I interviewed George Favaloro who discussed Sustainable Supply Chain Programs: Benefits and Effective Approaches, and Why Companies are Prioritizing this Now.
I’m George Favaloro. I’m a managing director in PwC’s Boston office. I’m in the Sustainable Business Solutions group, and we help clients think through their critical sustainability-related business issues and help them address risk issues, creating value and efficiency and returns through sustainability programs, and then ultimately capitalizing on opportunities to innovate and grow.
What is a sustainable supply chain and why is it relevant for supply chain professionals?
Sustainable supply chain is thinking about your total value chain with the goal of reducing any reputational risks or to improve your core performance or cost effectiveness by working on your operational supply chain issues, risk, and supply chain transformation. And you want to think about those things in an integrative fashion so that you can reduce the risks, find opportunities to improve the reliability of your suppliers, and then help make your suppliers more cost effective, and that can be shared with you and reducing your overall cost as well.
The thing that’s often missed that sustainability brings to the table is thinking through nontraditional business risks, and these can be highly disruptive and a major factor in the world economy today. Working through them explicitly through a sustainable lens is how you uncover the opportunities to improve reliability, reduce risk, improve cost effectiveness.
What’s the best way to engage suppliers to reap the benefits from sustainable supply chain initiatives? Carrot, stick, or both?
Working with your suppliers on sustainability is potentially very productive in that it’s an opportunity to collaborate and work together to eliminate sources of disruption to improve their effectiveness and, at the same time, improve the level of business effectiveness they can provide to you.
We really encourage our clients to think through sustainable supply chain in a holistic fashion that has, at its core, this type of collaboration and problem-solving. To get started, though, to really engage a supplier to get at the benefits, you need some basic building blocks. Usually, it starts with a code of conduct and a statement saying the kinds of things that you want suppliers to do. That’s sort of the initial structure that, then, the program starts to build upon. You can move from there to thinking about how your suppliers are operating from an environmental perspective, how your suppliers are operating from a social or labor perspective, and how your suppliers are operating from an economic perspective. Think through where are the potential risk areas, where are the things that could be disruptive to the business, where are there inefficiencies that have to do with waste or inefficient processes and bringing that in to a program where you're collaborating on identifying where there are wastes or issues, where there are risks, and then working to remediate those over time.
In terms of the carrot or stick, we find that the best programs incorporate both. If you’ve got a code of conduct and you're working with your suppliers and helping assess where there are issues that need to be addressed, there need to be some consequences to not addressing that, especially over time, and then there need to be rewards for suppliers that do collaborate and that do work on their issues. Those consequences or rewards can simply be increased business for the suppliers that are more effective at dealing with their issues or potentially decreased business for suppliers that are not as effective, with the overarching thought being suppliers that don’t have the ability to address these critical issues are not suppliers you're going to want to base your business on over time anyway. It’s a good way to engage the conversation and get specific issues addressed.
How can a sustainability lens allow companies to make strategic decisions on their supply chain (e.g., decide what to source and where to source from)?
This is an interesting one. What we’ve seen are companies that have mapped and know which of their suppliers are at risk, have issues going on in their plants, or perhaps are, because of the way they operate, they’d be more vulnerable to a weather event—let’s say it’s a typhoon—or they’re more vulnerable to a labor action. Companies that have thought about that issue set and understand which of their suppliers are not as prepared or are vulnerable to issues like that, they can react much quicker when something happens. Usually, they’re better at heading off a problem to begin with, and if an issue comes up, they can move quickly to respond.
Using a sustainability lens can help you understand where your vulnerabilities are and react very quickly when an issue comes about.
What are the best approaches to communicating and engaging with suppliers, setting goals and incentives, defining metrics, and monitoring performance?
Here, again, we really encourage a collaborative approach to the maximum extent possible. The best approach to communicating and engaging is, first, really laying out how you define sustainability and what your expectations are for your suppliers. But then setting goals and defining metrics is key to anything in business, and it applies here as well. What we often see is that suppliers are at different points of maturity. There needs to be, often, steps along the way where some of your suppliers are going to be a little bit less mature in terms of the sustainability issues, some of your suppliers are going to be more mature. You want to define levels and then move them along.
Have an incentive structure and goals that work at multiple levels so that over the course of a number of years, a supplier can move from a Level 1 to a Level 2 and so on and become more effective. And with each step, you want metrics that make clear they’re making progress.
One thing that we encourage is: You want both metrics at a supplier level, and those can be metrics like: Where do they stand in terms of their environmental audit? Where do they stand in terms of their social performance? It’s possible to score-card them and then, in subsequent years, encourage them to make progress and have clear goals that they need to make progress against their own score. That’s progressing them through the overall steps that I described earlier.
And then the other area where you want to have metrics is, you want to keep track of how many of your suppliers have you assessed and how many suppliers do you know where they have vulnerabilities? How many of your suppliers are at a given level of maturity in terms of their sustainability performance? And are you improving that over time? Those kinds of metrics can help as you source and help as, for example, your product-management organization works with the suppliers. It’s very helpful for them to be able to know where is a given supplier in terms of its sustainability performance. And should I feel confident in giving that supplier business? Can I feel confident growing my business with that supplier?
About George Favaloro
Managing Director at PwC,
Sustainable Business Solutions