Operationalise sustainable sourcing in supply chain management

Sustainability is a front-and-center issue for consumers and customers, who are leveraging their purchasing power to support companies that prioritise responsible environmental stewardship, ethical social practices and transparent corporate governance. In response, organisations are laser focused on building sustainable products, solutions and services. This often starts in the supply chain itself. Without an effective sustainability program within the sourcing and procurement and supply chain functions, the rest of the environmental, social and corporate governance (ESG) footprint can quickly disintegrate.

With the onslaught of natural disasters, pandemics, geopolitical conflicts and more, supply chain disruptions are growing in the face of global demand and increasing material scarcity, putting organisations at risk of financial loss that could reach millions of dollars each day. To maintain continued competitiveness, organisations must build a diversified and resilient supply base that embeds sustainability into business operations.

Sustainable operations require organisations to rethink how they function in order to uncover additional business value through their footprint. This is done by assessing, designing and implementing capabilities to improve processes; reduce emissions; optimise water, material and energy use; and support value-chain sustainability.

Sustainable sourcing requires a diversified supply base

A key element of sustainable operations is sustainable sourcing. In 2022, during the COVID-19 pandemic, the U.S. faced a severe shortage of baby formula products, with out-of-stock rates as high as 50% in some states. With formula production consolidated to just a few companies, the supply chain was impacted nationwide when top-producing facilities shut down. Companies that depended on these shuttered manufacturers to stock their shelves saw a direct impact on their bottom line as they were unable to maintain enough supply to meet customer demand.

For most organisations, 80% of their total spend is with their top 20% of suppliers – and conversely, only 20% of their total spend is with the remaining 80% of suppliers. To enable sustainable sourcing, organisations should create a diversified supply base that includes a range of businesses, from small- to medium-cap organisations to women-, veteran- and minority-owned businesses, etc., that are more agile and can easily pivot when needed, helping ease supply chain disruptions and ensuring they have the products their customers want, when they want to buy them. This ensures material availability and safeguards revenue and business continuity.

How to pivot to a new model of a trusted supplier network

Traditionally, organisations seeking to diversify their supply base first evaluated their needs within a certain category and then sought out diverse suppliers to meet those needs. Instead, organisations should pivot to a new model and ensure diverse suppliers are included in their strategy from the start. While not an exhaustive list, here are seven key steps to operationalising sustainable sourcing:

1. Assess your existing supplier base to understand your current state
2. Conduct a benchmark and gap analysis
3. Create and prioritise a list of opportunities
4. Define those recommendations and opportunities
5. Craft an organisational future-state vision with leadership and gain buy in and support
6. Define key performance indicators to ensure a high return on investment
7. Implement and operationalise with people, process and technology

Organisations also should identify technology platforms that can assist with sustainable sourcing. These platforms can help determine suppliers within the supply base, their location, their capabilities, and more, and then can track multiple metrics, including greenhouse gas (GHG) emissions.

As our global population swells to more than eight billion people, scarcity and shortages are a real threat to the global supply chain. Organisations have a strong incentive to incorporate ESG considerations into their business strategy, operations and reporting, as they recognise the importance of sustainable operations in meeting customer expectations and building long-term trust and loyalty. Ensuring that sustainable operations are foundational to the operating model can play an important role in reducing the risk of resource scarcity.

A dynamic and efficient supply chain that incorporates redundancy and a more diversified supplier base enables organisations to employ agility, design out waste and promote sustainable consumption. This in turn promotes operational continuity and innovation, employee engagement, and supply chain resilience. It also can lead to improved sales and opportunities that create new revenue pathways, ensuring the organisation can be sustainable for the long term.

Join Protiviti for our upcoming webinar, The Impact of Sustainable Operations on Profit and Long-Term Viability, on September 28 at 1 p.m., where industry experts will delve into the strategies and practices of integrating sustainability practices into a company’s operations.