Reining in the Risks of Sustainable Sourcing

Product shortages and supply chain disruptions have emerged as a frustrating reality for organizations across a wide swath of industries. Due to a convergence of factors -- including the pandemic, the war in Ukraine and a shortage of raw materials -- procuring essential materials and components is increasingly difficult.

Yet, things suddenly get a whole lot more complicated as soon as sustainable sourcing enters the picture. As businesses strive to meet aggressive climate goals and display results on Environmental, Social and Governance (ESG) reports, the headaches and risks multiply. An inability to obtain materials, products and services can threaten basic operations.

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

Yet, whether a beverage company is looking to swap out plastic for plant-based containers or an airline is transitioning to alternative jet fuel, there’s a path to progress. The key, says James Cascone, a partner and lead of the sustainability practice at Deloitte Consulting, is a mix of strategy and technology that delivers “visibility into the supply chain through AI, machine learning, digital twins and other tools.”

Taking Sustainability to the Source

Sustainable sourcing has clearly moved into the mainstream of business. For example, Delta Airlines is transitioning to synthetic jet fuel, Coca Cola is moving to plant-based bottles, Old Navy is producing clothing manufactured from bio-based materials and H&M is increasingly using recycled materials in new clothing.

Building more ecofriendly and sustainable supply chains is rapidly 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 that transparent sourcing would likely become a top factor in their supplier ratings by 2025.

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

Yet, getting the equation right can prove extraordinarily challenging. It’s critical that suppliers are equipped to deliver the necessary materials and goods -- and their practices meet sustainability standards. However, climate change, political instability and other factors can complicate things. A failed crop, embargo or excise tax can wreak havoc with an ESG initiative.

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

Adds Kevin O’Connell, ESG Trust Solutions Leader at PwC US: “It’s one thing to develop and publicize a net-zero goal, but the real work resides in execution.”

Ratcheting Down the Risks

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

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

Ensuring that suppliers can produce enough plant-based materials, alternative fuels or low-carbon concrete is critical to mapping out a carbon reduction plan. Scarcity is a common problem with alternative materials and products. A sustainable sourcing initiative might require new strategic partnerships, consortiums, even incubators or acquisitions to gain specialized knowledge or greater control over the supply chain -- in order to boost predictability and availability.

The objective, Lyons says, is to establish a trusted and consolidated set of partners that allow a business to adapt and scale as needed. “The goal isn’t to create the largest and most fragmented supply chain possible. It’s to build a sustainable supply chain that is highly efficient and generates the maximum value.”

Eye on Observability

Deep and broad insights into a supply chain come with a robust technology framework and data analytics. Business and IT leaders must focus on digitizing all the various parts of the supply chain, so that there’s complete data about suppliers, resources and costs. Technology is also crucial for forecasting the impacts of climate change and potential geopolitical problems.

Enterprise applications are introducing ESG-specific capabilities, though most aren’t equipped to handle sustainable sourcing in its entirety. BCG offers a platform called CO2 AI that measures, tracks, and reports on an organization’s environmental footprint, including Scope 3 emissions extending into the supply chain. It includes simulation features that show different risk scenarios and outcomes. Tata Consultancy offers a program called TCS Clever Energy, which delivers detailed carbon snapshots and AI analytics 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 impact raw materials and sourcing in the coming years. For example, these tools can aid in understanding how future crop yields and labor will likely change and even quantify the cost of inaction. Regardless of the exact approach an organization takes, the key is to gain end-to-end visibility for scenario planning, Lyons says.

The end 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 sourcing and Internet of Things (IoT) sensors to track and manage materials and commodities. Armed with data, organizations can identify which suppliers are the lowest emitters of carbon and which deliver the maximum overall value.

The journey isn’t easy, and enormous disruptions to traditional buyer-supplier relationships are inevitable, McKinsey warns. “Few have mastered this new skill. Fewer still have mapped their supply chain emissions using primary data -- in part because suppliers rarely collect this data themselves. Sourcing teams may need to help suppliers install hardware and software to generate the emissions data they want.”

To be sure, there’s no easy path to sustainability but a clear strategy and the right technology can reduce risks and improve results. Concludes Lyons: “Supply chains are complex by nature and sustainable sourcing introduces additional complexity and risks. However, with the right strategy and technology in place it’s possible to gain visibility -- and create value. Sustainability presents a strong business case, and that should be an organization’s North Star.”

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