October 4, 2021 How to Capture Sustainable Supply Chain Benefits

Some of the world’s biggest brands are realizing their sustainability ranks are inextricably linked with their supply chain partners.

By Sayan Bose

For industrial manufacturers, the growing connection between supply chain sustainability, resilience and business risk has become too compelling to ignore. Companies across the industrial landscape face up to $120 billion in new costs from environmental risks in their supply chains by 2026, according to recent estimates from CDP, the non-profit organization that manages a global environmental disclosure platform. The bulk of those costs — $64 billion — will be borne by the manufacturing sector.

“With US$120 billion at stake, addressing environmental risks through supply chain engagement is vital for companies to be competitive and resilient in the changing market,” said Sonya Bhonsle, global head of value chains for CDP. “Leading companies that address these risks will benefit from lower costs and better reputations. This gives them a more competitive edge today and helps them become more resilient for the economy of tomorrow. Meanwhile, laggard companies risk being left behind.”

In pursuit of a competitive edge, some of the world’s most prominent brands and companies are exerting leverage across their supply chains, having recognized that from a sustainability perspective, their fates are inextricably linked with those of their supply chain partners. As a recent study from Oxford Economics makes clear, more manufacturing companies now recognize that their carbon footprint extends beyond their own walls, to the supply chain. What’s more, two-thirds of the manufacturing executives surveyed for that study said having a sustainable supply chain is a competitive differentiator.  Incorporating sustainability best practices into their entire supply network directly influences their carbon and environmental footprint, as well as their material and resource consumption and how much waste they produce.

Building a resilient, sustainability-focused, lower-carbon supply chain and turning it into a competitive difference-maker takes alignment, collaboration, trust and a high level of digitally-enabled data intelligence across the entire value chain. Let’s look at some of the approaches and capabilities that will enable manufacturers to gain an edge:

The ability to evaluate supply chain partners based on their sustainability performance. Ruth Porat, CFO of Alphabet, an offshoot of Google, summed up why it’s critical that manufacturers have the ability to gather carbon footprint data from partner companies, then make supply chain decisions based in part on that data: “In 2020, 96% of our surveyed suppliers reported their carbon footprint, and 75% shared their targets to reduce it. This visibility allows us to better select, support, and partner with our suppliers on their climate-related targets.”

Companies across a supply chain must be digitally networked so they can share, data, verify its origin and accuracy, and make decisions accordingly. What’s at stake? Having supply chain partners with poor sustainability performance not only undermines a company’s sustainability goals and initiatives, it puts the entire supply chain at risk in terms of added cost, diminished reliability and tarnished reputation.

The power of extended business networks. There’s a growing realization among industrial manufacturers that they cannot achieve sustainability goals in a vacuum — that to meet those goals, and maintain resilience in their supply chains, the entire value chain needs to be digitally connected, working together and sharing information within a network or ecosystem that stretches beyond company and even industry borders.

From a shared network platform, industrial manufacturers and all their supply chain partners — multiple tiers of suppliers, partners, asset service providers, third-party logistics entities, distributors and others — can share data and tools so they all have visibility and insight into raw materials sourcing upstream, to last-mile logistics and even product usage, returns and recycling processes downstream. Using a common digital platform, a manufacturer and its raw materials suppliers could collaborate on material science to develop greener industrial products, for example.

Already we’re seeing these kinds of extended networks improve the resilience, agility and value of a supply chain. When the various members of a supply network are connected in real time, they can make quick, sound decisions based on shared data to innovate and respond to shifting conditions along the supply chain.

The tools to identify more sustainable supply chain pathways.  Leading companies and their supply networks are applying advanced AI- and machine learning analytics and modeling to data streaming from Industrial Internet of Things (IIoT)-connected collection points embedded in assets throughout the supply chain, as well as other sources. They can use this digital twin of equipment throughout the supply chain to collaboratively develop logistics processes and pathways that optimize loads to reduce mileage, emissions and carbon footprint, along with CO₂– and energy-optimized warehousing and transportation. These same tools can help them manage the entire asset lifecycle — or in the case of circular products, to manage them from cradle to cradle.

A powerful digital platform to factor “green line” considerations into every aspect of the business. As much as an industrial manufacturer’s decarbonization effort must focus on the supply chain, they also need to ensure their own businesses are synced internally to sustainability-related KPIs and strategies. Across the industrial landscape, businesses are recognizing that to stay competitive, they need to strike a balance between financial and sustainability-related priorities in every facet of their business. Thus they need the data-derived intelligence to understand how trade-offs between the bottom line and the green line impact supply chain costs and resiliency. From engineering to production planning to sales, finance and HR, the various facets of an industrial manufacturing enterprise all need access to information and insight that enables them to weigh those trade-offs. A digital platform can, for example, shed light on the most cost-effective pathways for minimizing waste and environmental impact in the factory by extending asset life and by monitoring and managing energy usage to minimize CO₂ emissions. It also can help companies design products to meet their own sustainability goals and those of their customers, and to illuminate simpler, more cost-effective circular pathways for repurposing, recycling and/or reusing materials and products at end-of-life.

As increasingly aggressive carbon-reduction policies and targets roll out in the U.S. and elsewhere, the business case for industrial manufacturers to include sustainability at the center of their strategic thinking grows even stronger, and the cautionary words from the authors of the Oxford Economics report — that the sustainability of a company’s extended supply chain and operations “may determine financial performance and company survival, not to mention creating a more hospitable world for future generations” — resonate even louder.

Sayan Bose is part of SAP’s Global Industrial Machinery & Components industry business unit in the North Americas. He’s based in Chicago.

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