dollars toward environmentally and socially responsible products and companies in an orderly and responsible way. Organizations that cannot afford an immediate, complete shift to sustainable purchasing can create a program and plan to prioritize efforts and transition at a fiscally responsible pace, while creating market awareness and demand for more sustainable business practices and products.

There is an ever-growing body of sustainability standards and certifications across many product categories. Product labeling or certification to demonstrate compliance with standards help companies quickly identify preferred products and institute sustainable purchasing practices. The objective should be to establish guidelines that make it easier for procurement staff to work toward more sustainable purchasing habits. These guidelines typically take the form of product criteria, lists of preferred products, or both.

Implementing sustainable purchasing as a strategy requires more than just setting criteria and making commitments. Purchasing decisions about which products meet established criteria and commitments are made as part of the day-to-day procurement process. The success of a sustainable purchasing initiative depends on how it is adopted and interpreted by those who make the purchasing decisions. To be successful, the sustainable purchasing principles, criteria, and commitments that the company adopts need to be fully integrated into the structure, processes, and training of the procurement function.

Sustainable purchasing can be used to support and reward other organizations with strong commitments to sustainability. It can be used to encourage and drive market innovation. Every change toward more sustainable purchasing sends a market signal, whether individually for large purchasers and collectively for smaller ones, and influences improvements in product attributes and impacts.

Getting started

Implementing and improving a supply chain management (SCM) program takes time. When getting started, best practice is to identify and work on managing the biggest risks and worst impacts of the most important providers in your supply chain.

Here are some practical tips for doing this:

Get a clear picture of where your company is spending its dollars. Examine and analyze your company’s average annual spending to identify its top purchasing categories. Often the vast majority (usually around 75%) of your company’s average spend goes to a handful of product categories. Also look for products or services that are critical to the operation of your company but fall outside the biggest spend items. Together, these are your key purchasing categories.
Identify your company’s most important supply chain partners. Who are the suppliers of the products and services that are in your key purchasing categories? Are there any other suppliers who are critical to your company’s operations? Include them as well. These groups comprise your key suppliers.
Be sure to identify the environmental, social, and economic impacts associated with your key purchasing categories when assessing your organization’s most significant issues. Some industries have well-known impacts that are available through a quick Internet check.
Brainstorm all possible events, factors, or scenarios that could disrupt your supply chain. Be sure to record these in your notes. This will help you evaluate these risks and will form the basis for creating a prioritized action plan for managing supply chain risks.

Once you have a clear picture of your company’s key purchasing categories, key suppliers, impacts, and risks, you can develop a strategy to reduce risks and manage your supply chain in an efficient and effective way. Supply chains can be large and complex. Choosing the work that you can achieve each year is part of the sustainability journey, and this is particularly important as you are getting started with managing your supply chain for greater sustainability.

Here are some initial steps that will help you get organized:

Be clear about what you are asking from your suppliers. One good way to do this is to develop a Sustainable Purchasing policy. Many purchasing categories are comprised of commodity goods, sold by multiple suppliers (e.g., office supplies, paper products, cleaning products). Identify the sustainability characteristics your want in these goods. Then create and inform suppliers of your policy and program that gives preference or an incentive for purchasing products that have your preferred qualities over those that lack them.
Develop and inform suppliers of guidelines for performance. Turn your expectations into a clear set of guidelines, such as a Supplier Code of Conduct. This establishes the minimum sustainability performance standards you expect from your suppliers.
Engage with your key suppliers to help them understand and manage their sustainability risks. The engagement could start with periodic training and education about your Supplier Code of Conduct.

Maturing your program

After you have built the foundation for supply chain management (SCM), you can begin to drive the change you seek in more formal ways and go deeper into your supply chain. You will find that some of the change you seek requires Key Suppliers to do similar work with their supply chains.

Here are some things to consider as you expand your supply chain management activities:

Incorporate the Sustainable Purchasing policy, Supplier Code of Conduct, and any other ESG requirements into contracts with Key Suppliers to formalize expectations and support sustainability reporting to your company’s key stakeholders. You can expand this when you have the capacity to manage putting these requirements in contracts with all suppliers.
Engage with Key Suppliers to help them build capacity for sustainability. Provide assistance and information to show them how they too can use tools and management systems to track, improve, and report on their performance and that of their suppliers.
Broaden you influence within supply chain. Ask your Key Suppliers to identify their own Key Suppliers. Work to help them develop a process for assessing their suppliers. Ask Key Suppliers to develop their own Supplier Code of Conduct and Sustainable Purchasing policy consistent with yours. Ask or require them to make it part of their contacts with suppliers.
Assess your Key Suppliers and let them know where they stand. Develop standards, criteria, and tools to assess each Key Suppliers’ performance against the standards your company has set. There are services such as Ecodesk to facilitate supplier assessments and reporting. Many companies ask suppliers to report on key risk areas such as environmental, health and safety programs, workplace health, safety and wellness programs, labor management and human rights, business ethics, and stakeholder engagement.
Identify and reward suppliers who excel as your preferred suppliers.
Consider investing in SCM software to organize and facilitate the SCM program. This type of software will help manage supply chain transactions, relationships, and business processes.

