The Challenge of Sustainable Supply Chains
Modern production is global, and globalization persists through epidemics, wars, xenophobia and trade wars. It persists because global supply chains improve product quality while reducing costs. Globalization continues as communication, information and even transportation technologies advance while becoming relatively cheap. For those who manufacture or sell goods and services, the question of sustainability is how do companies ensure that the products they manufacture or sell are not built with components that damage the environment or use child or slave labor in the production process? Out of sight, out of mind, lies at the heart of the sustainable supply chain challenge.
One of the still-debating issues in the proposed SEC carbon disclosure rules is how the SEC should address “Scope 3” emissions, those emissions that are outside an organization’s control but within its supply chain. Scope 1 emissions are those that arise directly during the production process, and scope 2 emissions are those that result indirectly through the use of whatever is produced. These are relatively easy to identify and measure. However, governments seeking to regulate GHG reporting recognize that supply chains must also be regulated.
as Dieter Holger recently observed wall street journal:
“In recent years, a series of supply chain regulations have come into force and more are on the way, which could expose companies to penalties and public criticism if they are found to be negligent,” the lawyer said. In reality, businesses, especially SMEs, have limited visibility into their supply chains and are struggling to expand the scope of regulation. One of the biggest pieces of legislation on the horizon is the EU’s Corporate Sustainability Due Diligence Directive. Proposals published last February would require large companies operating in the EU to identify, prevent and remedy human rights and environmental risks in their supply chains, such as minimum age requirements, worker safety, pollution and biodiversity loss. “
Supply chain relationships are not random encounters but contractual and formal inter-organizational interactions. Agree on the quality of the product or service, and exchange payment. Companies sourcing supplies need to add elements of environmental and social sustainability to the definition of quality and develop methods to ensure quality control. There will always be unscrupulous suppliers who cut corners and cheat on contracts or purchase orders, but the methods for detecting such behavior are well established and need only be expanded to cover these new elements of quality. We’ve seen this in other regulatory areas, such as car safety. The recall of defective airbags is perhaps the most famous example of ensuring that quality control principles are applied to ensure compliance.
The image of a supply chain is oversimplified because organizations often rely on multiple suppliers for the same supply, and their suppliers are also serviced by suppliers. It would be wiser to talk about supply networks rather than chains, and to replace the linear image of a chain with a more complex, multi-dimensional image of a network.In an article from 2020 Harvard Business Review, Verónica H. Villena and Dennis A. Gioia report their research into the sustainability practices of multinational corporations (MNCs) and their suppliers, and find that:
“In recent years, a rising quantity Multinational corporations commit to working only with suppliers who adhere to social and environmental standards. Typically, these MNCs expect their Tier 1 suppliers to adhere to these standards, and they require these suppliers to in turn require their suppliers to adhere to these standards—and ideally, suppliers to their suppliers to adhere to these standards. It’s an admirable idea, but one that’s been difficult to pull off in practice. Many multinational companies committed to this have faced scandals from suppliers who, despite knowing about sustainability standards, continued to violate them…and, all of these scandals involved Tier 1 suppliers. The practices of lower-end suppliers are almost always worse, increasing the company’s exposure to serious financial, social and environmental risks. ”
The way they propose to improve the supply chain performance of MNCs is to train their own procurement staff or procurement agents to understand that quality supply is defined not only by its technical requirements, but also by the environmental and social sustainability of the supply. Biena and Joey It was concluded that the senior management of a multinational company should:
“…make clear to their procurement officers, and motivate them to pursue not only economic goals, but also environmental and social goals. These officials should take a hands-on approach to collecting data on suppliers’ capabilities, monitoring metrics on their sustainability performance, And work with them on continuous improvement projects.”
The challenge of supply chain sustainability is no different from the overall challenge of sustainability management. The goal is more thoughtful, careful management. The point is precision. What resources must be used to produce this good or service, and how can we ensure that the production process is efficient and does not create more waste or environmental impact than needed? Likewise, are the people involved in producing the good or service treated well? Our goal is to keep workers healthy so they can continue to be productive as their lives, skills and organizational productivity are enhanced.
In a supply chain or supply network environment, this requires communication and efforts to build relationships between suppliers and customers. Instead of sitting back and expecting the automatic delivery of sustainable supply, engage suppliers and identify their barriers to sustainability. In one notable effort in this direction, Walmart has a program where they partner with HSBC to reward sustainable suppliers by paying invoices faster and getting funding. Some suppliers may require technical assistance to ensure compliance with sustainability quality standards. Procurement officials can help them obtain this assistance.
Formalizing sustainability requirements through regulation will help ensure that senior management places greater emphasis on these factors. Expectations of regulation in Europe and the United States have already had an impact. Major accounting firms are trying to add sustainability experts to their auditor staff, and companies are starting to realize that sustainability is more than just public relations. The Office of General Counsel is adding environmental attorneys or experienced legal analysts to scrutinize environmental and employment laws and regulations. While conservatives who find regulation inherently anti-business may seek to discourage these practices, it would be more useful if they could focus on ensuring that rules facilitate rather than hinder organizational productivity and efficiency. More enlightened labor practices can produce more motivated and productive workers. Production that generates less waste and uses less energy and water will reduce costs. It’s just good management, and at best, regulation encourages best management practices.
Sustainable management and prudent use of human and natural resources will be how we continue to grow economically without destroying the planet. The old management philosophy of having to crack eggs to make an omelet is outdated. A relatively free market is the best way to create the wealth we all depend on, but let’s put an end to the delusion that there ever was a completely free, unregulated market. Rules and regulations are required and have always been – for example, try “you may not steal though”. In this crowded, interdependent world, the rule of law has never been more important than it is today. We can address the challenge of supply chain sustainability, and the process has already begun.
