Building a Sustainable Future Through Responsible Supply Chain Management
Currently, sustainability in companies has emerged as a key concept. As businesses recognize the pressing need to address environmental, social, and economic challenges, incorporating sustainable practices is paramount.
There are several reasons to integrate sustainability into an organization’s strategy. Investing in corporate sustainability allows to comply with increasingly stringent regulations, satisfy consumers who are ever more concerned about sustainability, respond to investor pressure, or even improve talent attraction.
Implementing an ESG strategy starts indoors but must be extended to the entire value chain. Companies’ environmental and social impact is not restricted to their operations because the production and use of their products and services are part of a chain with several entities, ranging from the initial raw materials to the end of the product’s life. Supply chains play a central role in sustainability transformations. Recent research has shown that seven of the nine most common ESG initiatives involve value chain components. And for most products, more than 80% of greenhouse gas emissions are “Scope 3” – the result of activities from assets not owned or controlled by the reporting organization.
If organizations want to reduce the risks of climate change, build a fairer society, and generate growth, they must create a more sustainable supply chain management.
What is Sustainable Supply Chain Management?
Sustainable Supply Chain Management is the process that manages the value chain by integrating socially and environmentally responsible practices into a competitive and successful model. It involves incorporating sustainability principles into every stage of the supply chain, from sourcing raw materials to delivering the final product to the customer, to reduce the supply chain’s environmental, social, and economic impacts.
Sustainable Supply Chain Management aims to create a more sustainable value chain by promoting responsible sourcing, reducing waste and emissions, improving working conditions for employees, and increasing transparency. The goal is to create long-term value for all stakeholders, including suppliers, employees, customers, and the broader community while minimizing negative environmental impacts.
The benefits of fostering a sustainable supply chain
In addition to the existing benefits for society and climate change mitigation, fostering a sustainable supply chain can provide numerous advantages for companies, including:
Image and Reputation Improvement
A sustainable supply chain can enhance a company’s reputation and build trust with customers, investors, and other stakeholders increasingly concerned about sustainability.
Sustainability can increase sales by attracting eco-conscious consumers, building brand loyalty, and differentiating products.
A sustainable supply chain can help reduce costs by improving efficiency, reducing waste, and increasing productivity.
Many countries all over the world have introduced regulations related to sustainability, such as the reduction of greenhouse gas emissions targets. Fostering a sustainable supply chain can help companies comply with these regulations and avoid penalties.
By promoting sustainable practices, companies can reduce the risk of supply chain disruptions caused by ESG factors. Sustainable practices can also reduce the risk of reputational damage (public scandals and related loss of reputation) caused by unethical practices in the supply chain.
Sustainable supply chain management can drive innovation by encouraging the development of new products, processes, and technologies that reduce environmental impacts, enhance social responsibility, and promote economic growth.
A consistent ESG strategy can positively impact return on investments by applying capital to more favorable and sustainable opportunities. Companies attentive to ESG criteria can see opportunities and invest in more promising and sustainable resources (such as using renewable energies, adopting environmentally friendly processes, etc.).
Fostering a sustainable supply chain can create value for companies, society, and the environment, contributing to long-term success and resilience.
The Role of ESG Metrics in Supply Chain Sustainability
ESG metrics have become increasingly important in evaluating the sustainability of supply chains. These metrics assess a company’s activities impact on the environment, society, and governance structure.
One of the key benefits of using ESG metrics in supply chain sustainability is that they provide a comprehensive and standardized framework for evaluating sustainability, comparing their performance with peers, and identifying improvement areas. Another key benefit is that they can help build trust and transparency with stakeholders and help companies identify potential risks and opportunities.
It is important to distinguish three related but distinct concepts: ESG metrics, frameworks, and certifications. ESG metrics assess a company’s exposure to environmental, social, and governance risks. These metrics are considered for benchmarking and scenario analysis. ESG frameworks are systems that standardize the reporting and disclosure of ESG metrics. ESG certification involves an audit to assess ESG risks. These audits use selected environmental, social, and governance certification standards and ESG frameworks.
