Supply Chains: The Missing Link in Sustainability

A changing business climate

A recent report from global management consulting firm McKinsey & Company identifies supply chain management as a key component of operational sustainability. According to the report, the consumer-packaged-goods (CPG) market is expected to grow by 5.3% annually for the next 10 to 15 years as 1.8 billion people join the global consuming class by 2025.

The strong growth projection is great news for companies, investors and stakeholders, however, the report singles out sustainability as a factor that could slow a company's growth and diminish profits. Sustainability performance, as measured in environmental and social impact is gaining steam as the new way to do business. In fact, sustainability programs are creating value for companies by managing risks, driving growth and aligning corporate values with those of consumers.

The momentum towards a low-carbon economy is in full force with scientific consensus and government and business leaders calling for dramatic improvements to environmental performance. The Paris Agreement has been ratified by over 100 countries to date and is a great example of where we are heading with global climate goals.

So how do the projected growth numbers affect global climate goals? According to the report, consumer companies will have to greatly reduce the natural and social costs of their products and services in order to capitalize on rising demand without adversely affecting the environment and humans.

Supply chain management: The missing key

Supply chain management could present the missing link for meeting climate goals and capitalizing on projected demand growth. According to McKinsey, the typical consumer company's supply chain is far more impactful than its operations. Supply chains can account for 80% of GHG emissions and more than 90% of impact on air, land water, biodiversity and geological resources.

Supply chain management is clearly the key to mitigating environmental impact, and yet, it is a relatively unused strategy. According to McKinsey, of the companies that report to the Carbon Disclosure Project (CPD), only 25% say that they engage with their suppliers.

Companies that undertake supply chain management in an effort to manage environmental impact are likely to run into challenges such as not knowing where the impacts occur in their supply chain, and the presence of subcontractors and purchasing agents.

To address this, McKinsey recommends the following three approaches:

1. Locate critical issues across the whole supply chain

Several organizations offer frameworks and key performance indicator metrics to highlight areas of concern.

2. Link supply-chain sustainability goals to the global sustainability agenda

The CPD and WWF have calculated sector specific reduction targets that companies can refer to when setting their internal goals.

3. Assist suppliers with managing impact — and make sure they follow through

Ultimately, companies have tremendous purchasing power over their suppliers and should leverage this power to influence their suppliers' business practices.

Looking to the future

Companies that manage their supply chain may be the best positioned to benefit from the expected growth in consumption. By looking at their supply chain for the purpose of improving sustainability performance, they are highly likely to identify inefficiencies and opportunities that can improve their bottom-line and environmental performance.

Source: McKinsey & Company, 2016. Web. http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/starting-at-the-source-sustainability-in-supply-chains

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