For decades, global supply chains have focused on delivering agile customer service through efficient and just-in-time operations that combined cost management and operational synergies. But the frailties of that approach were highlighted by the pandemic as lean supply chains ran into capacity problems, stock shortages, resource challenges and greater scrutiny.
Without clear and decisive action, environmental impacts will bring even bigger challenges to supply chains: sourcing raw materials, manufacturing and distribution difficulties, labour shortages, commodity price rises, and a looming shortage of energy supply, among others.
One of the main takeaways from the COP26 summit in November 2021 was that supply chains will come under greater environmental scrutiny, particularly for their scope three greenhouse gas emissions. According to the CDP’s Global Supply Chain Report 2020, these emissions - produced from a company’s activities, not directly from the company - are on average 11 times higher than an organisation’s operational emissions.
But a recent PwC UK survey found that most UK businesses overlook the sustainability of their supply chains in change management and restructuring programmes. When asked about their objectives for current change management and restructuring programmes, only 5% said that creating an environmentally and socially responsible supply chain was their main objective.
The first step in any net zero transition must be getting a true understanding of your supply chain. Those that have clear visibility will be able to model the impact of net zero requirements on service, cost and operational capabilities.
According to Johnathon Marshall, Partner and Supply Chain Lead at PwC UK, that presents a challenge. “Generally, organisations have a good view across their own emissions. The difficulty comes when trying to get information on your extended supply chain: you need visibility into data through multiple tiers, some of which either doesn’t exist or isn’t readily available,” he says.
Additionally, the need for integrated, proactive management of risk across your supply has never been greater. Complex and extended supply chains contain both hidden risks and value. A clear, transparent view across your third-party supply ecosystem is essential for organisations looking to build resilience, protect value and mitigate risk.
But for many, they still see little incentive to look into their supply chain at the moment. Often, the more you investigate your supply chain, the more you find; and the worse it looks. Organisations think their supply chains are in reasonable shape until they interrogate them. When they start, they realise the issues and the scope of the challenge.
Clear, transparent data gives you the power to benchmark and baseline your carbon footprint, and how it is affected by your supply chain decisions. This information then gives you the power to make the right decisions to reduce emissions and measure the impact of any actions.
Being able to clearly and credibly report on the progress is vital. Speaking to our 25th CEO Survey, Keith Anderson, CEO of ScottishPower, says that any claims of ‘greenwashing’ can be addressed through honesty and transparency and a focus on facts rather than rhetoric.
“We've been very focused on showing what we're doing, how we're doing it, and by when. We've had the Carbon Trust come in to do a massive review of everything we do, from the way we procure goods, to the way we travel, to the way we run our buildings. And we're now looking at measuring our performance in terms of how we decarbonise our supply chain.”
That begins with organisations conducting a value chain greenhouse gas (GHG) footprint assessment, supplementing company data with environmental modelling techniques, and repeating foot printing annually. This view across the network - transport, procurement, manufacturing, and more - can help educate people throughout the supply chain, and help them make more educated decisions.
In turn, that transparency gives enhanced visibility over supplier spend, and clear insight into how to reduce and control it. With procurement typically accounting for 40% or more of a company’s cost base, a clear view of third party spend and risks can provide actionable results that deliver sustainable savings.
Often organisations look at managing supply chains for net zero as a purely negative cost impact. This needs reframing if the transformation is to succeed.
“Cost can be a real driver here. Essentially, a sustainably managed supply chain represents good cost management: it’s essential to really unpick and understand your supply chain. Having visibility of what you’ve got and how product flows allows you to make the right decision on what to make where, and whether you have to use air freight or can use greener and potentially cheaper ocean freight.”
Take near-sourcing, for example. A growing trend, it can be an effective way to reduce the overall carbon footprint of an organisation. On face value - and in the short-term - near-sourcing is likely to be more expensive, particularly for those organisations that have long relied on the cheaper, imported products manufactured in Asia.
But there are many longer-term benefits of this approach. With manufacturers or suppliers located nearer, transit time can be dramatically reduced, allowing organisations to deliver faster turnaround times and respond to customer needs more rapidly. It can also alleviate unpredictability of stock and lower inventory, which creates more certainty of cost. In turn, this could help organisations better manage their finances with more stability, predictability, and autonomy, ultimately leading to a virtuous circle that delivers new jobs, wealth and improves local communities.
According to Daniel Windaus, Working Capital & Operational Restructuring Partner at PwC UK, organisations need to think about the impact of near-shoring not just in terms of protecting margins. “Some may see it as paying for doing the right thing. But what we used to like about globalisation - getting the thing we wanted, for cheap - clearly no longer works. Organisations therefore need to rebalance their supply chain trade-offs. Producing closer to end markets has a positive impact on the carbon footprint, reduces lead times and enables lower inventories, lower obsolescence and increased supply chain agility,” he says.