Environmental, Social, and Governance Factors
ESG factors are a set of criteria companies and investors use to evaluate a business’s sustainability and ethical impact.
Environmental sustainability factors refer to a company’s impact on the natural environment, such as:
- Carbon and toxic emissions
- Energy efficiency
- Climate change vulnerability
- Water consumption and management of residual waters
- Biodiversity and land use
- Waste and hazardous substances management
- Product design and lifecycle management
- Green technology/green buildings/renewable energies
Social factors refer to a company’s impact on society, including its relationships with its employees, customers, and communities. Some main aspects:
- Workplace relations (inclusion and diversity)
- Health and Safety
- Human capital development
- Work conditions in the supply chain
- Prevention and work safety
- Product safety and quality
- Fair marketing and product labeling
- Community relations
Governance sustainability factors evaluate the quality and effectiveness of a company’s corporate governance structure and practices. They include aspects such as:
- Board structure
- Employee Compensation
- Customer satisfaction
- Supply chain resilience
- Business ethics and transparency of payments
- Tackle corruption and instability
- Systemic risk management
- Responsible/ impactful finance and investments
ESG factors are increasingly important to investors and companies as sustainability and responsible business practices become more critical to consumers, regulators, and stakeholders. Investors and companies can better manage risk by considering ESG factors, fostering long-term value creation, and contributing to a more sustainable and equitable world.
Measuring and Reporting ESG Performance
Measuring and reporting ESG performance can help companies identify areas where they can improve and can provide stakeholders with information about corporate sustainability practices.
Here are some steps that companies can take to measure and report their ESG performance:
- Select relevant ESG metrics: Companies should identify the ESG metrics that are most relevant to their business and stakeholders. This may include data on greenhouse gas emissions, energy usage, employee turnover rates, reported HR violations, or other relevant metrics.
- Collect data and set goals: Companies should collect data related to their ESG metrics and set targets for their performance based on the data analysis. These targets should be SMART (specific, measurable, attainable, relevant, and time-bound).
- Report ESG performance: Companies should report their ESG performance to stakeholders clearly and transparently. In companies with an ESG strategy integrated into the business strategy, the ESG information must be part of the company’s annual report.
Key Elements of a Green Supply Chain (H2) A green supply chain refers to a set of practices and policies that aim to minimize the environmental impact of a company’s supply chain activities while also achieving business objectives. It requires a holistic approach that involves all stakeholders, from suppliers to customers, from sustainable design to sustainable distribution and disposal. Next, we will present some key elements of a green supply chain.
Sustainable design is creating products, buildings, and systems that have a minimal negative impact on the environment and society while promoting economic prosperity.
Sustainable design practices include using renewable materials, designing for energy efficiency, recycling, and durability, and incorporating community input into the design process.
Sustainable sourcing is the practice of procuring goods in a way that meets ethical, environmental, and social standards.
The principles of sustainable procurement or sourcing involve considering the entire lifecycle of a product. It includes assessing the environmental impact of raw material extraction, processing, manufacturing, transportation, and distribution and the social and ethical implications of labor practices and human rights.
ESG sourcing also involves engaging suppliers to ensure they comply with sustainability standards and adopting transparent reporting mechanisms to track progress.
Sustainable manufacturing is a production process that considers the ESG aspects of manufacturing.
Some examples of sustainable manufacturing practices include using renewable energy sources and energy-efficient technologies, waste and emissions reduction, water conservation, implementing closed-loop systems, and employee well-being.
Sustainable packaging refers to the use of eco-friendly and renewable materials to pack products in a way that has a minimal impact on the environment. It aims to reduce waste, minimize greenhouse gas emissions, and promote a circular economy.
Several sustainable packaging options, such as biodegradable, compostable, and recyclable materials, are available. In addition to the materials used, sustainable packaging also involves reducing the amount of packaging used and increasing the efficiency of the packaging process through design optimization, lightweight, and reducing the number of components in packaging.
