Sustainable sourcing: Managing the risks

Product shortages and supply chain disruptions have emerged as a frustrating reality for organizations across a wide range of industries. Due to a confluence of factors – including the pandemic, the war in Ukraine and shortages of raw materials – securing essential materials and components has become increasingly difficult.

Yet things suddenly become much more complicated once sustainable sourcing enters the picture. As businesses strive to meet aggressive climate targets and demonstrate results in environmental, social and governance (ESG) reports, headaches and risks are multiplying. The inability to obtain materials, products and services could jeopardize essential operations.

“Optimizing a supply chain is incredibly difficult,” notes Michael Lyons, managing director and partner at Boston Consulting Group (BCG). “Companies are struggling to build highly efficient systems that are focused on green supply and decarbonisation. Sustainability introduces new risk factors and expands the company’s risk footprint.”

Still, whether a beverage company wants to replace plastic containers with plant-based containers or an airline switches to alternative jet fuel, there is a path to progress. The key, says James Cascone, partner and head of the sustainability practice at Deloitte Consulting, is a combination of strategy and technology that provides “supply chain visibility through AI, machine learning, digital twins and other tools.”

Bringing resilience to the source

Sustainable sourcing has clearly moved into the mainstream of business. For example, Delta Airlines is moving to synthetic jet fuelCoca Cola moves to plant-based bottlesOld Navy produces clothing made from bio-based materials and H&M is increasingly using recycled materials in new clothes.

Building greener and more sustainable supply chains is fast becoming a top priority for businesses. According to a report
from McKinsey & Company, two-thirds of chief purchasing officers (CPOs) in the fashion industry say transparent sourcing is likely to become a major factor in their supplier ratings by 2025.

Sustainable sourcing revolves around several key areas, reports McKinsey & Company. These include materials; transparency and traceability; relationships with suppliers; purchasing practices; ecological footprint; the circular economy; plastics and packaging and sustainability transformation.

Yet getting the equation right can be extremely challenging. It is critical that suppliers are equipped to supply the necessary materials and goods – and that their practices meet sustainability standards. However, climate change, political instability and other factors can complicate matters. A failed harvest, embargo or excise tax can wreak havoc with an ESG initiative.

As organizations seek to increase sustainability and gain deeper visibility into Scope 3 emissions that extend deep into the supply chain, there is a need for a well-defined strategy and specific technologies, Cascone says. “You need to be able to verify the authenticity of claims and model situations and scenarios across a broad ecosystem.”

Adds Kevin O’Connell, head of ESG Trust Solutions at PwC US: “It’s one thing to develop and promote a net zero goal, but the real work is in the implementation.”

Reducing risks

Sustainable sourcing starts with a basic requirement: “It’s essential to know who you’re buying from and where you’re buying,” says O’Connell. These decisions impact the environmental footprint – including exposure to climate change, grid energy efficiency, production requirements and circular considerations. They also provide some guidance on specific risks to the seller or supplier.

Vetting existing and new suppliers is essential. It is necessary to understand the partner’s sustainability goals and whether the firm is a good fit. Their practices – and their risks – become part of the buyer’s practices and risks. “The engagement strategy must be tailored to drive collaboration and provide support to help both companies achieve their sustainability goals,” explains O’Connell.

Ensuring that suppliers can produce enough plant materials, alternative fuels or low-carbon concrete is critical to developing a plan to reduce carbon emissions. Scarcity is a common problem with alternative materials and products. A sustainable sourcing initiative may require new strategic partnerships, consortia, even incubators or acquisitions to gain specialized knowledge or greater control over the supply chain – to increase predictability and availability.

The goal, Lyons says, is to create a trusted and consolidated set of partners that allow the business to adapt and scale as needed. “The goal is not to create the largest and most fragmented supply chain possible. It is about building a sustainable supply chain that is highly efficient and generates maximum value.”

Eye on observability

Deep and broad supply chain insights come with a robust technology framework and data analytics. Business and IT leaders must focus on digitizing all the different parts of the supply chain so that there is complete data on suppliers, resources and costs. The technology is also critical to forecasting the impact of climate change and potential geopolitical issues.

Enterprise applications are introducing ESG-specific capabilities, although most are not equipped to address sustainable sourcing in its entirety. BCG offers a platform called CO2 AI which measures, tracks and reports an organization’s environmental footprint, including Scope 3 emissions that extend across the supply chain. It includes simulation features that show different risk scenarios and outcomes. Tata Consultancy offers a program called TCS Clever Energywhich provides detailed carbon snapshots and AI analysis along with digital twins.

Organizations are also turning to their own analytics, machine learning and digital twins to better understand supply chain dynamics, including how climate change and other factors will affect raw materials and procurement in the coming years. For example, these tools can help you understand how future crop yields and labor are likely to change, and even quantify the cost of inaction. Regardless of the exact approach an organization takes, the key is to get end-to-end visibility for scenario planning, Lyons says.

The ultimate goal is to establish strategies, policies and processes that fully support sustainable sourcing. Along the way there may also be a need for blockchain technology to verify the source and Internet of Things (IoT) sensors to track and manage materials and goods. Armed with data, organizations can identify which suppliers have the least carbon footprint and which deliver the most total value.

The journey is not easy and massive disruptions to traditional buyer-supplier relationships are inevitable, McKinsey warns. “Few have mastered this new skill. Even fewer have mapped their supply chain emissions using primary data—in part because suppliers rarely collect this data themselves. Procurement teams may need to help suppliers install hardware and software to generate the emissions data they want.

Of course, there is no easy path to sustainability, but a clear strategy and the right technology can reduce risks and improve outcomes. Lyons concludes: “Supply chains are complex in nature and sustainable sourcing introduces additional complexity and risks. However, with the right strategy and technology, it’s possible to gain visibility — and create value. Sustainability makes a strong business case and it should be the North Star of an organization.”

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