Unlocking the Competitive Advantage of Ethical Supply Chains

Ethical and profitable operations coexist quite nicely with ethical behaviors, making it easier for companies to profit. So why is it that businesses struggle with the concept? What is holding back the development of ethical or socially responsible supply chains?

The reasons may vary but it’s not uncommon for businesses to view the maintenance of profitable supply chains as an exercise in trade-offs: that cheaper upstream labor affords better downstream customer service. Others struggle with the business case, “getting the numbers straight” and failing to justify necessary investments.

Essential Practices

In reality, ethical supply chains are no longer just “nice to have.” Companies that choose to “talk the talk” instead of “walking the walk” when it comes to responsible supply chains may begin to lose their ability to grow and compete for several reasons.

First, their customers, via social media, are gaining greater transparency, and faster. News of the Rana Plaza disaster circled the world. Consumers also view news of manufacturing sweatshops, wherever they may be, with disdain. A company that looks away as factory workers are exploited by a sub-supplier will feel the ire of their global customer base as they take the business elsewhere.

Second, reputable analyst firms increasingly factor ethical behavior into their valuations. Sustainability can create a significant impact on stock prices, and companies are taking notice. In fact, the UN Global Compact – Accenture CEO Study on Sustainability research found that 52 percent of executives report that investor interest is an incentive for them to invest in sustainability, and 69 percent expect investor interest to be an increasingly important factor in building sustainability issues into their core business.

Third, millennials (born between 1980 and 2000) believe sustainable practices are essential. Companies that ignore their preference may find it increasingly difficult to attract and retain these workers. CEOs are recognizing the impact of corporate sustainability on the war for talent. In fact, 46 percent of CEOs included in the aforementioned UN Global Compact study report that employees would be among those having the most impact on their action on sustainability – second only to consumers over the next five years.

When taking a collective view of corporate stakeholders, the importance of managing ethical supply chains is clear in today’s competitive business arena. Moving from a focus on compliance to ethical practices can create market differentiation, or as some have said, a “license to operate,” in that they establish trust with local governments and among societies where they operate by complying with regulations and establishing health and safety programs that give them tacit permission to do business.

Competitive Advantage

For those who see ethical behaviors more as giving them a “license to grow,” the competitive barrier that can create in the marketplace can be unassailable. In essence, being ethical is synonymous with being competitive. Those companies that create responsible and profitable supply chains can gain a triple advantage resulting in a commercial edge while delivering benefits to the environment and society as a whole.

As noted in the World Economic Forum report, “Beyond Supply Chains – Empowering Responsible Value Chains” prepared in collaboration with Accenture, companies that adopt practices that are good for the environment, local economies and societies also find that they contribute to their profitability, with revenue uplifts of 5 to 20 percent; supply chain cost reductions anywhere from 9 to 16 percent; and brand value increases from 15 to 30 percent, as well as significant risk reduction.

With such solid numbers supporting them, businesses can move from a philosophical argument about what is the right thing to do to actually having a clear business case for actions that can boost their profits.

Despite the strong business case, few CEOs believe businesses are doing enough on sustainability, even though 87 percent of them see it as an opportunity to innovate and achieve growth. To reverse the inertia and begin “walking the walk,” supply chain executives need to gain transparency when it comes to the many management levers they can pull. Decision-support tools exist that can help them find their way forward on the route to competitive advantage. For instance, the World Economic Forum (WEF) “Beyond Supply Chains” report contains a framework that can help companies make responsible decisions.

Given how difficult it can be for companies to make these decisions, the WEF report offers a toolset that can be used to help clarify how operations executives can move from thought to action. Among the features in the decision framework are a landscape of supply chain practices, a detailed value assessment, leading practices and a triple advantage decision matrix.

The information dives into practical examples that worked well for other companies and outlines the potential value proposition based on the experience of others. For instance, the WEF report cites several companies that have reduced the use of packaging materials in their supply chain and that of their partners by minimizing the size/density of the package.

Based on the experience of those companies, the report says companies could experience 3 to 5 percent reductions in their supply chain costs with less packaging material costs, higher freight utilization and lower inventory costs – all while delivering a 2 to 3 percent reduction in greenhouse gases.

Along this journey to the realization of ethical supply chains, collaboration across the extended value chain of internal stakeholders, suppliers, subcontractors, sub-subcontractors and consumers is key. Each change a company makes in a product, service or process can have ripple effects, and everyone across the supply chain needs to understand exactly what those effects are to avoid unintended consequences. Additionally, the more a company collaborates across the value chain, the more value they are likely to derive from the triple advantage.

The bottom line is that the time is ripe to move beyond talking about the importance of sustainable practices and to embrace them as a strategic weapon to gain business advantage. Those companies that hesitate to “walk the walk” and continue to be “all talk” do so at their own peril. While customers, investors and employees increasingly demand ethical operations, the biggest benefit ultimately lands on the bottom line through new sources of growth and innovation.