Responsible Sourcing and Supply Chain Resilience
By: Jonathan Laverentz
Jonathan Laverentz, Head of Digital Innovation, is responsible for all aspects of product marketing and strategic positioning at Tradeshift. Jonathan Laverentz is passionate about uncovering ways Tradeshift’s B2B marketplace platform can empower strong, sustainable, and healthy relationships between buyers and suppliers. In this article, Jonathan Laverentz breaks down the timely importance of responsible sourcing and how organizations can make their supply chains more resilient by sourcing more responsibly.
At its simplest level, responsible sourcing ensures that goods and services are produced or executed in an ethical, sustainable, and socially conscious way at each stage of the supply chain.
If you look at the disruption that’s taken place over the past two years, the foundations of responsible sourcing and supply chain resilience are very closely related.
Is it truly responsible that, until the pandemic, most large organizations based their entire supply chain and procurement strategy on the premise that ‘nothing bad will ever happen?’
Is it really responsible to ship parts and materials back and forth across the world rather than looking at more diverse, localized production methods?
Importance of Responsible Sourcing in Procurement
The pandemic cast a pretty damning spotlight on what happens when you build supply chains hardwired for cost savings and efficiency gains. Ultimately, if something is cheap, someone or something somewhere is paying for it – likely in less-than-responsible production.
It’s increasingly accepted that companies with solid ESG credentials fared better during the pandemic than those who didn’t. In other words, resilience and ESG go hand in hand. Climate change will likely create more damaging and more regular disruption to supply chains in the next 20 years than any of us have seen in the past two years. It’s critical that we take a closer look at the resilience of responsible sourcing as a road to sustainability.
Even if we strip out moral and ethical considerations from this discussion, businesses that ignore the principles of responsible sourcing simply won’t survive in a world where volatility and disruption are norms.
Ways to Enforce More Sustainable Sourcing
There are two things critical to attaining a more responsible supply chain.
1. Provide Transparency
Most companies set out to do the right thing. But the complexity and disconnected nature of modern supply chains can make it very difficult for organizations to isolate and address unethical behaviors lurking deep within their extended supply chains.
Many of these issues stem from a lack of data available across the supply chain ecosystem. Digitalizing the relationships across supply chains will go a long way to giving businesses the kind of transparency they need to ensure their best intentions are matched by best practices.
Once you have that digital foundation in place there are a number of other ways that technology can help organizations increase their focus on responsible sourcing. B2B online marketplaces that pre-vet suppliers according to their ethical credentials are a great example. There’s also significant potential in areas such as digitally-enabled green financing that rewards suppliers who commit to high ethical standards with more favorable payment terms and working capital arrangements.
2. Establish Supplier Diversity
By creating a diverse and redundant supply chain, an organization is more able to impose greater restrictions or even discontinue a business relationship with a supplier that may have a moral ambiguity to the way they manufacture or acquire goods or services.
In choosing to rely on a static supply chain, a buyer makes a deliberate choice to tether themselves to a supplier. In doing so they must face “guilt by association.” Whether they choose to do business in an ethical or moral way is of little consequence. By continuing to do business with a supplier who acts irresponsibly, they are actually financing – and thereby supporting the negative operational practices.
Starting down the road to ethical sustainability and supply chain resilience begins with the simple act of recognition. First, get bullish about ethical business practices within your organization, then turn your attention to your supply chain. Undertake the challenge of understanding exactly who your immediate network of suppliers are, then turn your lens further upstream and downstream in your supply chain. See a challenge – seek out an alternative supplier. Rinse and repeat. Just commit to it.
Why Focus On Responsible Sourcing Now?
The spotlight on this problem comes from multiple angles.
Shoppers are more heavily scrutinizing the source of the goods they buy and expect manufacturers to provide the answers. According to one recent study from Mastercard, 58% of consumers say they have grown more conscious about their impact on the environment since the pandemic. A quarter said they’d refuse to shop with an organization that couldn’t back up ethical claims with sound evidence. This scrutiny is echoed in a new generation of younger consumers who are more environmentally and socially conscious than ever before.
Banks and financial institutions are rolling out programs that reward more ESG-driven businesses and are creating barriers to access capital for businesses that fail to show evidence of responsible sourcing practices. This new level of accountability requires businesses to show data-backed tangible evidence to support their claims.
There’s also increasing regulatory scrutiny over sourcing practices. Germany adopted a draft Bill of the Supply Chain Due Diligence Act last year, demanding that companies with more than 500 employees ensure that social and ecological standards are observed through all tiers of the value chain. Similar legislative proceedings taking place in numerous European countries, as well as at the EU level.
Regulation will help to accelerate the transition towards a more digitally connected supply chain ecosystem where organizations can no longer use ignorance as an excuse for unsustainable or unethical behaviors in their supply chains.
But not all businesses need to fear this scrutiny. There is a broader business movement afoot that leverages sustainability and resilience into their culture.
Companies like Unilever have long espoused a mantra of ‘doing well, by doing good.’ The strategy is bearing fruit. Unilever recently stated that its sustainable brands are growing 50% faster than the rest of the business. Investors are increasingly looking to cash in on a trend they believe will continue to gather momentum.
Becoming More Responsible In Sourcing
Responsible sourcing requires a commitment from all stakeholders within an organization. Ultimately that means setting a clear charter that’s agreed upon across finance, procurement, and operations. Organizations need to set clear goals and establish effective ways to measure progress.
Measurement relies heavily on establishing a clear line of visibility across the supply chain. There’s a lot of debate over standardization and measures for ESG, but a consensus is beginning to emerge.
Above all, be proactive and be inclusive of the ecosystem of suppliers you rely on. Most organizations already see the reputational, structural, and commercial benefits of better ESG performance. Identifying and punishing suppliers for poor behavior might weed out a few bad apples, but the long-term impact of this approach is highly debatable. If organizations really want change, they need to give their suppliers access to the tools to make those changes.
Getting Started
At the risk of over-simplifying things, I’ve broken it down into four steps:
- Document – Ensure the digital footprint of goods from the source of production matches the documented process (know your suppliers – and their suppliers – and so on and so on…)
- Audit – Regularly audit your supply chain upstream – as well as downstream
- Certify – Ask your suppliers for certification and/or other proofs of responsible production and ethical working environments
- Validate – Engage a third party with domain expertise in supply chain sourcing validation – There are plenty of companies out there to help. We work with Normative who uses invoicing data on our network to provide companies with visibility into the scope of their carbon emissions. Organisations like FRDM are also doing great work in terms of helping businesses to spot potential instances of modern slavery in their supply chains.
