Building a sustainable supply chain is a huge undertaking. Most of the transition requires course-correcting or shifting processes that have been the norm for decades.
That said, supply chain parties should not underestimate the importance of sustainability in supply chains.
Beyond meeting goals of environmentally conscious practices, there are cost reductions when sustainable systems are implemented.
What is supply chain sustainability?
A sustainable supply chain ensures that all stages of the supply chain journey (from harvesting raw materials and manufacturing to last-mile delivery of finished goods to consumers) are designed to account for human rights and fair labour practices to minimise the negative environmental impact, minimise material waste and ensure future generations can continue receiving the benefits of social and economic growth.
Why are sustainable supply chains crucial to the planet and our environment?
Those working with supply chains can no longer ignore sustainability.
Sustainability issues can disrupt business, whether you are a raw material provider, manufacturer, logistics provider or retailer.
For instance, a study of Toronto's climate change predicted that more intense ice storms, heatwaves and urban flooding would disrupt the power lines and roads, compromising future supply chain operations.
Supply chains are responsible for nearly 40% of global greenhouse gas emissions. Eight supply chains account for more than 50% of global emissions: food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services and freight. Furthermore, a significant share is indirectly controlled by only a few companies.
The impact of supply chain parties cutting unnecessary production and transportation would be game-changing for the environment.
In addition to reducing costs by streamlining operations, retailers will gain today's 'sustainable shopper' support and loyalty.
The challenge for retailers is that even though sustainability is critical, they are still businesses that must generate profits.
Is it possible to prioritise both?
Sustainable supply chains are not working against their interests. They benefit on many fronts, including increased return on investment, improved brand image, and a more significant market share.
Building sustainable supply chains are also profitable
With 40% of all greenhouse gas emissions arising from supply chains, any reduction in the world's supply chains would positively affect the planet and subsequent generations.
This should be reason enough for supply chain parties to rethink legacy processes in a perfect world. However, since we do not live in an ideal world, here are three more reasons.
Unsustainable supply chains are becoming more expensive
Today's supply chains are haemorrhaging money at every stage of the product journey because of inefficiencies intrinsic to their outdated business practices.
- Planning inventory at the category level is not explicit enough to prevent wastage on individual SKUs, leading to tonnes of goods being destroyed yearly.
- Allocating inventory across several locations without accounting for their unique demand profiles will inevitably lead to massive inventory distortions, out-of-stocks, and stocks — wasting raw materials, freight and warehousing space.
- Replenishing stock using rudimentary methods like reorder point, top-off, or periodic replenishment leads to increased waste, not only in out-of-stocks or overstocks but also in unnecessary shipping costs that contribute to greenhouse gases.
- Failure to proactively rebalance stock across locations leads to dead inventory at some sites. The new inventory of an SKU is ordered at full cost for other locations — creating unnecessary replenishment costs and supply chain emissions.
If losing money on easily solvable issues is not enough, manufacturers and retailers struggle to gain and hold onto their market share as consumers choose more conscious-made products.
Optimising supply chains will stop the haemorrhaging of costs and save our planet's resources.
Unsustainable companies are becoming social outcasts
21st-century consumers want a purpose-driven shopping experience and vote with their wallets.
Fostering sustainable practices in supply chain strategies more visible to the public generates goodwill and customer loyalty.
Retailers and Consumer Packaged Goods (CPG) companies that do not step up will get left behind by their customers.
Another study found that 77% of consumers want sustainable brands, and most are willing to change their shopping behaviours.
The catch is that consumers struggle to get good sustainability information. That is why they use brands as proxies for the sustainability issues they care about.
Consequently, retailers and CPG organisations must be careful when playing the sustainability card. They must have proof of their claims because consumers do not like being misled.
In a world where social media rapidly amplifies these untruths, the last concern a company wants is to get called out for greenwashing.
