Risk & Credit

Why sustainable supply chains are more resilient

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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.

New requirements of supply chain management

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".

 

 

“The upheavals of the last few years have triggered a broad-scale change in strategy. Above all, supply chains must today be resilient, highly diversified and lend themselves to agile management. This is the only way they can react quickly to unforeseen changes without having to make compromises in terms of costs, efficiency or quality,”

Stuart Swindell Senior Product Director Dun & Bradstreet

However, establishing a supply chain that’s also resilient in terms of ESG criteria places additional demands on supply chain management.
The five steps below provide orientation and highlight the key factors to a resilient supply chain

1. Identify and avoid risks

How likely is it that a supplier won’t be able to deliver? How can I minimise this risk? What risk is a company willing to accept? The objective is to identify, assess and reduce risks within the supply chain.
A supplier’s ability to deliver on time depends on many different factors. Among others, these include geopolitical risks, currency risks, natural disasters and pandemics. Alongside classic risks, data on ESG performance from Dun & Bradstreet also helps determine a company’s probability of default with regard to ESG factors. Using this data, it’s then easy to identify which suppliers have a good carbon footprint, observe human rights or place great emphasis on health and safety at work.
“When the ESG data is available centrally on a platform like D&B Risk Analytics, sustainability risks can be reliably determined, prioritised and anchored in the award decisions on the basis of a supplier rating,” explains Swindell.

2. Broadening the view of the supplier pool

Given the level of volatility in the procurement market at times, companies should continuously monitor their suppliers’ data. This enables them to identify external factors that may impact their supply chain at an early stage in order to avert potential disruptions.
Additional security is provided by looking at wider measures when assessing and selecting suppliers. For example, innovative purchasing organisations no longer choose suppliers based on price alone, but expand the criteria to include factors such as performance history, ownership, risk of sanctions, geographic location, financial stability, governance and industry reputation. This step is made possible by access to comprehensive and up-to-date supplier data - as well as the continuous enrichment of this data, which creates additional added value.

3. Provide support to suppliers and partners that are critical to business

Resilient supply chains are highly diversified, since having multiple suppliers for goods and services from various regions minimises the risk of disruptions. However, supplier relations must also be strengthened to promote compliance.
To this end, sustainability requirements should be set out in requirements specifications and contracts. Information provided voluntarily by suppliers and regular on-site checks together represent an effective approach to determining which requirements a supplier is not currently satisfying, and what kind of skills development or training might help resolve the issue.

4. Examine and eliminate violations

“Fail fast” is not just a tried-and-tested motto for agile IT projects, but also a helpful approach for ESG risk management of supply chains. Here, ESG violations should be examined using a standardised process and then translated into plans of action that are tailored as individually as possible.
The objective is to eradicate violations quickly and improve supplier ESG performance, both actively and effectively, to prevent future violations.
“The top priority is to be proactive in helping suppliers develop and thereby ensure observance of human rights and environmental standards throughout the entire supply chain,” comments Swindell.

5. See resilience management as a long-term commitment

Securing supply chain resilience is a continuous and dynamic process. The causes, types and duration of disruptions can change just as readily as regulatory requirements or customer expectations. Companies are also continuously developing and moving forwards.
The supply chain and its management must therefore be agile enough to adapt to this dynamic environment. It also helps when resilience isn’t implemented as a separate function, but rather integrated into the supply chain, and supply chain managers are able to act autonomously when ESG-critical events occur. This often requires a gradual transformation of the corporate culture, removing control structures in favour of self-organisation and agility as part of the compliance policy.
The objective here is to establish a system of risk management that also ensures supply chain stability during times of crisis. ESG data from Dun & Bradstreet provides valuable support in reaching the right decisions.

 

Sustainability determines competitiveness

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.