ESG: Why Organisations should Implement Sustainable Supply Chain Management

March 13, 2023

ESG: Why Organisations should Implement Sustainable Supply Chain Management

Supply chain management is vital to economic growth in modern societies, ecosystems, and the global economy: supply chains are responsible for an estimated 80% of today’s global trade. When done right, supply chain management can help reduce costs, increase productivity, and boost competitiveness, all of which can drive economic growth and job creation.

However, traditional supply chain management has a primarily negative impact on the environment. According to a McKinsey report, the supply chains of companies that package consumer goods are responsible for over 90% of environmental damage. Many prominent companies have come under fire in high-profile cases for unsustainable supply chain practices that contribute to worsening social issues, depletion of natural resources, and environmental destruction. When climate change is accelerating at an alarming rate, consumers, governments, shareholders and investors are putting pressure on businesses to look beyond profits and prioritise ethical and sustainable practices.

It is time for business leaders committed to the long-term growth of their organisations to assess the environmental, economic, and social impacts of their products and services. This article will explore how organisations can ensure success in today’s business landscape by mitigating risk and ensuring resilience.

The Risks of Unsustainable Supply Chain Management

Supply chain management has traditionally been focused on key considerations such as cost, quality, and delivery time. In the pursuit of cost efficiency and speed, a company may overlook other critical factors such as worker health and safety and environmental pollution. Here are some of the risks associated with traditional supply chain management practices:

Reputational Damage:

Negative publicity related to issues like environmental pollution, exploitation of workers, and human rights violations can quickly damage a company’s brand image and lead to a loss of customer loyalty. This, in turn, can result in declining sales and revenue. One example of such reputational damage can be seen in the textile industry, where companies have faced intense scrutiny and backlash over allegations of sweatshop labour and poor working conditions in their overseas factories. The controversy tarnished the industry’s reputation for years, prompting companies to implement significant changes in their supply chain management practices to address these issues. For instance, after reports of poor working conditions and low wages in textile factories, major fashion brands began to implement policies that prioritize the rights and well-being of workers in their supply chains.

Legal Liabilities

Apart from reputational damage, unsustainable supply chain practices can also result in running into legal liabilities. Companies can face legal action from various stakeholders, including employees, consumers, and regulatory bodies. For instance, a lack of sustainable supply chain practices in the mining industry can result in environmental pollution and damage to the surrounding communities. In such cases, regulatory bodies can initiate legal action against the industry to ensure compliance with environmental laws and regulations. Similarly, employees and consumers can sue companies in the industry for unsafe working conditions and negative health impacts resulting from unsustainable practices. These legal liabilities can have far-reaching consequences on the industry’s operations and reputation.

Supply Chain Disruptions

Unsustainable supply chain management can increase the vulnerability of a supply chain to disruptions. For example, if a company relies on a single supplier for a critical component of its products, and that supplier experiences a disruption such as bankruptcy or a natural disaster, the entire supply chain can be affected. Similarly, if a company sources materials from areas with high environmental risks, such as deforestation or water scarcity, it may be more susceptible to supply chain disruptions caused by natural disasters or other environmental events.

Financial Losses

Unsustainable supply chain practices can lead to financial losses for companies. For example, a company may incur fines and penalties for violating environmental regulations or for engaging in illegal labour practices. Additionally, supply chain disruptions can result in lost productivity, missed deadlines, and cancelled orders, all of which can impact a company’s bottom line.

How Business Leaders Can Ensure Sustainable Supply Chain Management

To mitigate the risks associated with unsustainable supply chain practices, business leaders must prioritise sustainability and take a holistic approach to supply chain management. Here are some ways companies can ensure sustainable supply chain management:

Transparency and Traceability:

Business leaders must have complete visibility into their supply chains and ensure transparency and traceability. By knowing where their products come from and how they are produced, companies can identify potential risks and take appropriate measures to mitigate them. This requires building strong relationships with suppliers, implementing rigorous supplier evaluation processes, and monitoring supplier performance regularly.

Collaboration and Partnership:

To achieve sustainable supply chain management, companies must work collaboratively with their suppliers, customers, and other stakeholders. By forming partnerships with suppliers and customers, companies can work together to address issues such as environmental pollution, labour exploitation, and human rights violations. Collaboration and partnership can also lead to increased innovation, better risk management, and improved supply chain resilience.

Sustainability Metrics and Reporting:

Business leaders should establish sustainability metrics to track and report progress towards sustainable supply chain management. These metrics can include environmental impact assessments, supplier performance evaluations, and social responsibility indicators. By regularly reporting on sustainability metrics, companies can demonstrate their commitment to sustainable practices and provide stakeholders with transparency into their operations.

Investment in Technology:

Investing in technology such as blockchain, artificial intelligence, and machine learning can help companies enhance transparency and traceability, improve supply chain efficiency, and reduce environmental impact. For example, blockchain technology can help ensure transparency and traceability by providing a secure and immutable record of transactions in the supply chain.

By implementing sustainable supply chain management, companies can mitigate risks, ensure resilience, and drive long-term growth while contributing to a healthier planet and a better future for all. For business leaders seeking to prepare their organisations for a sustainable future, the Graduate Diploma in Business Sustainability & Environment, Social and Governance (E-Learning) imparts leadership techniques for sustainability that can help manage climate risk, promote ESG integration, and provide long-term value for shareholders and society.

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