Consumers, investors and shareholders are prioritising Environmental, Social, and Governance (ESG) criteria
Consumer outrage has grown louder over sustainability concerns like:
- Unethical supply chain practices (for example, if a supplier does not abide by the no child labour law)
- The increase in carbon emissions (applicable to those harvesting raw materials, manufacturers and transport logistics)
- Massive destruction of leftover inventory
- Impact on the local environment and economy
This has affected how retail and supply chain leaders manage their companies today. Beyond a renewed sense of social responsibility, supply chain leaders and businesses are beginning to equate sustainability with innovation and future success.
In response, they have invested in analytics, blockchain, automation and AI-powered retail IT because it enables them to optimise operations — from planning to fulfilment.
This has caused manufacturers, retailers and supply chain leaders to face a 'make or break' decision. Either invest in more sustainable supply chains or get left behind.
Challenges facing supply chain sustainability
Most companies will face supply chain risks and challenges at every stage. The three major concerns of improving supply chain sustainability congregate around the following:
1. Increased cost
Change always comes at a price.
Supply chain leaders may feel caught between economics, social responsibility, or consumer demands.
Every company feels increasing costs. However, for those supply chain organisations who strive toward supply chain sustainability, they should also note additional concerns:
- Using new technology specialists to advise on new systems and protocols.
- vetting suppliers or sourcing from more sustainable partners who espouse environmentally conscious values
- the inefficiency of vendors or carriers
- the reputational impact of dealing with non-sustainable supply chain parties
- being non-compliant in the face of new ESG regulations
With public favour shifting so dramatically in favour of corporate social responsibility, costs are justifiable and likely to be recovered eventually.
For instance, freight carriers who have invested in emission-efficient vehicles, including trucks and aeroplanes, is a long-term strategy that will cost more up-front but will yield a long-term return.
Moreover, there is also a measurable cost to not implementing sustainable practices in the supply chain.
Research has estimated that environmental supply chain risks will amount to $120 billion by 2026. This means there could be an even higher cost in the future for not implementing sustainable supply chains now.
2. Lack of a supply chain framework
Whether a supply chain company is entering or is well on the path to optimal efficiency and sustainability, the ongoing question remains 'how to build a sustainability framework across supply chains'.
Businesses do not operate in a vacuum and rely on numerous internal and external systems. This is why the question of supply chain sustainability is often systemic, addressed from the highest level of governance.
For instance, the European Union is implementing a new approach to supply chain sustainability. The Corporate Due Diligence and Corporate Accountability bill will enact an EU-wide regulation around ESG risks in supply chains.
Regional companies will be expected to implement these measures to align with these standards.
It will be essential for global enterprises to build frameworks and protocols that meet legal requirements yet still make it possible to maintain new, sustainability-oriented policies and procedures.
The promising news is that interoperability is already a goal many are working toward and one that technology is making possible.
3. A lack of expertise in implementation
One side of the supply chain sustainability is assessing how to work toward its impact on existing relationships and structures. The other side is what is required to enact the change.
Supply chain companies may lack the resources, technical expertise or knowledge to follow new regulations and guidelines in building sustainable supply chains.
The promising news is that these deficiencies are compensated for by a growing cohort of talented individuals specialising in supply chain sustainability. The other good news is that some practices that will best position an organisation for change in this area are practices they should already have in play.
For example, several supply chain companies are using blockchain technology to optimise their connectivity, lower CO2 emissions and obtain high-quality, reliable data analysis from their supply chain sustainability efforts.
Optimise supply chains and sustainability will follow
Ultimately, supply chain efficiency and sustainability are interrelated.
Supply chain parties from retailers, manufacturers and freight carriers must first focus on optimising the supply chain, and sustainability will soon follow.
Using newer technologies like advanced analytics, artificial intelligence, blockchain, and automation will enable companies to
- Cut overstocking by only sourcing products that have actual demand
- Slash carbon footprints by eliminating unnecessary shipments and routes
- Increase interoperability and data accuracy
- Gain customer loyalty by championing the most crucial cause of our times
Building sustainable supply chains is good for the planet and positive for the balance sheet.