Sustainability in the supply chain as a key differentiator

Georg Hantschke
August 31, 2021

Our planet and its people face the greatest challenge in history – climate catastrophe. The demands placed upon natural resources by businesses and their supply chains are a huge factor in causing climate change; that's why we know supply chasins have to become more sustainable. Finding ecological balance in our supply chains is now vital to avoid destroying our environment beyond repair.

It's no theoretical, predicted event; climate change is negatively impacting our lives already. As a result, corporations are facing increasing pressure from consumers, investors, and governmental institutions alike to meet climate-related regulations and actively contribute to a sustainable future. Lower-tier suppliers, OEGs, buyers, manufacturers, and every other stakeholder within supply chains are feeling the pressure to act.

Not meeting sustainability requirements represent one of eight root causes of supply chain performance gaps, where companies are not reaching their supply chain potential.

To get stuck in, let's look at the “Triple Bottom Line” concept. This is a three-pillar model to view sustainability, which argues that the “bottom line“ of a business should not just be profit, but maintain a balance between people, planet and profit. However, its inventor claims it is no longer of relevance, as it has become a accounting tool for corporations to balance tradeoffs. In 25 years, it has failed to guide businesses towards fundamental change. In other words: we need a new framework.

The United Nation's Sustainable Development Goals (SDGs) offer such a framework. These goals, established in 2015, are a blueprint for navigating social, environmental and economic challenges and creating a more sustainable future for all. Each goal includes targets and indicators that concretely outline how success – or reaching an SDG on country or corporation-level – is defined. And, importantly for us, the SDGs explicitly highlight the role of corporate supply chains in building a sustainable global economy.

How unsustainable business inhibits supply chain sustainability

Greenhouse gas emissions cause climate change, there's no doubts there.  A significant proportion is due to corporate production and transport, which is a direct failure in the design of supply chains. Globalization has increased demand for faster and more frequent deliveries across long transport routes. The global volume of trade has more than doubled in the last ten years, a facet of which we can all see clearly in the food industry - avocados flown in from Mexico, asparagus from Kenya. Here is where consumer pressure is creating change; there is increasing demand for products that can be procured locally.

Supply chain managment, as an academic and practical field, has encouraged the use of just-in-time (JIT) supply chain planning. The small and frequent deliveries demand high delivery intensity, generating savings in inventory holding costs that outstrip the increases in logistic costs. In this case, the challenge lies in balancing supply chain sustainability with financial optimization.

Human rights also feature in the SDGs, often in conjunction with sustainability initiatives. The textile industry provides frightening examples of where this needs fast and long-term change. Unreasonable working conditions and child labor are one side of the human rights disasters, but factories in Bangladesh, Indonesia, China, and India are also known to dump highly toxic waste into local waterways. Consequently, marine life is destroyed and the local population is exposed to harmful chemicals.

Can certification solve the conflict in sustainable responsibility?

Corporate Social Responsibility (CSR) comprises the voluntary action of companies to pursue sustainability goals. This includes, for example, voluntary certification by relevant standards like ISO 26000 for social entrepreneurial activity. Another is ISO 14001, a standard for setting up an environmental management system.

Companies should also be prepared for non-voluntary sustainability initiatives, such as carbon taxes. The legal trade in emissions certificates has been taking place in the EU since 2005, and environmental policy in many countries is aiming for higher use of renewable energy generation. Corresponding regulations, in stricter and internationally applicable form, could shift the objectives of the supply chains significantly in the direction of "carbon footprint minimization." Energy-intensive production at locations with previously low environmental protection requirements or long delivery routes could become substantially more expensive. Here, companies can expect a competitive advantage if they deal with the relevant models preemptively.

End-to-end sustainable supply chains: All decisions have impact

The value chain has multiple chances to integrate sustainability initiatives , as this graphic based on Martin Christopher's ideas illustrates:


Take logistics; here are just some ways action can be taken:

  • Optimized product design: Include as many regional components as possible, allowing procurement to limit the delivery emissions. If you can use materials that are possible to recycle in the area, then the end-of-life phase of the product also requires less logistic efforts.
  • Optimized supply networks: Strategic sourcing enables localization and efficient transport. It is important always to be aligned with suppliers and other requirements from the market, legal, etc. This requires a continuous, holistic, and proactive evaluation of sourcing activities.
  • Optimized transport modes: The environmental impact varies according to the respective mode of transport (MOT). It is necessary to achieve a multiobjective optimization and consider the tradeoffs between cost, speed, and carbon emissions. Companies should aim for a greener MOT while simultaneously optimizing the total logistic costs.
  • Optimized logistics planning: Transport capacities (e.g., containers, trucks, etc.) are often not full to capacity, and route planning needs improvement. For example, vehicles driving without cargo results in higher logistic costs and decreased efficiency. Better planning can reduce both costs and transport intensity.
  • Optimization of production planning: By using postponement strategies, you can carry out ​​customization close to the source of demand, and thus transport standardized preliminary products or commodities in larger quantities. With skillful planning, you can also achieve a reduction in transport intensity.