Supplier diversity

Supplier diversity can deliver important benefits when companies go beyond inflexible or tactical quota systems. A strategy to include small, local, minority-owned, or other traditionally underrepresented companies should be presented in clearly defined policy statements and performance expectations. It should be designed to deliver benefits to the purchasing company such as savings resulting from increased competition, enhanced reputation in stakeholder communities, and expanded opportunities for innovation in new products, services, and solutions.

Supply chain resilience

The domino effect is inherent in today’s complex, globalized, and rapidly evolving supply chains. When one part of a supplier network is exposed to risk, all parts become vulnerable to disruption and impact. Companies can take proactive steps to build resilience into their supply chains. Organizations that strategically monitor and manage supply chain risks are better positioned to withstand natural and man-made disruptions such as geopolitical conflicts, changing weather patterns, natural resource shortages, volatile markets, labor disputes, and cyberattacks. These disruptions can have severe financial and reputational impacts, beyond immediate operational impacts. Building flexibility, traceability, and transparency into the supply chain enables a company to more effectively anticipate, respond to, and bounce back from unforeseen business shocks.

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Sustainable procurement

Companies that want to manage risks and reduce impacts linked to the company’s purchasing take steps to identify and assess the environmental and social impacts of the products they buy. They set guidelines based on product availability and company criteria, make commitments, and continuously work to improve the percentage of total spending on sustainable and environmentally preferred products. They regularly assess outcomes and adjust their purchasing targets to drive the market to produce more sustainable products.

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Sustainable Procurement Practice

Supplier ESG management

The scope work required to understand and manage supplier ESG issues varies in difficulty depending on the size, number, location, and relative market power of a company’s suppliers. Managing ESG factors to effect change involves audit, evaluation, standards, compliance, and clearly defined consequences. These issues often arise in parts of the world that have inadequate or no legal protections or social norms to regulate behavior. Many companies hurdle these challenges by focusing efforts on suppliers who are most critical to their business and who show the greatest opportunity for significant change. Some companies collaborate with key suppliers or work with industry groups or through strategic partnerships with NGOs active in the areas where their suppliers operate to do this work.

Supplier collaboration

Collaborating with suppliers to manage and reduce ESG impacts often delivers better results because it requires a higher degree of understanding of the supplier’s processes, input-output materials, business model, political environment, and industry. Companies with a strategic approach to supply chain management go beyond periodic compliance audits and enforcement actions to uncover and more deeply understand what makes change challenging. Collaboration promotes trust and sharing of credible on-the-ground information. It results in more effective action to address and eliminate adverse ESG conditions.

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Creating Shared Value

Supply chains basics

Every product in the economy represents the cumulative efforts of many people and activities. Those who participate in the process of bringing a product to market form the supply chain for that product.

Supply Chain Elements:

Commodities (sourcing, extracting, purchasing)
Production (manufacturing, processing, packaging)
Distribution (transporting, warehousing, retailing)

Supply chains are built on business models for bringing a product to market in the most efficient and cost-effective way. A typical supply chain begins with sourcing and extracting natural resources, followed by the conversion and assembly of those resources into components and final products. There are storage, transportation, and distribution activities before the product finally reaches the consumer.

The participants in a product company’s supply chain define the ability of that product company to compete. Suppliers have independent business interests, such as maximizing revenue, increased market share, and growth. The ability of a product company to build and manage a cost-effective and efficient supply chain is a significant factor in determining the bottom line for companies that provide goods and supply chain driven services. Who is in a company’s supply chain, where they are located, and how they behave can have a significant impact on the company’s ability to conduct business, compete, and maintain a healthy social license to operate.

With outsourcing and globalization, the flow of goods and services has expanded and supply chains have become longer and more complex. The world’s most pressing sustainability issues have an impact on supply chains. Events thousands of miles away can prevent a supplier from providing a critical product or service, or tarnish the reputation of companies within the supply chain.

Companies must work to reduce negative social, environmental, and ethical impacts throughout their supply chains. To do this, they must bring pressure and influence to bear on their supply chain partners. Through direct and indirect efforts, the goal is to make the entire supply chain as efficient, economical, resilient, and responsible as possible. Supply chain management is key to addressing these challenges.