What is a sustainable supply chain?
What is a sustainable supply chain?
A sustainable supply chain is one that fully integrates ethical and environmentally responsible practices into a competitive and successful model. End-to-end supply chain transparency is critical; sustainability initiatives must extend from raw materials sourcing, to last-mile logistics, and even to product returns and recycling processes.
Digital transformation and the growing sophistication of digital supply chain technologies are playing a major part in the evolution of supply chain sustainability. Big Data management, advanced analytics, artificial intelligence (AI), and security tools, such as blockchain and RFID sensors, have brought unprecedented visibility and accountability to modern supply chains. Companies now have a much greater ability – and obligation – to demonstrate corporate social responsibility and to share best practices for green supply chains and sustainable logistics.
As ethical supply chain practices become a greater and more immediate priority for businesses, compliance goals and sustainability benchmarks are also becoming more standardized. The United Nations Global Compact has laid out 10 criteria for measuring supply chain sustainability. These cover areas of environmental responsibility, labor practices, human rights, and corruption. These principles are built upon the realization that socially responsible practices and products are not only good for people and the planet, but are also good for building positive brand awareness, competitiveness, and long-term profitability.
Supply chain sustainability in a changing world
For many businesses, it took the arrival of COVID-19 to deliver the sharp jolt of realization as to just how outdated and vulnerable their supply chain operations were. However, even before the pandemic was upon us, some fundamental changes to consumer behavior had been causing global supply chain managers to begin reevaluating their operations.
One such change has been the huge rise in demand for next-day shipping. This is known as the Amazon Effect, and it has created something of a paradox as it relates to supply chain sustainability. In a 2019 survey of over 1,500 U.S. consumers, delivery speed was ahead of all other factors when it came to choosing a retail channel. Yet, in many other reports, such as this study by the MIT Sloan School of Management, customers indicated a willingness to pay more for products that ensure green logistics practices and transparent supply chains.
If companies are to deliver on both speed and sustainability in a meaningful way, it will require the ability to have real-time access to third-party logistics networks and deep, end-to-end visibility into their entire supply chain operation, including the most distant, low-tier suppliers.
A recent article in the Economist calls COVID-19 “the new normal” and suggests that we will have to restructure our lifestyles and businesses in the long term. Part of this will mean decreased reliance on overseas suppliers and manufacturers. Added to the uncertainty we’ve seen in the past few years regarding global trade and tariffs, we will be looking at increased reliance upon modern supply chain and manufacturing technologies to help us bring our supply bases closer to home. But, realistically, ours is a global economy and we will always have to rely on some international sources for certain raw materials and manufacturing capabilities.
Three components of sustainable supply chains
- What is a green supply chain? A green supply chain is achieved by successfully integrating environmentally responsible principles and benchmarks into supply chain management. This includes product design, materials sourcing, manufacturing, logistics, and end-of-life product management. With the rise of e-commerce, there are more product and shopping choices than ever. To compete, businesses need to find resilient solutions to greening their supply chains while still growing profit. Supply chain technologies such as AI and machine learning can help businesses spot risks, patterns, and opportunities – allowing them to minimize waste and improve efficiency.
- What is a transparent supply chain? Supply chain transparency refers to the ability and willingness of a business to openly disclose information about the provenance of goods and labor and end-to-end supply chain practices. Many businesses invest significant time and resources into establishing and maintaining ethical and environmentally responsible standards. The problem is, even with the best of intentions, this has traditionally been very difficult to enforce and reliably implement. Fortunately, through the use of digital technologies such as blockchain and RFID sensors, supply chain managers can now obtain an accurate and irrefutable record of all the products and suppliers along the entire supply chain journey.
- What is a circular supply chain? In a circular supply chain, products are disassembled or reduced to their raw materials form, and remade into sellable products – thus allowing businesses to achieve the environmental benefits of recycling while recouping costs in the process. The win-win nature of this model is growing in popularity, and, according to a 2020 Gartner survey, 70% of supply chain leaders plan to invest in the circular economy. Some of the modern technologies that support these initiatives include the use of recycled plastics in 3D printing and the ability for advanced analytics to map out the most efficient logistics journeys for returning products into the supply chain loop.
