Supply Chain Sustainability in the Manufacturing Industry

How digitalisation can enable the supply chain sustainability transformation?

Sustainability is most probably the biggest megatrend that will disrupt the global economy & businesses in the near future. Alongside another megatrend, digitalization, it will revolutionize companies’ business models, revenue logics, and operations more than we believe and sooner than we think. Sustainability is not topic to handle by a separate corporate responsibility function but rather it should be an integral part of the company’s strategy and be considered holistically in all decision-making. Currently, for instance, consumer, food, and energy industries are leading the way towards sustainability transformation. Anyhow, no one should think that sustainability will not influence their industry. The manufacturing industry is not an exception.

Manufacturing companies are impacting society and the environment in many ways. Of course, in terms of jobs they create, the tax they pay, and products they offer, but also in terms of greenhouse gas (GHG) emissions (e.g. carbon footprint), pollutions, equality, human rights, diversity & inclusion, working conditions, health & safety, training, and new technologies & innovations.

Today, products are typically produced in complex global supply chains. Therefore, manufacturing companies’ value-creation model is highly dependent on their supply chain. For instance, purchases from suppliers can cover up to 80 % of the company’s cost structure. In addition, suppliers play a key role in fulfilling the quality and delivery punctuality of the deliveries to the end-customer.

It is important to notice, that the same principle applies also to the sustainability of the manufacturing industry. Companies’ sustainability is highly dependent on supply chain sustainability. A significant share of companies’ environmental and social impact is coming from the suppliers and sustainability deviations in the supply chain can cause serious problems for companies’ competitiveness. Therefore, it is not enough to manage sustainability only in internal operations, but supply chain sustainability management must be included tightly as well. Supply chain sustainability transformation should be a key business driver in the manufacturing industry. Why it is still not?

Why supply chain sustainability is still not a priority

We recently published a Review of the key business drivers of procurement organizations in the manufacturing ecosystem where we analyzed the priorities and themes of medium-sized manufacturing companies in Finland and Sweden based on over 80 interviews of procurement executives and professionals. The top 5 themes that came up were: supply chain digitalization, improving supply chain transparency & communication, releasing employees’ time for more value-adding work, improving employee satisfaction, and increasing purchasing productivity.

Surprisingly, supply chain sustainability was missing on the priorities almost completely. Only one person out of 83 discussed its importance in the interviews. Anyhow, all these top 5 themes have a relatively clear link with sustainability as to be discussed later.

In general, sustainability is often seen as a big, difficult, and way too complicated topic to handle, and actions made in supply chain management are typically focused rather on small improvements in separate areas than the holistic management of sustainability. There are basically three reasons why it is still missing from the procurement’s top priority list:

  1. Lack of business cases – Financial payback is difficult to estimate.
  2. Lack of resources & competencies – Focus is on daily manual routine work and there is not enough time, competence, and capabilities for sustainability development.
  3. Lack of understanding & concreteness – Practical initiatives and applications are missing and it is difficult to know where to start.

Firstly, manufacturing executives do not see the financial payback of investing in sustainability. The impact of increasing productivity or doing more value-adding work is relatively easy to estimate in terms of money, but currently, sustainability is not. That is why it is not yet a part of the strategic development themes of procurement executives.

Secondly, as our review shows, the current focus of procurement is highly on daily manual operative work. Purchase orders need to be managed and deliveries secured and according to the analysis 40-50 % of the purchasers’ time is spent on manual routine work. Therefore, there is simply not enough time for strategic thinking and management of sustainability transformation in procurement organizations. Finally, manufacturing companies understand the importance of sustainability at a general level, but they do not know how to approach it in practice in supply chain management. In other words, procurement executives are lacking a strategic view and concrete initiatives and applications related to sustainability.

Supply chain sustainability is becoming a key competitive advantage

Climate change and biodiversity loss are the most significant challenges for humankind. Both are having a clear link to the global economy and businesses also as discussed in a newly published report The Economics of Biodiversity led by Cambridge Professor Sir Partha Dasgupta. Climate change and biodiversity loss are self-evidently and comprehensively scientifically-proofed facts that should be considered in all decision-making in all industries, naturally, also in the manufacturing industry.

