Enabling Responsible Sourcing in our Supply Chains

Editor’s Note: Miguel Cossio, Director Analyst, Gartner Supply Chain

It has been encouraging to hear in recent weeks the dialogue happening at the UN Climate Change Conference (COP26) and country level commitments being outlined.

Over time, these pledges will cascade down to policies that will impact supply chains. As we begin to redefine the role supply chains play in building a sustainable future, now is the time for CSCOs to consider operations of their supply base and ways they can support their organization’s sustainability goals going forward.

New Sustainability Expectations for Supply Chains

According to findings from the 2020 Gartner Sustainability Survey, organizations are under increased pressure to invest in sustainability initiatives, with the top three stakeholder groups driving for change being customers (63%), investors (48%) and regulators (46%). As pressure from these stakeholders continues to grow, companies are responding with increased transparency on their impact and commitments to support these growing concerns.

As requirements and expectations change, companies are facing the challenge of reporting not only on the impact of their own operations, but also on the impact from their supply chains. This has led to 93% of respondents in the 2020 Gartner Fortune of Supply Chain Survey highlighting how “investing in responsible sourcing” is a priority in the next 18 months.

Outlining your Organization’s Approach to Responsible Sourcing

The concept of driving sustainability in the supply chain — often called responsible sourcing or sustainable procurement — is complex. It can feel overwhelming to some supply chain leaders, especially as the focus and the outcomes can differ significantly across organizations.

The best way to begin is by addressing “What does sustainability mean for our organization?” Responses will vary, with some people assuming only environmental issues, while others taking a broader approach to include social and governance aspects, or ESG issues in short.

From there, consideration should be given to what outcome your organization is looking to achieve with your strategy. Our research shows that the outcomes organizations are pursuing can be classified as being focused on compliance, market differentiation or ecosystem enablement — or a combination of all three:

• Compliance-focused: This is where most organizations begin their strategy, as they are what’s commonly known as a company’s “license to operate.” They aim to ensure the supply base operates in accordance with local and global regulations.
• Market differentiation: Is an approach that demonstrates a shift from avoiding having a negative impact to one that focuses on delivering positive outcomes. The strategy typically aligns to how the company wants to position itself in the market to win over customers.
• Ecosystem enablement: At this level, companies move from trying to outpace their competition to focusing on joining ecosystem partners — including competitors — to address a common issue that threatens their long-term ability to operate.

Accelerating the Pace of Change

As organizations further refine their sustainability strategy to extend to their supply base, pressure on supply chain and procurement leaders will inevitably increase. In addition to cost, cash and availability, supply chain leaders will have to incorporate sustainability as a key focus area. The top actions they should prioritize are:

• Supplier collaboration and engagement: Many will face suppliers that are either unwilling or unable to support their sustainability agenda. Building deeper relationships that share a common goal, investing in supplier development programs and tapping supplier innovation will be imperative.
• Governance on ESG issues: Asking suppliers to acknowledge a code of conduct is simply not enough. Organizations will need to embed their sustainability objectives in their decision-making process, specifically along the entire supplier lifecycle.
• Incorporate digital solution: New technology solutions are being launched to support this, ranging from survey-based and ESG risk monitoring solutions to worker engagement tools and traceability applications. Supply chain leaders will have to learn to evaluate these solutions and plan ahead how different solutions will have to be used.
• Measure and communicate value in new ways: Performance indicators for both internal staff and suppliers alike will have to incorporate sustainability metrics, which might conflict with traditional financial metrics. Trade-offs and cost optimization (rather than reduction) will have to become part of the narrative on how both groups convey their value proposition.

For those wondering how to balance sustainability objectives with financial goals, my answer is always the same: Leading organizations think about sustainability the same as they think about supplier quality — it’s something that’s expected and it’s non-negotiable.

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