Supply chains are a major source of greenhouse gas emissions — 11.4 times higher than operational emissions, according to the CDP. Deloitte reports that for many businesses, these emissions make up more than 70% of their carbon footprint.
In light of statistics like these, over the past few decades, sustainability has evolved into a significant focus area for the supply chain management industry. Prior to the 1990s, when it came to their supply chain operations, companies primarily focused on cost efficiency and profit maximization. Companies are now showing an increased awareness and concern for the environmental and social impact of their businesses.
We sat down with Gökçe Esenduran, PhD, associate professor of management at Purdue University, to discuss supply chain sustainability.
“The potential risks associated with the scarcity of natural resources is a major motivator for companies to adopt sustainable practices,” says Esenduran. “For example, the EU [European Union] has announced a list of critical raw materials — including magnesium, cobalt and tungsten — that are economically crucial but have a high risk of supply disruption.”
A growing emphasis on social and ethical issues in general also factors into companies’ increased sustainability efforts. These issues include fair labor practices, fair trade, human rights, diversity and inclusion programs, health and safety programs — and the overall well-being of workers throughout the supply chain.
“Stakeholder pressure regarding transparency and ethical business practices is another major driver of increased efforts in supply chain sustainability,” says Esenduran.
According to McKinsey, more than 90% of S&P 500 companies now publish environmental, social and governance (ESG) reports in some form, and in some places, reporting ESG data is either mandatory or under active consideration.
By adopting sustainable practices within its supply chain, a company can meet investors’ ESG standards.
Given climate change and other environmental factors, companies need to build resilience in their supply chains.
“By adopting sustainable practices, companies improve the probability that their supply chain can withstand environmental disruptions such as floods or wildfires — as well as their impact on logistics and manufacturing plants,” says Esenduran.
“Many companies also explore ways to incorporate circular economy principles into their businesses and supply chains where resources are used more efficiently through recycling, reusing and eliminating waste,” she adds.
American customers reward companies with good sustainability practices by buying their products. This study by McKinsey found that in many categories of consumer spending, there was a “clear and material link between [a company’s] ESG-related claims and consumer spending.”
In addition, according to the IBM Institute for Business Value, purpose-driven consumers — those who choose products and brands based on how well they align with their values — now represent the largest segment (44%) of consumers.
Relatedly, people want to work for ecologically responsible companies. According to the IBM Global Consumer Study, 67% of respondents say they are more willing to apply for (and 68% say they are more willing to accept) jobs from organizations they consider to be environmentally sustainable.
Practicing supply chain sustainability makes one a more desirable employer.
Climate experts and lawmakers are increasingly demanding that businesses reduce contributions to global warming. Proposals include:
It is challenging to assess and address environmental issues throughout the entire supply chain. In fact, according to the United Nations Global Compact, participants rank supply chain practices as the biggest challenge to improving their sustainability performance. Why is this?
“Today's supply chains are global, complex and huge networks involving multiple tiers of suppliers across various regions of the world,” Esenduran says. “For example, Walmart has more than 100,000 suppliers around the world, many of whom have their own suppliers. This complexity makes it difficult for companies to have full visibility and control across all suppliers.”
Companies often struggle to get correct and sufficient information about their suppliers' practices, especially those in lower tiers.
Esenduran recounts a typical example of how a supply chain is a difficult area for sustainability efforts:
>> A company that wants to measure and reduce its carbon footprint can relatively easily figure out its Scope 1 and Scope 2 emissions — direct emissions and indirect emissions from energy use, respectively.
>> For most companies, however, their Scope 3 (indirect value chain emissions) emissions constitute the most significant contribution to their footprint. Yet, Scope 3 emissions are the most challenging to measure due to the complex and interconnected nature of the supply chain. Obtaining accurate and reliable data from suppliers is generally difficult.
“There may also be resistance to change within supply chain partners, especially among suppliers who are accustomed to existing practices,” she continues. “Overcoming this resistance and fostering a culture of sustainability throughout the supply chain can be a long process.”
Just as the U.S. has regulations in place regarding sustainable business practices (plus new ones on the horizon), other countries also continue to pass new laws. As many supply chains are worldwide in scope, it’s vital that U.S. businesses ensure continued regulatory compliance.
“This is an important concern and challenge for companies,” says Esenduran. “For example, I may be a U.S.-based company, but if I'm selling my products in the EU, I need to comply with their laws. And the EU is far ahead of us in the regulatory arena.”
To stay in compliance and be prepared for future regulations, it is important for companies to stay informed and be part of the discussion as policymakers engage with industry leaders when designing the regulations.
“By proactively adopting sustainability initiatives, companies can ensure compliance with potential future regulations, reducing the risk of regulatory-related disruptions in their supply chain,” says Esenduran. “It is also important to build flexibility into their contracts when working with suppliers abroad and to identify each party's responsibilities.”
Companies should also consider seeking non-governmental organizations’ input and collaboration.
Esenduran points to the United Nations’ 17 Sustainable Development Goals.
“Although not legally binding, the 17 goals provide a global framework, and they have been a driving force influencing how companies manage their supply chains,” says Esenduran. “It encourages environmentally sustainable practices, ethical sourcing and fair labor practices.”
Both the UN’s “17 Goals” and Esenduran recommend the following strategies to help supply chains become more sustainable:
Esenduran reminds us, however, to look at these strategies in a greater context.
“Keep in mind that it is all complex,” she says. “For example, local sourcing may lead to lower environmental impact and improve economic sustainability. Further, it may also lead to better visibility into the supply chain, and, therefore, make it easier to ensure fair labor practices.
“One needs to consider the whole picture and analyze the impact of each practice while considering its particular circumstances,” Esenduran continues. “For instance, considering the above example, it doesn't mean that local sourcing is always good. It may also be the case that local sourcing increases the environmental impact due to the lack of strict environmental regulations in the region.”
To understand the true environmental impact of a practice, Esenduran recommends performing a life cycle analysis. “But we should remember that there are always pros and cons to each practice,” she says.
Companies rely on globally dispersed and complex supply chain networks to manufacture their goods and services. While this strategy can provide a competitive advantage in cost, quality and/or variety, it also brings significant sustainability challenges.
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