Beyond transportation, measures for reducing water, energy, or raw material consumption are also necessary. You can do this at the source as with transportation, of course, but sustainable supply chains must also consider what happens to waste. In Spain, a recent highway construction project near Valencia is showing the way. Paper ash is used to replace cement that would typically be used to fortify the road, replacing the resource- and carbon-intensive cement. Paper waste is impossible to recycle, but rather than go to landfill, this project finds a use for waste beyond the point of recycling.

Circular economy - your chance to be one step ahead?

Developing a business model around a circular economy is a huge step. We looked at how to create a strategy for changing your business model in our article about speed of innovation, but now's the time to look specifically at becoming a circular economy.

"The circular economy is a model of production and consumption, which involves sharing, leasing, reusing, repairing, refurbishing, and recycling existing materials and products for as long as possible. In this way, the life cycle of products is extended. In practice, it implies reducing waste to a minimum. When a product reaches the end of its life, its materials are kept within the economy wherever possible. These can be productively used again and again, thereby creating further value. This is a departure from the traditional, linear economic model based on a take-make-consume-throw-away pattern. This model relies on large quantities of cheap, easily accessible materials and energy. "

Circular economy and, in particular, cradle-to-cradle philosophy promotes the rethinking of industries and products towards having a positive impact by solely creating things that support our ecosystem. This is in stark contrast to just minimizing the negative impact of a business. It challenges us to fundamentally rethink how business is done and sets new targets for inventors, engineers, and product designers.

Transform towards a circular economy, maintain customer benefits

For sustainability projects, seeing the impact of implemented measures requires transparency. Tools or practices like blockchain provide support here, which bring success at the operational level.

Let's have a look at the example of Pocheco, a French envelope producer.

Pocheco operates without destroying and produces without leaving any toxic trace. Therefore, Pocheco invented the method "Ecolonomy "and has been using it for 25 years. The company understands "Ecolonomy" as the art of reducing its impact on the environment while improving social conditions and saving money.

The "Pocheco" is designed and produced in the ecolonomic factory of Forest sur Marque in the suburbs of Lille, North of France. Paper fibers, water-based inks, vegetable glues, recyclable cardboard boxes, returnable wooden packaging and transport boxes,: all the raw materials are sourced with immaculate eco-friendliness. The site is self-sufficient in regards to energy, maintains a permaculture garden, and has wood-fired heating fed by pallet waste.

Furthermore, the company put their strategy to market, sharing their proven circular economy solution to other businesses and acquiring a whole new market. This is a great example of sustainability — supply chain sustainability and cross-functional sustainable practices — being a boost to business. If that doesn't get buy-in from a stakeholder, nothing will.

Decarbonization along the Supply Chain

To meet EU targets of cutting 55% of greenhouse gas emissions by 2030 and climate neutrality by 2050, everyone must act. Looking at the breakdown of GHG emissions by source, it is apparent that global trade, multinational enterprises, and their globalized supply chains have a major stake in making or breaking climate targets. Roughly 73% of all emissions can be attributed to energy use. Thereof, 24% percentage points (energy in industries) and 16 percentage points (energy in transport) are directly linked to supply chains. Beyond energy, waste (3%) and industrial processes (5%) produce a significant fraction that occurs largely as part of a company's network operations.

As supply chains are one of the biggest greenhouse gas emitters, their swift decarbonization is required. This is supported by a recent Carbon Disclosure Project finding, which states that supply chain emissions are on average more than 11 times higher than a company's operational emissions.

While offsetting carbon emissions has become a favored strategy employed by many companies, actual and lasting change is not easy to come by. Apart from determining a supply chain's carbon footprint baseline, the measures require customization on the industry and company level to be effective. Considering the different scopes, an effective reduction of the corresponding carbon footprint would require established physical and chemical processes to be upgraded with new technologies. Scope 2 indirect emissions relate to energy purchased, and could be more easily reduced if companies buy solely renewable energy. Scope 3 emissions occur due to company activities but from sources outside of the company's control. For example, transportation logistics outsourced to a third-party would contribute to scope 3 carbon footprint, and could be reduced through a supplier change or renegotiation.

Unfortunately, there is no one size fits all approach to decarbonizing a company's supply chain. Yet, we can fulfill international climate targets by making decarbonization a core element of the company strategy, following established carbon accounting methodologies, engaging with supply chain partners, and committing to emission reduction measures.

Sustainability - a chance for change

Many companies view sustainability requirements with pessimism. Of course, it means adaption and changes in strategic and operational business. But despite that, there are ways to act economically and ecologically. With great support from the right technology, sustainable supply chains can be your competitive advantage.

Our upcoming article will capture the last of the eight root causes we analyzed due to the supply chain performance gap: Internal complexity. Have you already looked at the previous article about regulatory complexity?

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Meet the Writer
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Georg Hantschke
Georg is an RSM graduate and an experienced professional with a strong background in supply chain management, having worked in manufacturing, startup, and consulting environments.


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