Sustainability is at the root of supply chain risk – and opportunity.
There is increasing alignment between the risks and opportunities supply chain professionals are managing and those sustainability professionals manage. I’m not primarily referring to the issues of labor practice and worker treatment, though those are genuinely important issues to manage. Other significant global sustainability issues are disrupting supply chains ability to deliver and, thereby, impacting corporate profitability.
For years, supply chains have faced varying crises of trust over traditional sustainability issues: unknown toxic chemicals, untraceable raw materials, uncontrolled labor practices and unmanaged pollution and waste. The result has been 20 years of increasing societal demands for transparency, traceability, accountability and reporting within a comparable framework. The Global Reporting Initiative, Carbon Disclosure Project and United Nations Global Compact are all examples of these demands.
Each of the sustainability issues mentioned has created a crisis of trust within many supply chains. Each of these issues has directly impacted quite a few companies’ brand equity, image, sales and revenue. However, these traditional sustainability issues have rarely, in-and-of-themselves, created major disruptions in a supply chain’s ability to deliver raw materials, components or products.
But the nature of global sustainability challenges in supply chains has been changing.
- The CFO of one of the world’s largest consumer products companies, with one of the largest commodity-based supply chains, has said the reason profits were below projected levels for Q1 2012 was due to high and unpredictable commodity prices.
- Due to floods in Thailand, supplies of certain electronics component decreased 35 percent and prices increased 40 percent in Q4 2011. The COO of one of the largest B2B distributors of electronics components stated that his company did not view this as an isolated occurrence.
- A major apparel brand, with a great deal of sophistication in supply chain management, missed their Q1 2012 revenue target by 25 percent due, in large part, to the impact of a drought in Pakistan on cotton supplies.
Each of these examples has climate change as one contributing factor. Climate change related events will continue to alter weather patterns, water supplies, floods and storms, as well as our ability to accurately predict commodity futures.
But not all sources of sustainability risks in supply chains are issues of climate change. For example, during the last five years of work in Bangladesh on energy and water projects for textile and apparel companies, we have watched water supply wells deepen from 150 feet to 450 feet. The primary reason for the drop in the water table is the enormous increase in groundwater withdrawals by the Bangladeshi textile industry for dyeing and washing of cotton.
The impact at an operational level is a dramatic reduction in the water quality used in the textile dyeing and washing operations. The impact at a supply chain planning level is a significant increase in uncertainty of planning. How much should a buyer be worried about their suppliers’ ability to access the water needed to deliver the product?
As we track the actions of companies with complex international supply chains, we see relatively little awareness, except on the part of companies that have already experienced sustainability related supply chain disruptions. To give just one example, a 2012 survey of chief purchasing officers by a leading management consulting firm found that 89 percent had Bangladesh on their list of top three future sourcing locations. I think it is very likely that most of those purchasing officers are more focused on labor costs than sustainability risks.
For those that recognize the threat or have experienced disruptions, we are seeing systemic business changes beyond the impact of the disruption itself. Risks from supply uncertainty cascade through demand planning, supply planning and order management. Greater uncertainty of supply creates a lack of confidence in product delivery timelines.
There is a developing trend for companies with complex international supply chains to hedge their bets. One example of this hedging against risk is a move away from some of their just-in-time inventory practices. Less confidence in the certainty of the supply of raw materials and components results in having factories or first tier suppliers maintain higher inventory levels as a hedge against the uncertainly of supply.
Certainly there are serious business risks from sustainability related impacts in the supply chain. There are also real opportunities. Many of our clients first seek to better understand the nature of the sustainability risks in their supply chain, through actions such as mapping the water risk, flood risk or social risks of their owned-facilities or first tier suppliers. Risk mapping helps our clients prioritize what they have learned about risk and integrate this into their existing supply chain management systems and decision-making processes.
Other clients take a different approach; they start by engaging directly with a set of critical suppliers. The benefit of this approach is it results in a unified sustainability risk and opportunity agenda for the supplier – an improvement agenda that inherently reduces risk. This improvement agenda defines methods to harness sustainability to increase the business value of the supply chain. This assessment also identifies cost reduction opportunities. Direct engagement can yield significant positive environmental and economic outcomes in supply chains at a time when all companies need their supply chains to contribute more to the bottom line than simply cost control.
By whatever route you choose, the economic climate is right for businesses to expand their understanding of sustainability risk and opportunity in the supply chain. For better or worse, the attributes of the suppliers you choose, and the materials and processes they choose, become the attributes of your products and, eventually, of your company and brand.
Phil Berry is vice president of sustainability strategy for WSP USA, and the former Nike sustainability director. He can be reached at Phil.Berry@WSPGroup.com or 503.792.4784.