Sustainable logistics and distribution are the processes of delivering goods to customers to minimize negative environmental and social impacts while maximizing economic benefits.
By optimizing transportation routes, companies can reduce their carbon footprint and improve efficiency, resulting in cost savings. Adopting new technologies allows to improve efficiency and reduce waste, like using electric or hybrid vehicles, autonomous delivery systems, or blockchain technology to track the supply chain.
Sustainable consumption involves making conscious choices in our consumption patterns to reduce waste, conserve resources, and promote a more sustainable way of living. Reduce, reuse, and recycle are the fundamental principles of sustainable consumption.
It involves being mindful of the products we buy and their lifecycle and choosing durable, energy-efficient, eco-friendly, and ethically produced products. Use the concept of a circular economy to minimize waste and optimize resources by keeping them in the economic system for as long as possible. It involves designing products for durability, repairability, and recyclability and implementing strategies for recycling and reusing materials.
Sustainable disposal refers to the responsible and environmentally friendly management of waste. It involves appropriately handling, treating, and disposing waste to minimize environmental and human health impacts.
The best way to minimize waste is to reduce the materials consumption in the first place and reuse products as much as possible. It includes repairing broken items and using refillable containers instead of disposable ones. Recycling can help reduce the need for virgin materials and the amount of waste in landfills.
Implementing Sustainability in Your Organization
The KAIZEN™ Approach to Sustainable Supply Chain Management
Many organizations claim that sustainable practices are a strategic ambition. However, sustainability has had a parallel agenda and is still managed as a stand-alone initiative, resulting in disorganized execution and slow progress.
Companies must choose a sustainable business strategy rather than a sustainability strategy. ESG should be an integral part of the company’s strategy, not a secondary consideration to other, broader business strategies.
The KAIZEN™ Approach to sustainable supply chain management has five steps. This approach aims to integrate sustainability into the organization’s strategy and to extend it to the entire value chain:
- Assess the current state of sustainability in the supply chain;
- Review and plan the business strategy;
- Deploy the strategy until the point of impact;
- Implement the strategic breakthrough initiatives;
- Monitor results and implement countermeasures.
Assess the current state of sustainability in the supply chain
The assessment process involves mapping the supply chain, engaging with suppliers, collecting data, conducting site visits and audits, and analyzing supply chain documentation. Various frameworks and standards, including the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB), can guide these assessments.
Some key components typically considered in an ESG supply chain assessment:
- Environmental Factors:
- Carbon emissions and energy consumption
- Resource conservation (e.g., water and forests)
- Waste management
- Social Factors:
- Labor conditions (e.g., fair wages, safe working conditions, labor rights)
- Human rights
- Diversity and inclusion
- Governance Factors:
- Transparency and accountability
- Ethical practices (e.g., anti-corruption policies and fair competition)
- Supplier management
By identifying areas for improvement in the supply chain, companies can develop strategies to address ESG challenges, promote transparency, and create a more sustainable and resilient supply chain.
Review and plan the business strategy
Companies need to define a strategy based on a conviction, distinctive, meaningful to their stakeholders, resonates with the market, and is aligned with their purpose. This strategy should include the ESG strategy (internal and external – for what the company can impact on the value chain).
The review and planning of the business strategy involve the following steps:
- Carry out an analysis regarding the presence in current and potential markets (quantitative and qualitative);
- Analyze historical performance and reflect on lessons learned;
- Identify, prioritize, and listen to stakeholders concerning the impact of the organization and the opportunities for value creation;
- Analyze the main change drivers within the industry and globally;
- Evaluate the results of continuous improvement maturity assessment;
- Evaluate the results of the sustainability assessment;
- List all options for the most promising strategic opportunities and run tests;
- Design a strategic vision.