Manufacturing companies should start the supply chain sustainability transformation right now. Of course, because it is essential for the future of earth and society, but also for being competitive in the future’s markets. It is important to notice, that the politics, regulations, and market situation are changing radically now.

Firstly, the United Nations (the 2030 Agenda for Sustainable Development), the European Union, and different countries, regions, and cities around the globe have committed to sustainability goals to fight against climate change and biodiversity loss and to improve human rights. As the voluntary acts on businesses sustainability initiatives seem to be insufficient this will soon affect related legislation and sustainability management will become mandatory. For instance, the European Union is currently preparing an EU Mandatory Due Diligence Legislation to Promote Businesses’ Respect for Human Rights and the Environment which would cover the whole supply chain of the companies.

Secondly, there will soon be a price for emissions. The world-leading banks, VCs, and funds have recently published concrete commitments for sustainability. For instance, Nordea announced a mid-term objective to reduce carbon emissions from its lending and investment portfolios by 40-50 % by 2030 and to become completely carbon neutral by 2050. Also, Norway’s governmental 1,2 trillion dollars’ wealth fund is asking the portfolio companies that emit the most CO2 for more detailed climate-related data for understanding the risks of the investments better from a sustainability point of view. Additionally, for instance, BlackRock, Bank of America, Morgan Stanley, and JP Morgan Chase have announced similar types of targets. As a result, the companies that are overlooking sustainability will not get money for their investments in the future anymore.

Besides, consumers are already calling for sustainability both from environmental and social aspects, and soon will also the customers of the manufacturing industry. Companies that will not invest in sustainability holistically will suffer from an irresponsible image, lose their market share and become obsolete on the markets compared to forward-looking ones. This evolution will impact significantly supply chain management. There will be value for supply chain sustainability also in terms of money, and therefore, the financial impact of different types of initiatives will soon be easier to estimate.

Another important factor impacting already now is supply chain digitalization. It will be a key enabler in supply chain sustainability. New digital platforms are enabling concrete practical initiatives and use cases for sustainability management and development.  They will significantly improve the transparency and communication in the supply chain and bring standardized ways to manage and develop the supply chain sustainability holistically both at strategic and operative levels. Another impact of digitalization is the possibility to release 40-50 % of procurement professionals’ work time for more value-adding work by automating manual routine tasks. Elimination of manual work will change the focus of work more from operative towards strategic development-oriented work. This resource could and should be used for developing new competencies and capabilities to improve supply chain sustainability. Besides, there is evidence from a social responsibility point of view that this type of digital restructuring of work is pleasant for people working in the supply chain, and therefore, will also improve employee and supplier satisfaction.

How digitalization can enable the supply chain sustainability transformation

As discussed in the previous chapter, supply chain sustainability can be a big and complex topic to understand and approach in practice. It should rather be considered holistically both at the operative and strategic level than separately in silos. Digitalization will be a key enabler for manufacturing companies in supply chain sustainability transformation.

Digital platforms will support supply chain sustainability at many levels by providing visibility, concrete use cases, and manageability for suppliers’ compliance, development & innovation initiatives, and operative supply chain processes in terms of sustainability. In addition, digitalization enables increased transparency, improved communication, and standardized and structured ways to manage the supply chain sustainability holistically as well as tools for sustainability risk management, reporting, and traceability.

Finally, digitalization enables productivity improvement of procurement’s white collar-work and releases employees time to build new sustainability-related competencies and capabilities for working more with the sustainability of the supply chain. At the same time, it also improves employee and supplier satisfaction by eliminating manual routine work, changing work descriptions towards more value-adding and pleasant tasks, and bringing modern easy-to-use tools for the whole supplier experience management.

To bring even more concreteness around this topic, some practical use cases are presented under three themes in the following table.

Table 1. How digitalization can enable the supply chain sustainability transformation.

