How Sustainability Drives Supplier Management

The following is an extract from Supplier Relationship Management.

As consumers demand social responsibility from the brands they are buying, the business case for sustainability has become nothing short of compelling. In fact, sustainability has now taken its place firmly on the agenda in most boardrooms.

And, while firms become increasingly considerate of the impact of their actions on the world, the environment has affected supply chains as never before, as global catastrophes such as earthquakes, hurricanes, floods and heatwaves decimate whole industries.

Climate change suggests such extremes are likely to become commonplace, meaning that supply and value chain network risks must be considered more than ever. Companies need to get serious about sustainability and back their commitment with visible policies and the necessary resources to turn good intentions into reality.

However, responsibilities cannot stop at the physical boundaries of a business. What happens in the supply chain presents a real challenge. If we are truly to embed sustainability at the core of our business principles and operations, it must run through all aspects of how we manage suppliers and our relationships with them.

Supplier segmentation

Ultimately, Supplier Relationship Management (SRM) is all about unlocking value from the supply base. Our most important suppliers will realize the most value for us, so it is important that we identify who these are.

This is achieved through a process of segmentation which involves dividing or segmenting the supply base into groups according to their importance, using set criteria. The results identify strategic suppliers. Put simply, some suppliers are more pivotal than others.

If sustainability is now a key focus for our business, then it follows that it must be an important consideration in any segmentation exercise. After all, if a business adopts sustainability objectives, then it must also choose and value those suppliers that align with its business ethics, beliefs and policies.

In practice, segmentation is achieved by first defining the criteria that will be used to rate suppliers. These can be generic but the most effective will be specific to an organization as this bespoke approach will yield the best understanding of which suppliers are important and why. The primary foundation for this exercise is the segmentation wheel. Here, a range of components forms the basis of a robust, defined set of criteria to determine supplier importance and the nature of intervention required.

Supplier segmentation allows us to determine the right relationship for our important suppliers and make plans for the required levels and types of intervention.

Any organization that values sustainability will, in turn, rate like-minded suppliers that are best placed to generate value and minimize sustainability risk. In this case, sustainability criteria such as alignment of policies, compatible ethics and beliefs, sustainability goals and action, sustainability risk and protection of the brand must sit at the heart of the exercise.

Innovation

Suppliers and the wider supply base represent a powerful source of innovation that holds the potential to add value, enable growth and develop competitive advantage. Identifying strategic suppliers and building relationships with them is now essential for any sustainable firm wishing to operate and innovate in today’s fast-changing world.

A business driven by sustainability will, naturally, seek innovation in areas such as new product development, packaging, energy use and waste management. Suppliers deemed strategic through their alignment with sustainability objectives will want to collaborate here and are most likely to drive improvement and deliver innovation.

Supply Chain Management (SCM)

Sustainability has also driven the realization that organizations need to better understand and have more confidence and control over supply chains.

Practices upstream in the supply and value chain network, sometimes in remote corners of the world, can pose a real threat, particularly to a company’s sustainability objectives, and there is a significant risk to brand equity from poor supply chain practices.

But how can firms recognize and mitigate such threats?

One of the five pillars of SCM, sustainability, demands an understanding of the processes, practices and original sources in the supply chain, and specific interventions to ensure compliance with any corporate policy.

A review to consolidate and prioritise risks and opportunities in the supply and value chain is a good place to start and sustainability is a key factor to place centre stage. Such analysis should inform an overarching supply and value chain network management and, crucially, the allocation of resources to activate the strategy. To achieve the resulting objectives, supplier management can take a number of different forms.

Improvements to network performance can be driven simply by imposing strict contractual terms, although be warned - any impact may be superficial. Suppliers are likely to argue that what happens upstream is, essentially, outside their control.

The greatest improvement to supply and value chain network is said to happen through improved collaboration and relationships. While there are potential obstacles, this approach can potentially unlock value for all involved.

Improvement

As businesses increasingly adopt sustainability as an overarching corporate goal, our understanding of the area is fast developing. Sustainable businesses will need to seek continuous improvement in order to keep the issue at the top of their agendas.

Scoping or mapping a supply chain network is a means of better understanding a network and identifying where intervention is necessary. The use of lenses is a valued technique to help us to see supply and value chain networks in different ways, and a sustainability lens will look specifically for impacts and potential risks against a corporate policy or framework. This can include supplier, supply chain and factory/plantation auditing, local knowledge and representation and investing in and building direct relationships with original producers.

Summary

Now centre stage at boardroom tables across the globe, sustainability is a key consideration not just for a company’s operations but also for its management of supplier relationships and the wider supply and value chain network.

Placing sustainability at the heart of every supplier relationship will not only minimize costly risks from poor supply chain practices, but it will also, most importantly, generate levels of supplier performance and innovation that only strategic and aligned collaboration can deliver.