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Supply chains that satisfy current ESG criteria not only reduce a company’s carbon footprint and reputation risks, they’re also more resilient and cost-efficient. ESG data is becoming the determining factor here – as well as an opportunity for companies.
Just a few years ago, discussions about supply chains received little attention. Good supply chain management was all about improving cost efficiencies, having maximum availability with minimal inventories, and a flexible emergency plan to cover any disruptions.
However, this has now changed fundamentally. The consequences of the COVID-19 pandemic, the war in Ukraine and other macroeconomic events such as a lack of resources (physical or human) or an increase in natural disasters have shown just how quickly supply chains in all sectors can break down and what impact this has on the resilience of a company. Supply chain managers must also try to keep up with ever-increasing demands from consumers, investors and business partners. As if that weren’t already enough, regulatory requirements such as the German Supply Chain Act (LkSG) and international rules relating to Environmental, Social and Governance (ESG) have a major influence on both the structure and management of supply chains.
Companies are facing the herculean task of making their supply chains more resilient and sustainable as a way of securing better protection from unanticipated events such as natural disasters, supplier insolvencies or the effects of pandemics. Using ESG data to classify suppliers in terms of their compliance with environmental standards, human rights or health & safety at work represents an initial yet important step on the path to creating a resilient supply chain.
Classic supply chain management aims to establish a profitable balance between supply and demand with as few suppliers and inventory buffers as possible. The principal benefits of this approach are reduced operational and logistical complexity, coupled with high profitability.
However, the outbreak of the COVID-19 crisis showed that this strategy is particularly susceptible to problems. Within a very short space of time, multiple supply locations all went offline and could not be replaced at short notice. This led to production interruptions due to a lack of materials.
Price vulnerability and a lack of flexibility are further risks associated with this strategy. Freight costs for sending one shipping container from Shanghai to Rotterdam sky-rocketed from US$ 2,000 to US$ 54,000 within just a few days of Russia’s invasion of Ukraine. Companies with empty warehouses that had no other options available then had to pay 2,700 percent more than before or shut down their production operations – transforming "just in time" into "just in case".
At first glance, transforming supply chains to deliver greater sustainability can seem like a tough task. However, it actually represents an opportunity, since a company’s ESG performance increasingly also defines its competitiveness and its scope for capital procurement. “Investors, banks, lenders and stakeholders are all increasingly viewing a lack of commitment to the topic of sustainability as a relevant risk factor,” explains Swindell.
Adopting a credible stance with regard to ESG topics also helps keep staff loyal and improves any company’s chances of recruiting new talent. Depending on the sector and competitive environment, good governance, fair working conditions, observance of human rights and environmental protection can also be used as arguments for establishing higher prices. After all, the resource savings made with sustainable purchasing have a positive impact on the environmental and cost balance.
However, the challenges to be faced along the way are considerable. “Companies with globally diversified supply chains in particular will have no choice but to perform continuous ESG screening of their business partners if they wish to prevent violations of new regulations,” comments Swindell.