Creating A More Sustainable Supply Chain
by Max Ward, CEO of Liberatrade
Environmental, social, and governance (ESG) considerations are quickly becoming more important when it comes to investment decisions and governance to drive shareholder value of all retail supply chains, as more individual and institutional investors begin to see the value and relevance in developing a sustainable economy.
In fact, a recent report by Moody’s Investor Service reveals that ESG issues have increasingly influenced credit quality assessments.
Sustainability is no longer just a buzzword among corporations, it has become a top concern in the global economy for both consumers and companies. Today, a higher number of businesses are committed to responsible business practices from its subsidiaries to suppliers.
Why are companies leaning towards sustainability?
The growing evidence that sustainable corporate practices are linked closely to performance, has impelled more companies to link recurring business drivers to the United Nations’ Sustainable Development Goals.
Businesses are beginning to incorporate sustainability requirements into their supply chains through brand positioning and value, corporate strategies, regulatory and reputational risk assessments, product innovation, and decision to enter new markets.
The increased interest in ESG comes with the reward of a more inclusive market as well as contributing to the advancement of sustainable development in line with the United Nations’ Sustainable Development Goals.
For the global supply chain industry, sustainability plays an even more crucial role in promoting human rights, fair labour practices, environmental progress and anti-corruption policies, according to the UN Global Compact.
So, beyond just the right thing to do, managing the social, environmental and economic impacts of supply chains makes good business sense.
Being sustainable, however, may not be smooth sailing as the scale and complexity of supply chain practices makes it the biggest challenge to improving sustainability performance, according to the UN Global Compact.
What is a sustainable supply chain?
Building a sustainable supply chain comes from practicing good governance and managing the environmental, social and economic impacts throughout the entire life cycle of goods and services.
The goal of supply chain sustainability is to create, protect and grow long-term environmental, social and economic value for all stakeholders involved in bringing products and services to market.
(Image source: process.st)
Economic sustainability, for instance, is achieved when the long-term success of an economy operates sustainably, protecting both social and environmental elements.
Some reported fiscal benefits to economic sustainability include reduced agency expenditures, boost in tax and fee revenues, reduced long-term liabilities, lowered operating costs, and improved fiscal stability.
Environmental sustainability, on the other hand, can be achieved by bringing heightened awareness to global environmental concerns, and providing incentives for businesses to assess their environmental impact such as the usage of natural resources and carbon footprint.
Applying the UN Global Compact’s Ten Principles into a company’s value system and adopting a principles-based approach to doing business are some ways to achieve a more sustainable supply chain.
Companies can try to achieve a sustainable supply chain through the following means:
Overcoming the “bullwhip effect” in supply chains — a driver of sustainability
In supply chain management, this phenomenon is used to describe increasing swings in inventory in response to shifts in customer demand as one moves up the supply chain. Imagine a consumer holding up a whip and cracking it, as its ripples are felt all along the supply chain right back to the manufacturer.
The bullwhip effect is caused by key variables like lead-time — delays in manufacturing, shipping and transmitting information, fluctuations in product and supplier orders and demand, forecast inaccuracy at the end-customer demand point, and lack of communication. Research shows that bullwhip effect is often associated with three characteristics: oscillation, amplification and phase-lag.
The effects of this detrimental phenomena on companies is particularly evident in today’s COVID-19 marred economy. Countries heavily impacted by the virus, such as China, have restricted trade and shut down borders, causing a huge disruption in unprepared supply chains and commerce that is already in chaos due to an uptick in panic buying. Manufacturers are inundated with replenishment requests to replace supply shortages due to an overwhelming influx of demand because of COVID-19.
A clear example is the imbalance between the demand and distribution of personal protective equipment (PPEs) and the production of PPEs which has led to overproduction and misinformed inventory build-up. The inefficiencies caused by a lack of dynamic and real-time understanding of demand cause a scrabble for suppliers who have enough inventory to match this demand. The imbalance causes lost sales, increases stockout risks and affects the cost of expediting goods, particularly when working with suppliers that are new and need to be managed and financed.
Though businesses work hard to forecast demand in order to maintain a manageable and useful inventory, and avoid the bullwhip effect, they still experience an excess or inadequate inventory because of misguided forecasts.
The solution? An array of remedies have been identified, including information sharing, integrated supply chain information system, joint planning, vendor-managed inventory, shorter lead times, and synchronized deliveries, according to the International Journal of Production Economics.
