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Values Proposition

A tectonic shift in supply chain governance

Developing options to advance sustainability is a major focus of rethinking supply chains. To be successful, though, sustainability cannot be managed as a standalone set of factors.

Slabs of marble piled in a broken pattern

Image via Shutterstock/Mikala Skovgaard

A transition is underway to redirect 30 years of corporate strategy that outsourced business operations to lower wage nations with fewer regulations. Newer realities have intruded, including rising geopolitical risks in the Asia-Pacific region, disruptions to extended supply chains during and after the COVID-19 pandemic, accelerating climate change risks, and rising business subsidies from the United States and Europe to re-locate assets closer to home. As a result, major global companies are rethinking procurement and product development for their own facilities and those of related supply chains.

As a practical matter, companies are seeking to optimize all of the above business drivers into a common strategy to both strengthen customer relationships and mitigate business risks. Developing options to advance sustainability is a major focus of rethinking supply chains but, to be successful, sustainability cannot be managed as a standalone set of factors.

C-suite executives — including CEOs, CFOs, CSOs and chief supply chain officers — are evaluating at least three major, interrelated supply chain issues:

  1. What are major impediments to achieving better governed and more productive supply chains?
  2. How are leading companies upgrading supply chain management?
  3. What new business opportunities and strategies are emerging from these business reviews that can also drive sustainability performance?

Impediments to strengthening supply chain management. A number of large companies — major retailers, food producers and auto manufacturers — literally have tens of thousands of suppliers engaged in providing ingredients, products or services to their businesses. The overwhelming number and complexity of these business relationships has created enormous obstacles to holding suppliers accountable or even knowing their identity or the business risks they can create for business customers further downstream.

A related problem is tracking supplier performance. The absence of data standards or common information technology platforms to align supply chain data reporting challenges enterprises of all sizes. Exacerbating these challenges is the need to transition from a supply chain model built on achieving the best financial returns from the greatest economies of scale to a newer model adaptable to more recent geopolitical realities (deemphasizing reliance on China), reducing reliance upon single suppliers or nations for essential materials or parts, and aligning supply chains with emerging climate reporting and other regulatory requirements in the European Union and the United States.

Leading company initiatives for strengthening supply chain governance. Four supply chain strategies are taking shape. The first is resilience, or the ability of companies and their suppliers to minimize disruptions to business continuity from costs, infrastructure bottlenecks, political disputes and climate change. While the redesign of supply chains will add costs, this factor is counterbalanced by opportunities to minimize risks.

A second emerging supply chain strategy is regionalization. As described by Keith Sultana, senior vice president for integrated supply chain and operational services with Trane Technologies, regionalization increasingly prioritizes a goal to reposition production closer to markets, or to "buy where we sell." (Disclosure: I serve on Trane’s Sustainability Advisory Council.) A desired outcome of this strategy is to shorten the length of global supply chains, while not abandoning specific markets. In other words, regionalization is about reducing complexity while optimizing opportunities to speed up the movement of materials and goods, reduce energy costs and build deeper levels of collaboration with core suppliers.

The third emerging strategy is supply chain diversification, or reducing overdependence upon single source suppliers by selectively shifting operations. Over the next decade, for example, semiconductor manufacturing will expand beyond Taiwan (which manufactures over 60 percent of the world’s semiconductors and more than 90 percent of the most advanced ones) into the U.S. (aided by funding from 2022’s CHIPS and Science Act), the EU and other markets.

And fourth, investment in digital data systems through common metrics and platforms of customer-supplier communications networks, improved efficiency of warehouse operations, optimized logistics (ships, planes, rail and trucks) is creating real time electronic data exchanges up and down the supply chain.

The goal of more sustainable supply chain governance is the expansion of mutual business opportunities and reduction of enterprise risk in a manner that protects people and critical planetary resources.

How does sustainability fit into strengthened supply chain governance? A predominant management principle for advancing sustainability in supply chain management is not to establish a separate sustainability strategy or governance process but rather to embed it within the emerging strategies that leading companies are adopting (as discussed above).

Several categories of expanding business development and sustainable supply chain initiatives illustrate the practices of leading companies:

  • Governance. CEOs and their boards of directors are beginning to own the governance process in which sustainability is central to the business purpose and values of the company. Performance expectations and transparent reporting that embody this ownership cascade throughout business units, plants and the supply chain. Business goals and metrics embody environment, social and governance (ESG) expected results alongside financial and other outcomes.
  • Focus on sustainable products. Sourcing, product design, manufacturing, distribution and consumption of more sustainable products are increasingly the lens through which to organize sustainability supply chain practices. Some current best practices for advancing this outcome include: applying product-specific life-cycle analysis (LCA) within a broader commitment to circular business processes; instituting returnable packaging at each step of the supply chain; and providing more complete information on issues such as carbon footprints, water consumption, chemical use and waste generation.
  • Design better data streams with suppliers. Digitized data systems should enable more frequent communication between customers and their suppliers to foster co-creation innovation opportunities and accelerate business decisions and also ensure such systems are adaptable to ESG reporting at a level relevant and appropriate for suppliers.
  • Holding suppliers accountable. Strengthening sustainability in supply chain performance is less about mandates than it is about commitments to common objectives, conducting business reviews to measure progress, providing technical support or mentoring to smaller suppliers, and defining future commitments for climate and other metrics. If, following these steps, suppliers are unable or unwilling to keep pace with customer needs, then termination of the business relationship should be an expected outcome.

Companies that are evolving their supply chains in this direction include Ecolab, Intel, Kimball Electronics, Nike, Philips Electronics, Trane, Unilever and Walmart.

The goal of more sustainable supply chain governance is the expansion of mutual business opportunities and reduction of enterprise risk in a manner that protects people and critical planetary resources. Given the many transitions underway across the various sectors of the global economy, enabled by transformations in both technology and public policy, large and growing opportunities await those clusters of businesses that have aligned their supply chains to provide products and services that embody sustainability. Growing numbers of suppliers increasingly hear this message, acknowledge its application and value, and seek to redesign their own supply chain strategies.

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