How do sustainable supply chains work?
- Sustainable supply chains work by collaborating. A surprising number of the world’s largest companies use the same raw materials and low-tier suppliers. Global pressure to improve sustainability and transparency has seen improvements. However, compliance with green and ethical operational standards has traditionally been difficult to enforce in many parts of the world. If supply chain managers are to combat this, they can best do so by working together, sharing information, and sending a message that sustainability compliance is essential to doing business. The Fashion Revolution movement began in 2013 and is a great example of many major – and highly competitive – fashion brands, choosing to work together to combat unethical suppliers in their industry.
Despite some initial skepticism, a 2020 Fashion Transparency Index report shows that seven years on, supply chain transparency has overwhelmingly improved in the fashion industry, and that, far from damaging their competitiveness, the collaboration and sharing of data allowed all players in the industry to benefit from the improved public sentiment this brought to their brands.
- Sustainable supply chains work by leveraging the best available technologies. Supply chain sustainability presents a challenge due to the complexity and wide distribution of the many links in the chain. Without modern digital technologies, it’s simply not possible to maintain and coordinate the level of accountability and real-time visibility necessary to achieve ambitious sustainability goals. And the great thing about digital transformation in supply chains is that it doesn’t have to happen all at once to be effective. Incremental steps can be taken to gradually digitize supply chain operations. Furthermore, smart factory and digital supply chain solutions gather and analyze data by their very nature. So from the moment of integration, connected technologies begin to calculate their own ROI.
- Sustainable supply chains work by setting consistent standards. In order for a strategic supply chain sustainability plan to work, it’s important that benchmarks, targets, and guidelines are clearly spelled out. They must then be shared – and agreed to – among all the stakeholders and suppliers across the chain. Fortunately, today we have numerous bodies that help businesses set these goals and criteria, and digital technologies make it easier than ever to track and manage compliance. There are also growing amounts of data and intel to demonstrate the bottom-line value of sustainability benchmarking. A 2018 Bank of America Merrill Lynch report, for example, found that firms with a better ESG (environmental, social, and governance) record than their peers, produced higher three-year returns, were more likely to become high-quality stocks, and were less likely to have large price declines.
- Sustainable supply chains work by communicating their successes. Your customers can’t know what you don’t tell them. When businesses attain their sustainable supply chain goals, it’s important that they share the good news, or risk wasting the powerful reputational benefit of that news. A deserved reputation as a green corporation is always good for the brand and, as a recent article in Forbes magazine points out, “Utilizing green marketing can improve reputation and brand image, resulting in consumer loyalty and a positive impact on the bottom line.” But that’s only part of it. Businesses have the opportunity to lead their industry by example, and to demonstrate how supply chain sustainability initiatives can bring measurable benefit – both financially and environmentally. By sharing their accomplishments and best practices, they associate their brand with innovation and thought leadership in the sustainability space.
Top three benefits of a sustainable supply chain
For companies that invest in more sustainable and transparent supply chains, there are potential benefits across the entire business, including:
- Cost control: Between 2019 and 2020, over 6,000 senior supply chain executives were surveyed by PWC. Based upon their level of investment and implementation of digital supply chain technologies, they were ranked from Digital Novices to Digital Champions. The Digital Champions reported an almost 7% drop in supply chain operations costs as a direct result of digital transformation. And a full 50% of the Digital Champions indicated that investment in supply chain sustainability and transparency would be a higher priority than ever. When businesses successfully green their supply chains, they successfully lower their costs
- Building brand loyalty and reputation: Statistics recently published in Forbes magazine showed consumers to be up to 88% percent more likely to be loyal to companies that demonstrate strong social and environmental responsibility. Consumer awareness and preference for sustainable businesses had been steadily increasing even before the pandemic. But now, public demand for transparent supply chain and business practices is at an all-time high. This sentiment is echoed in a 2020 article in Fortune magazine, which states that “Companies are under an intense microscope during the COVID-19 crisis. […] A company’s social footprint is taking center stage in an unprecedented way.” More than ever, a reputation for sustainable and transparent supply chain practices can give businesses a competitive edge during difficult times.