What might seem expensive to invest upfront, is likely to pay substantial dividends down the line.
Incentivising will be key to reducing emissions. And there are many levers that organisations can use to begin decarbonising their supply chains, ranging from penalty-based to reward-based levers. A recent whitepaper published by PwC UK and WBCSD considers how organisations can best reach net zero through supply chain incentives.
With the UK government announcing £600bn in public investment for net zero, innovation and the levelling-up agenda, as well as taxes and reliefs increasingly used to drive environmental practises and behaviours, there are significant financial incentives for organisations to decarbonise supply chains.
Elsewhere, ESG commitments are fast becoming essential to commercial success. Those organisations that can demonstrate good ESG performance are increasingly attractive as an investment proposal.
Interviewed for our 25th Annual CEO Survey, Amanda Blanc, CEO of Aviva, confirmed its growing importance from an investment perspective.
“At the beginning of last year we spoke to the top 30 carbon emitters in our equity portfolio and said to them ‘you have three years to sort yourself out and come up with a transition plan, otherwise we will be disinvesting’.”
Aviva also requires its suppliers to demonstrate a clear commitment to net zero by 2040, and refuses to invest in - or underwrite - businesses where more than 5% of revenue comes from fossil fuel.
And with a reported $130 trillion of assets under management now committed to aligning net zero performance, Aviva isn’t the only investor reviewing the sustainable credentials of potential investments.
This growing financial interest highlights the need for a joined-up approach to understanding the true ESG impact of a company’s supply chain. One solution is the development of an ESG reporting framework, of equivalent quality, independence and auditable rigour to that of financial reporting, to drive and incentivise the right behaviour globally: encouraging companies to reduce carbon emissions and remove human slavery from every part of their supply chain.
All organisations can take some practical steps to move their supply chains towards net-zero: rethinking the life cycles of products, how they’re provided, and the organisations they collaborate with. Often, it begins with revisiting macro drivers and looking at what they can do at a corporate level to have an impact.
That could be to look at who your current suppliers are, and how you engage with them. Are you in a position to demand data-based targets from them, rather than simply requesting they reduce emissions? Could you add different criteria to your scorecards for suppliers and logistics providers to back up your goals?
Some organisations may look to reduce emissions through innovation up-front during product development - for instance, through product and packaging design centred around greater energy efficiency, increased use of recycled raw materials and a shift to more sustainable materials.
Others may choose to focus on logistics. Traditionally, organisations have chased a more sustainable supply chain through procurement. Now, some are looking at fulfilment as a way to decarbonise through transportation: alternative freight options, distribution centres or last-mile delivery. Menzies Distribution group, for example, has expanded its zero-emissions delivery fleet to more than 120 vehicles, and is the largest all-electric vehicle fleet - and commercial charging infrastructure - in the UK.
Then there’s the circular economy to explore. Can your products be designed to have a second life or be recycled or repurposed after their original use has finished? By replacing disposal with collection and reuse, it’s possible to make a significant dent in supply chain emissions.
Organisations may also take operational decisions to reduce emissions: are there ways you affect the supply chain on-site, in factories, or warehouses?
Take pack rationalisation, for example. By examining your product portfolio, it's possible to see where certain products and packaging types could be discontinued to improve efficiency. This has the added benefits of eliminating unprofitable or marginally profitable products, reducing changeovers on production lines (reducing expedited transport and re-packing), shrinking inventory storage requirements and ultimately driving a cost saving, with potentially little top line impact.
As organisations look to pin down supply chain strategy and operational challenges, they can often overlook tax implications.
Get your strategy wrong, and a raft of green taxes could present a cost to your business. But get it right, and there are significant incentives and reliefs available that could help your business as you transform. Your tax function must be aware of what’s happening across your supply chain, because any actions may have much wider tax implications that could increase or erode margins.
“While overall strategy is critical for managing supply chain emissions, tax must be considered alongside it. It might be a trigger, it might be a catalyst for action; it might even be a reason to not do something. There are also hugely important factors to think about around reporting.”
Take virgin plastics for instance. Operationally, most organisations know what they’re doing. But many have failed to consider the regulatory reporting requirements and obligations they need to follow to get the financial support they’re eligible for, or to make sure they don’t get caught out.
Supply chain strategies of old are no longer fit for purpose. Many organisations will need to overhaul their approach to supply chain management and find ways to drive greater agility and efficiency while reducing emissions.
Those that get their strategy right will not only benefit from reduced costs and greater resilience in the long-term, but are likely to become more attractive to investors and unlock new sources of funding.
But changes will only be effective if you have complete understanding - and transparency - across your end to end supply chain before making decisions.
To discuss any of the issues raised in this article, please get in touch.