Supply Chain Sustainability: Why It Is Important & Best Practices

In recent years, customers, employees, investors, and governments have put increasing pressure on companies to demonstrate greater environmental stewardship and social responsibility. This comes at a time when the business case for sustainable operations grows stronger every year.

For many businesses, supply chains have come into focus because they use a lot of resources and money and are frequently a source of unnecessary waste. Thus, supply chain sustainability has emerged as a key corporate goal. Companies have started to measure the environmental and societal impact of their goods and services, from the beginning to the end of their life cycles.

What Is Supply Chain Sustainability?

Supply chain sustainability refers to companies’ efforts to consider the environmental and human impact of their products’ journey through the supply chain, from raw materials sourcing to production, storage, delivery, and every transportation link in between. The goal is to minimise environmental harm from factors like energy usage, water consumption and waste production while having a positive impact on the people and communities in and around their operations. These concerns are in addition to traditional corporate supply chain concerns around revenue and profit.

To set the stage for a more comprehensive understanding of supply chain sustainability, here are some foundational definitions and answers to common questions.

What Is a Supply Chain?

A supply chain is a co-ordinated network of all the companies, facilities and activities involved in developing, manufacturing and delivering a business’s products.

What Is Supply Chain Management?

Supply chain management is the practice of co-ordinating sourcing, production, inventory management and transportation among all the participants in a supply chain to maximise efficiency and customer satisfaction. Many businesses realise major time and cost savings by evaluating and improving supply chain management.

What Is Sustainable Supply Chain Management?

While conventional supply chain management focuses on the speed, cost and reliability of operations, sustainable supply chain management adds the goals of upholding environmental and societal values. This means addressing global issues such as climate change, water security, deforestation, human rights, fair labour practices and corruption.

How Can a Supply Chain Be Sustainable?

Companies around the world have taken steps to lower their carbon emissions, cut back on waste and improve labour conditions. By tracking sustainability metrics in supply chain management (SCM) systems, they monitor multifaceted programs that, for example, prioritise renewable energy, recycle products and materials or encourage greater social responsibility among suppliers. Fonterra, one of the world’s leading dairy exporters, is a compelling example of a company with a sustainable supply chain, as documented by the World Benchmarking alliance. The New Zealand-based cooperative has worked to reduce water use at its manufacturing sites, with a goal to use a 30% less water by 2030.

Additionally, companies can use intelligence and predefined rules to ensure that products aren’t being shipped unnecessarily — for example, making sure products are sent from the closest distribution centre as opposed to one on the other side of the country.

Why Is Sustainability Important in the Supply Chain?

Research has shown that, for most companies, the supply chain is responsible for the bulk of their environmental impact. By their very nature, supply chains often involve energy-intensive production and transportation as goods are made and moved around the globe. Therefore, organisations can often make the biggest difference by making changes to their supply chain rather than to other business operations.

The complexity of myriad supplier relationships and border crossings also makes supply chain sustainability challenging. This complexity can hinder visibility into important operational considerations such as labour conditions at a supplier’s factory that is thousands of miles away.

Supply Chain Sustainability Statistics

As businesses have put more focus on supply chain sustainability, many have studied trends in this area across industries, countries, and areas of impact. Here are several notable statistics:

• Demand: According to PwC, 52% of consumers in South-East Asia expect businesses to be accountable for their environmental impact, while 46% of Australian consumers regularly purchase from ethical or sustainable fashion brands.
• Environmental impact: The supply chain accounts for more than 90% of most consumer goods companies’ environmental impact, according to McKinsey & Company.
• Societal risk: Supply chains which are not measured against sustainability metrics are more likely to have grave societal impacts, such as the employment of child labour in their supply chains. According to the UN, 7% of children across APAC are in child labour, or approximately 62 million.
• Data systems: A 2020 Carbon Disclosure Project (CDP) survey found that 65% of its corporate members used environmental metrics to inform supplier management and hold their business partners accountable to supply chain sustainability goals.
• Progress: CDP has also reported promising progress in cutting greenhouse gases: In its 2020 survey, 29% of 7,000 suppliers to some of the world’s largest corporations reported a decrease in emissions.

Supply Chain Sustainability Examples

Outdoor apparel and gear retailers provide particularly helpful models for supply chain sustainability. Some brands make clothes from recycled plastic bottles or collect used garments, repair them, and resell them as ‘upcycled’ goods. Patagonia operates an award-winning green distribution centre and built a ‘zero waste’ program by reducing the weight of packaging and using sustainable packaging materials.

Examples of sustainability cut across industries. Australian sustainable food packaging company BioPak focuses on reducing fossil-fuel based plastics and tree-based papers in food service by manufacturing compostable alternatives. Aside from considering the materials it uses in its own supply chain, BioPak has built a carbon calculator — on NetSuite — that can help its customers understand how much carbon they can divert from the atmosphere by making more sustainable choices.