- Minimizing risk and vulnerability: It seems that every few years, we hear a story about how a tainted or dangerous product slipped through the cracks and made it into the supply chain. Quite apart from the devastating consequence of anyone getting hurt, a product recall has the potential to damage a company – sometimes beyond repair. Often what isn’t lost in costs and legal fees is taken away via reputational damage. When supply chain transparency is enforced and implemented with digital security solutions, unscrupulous suppliers and manufacturers have nowhere to hide. Not only can these measures protect businesses from unethical and environmentally irresponsible partners, they can track and document all the labor, handling, and materials components from source to destination.
Technology components of a sustainable supply chain
Digital transformation in the supply chain allows companies to meet and exceed sustainability benchmarks while also innovating and growing their businesses.
- Artificial intelligence: AI technologies allow for the curation and analysis of multiple, disparate data sets across the supply chain. A particularly powerful benefit that AI brings to the sustainable supply chain is the capacity for synchromodality and collaborative shipping. This means tracking the status and location of packages to take real-time advantage of opportunities to combine shipments or utilize less resource-heavy logistics if time permits.
- Machine learning: As an application of AI, machine learning uses Big Data to help systems and connected devices adapt in real time – to discover patterns, learn from experience, and automate agile and responsive workflows. For supply chain managers, the operational optimization measures that come out of this process can significantly reduce waste and energy usage.
- Robots and automated things: Online shopping has risen by over 149% since the start of 2020. With many customers expecting fast or next-day delivery, we are pushing the existing capacity of warehousing and last-mile logistics provision to its breaking point. Electronic drones and inventory management robots are examples of automated things that can be optimized with intelligent automation to improve workflow efficiency, optimize energy, and save on fossil fuel usage in the logistics network.
- Additive manufacturing: Also known as 3D printing, additive manufacturing allows companies to maintain virtual inventories and to manufacture stock on demand. The ability to manufacture on-site and on-demand eliminates fossil fuel usage and other resources used in overseas shipping and packing. It also has the potential to use recycled plastics from within the supply chain loop as the base material for 3D manufacturing.
- Industrial Internet of Things (IIoT): When connected devices and machines within a business are fitted with unique identifiers and the ability to send and receive digital data, they become part of an IIoT network. Asset intelligence in a sustainable supply chain can help to optimize machine performance and automate maintenance to reduce energy usage and eliminate redundancies in workflows.
- Blockchain: In sustainable supply chains, blockchain is particularly useful in its ability to act as a single source of truth. Through the use of sensors, products and materials can be accurately tracked back to their source to remove any speculation as to their provenance, quality, and handling – at any stage across the supply chain.
- Sensors: RFID devices and other small, inexpensive sensors can easily be fitted to products and raw materials – at their source or anywhere along the supply chain. When partners and suppliers comply with mandatory sensor attachment, an unprecedented level of transparency is achieved – especially in regions that may have previously been somewhat hard to reliably monitor.
- Modern databases and ERP: The best sustainability solutions run on in-memory databases and ERP systems that can manage Big Data and diverse, complex processes. The technologies and automated components of a sustainable supply chain are dependent upon predictive and advanced analytics as well as on the real-time insights made possible by these modern, centralized business systems.
Sustainable supply chains in action
By combining innovation, creativity, and modern supply chain technologies, these companies have developed sustainable solutions to keep their supply chains green, transparent, and more competitive than ever.
- Natura is furthering their environmental mission through digital transformation.
- Kemira used end-to-end supply chain planning to make their operations more efficient and sustainable.
- TemperPack is meeting both customer satisfaction and sustainability goals by streamlining their supply chain and business operations.
SAP Insights Newsletter
Gain key insights by subscribing to our newsletter.