Driving sustainability through digitization: from silo to ecosystem
The creation of a more sustainable supply chain needs players to operate within a data ecosystem. This requires the establishment of a consortium to manage, strategize and curate data, so that everyone in the consortium may benefit from data sharing.
Thanks to cutting edge innovation, the execution of the data strategy and digital tools in supply chains have proven to increase efficiency.
Application program interfaces (APIs), for instance, have managed to connect traditionally siloed data sources among multiple parties typically involved in the end-to-end supply chain in freight logistics. Typically caused by underlying problems such as inaccurate or absence of data, API mitigates the issue of lack of cargo visibility — or the inability to make economic decisions based on knowledge of current whereabouts and status of cargo.
Customized directory services markup language (DSML) tools also play a significant role in customer service and supply chain applications, which rely on a customized presentation of data — a challenge in an industry made up of thousands of stock-keeping units, millions of point of sale (POS), a myriad of suppliers, logistics partners, warehouses (network nodes) etc.
Depending on data, however, comes up with its own challenges. Because data has proven to be the most valuable resource in many industries like advertising, financial services, transportation and supply chain, it has also made it the most guarded source among businesses. The good news is that over the years, more businesses are progressively beginning to participate in data cops — or sharing of pooled data from online consumers between two or more companies — as there’s an increasing awareness of the limitations of first party data. Co-op may also help mitigate the bull-whip effect because industry insights are superior to single supply chain insights.
Through the use of existing company data or SaaS supply chain data management tools, LiberaTrade is able to navigate and overcome data silos, and build a more resilient supply chain while reducing logistics costs, and improving access to capital.
Its data driven funding model for supply utilizes predictive modeling to match demand with supply, allowing it to analyze causes and effects at scale, while also offering transparency in logistics through its SaaS solutions, allowing quick and effortless understanding of the state of the supply chain.
LiberaTrade creates growth potential by bringing simplicity to the supply chain, as well as by reducing waste through the prediction of supply chain fundamentals: what is needed, where and when, all while operating with reduced risk.
Supporting SMEs — an inclusive business is a sustainable business
Though the global economy is being driven by the strong growth of emerging Asian countries, an ADB report states that continuous global imbalances give rise to one crucial dilemma: that the current growth pattern in Asia may not be sustainable.
For Asian economies to achieve economic success, fully functioning support measures for small and medium-sized enterprises (SMEs) is a must, as they are the backbone of the Asian economy, making up more than 96% of all Asian businesses and providing two out of three private-sector jobs on the continent.
Against this backdrop, policymakers, thought leaders, and decision makers have been urged to realize that the creation of a robust, resilient, and growing industrial base should be a prioritized policy agenda in Asian countries. Leaders should also foster SMEs as growth entities, rather than weak entities in order to realize a balanced regional economy in Asia.
SMEs are also able to stimulate domestic demand, and be the driving force of economic and social stability by creating jobs, fostering innovation, expanding the industrial base, and stimulating a competitive business environment. SMEs involved in global production supply chains have the potential to encourage international trade and help revitalize rural economies, according to an ADB working paper series.
Unfortunately, in Asia, inadequate access to finance is a real problem that all SMEs face — and one of the core factors impeding SME development. According to estimates by IFC’s MSME Gap Assessment report, the global gap in such funding is $5.2 trillion. And given the diversified nature of SMEs, there is no one-size-fits-all financing solution — but the improvement of lending efficiency and the diversification of financing modalities, have been cited as ways to help expand SMEs’ access to finance, particularly given the largely bank-centered financial system in Asia.
On the environment front, SMEs, on aggregate, have a high environmental footprint. Literature estimates that SMEs contribute 60–70% of industrial pollution in Europe, according to OECD, particularly in the manufacturing sector as they account for a large share of global resource consumption, pollution, and waste generation. Therefore, aiding SMEs through their sustainable journeys, indirectly, reduces the carbon footprint accumulation across the globe.
Hence, given the economic, social-well being, and environmental significance of SMEs, they are critical drivers of inclusive and green growth.
Final thoughts: green impact is on par with business impact
Over the years, more and more supply chain companies are beginning to pay close attention to the social and environmental impact of their business activities.
This appreciation influences how their supply chains contribute to global sustainability challenges, as more begin to realize the benefits and impact of sustainability, and on the flipside, how the effects of poor sustainability management can impede growth and profitability.
Companies who place sustainability at the forefront of their businesses are best positioned to gain from the boom in consumer spending — a segment that has evolved to become more sustainability-conscious — as it is expected to take place over the next decade and beyond.
