Managing Risk Through Sustainable Supply Chains

The idea of having resilient supply chains to reduce risk is not a new way of thinking. However, when the COVID-19 pandemic hit, many companies around the world discovered that their supply chains had unanticipated vulnerabilities. For example, the pandemic caused border closures that disrupted transportation routes, which compromised suppliers’ ability to meet the demands of their partners. Lockdowns led many economic players to halt production, at least temporarily, to reconfigure operations and allow workers to safely resume their activities. Some companies also discovered the true scale of their supply chains, and that a production shutdown affecting a minor component required for their products could disrupt their entire process. I addressed this and other topics relative to the impact of COVID-19 on supply chains in a previous Responsible Business Blog post. Companies now are looking for ways to prevent these disruptions from happening again as we enter the Next Normal.

These breakdowns and unforeseen risks have shed new light on the topic of supply chain sustainability. From a business perspective, if enterprises can create a sustainable supply chain and better map various risk categories, then they have a stronger likelihood of avoiding future disruptions from pandemics, natural disasters, geopolitical events and other regional or global events.

Building a sustainable supply chain will lead companies to understand risks, assess and monitor how their suppliers are managing those risks, and also diversify their supplier portfolio to reduce vulnerabilities. For example, an agri-food company could realise that most of its suppliers for a specific commodity are beset with water scarcity issues in its historical supply basin. At the very least, the company should engage with those suppliers and assess how they develop risk mitigation strategies, but it can also develop redundant suppliers, located in other regions without these issues or at least where drought patterns would be independent from the first region. That way, if a drought disrupts supplier production in the first regions, chances are that the company could “load balance” to the other suppliers to compensate.

Let’s examine several ways in which organisations can achieve greater supply chain sustainability.

Identifying and Planning for Supply Chain Risks

When it comes to risk management, there is simply no such thing as “eliminating risk.” Especially for large companies with extended supply chains, there are too many players in the ecosystem to identify and eliminate all risk, which is inherent to operations.

Companies can, however, put in place processes to identify risk areas in their supply chains and develop specific action plans to anticipate, monitor and solve problems should they arise. Sustainability is not a function of making sure that nothing bad will ever happen (that’s not a realistic goal); rather, it’s a function of designing and implementing processes for understanding, anticipating and managing risk when it materialises.

Currently, many companies are not investing in managing risk across some of the highest impact areas of business today. According to the Deloitte 2020 Extended Enterprise Risk Management (EERM) survey, organisations are not investing in key third-party risk domains including: climate risk (74 percent), environmental risk associated with air pollution and water waste (57 percent) and labour and modern slavery risk (54 percent). Understanding these risks and determining what sort of action or support could be provided is pivotal in avoiding supply chain breakdowns.

Increased Transparency

Having a more sustainable supply chain can help reduce the potential damage of disruptions, facilitate compliance with various regulatory regimes across geographies, preserve licenses to operate in various countries and protect corporate reputation – the way employees, customers and other stakeholders view the business.

But what happens when a supplier is identified as a potential risk to these objectives? For example, if one is conducting itself in a way that might put a license to operate at risk? While it might be tempting to simply walk away from that supplier, it may be more beneficial to work with them to fix any problem areas, and stop business relations only if no progress is made despite these efforts.

For instance, if a supplier were found to be polluting nearby water sources, simply walking away will not solve the problem. In fact, that supplier could simply move to another buyer, perhaps offering its goods at a lower price than is possible with non-polluting suppliers. Or it could be that most or all suppliers of the same industrial regional cluster lack acceptable water stewardship policies.

An alternative approach would be to engage with that supplier, agree there’s a problem and come to a joint understanding on what needs to be changed (in this example, that change could be investing in a water treatment process). By working with the supplier to solve the problem, the company can eliminate the damage that supplier is doing to the environment while also depriving less responsible competitors from engaging that supplier and perpetuating its practices. This can also send a signal to peers and other clients that change of practice is feasible and likely increasingly expected by end customers. Taking this “responsible business” approach strengthens the overall supply chain, while also protecting the reputation of the buyer’s industry – which is a source of risk shared by all competitors.

Contributions to Society: Your Work Impacts Everyone

Understanding the impact a company has on society may also go a long way toward bolstering sustainable supply chains. This is particularly true at a time when many large corporations are redefining their purpose from the traditional “grow shareholder value” to one that embraces the needs of all stakeholders such as employees, customers and community.

When companies think about sustainability throughout supply chains, they may want to think about the impact their business operations are having on the local communities and economies. For instance, if a company can provide good working conditions in an underdeveloped area, they may also be able to create sustained economic activity in regions that typically would not have those opportunities. Companies taking this type of approach can strengthen supply chain sustainability through stronger supplier loyalty while also enhancing corporate reputation.

Sustainable Solutions

By identifying risks and having action plans in place, increasing transparency, and understanding contributions to society, it is possible for companies to make their supply chains significantly more sustainable. COVID-19 has exposed the need to achieve greater sustainability – and it has been demonstrated that ESG leaders have outperformed during this crisis - now it is up to companies to take these readily achievable steps to meet that need.