Although there are positive signs that overall corporate behavior is leading to more responsible supply chain management, environmental and societal challenges faced by companies, local workers, and supplier communities are not diminishing.
In fact, in many business sectors, sustainability challenges emerge predominantly in the supply chain. For example, companies in Germany importing products via international supply chains are exporting the larger part of their ecological footprint.
Atlas on Environmental Impacts – Supply Chains, recently published by Adelphi, illustrates this clearly: the suppliers of German companies abroad endanger the climate and pollute the environment up to nine times as much as their clients in Germany. Greenhouse gas emissions along the international automotive industry, machinery industry, and food retailing supply chains are about 10 times higher than at their respective locations in Germany.
A similar picture emerges for pollutant emissions. Within each sector, 20 to 30 percent of the emissions generated occur at the level of the direct supplier. But this represents an opportunity to make some real progress. The figures in the Atlas reveal that if companies deliberately select their suppliers and build sustainable supply chains, they can achieve a great deal for global climate and environmental protection.
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Identifying essential sustainability topics and areas of action along the supply chain represents an important first milestone in sustainable supply chain management for companies. Focus is important in order to be able to use limited human and financial resources as effectively and efficiently as possible.
However, this is often not easy. Both assessing data across national boundaries and pressuring direct and sub-suppliers to improve their sustainability performance are challenging for companies.
There are four key challenges that companies need to overcome to achieve more sustainable supply chains.
1. Sustainable supply chain management is a marathon, not a sprint.
Nowadays, supply chains are usually global and complex. Even smaller companies have supply chains that span across countries. Companies should thus begin pragmatically and carry on step-by-step. Improving supply chain understanding, exchanging information with other businesses in the industry, and forging links with direct and sub-suppliers will, over time, result in more possibilities and approaches to optimize sustainable supply chain management. Not only companies, but also governments, the media, civil society organizations, and consumers should acknowledge this.
2. Determining supply chain sustainability impacts and risks can be demanding but focus is necessary, and knowledge is available.
The first milestone is to identify real and potentially significant impacts on people and the environment. Negative impacts can represent risks for the business in a variety of forms, such as legal, financial, or image-related risks. Exact local knowledge of suppliers and sites is critical to determine significant impacts. In practice, this is rarely available and requires great effort.
Businesses should thus develop useful filters by focusing on specific countries and making use of existing industry knowledge on sustainability impacts. Ecologically extended input-output models show where — both functionally and geographically — in the supply chain negative effects can occur for selected sectors with high environmental impacts. This makes “hot spots” visible to the industry. This type of information can be used by companies as a starting point for their individual analysis on supply chain risks and opportunities.
3. Sustainable supply chain management goes beyond direct suppliers.
Usually, companies first turn to their direct suppliers with whom they are contractually bound. Often, however, negative impacts originate at the sub-supplier level. For example, land use almost exclusively concerns raw material production, which may come from sub-suppliers. It is thus important to consider how sub-suppliers can be brought into the process. For example, a code of conduct can oblige direct suppliers to apply the same standards for their suppliers. Companies should, however, avoid simply passing on the responsibility. Rather, they should work with their direct suppliers to determine how to proceed.
4. Cooperation with suppliers is vital.
When the possibility of influencing the supplier is low, for reasons such as low contract volumes, lack of a direct contractual relationship, or lack of customer specifications, cooperation is essential in order to avoid encountering prohibitive obstacles in the attempt to make the supply chain sustainable. Businesses usually opt for a direct exchange with their suppliers, potentially in cooperation with their customers, to jointly exercise influence on the supply chain.
Wherever possible, companies should use industry initiatives and sector-specific or cross-sectoral collaborations, as these can benefit both the company and its suppliers. By jointly establishing effective standards and working together on training and control, companies can save money. The same applies to suppliers since they do not have to react to every single request from their customers, whose claims are bundled.
The transfer of environmental impacts offshore is a massive challenge for both German and international environmental and sustainability policy. Growing expectations for companies to recognize their social responsibilities, including those related to their supply chains, are, above all, the result of closer relations between companies and suppliers in the context of globalization.
With globalization under attack now more than ever, companies — supported by governments, consumers, and civil society — need to show in a convincing manner that they can manage their supply chains in an effective way and act like responsible global citizens.
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