Supplier compliance is the base for strategic supplier sustainability management.  It consists of supplier evaluation, monitoring and reporting processes, and managing suppliers’ code of conduct, third-party certificates, audits, contracts, instructions, and guidelines. It creates visibility and enables structured policies for supplier sustainability management and risk mitigation at the whole supplier network level. Besides, it enables a full audit trail and proof of systematic approach for holistic supplier base sustainability management.

Sustainability innovation. It is possible to achieve significant improvement in supply chain sustainability when collaborating and involving the suppliers systematically in innovation activities. Sustainability innovation can include, for instance, design for sustainability and process innovation initiatives.  Companies can map together with the biggest sustainability-related improvement possibilities in their business relationship and based on these to co-innovate, for instance, required new sustainable offerings, introduce social responsibility initiatives, and implement carbon footprint reduction and waste minimizing actions.

Operative sustainability is the third important part of successful supply chain sustainability management. It enables better transparency and communication in daily supply chain processes, such as purchase orders, claims, and engineering changes managements.  It eases, for instance, the management of project-specific sustainability requirements like traceability of materials or energy-efficiency of components. Besides, it improves the quality of the operative processes that can have a high impact on sustainability as well. Accurate data and continuous learning and interaction regarding purchase orders or supply chain quality are significantly important from a sustainability perspective as well. For instance, manufacturing a component twice because of a wrong revision of the specification or quality defect causes double emissions.

Managerial summary: Towards supply chain sustainability

Two megatrends – sustainability and digitalization – are shaping the manufacturing industry more and sooner than we think. The business environment is changing rapidly. The politics and regulations are changing and consumers are already calling for sustainability in the whole supply chain and soon will also the customers of the manufacturing industry. Besides, there will soon be a financial payback for sustainability initiatives that makes business case estimations easier. Digitalization will be the key enabler for supply chain sustainability transformation in manufacturing companies by providing visibility, concrete use cases, and manageability for supplier base compliance, development & innovation initiatives, and operative processes in terms of sustainability.

Manufacturing companies’ sustainability is highly dependent on their supply chain’s sustainability and a significant share of their environmental and social impact is coming from the supply chain. New sustainability-related competencies and capabilities must be built-in procurement organizations. Therefore, the focus of work should be changed from operative manual work towards strategic and development-oriented work. Companies should invest systematically and holistically in supply chain sustainability. They should start concrete initiatives on supply chain-related, for instance, to greenhouse gas (GHG) (e.g. carbon footprint reduction), pollutions, equality, human rights, diversity & inclusion, working conditions, health & safety, training, and new technologies & innovations.

It is time to see sustainability as a highly value-adding key business driver and a vital part of an excellent supplier experience. Early adopters can achieve significant competitive advantages on the market by moving towards supply chain sustainability transformation. It is better to act just now than wait some more years to lose market share and become obsolete. The more sustainable your supply chain is, the more profitable you will be in the future.

The following checklist will help you to get started with supply chain sustainability transformation:

  1. Think holistically – Consider strategic and operative viewpoints: supplier compliance, sustainability innovation, and operative sustainability.
  2. Include environmental & social aspects – Involve both environmental and social sustainability impacts.
  3. Set targets & define KPIs – Set concrete targets and define appropriate KPIs to follow-up on the progress.
  4. Use digital tools – Utilize a digital supplier experience platform to enable the sustainability transformation and building concrete use cases.
  5. Build new competencies & capabilities – Eliminate manual work where possible and build new sustainability-related competencies and capabilities in your organization.
  6. Collaborate with suppliers – Work together with the suppliers at strategic and operative levels to achieve great results in different sectors.
  7. Remember the scale – Focus on the biggest sustainability impact of different areas.
  8. Avoid greenwashing – Do not tinker around for only looking good, but focus on honestly impactful and meaningful things.

Timo Rossi, CBDO at Jakamo

This article is originally published in Jakamo’s Supplier Experience Online Magazine on 23 March 2021.