Three Tiers of Sustainability

Lack of visibility into the supply network is one of the biggest challenges to supply chain sustainability, particularly because businesses usually work with suppliers in multiple tiers. Many buyers have direct relationships with their Tier 1 suppliers and contract manufacturers. Those Tier 1 companies’ suppliers and subcontractors, in turn, are Tier 2 suppliers; those subcontractors may be working with mines, farms and other providers of raw materials that fall into Tier 3.

According to a joint survey carried out by Ernst & Young and the UN of 70 companies globally, the task of understanding supplier practices and performance beyond Tier 1 suppliers is still a challenge.

Benefits of Supply Chain Sustainability

Supply chain sustainability benefits not only companies’ own interests and those of their stakeholders but also society and the planet at large. Companies have realised that climate change, for example, can put their business continuity at risk with extreme weather disruptions and growing resource scarcities.

Here are five frequently cited business activities that benefit from sustainability:

Supply chain operations: Recent examples show that energy costs decrease, for example, as companies set emission targets with suppliers and help them identify potential areas for improvement.

Branding: Consumers are more concerned than ever about where products come from and how they’re produced. Researchers at MIT’s Sloan School of Management found that consumers may pay 2-10% more for products that provide supply chain transparency.

Investor relations: Institutional investors are keenly aware of the reputational risk of unsustainable supply chain operations. In recent years, the media has reported many irresponsible supply chain practices, and in some cases, it’s hurt a given company’s stock prices. These accounts have revealed businesses sourcing electronics from overseas, maintaining hazardous working conditions, using suppliers that routinely polluted local rivers, and procuring defective components or toxic materials. Interestingly enough, MSCI’S 2021 Global Insights Report states that 57% of Asia-Pacific investors aim to have “completely” or at least “to a large extent” carried out their investment analysis by incorporating ESG issues in their evaluations by the end of 2021.

Corporate culture: Millennials, in particular, seek greater purpose in their work, according to demographers. Successfully hiring and retaining employees often depends on a company’s corporate culture and values, and sustainability plays a key role in that.

Compliance: Governments around the world are mandating greater supply chain sustainability, in part to meet the United Nations’ 2030 deadline for achieving Sustainable Development Goals, like clean water for all. Government regulations cover many areas, including the traceability of pharmaceuticals, disposal of electronics and avoidance of conflict minerals.

Challenges of Supply Chain Sustainability

Cost is the primary impediment to sustainable supply chains, with smaller companies finding it particularly difficult to afford the upfront costs of making a supply chain more sustainable. However, an investment in something like compact packaging, for example, can lead to a reduction in the size and number of shipments, a lower environmental footprint and cost savings over time.

Other companies find that there simply aren’t sustainable options for components, or that they’ve inherited supply chains from acquisitions that are difficult to shift towards sustainable practices because of complexity or organisational structure. While these challenges can be overcome, a small minority of customers are simply not passionate (11%) or feel like shopping sustainably is too much of an effort (10%), which makes it difficult for some companies to justify the added expense or effort.

Supply Chain Sustainability Best Practices

For many companies, sustainability is no longer just something to monitor, but integral to the foundation of their supply chain. CDP reports its members integrate environmental data into procurement tools and processes, using environmental metrics alongside cost and quality stats as they evaluate suppliers.

Other CDP members include specific environmental performance language in contracts and tender documents. While some businesses provide sustainability training to their own procurement managers and suppliers to help the cause.

Four Steps to a More Sustainable Supply Chain

Forrester Research has developed a framework for integrating sustainability into your supply chain, with a focus on four areas:

1. Procurement: Most companies start sustainability programs by looking at energy and water procurement, and by procuring sustainable materials to use in their products.
2. Operations: Look for operational processes or steps across the supply chain that could be more efficient and reduce resource usage.
3. Retirement: Avoid excess waste and obsolete items by designing products for upcycling and reuse.
4. Data and communication: Measure the effectiveness of initiatives in the first three areas, and strengthen any related efforts, by communicating them to customers, supply chain partners and other stakeholders.

Supply Chain Sustainability Trends

Innovation has and will drive supply chain sustainability in the years to come. Two trends that will keep momentum going in this area are that of the circular economy and the data-driven supply chains.

The goal of a circular economy is to ensure that the products and systems involved in the supply chain are based on the principles of sustainability. In this economy, products are designed to have minimal carbon footprints, greater lifespan and be easily disassembled to be reused or transformed.

In data-driven supply chains, companies leverage cloud-based supply chain execution systems that provide detailed analytics and may even pull data from equipment sensors and other Internet of Things (IoT) devices. This gives businesses deeper visibility into their operations, and they can then find, implement, and monitor strategies to become more sustainable.