The supply chain is the hub for creating new Constellations of Value

Editor’s note: This is the second article in a four-part series on actions supply chain leaders can take to improve cross-functional collaboration and create new more flexible and resilient supply chain models. Parts three and four will appear on July 6 and July 13. You can read part one here.

New digitally integrated and transparent business models will require new types of internal collaboration in the organization. Companies will need to break down operational silos and create cross-functional workflows specifically aimed at creating more happy and loyal customers and in meeting increasingly important ESG goals.

Globalization over the past 30 years has been focused on outsourcing and offshoring to achieve lower costs. The supply chain function supported this strategy by finding lower cost sources and creating more efficient logistics. However, with the emergence of the higher expectations of the new customer, the supply chain function must join marketing, product development and ESG to become more customer-facing. In our research and conversations with the Digital Supply Chain Institute (DSCI) member companies, we have a shorthand term for the transformation of the supply chain to customer facing. We call it the “Frontside Flip” – with supply chain shifting from back-office fulfillment to being integral in meeting customer expectations. As supply chain transforms into a collaborative customer-facing group it will require attracting, developing, and retaining new talent.

Today, an essential element of the Frontside Flip includes better integration of ESG into strategy and operations. The supply chain function is the hub of this ESG integration because so much of the data and ability to meet ESG goals lies with the end-to-end operations, and the companies in your supply chain.

Read part 1: Supply chain: The intersection of ESG and the new customer

Read part 3: Unlocking competitive advantage through strategic data sharing

Companies need to think about ESG as a sustainability issue, reputational issue, legal issue, and an operational issue. This requires effective cross-functional collaboration. With the growing number of regulations related to everything from data privacy to environmental practices to human rights, we see that each regulation has similar overall requirements, with some specific variations. They all require you to be aware of, and take some responsibility for, your suppliers’ actions. It is critical for supply chain leadership to also be present alongside legal departments in evaluating new regulations so new goals and the related policies and procedures are practical to implement.

One of the ways to gain the support of the legal function and the business units is to work with them to come to a common understanding of what level of risk is acceptable and to set ESG goals that are aligned with business performance goals. Another key reason for building cross-functional support is to operationalize the idea that ESG issues need to be considered at every step of the product lifecycle, from development through recycling or disposal. This circular approach is critical to making the shift from being reactive to more preventative and proactive.

The importance of cross-functional collaboration comes into play again as you consider ESG and your third parties. Suppliers are one of the highest risk areas for topics ranging from corruption to data privacy to environmental practices to labor violations. Since the supply chain function often owns or co-owns these relationships, you must play a central role in using your leverage and control to gain suppliers’ support and to access the data you need to meet your reporting requirements.

ESG-driven supply chain leadership imperative: Creating Constellations of Value

In addition to required internal transformations, ESG-integrated business models require the development of new, secure external relationships.

Instead of thinking in traditional terms of rigid supply and sales channels, companies need to think about forming flexible supply and sales constellations. Supply chain leaders are now the chief builders and managers of these Constellations of Value. The need to integrate ESG considerations into operations requires a new lens in why and how companies are brought into your supply chains. A company could be your competitor in one constellation but your partner in another constellation.

The need to integrate ESG into operations means that every company in your value-chain needs to be considered from a business and ESG performance perspective. The need for cross-functional decision making is clear as companies seek to balance competing pressures. Here are examples of decisions companies will need to make:

• Shifting production to a new low-cost factory may reduce short-term product costs but greatly increase labor and environmental compliance risks.

• Adding a back-up supplier may improve resiliency but create enormous new intellectual property (IP) protection and cybersecurity risks.

• Using a new shipping company may improve on-time performance, but dramatically hurt your ability to meet carbon reduction goals.

• Hiring a local “consulting” firm may help win a government contract but increase corruption exposure.

Every business is on a tightrope between business and ESG performance. Making decisions that maintain your balance on the tight rope is only possible with rigorous internal collaboration and flexible, trusted suppliers in your constellation. Business growth by creating and retaining more happy and loyal customers is at the end of the tightrope.

As companies shift to new business models, they must design new approaches to business continuity and supply chain resiliency from the start. The last three years have fundamentally changed how companies need to build and operate their supply chains. Several “unexpected” events - the COVID pandemic induced shortages, the ship blocking the Suez Canal, and the war in Ukraine - caused enormous disruptions in supply chains. Meanwhile, the rapidly increasing number of cyberattacks on software and physical goods supply chains adds to the unpredictability and increases the need for companies to develop trusted constellations that provide a level of security in addition to flexibility and resiliency. Business continuity must be approached in a holistic manner that looks at risks ranging from data privacy to labor to environmental to geopolitical issues.

As ESG is increasingly integrated into purchasing decisions by consumers and companies, each company must understand that meeting any ESG goal is a shared responsibility by every company in the supply. chain.

In our next article in this series, we will cover specific steps companies can take to get the data needed to track progress towards meeting ESG goals while building trusted, resilient constellations.

About the authors:

Craig Moss is executive vice president of Ethisphere and director of the Digital Supply Chain Institute David Kurz is senior fellow at the Digital Supply Chain Institute and associate clinical professor at Drexel University

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