Deploy the strategy until the point of impact
Without action plans, there is no strategy. It is at the point of impact that the strategy comes to life with objective guidelines: “what,” “when,” “how,” and “how much” the company wants to achieve.
The deployment of the strategy to the point of impact involves the following steps:
- Select the strategic opportunities that need a deep dive: core value streams and areas of more significant materiality;
- Hold diagnostic workshops: value streams analysis;
- Set ambitious goals and annual priorities (including for ESG criteria);
- Create the top X matrix;
- Define the deployment structure and points of impact and assess capacity;
- Deploy based on the strategic initiatives, roadmaps, and business case of the VSAs;
- Develop the strategic report with the matrices and action plans at each level;
- Formulate sustainability targets to be publicly communicated.
Implement the strategic breakthrough initiatives
Following a structured approach is critical to ensure breakthrough improvements’ success, maximize outcomes, and perpetuate them.
Each strategic priority is developed with a multidisciplinary team and clear objectives to implement the initiatives.
It is necessary to follow an ESG improvement framework to implement the breakthrough projects such as:
- Supplier development;
- Sustainable product design;
- Responsible Sourcing Programs;
- Reduction of transport emissions;
- Decrease of carbon footprint;
- Energy efficiency;
- Increase in material yield;
- Empowerment of people;
- Improvement of employees’ energy and motivation;
- Product reengineering;
- Improvement of the customer experience.
These are some examples of initiatives that may arise within the ESG framework.
Monitor results and implement countermeasures
The process of monitoring the strategy implementation and defining countermeasures follows the next steps:
- Define the meeting cascade to review the strategy (bottom-up);
- Establish a Mission Control space to visualize the strategy execution;
- Monitor the degree of targets achievement through bowler charts and assess their financial benefit;
- Define countermeasures for deviating metrics using structured problem-solving tools;
- Hold biannual retrospective sessions;
- Draw up the sustainability report summarizing the main initiatives and results.
Sustainability reports should be a true mirror of the ongoing effort to pursue priorities and achieve strategic goals.
Key Principles of KAIZEN™ for Sustainable Supply Chain Management
Companies trying to implement a sustainable supply chain should encourage their top-tier suppliers to comply with ESG standards and ask those suppliers to ask the same of their suppliers, and so on. The goal is to create a cascade of sustainable practices for the supply chain. Although it seems an excellent idea, this approach is challenging to implement.
The companies that have achieved the best results in implementing sustainable supply chain management follow the following principles:
- Sustainability is a strategic priority and part of the business model.
- Top management must be fully committed to sustainability.
- The company must have a long-term sustainability strategy and objectives.
- All links in the chain must influence sustainability change across the value chain, and companies should require suppliers to define their long-term sustainability strategies and goals.
- Sustainability must be present in all teams’ KPIs, and everyone is responsible for its implementation.
- There should be processes to measure and monitor ESG-related KPIs frequently.
- Sustainability and financial disclosures are reported together.
In conclusion, building a sustainable future with responsible supply chain management requires a holistic approach that covers sustainability’s environmental, social, and economic aspects. Businesses must set clear and measurable sustainability goals, conduct a sustainability assessment, engage with suppliers, use sustainable materials, reduce their carbon footprint, ensure social responsibility, and ensure transparency throughout the supply chain. Kaizen consulting can help companies implement their business and ESG strategy.
Do you have questions about sustainable supply chains?
What’s a carbon footprint?
The carbon footprint is the total amount of greenhouse gas emissions produced directly and indirectly by an individual, organization, event, or product throughout its life cycle. It measures human activities’ impact on the environment in terms of their contribution to climate change.
What is ESG?
ESG stands for Environmental, Social, and Governance. Investors and organizations use a set of criteria to assess a company’s operations’ sustainability and ethical impact.
What are green operations?
In the context of corporate sustainability practices, “green operations” refer to environmentally friendly or sustainable business operations.
What is an X matrix?
The X matrix is a one-page document summarizing an organization’s strategy, including objectives, improvement priorities, metrics, and owners.
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