‘Just in time’ supply chains have become the corporate norm over the past two decades, but as Standard Chartered’s recent Critical Indicators of Sustainable Supply Chains report reveals, companies headquartered in North America and Europe are looking beyond ‘just in time’ to ‘just in case’, expanding their focus from optimising efficiency to managing risk.
This renewed emphasis is also shared at a political level, as reflected in the White House 100 day report, Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth1, published in June 2021.
Managing supply chain risk includes ensuring reliability of supplies and the financial viability of key suppliers, but also mitigating environmental and social risks.
This finding is reinforced by recent data from environmental disclosure organisation CDP which suggests that the total financial impact amongst 8,000 suppliers to 154 major buyers due to environmental risks (climate change, deforestation and water insecurity) in the next five years could reach $1.26 trillion.2 At the same time, companies are focused on reducing the risk of non-compliance with environmental, social and governance (ESG) targets and regulatory obligations, and managing the reputational damage resulting from poor ESG performance.
This sentiment is echoed in the recent White House report referenced earlier3 which states, “More secure and resilient supply chains are essential for our national security, our economic security, and our technological leadership.”
Resilient supply chains first need to be financially viable.
3 White House, ibid
The flexibility to manage different supply and demand dynamics is another important element of resilient supply chains.
Companies are taking different approaches to building resilient and flexible supply chains, however, depending on their industry, geographic footprint and business culture.
This diversification and agility can be difficult to achieve quickly, so in some cases these strategies are more likely to be part of a longer-term plan rather than a means to resolve immediate vulnerabilities.
Supply chain risk management also extends to environmental, social and governance (ESG) considerations. The most recent CDP report, published in February 2021, reveals that a company’s supply chain emissions are, on average, 11.4 times higher than its own4.
ESG considerations are becoming a growing priority, not least to meet consumer and shareholder demands. Nearly 1 in 3 consumers say that they have stopped purchasing specific brands or products for environmental or ethical reasons5.
Investors have similar priorities. Sustainable investments now amount to $35.3 trillion globally, and 36 per cent of all professionally managed assets in Europe, North America, Japan and Australasia6. Senior executive objectives are increasingly aligned with consumer and shareholder priorities. 45 per cent of FTSE 100 companies are linking annual bonus targets or long-term incentive plans (LTIP) to ESG measures7.
These priorities are strongly reflected in our research.
Despite compelling reasons to focus on ESG elements of supply chain risks, companies need to overcome challenges such as lack of consistent data; disparate environmental and social standards, and difficulties in channelling financing to crucial parts of the supply chain.
There are a number of initiatives underway to overcome this. The European Parliament recently recommended new rules8 that require companies to identify, address and remedy ESG risks in their supply chains, replacing existing voluntary guidelines and industry or market-specific regulations.
Most North American and European companies produce goods outside their home region, particularly in Asia, which generates one third of global exports9. Outsourced and offshore production is a trend that is likely to continue despite the potential for some onshoring or reshoring, in part the result of US10, EU11 and individual country policies to try to improve supply chain security and resilience. Wherever possible, companies aim to achieve global standards of ESG compliance by defining a supplier code and monitor compliance.
10 White House, ibid
However, different environmental and social regulations may apply in a company’s sourcing locations. Reuter emphasises banks’ role in helping to understand and address these differences.
Smaller suppliers, which are often the most vulnerable, are less likely than their larger peers to be able to invest in ESG performance. Sustainable finance has a growing role in addressing this; however, most existing sustainable financing solutions are bilateral, between the bank and the company, as opposed to supporting the company’s wider supply chains.
Standard Chartered is also seeing increasing demand from clients for sustainable SCF solutions that enable and incentivise suppliers to invest in their ESG performance. To have a meaningful impact on ESG metrics, this needs to include both direct, but also indirect (or deep tier) suppliers.
The challenge for many companies having identified the right suppliers and devised an appropriate financing solution is the practical process of providing this financing.
‘Just in case’ supply chains are compatible with ‘just in time’. A risk-based approach should support more reliable and timely production, by harnessing transparent data, common objectives and targeted financing across supply chains. Digitisation plays a role in achieving this extended view of supply chain risk, but just as important is the shift in mindset from efficiency to a true cost and risk-based approach. The impact could be transformational on the supply chains of the future, with the potential for broader-based supplier ecosystems, the rapid and efficient flow of data across supply chain participants, and a better appreciation of the human and environmental costs of the products on which individuals, communities and businesses rely.
