I recently had the pleasure of sharing Gartner’s latest insights on responsible sourcing at our yearly supply chain symposium, which had a sizeable attendee turnout. If I look back just five years ago, a similar session would’ve had only a handful of attendees, many of whom were attending based on personal curiosity rather than because of a business imperative. The same increased interest can be observed in conversations with Gartner clients, social media posts and news outlets. What has changed?
Expectations are Evolving
Our research shows that organizations are under increased pressure for investing in sustainability initiatives, with the top three stakeholder groups being customers (63%), investors (48%) and regulators (46%).1 As pressure from these stakeholders continues to grow, companies are responding with increased transparency on their impact and commitments to support these growing concerns. A study found that in 2020, 77% of the top companies by spend worldwide were reporting on sustainability — up from 18% back in 2002.2
As requirements and expectations evolve, companies are facing the challenge of reporting not only on the impact of their own operations, but also on the impact from their supply chains. This has led to 93% of survey respondents highlighting how “investing in responsible sourcing” is a priority in the next 18 months.3
Not All Strategies are Created Equal
The concept of driving sustainability in the supply chain — often called responsible sourcing or sustainable procurement — is complex. It can feel overwhelming to some supply chain leaders, especially as the focus and the outcomes can differ significantly across organizations.
The first question you want to answer: “What does sustainability mean for our organization?” Responses will vary, with some people assuming only environmental issues, while others taking a broader approach to include social and governance aspects, or ESG issues in short.
The second question to ask: “What is the outcome we’re pursuing with our strategy?” Our research shows how the outcomes organizations are pursuing can be classified as being focused on compliance, market differentiation or ecosystem enablement — or a combination of all three. (see Figure).
- Compliance-focused strategies are what most organizations start with, as they are what’s commonly known as a company’s “license to operate.” They aim to ensure the supply base operates in accordance with local and global regulations.
- Market differentiation. This is the turning point where a company’s strategy will shift from avoiding having a negative impact to one that focuses on delivering positive outcomes. This is typically aligned to how the company wants to position itself in the market to win over customers. For example, Unilever has committed that all its suppliers of goods and services will earn a living wage by 2030.
- Ecosystem enablement. At this level, companies go beyond trying to outpace their competition, instead focusing on joining ecosystem partners — including competitors — to address a common issue that threatens their long-term ability to operate. For example, in the soft drinks industry, PepsiCo, Coca-Cola, Red Bull and others are coming together to develop a circular packaging vision for 2030 in the EU.4
The Road Ahead
The pace of change is accelerating, and as organizations further refine their sustainability strategy to extend to their supply base, it is without a doubt that pressure on supply chain and procurement leaders will increase. In addition to cost, cash and availability, supply chain leaders will have to incorporate sustainability as a key focus area. The top actions they should prioritize are:
- Develop stronger supplier collaboration and engagement. Many will face suppliers that are either unwilling or unable to support their sustainability agenda. Building deeper relationships that share a common goal, investing in supplier development programs and tapping supplier innovation will be imperative.
- Enhance governance on ESG issues. Asking suppliers to acknowledge a code of conduct is simply not enough. Organizations will need to embed their sustainability objectives in their decision-making process, specifically along the entire supplier lifecycle. At Vodafone, 20% of the criteria used to award new business to a supplier is directly linked to the supplier’s ability and willingness to support their sustainability agenda.
- Leverage digital solutions. New technology solutions are being launched to support this, ranging from survey-based and ESG risk monitoring solutions to worker engagement tools and traceability applications. Supply chain leaders will have to learn to evaluate these solutions and plan ahead how different solutions will have to be used (you guessed it, not one solution can do it all).
- Evolve how you measure and communicate value. Performance indicators for both internal staff and suppliers alike will have to incorporate sustainability metrics, which might conflict with traditional financial metrics. Trade-offs and cost optimization (rather than reduction) will have to become part of the narrative on how both groups convey their value proposition.
We have an exciting road ahead that will redefine how supply chain — particularly the procurement function — operates. For those who ask me how leading organizations balance sustainability objectives with their financial goals, my answer is always the same: Leading organizations think about sustainability the same as they think about supplier quality — it’s something that’s expected and it’s non-negotiable.
Gartner Supply Chain
1 Source: 2020 Gartner Sustainability Survey. N=183
2 Source: KPMG. n = 5,200 – The KPMG Survey of Sustainability Reporting 2020
3 Source: 2020 Gartner Future of Supply Chain Survey. n = 1,217