Background

Corporate supply chains have grown in scale and complexity globally over the past decades. Open markets have enabled companies to source from suppliers in developing and emerging economies, or to move or outsource production, because of the cost advantage these regions offer. As a business strategy, this can deliver significant benefits such as reduced costs, and enhanced profitability and shareholder value. At the same time, it can contribute to much needed economic and social development, and higher standards of living for millions of people.

However, widespread concerns about poor social and environmental conditions in companies’ supply chains have emerged. Weak implementation of local social and environmental regulation has forced companies to address issues that traditionally have been seen to lie outside of their core competencies and responsibilities.

Moreover, public scrutiny of business behaviour has led to rising expectations that companies are responsible for the environmental, social and governance (ESG) practices of their suppliers. Failure to address suppliers’ ESG performance can give rise to significant operational and reputational risks that can threaten to undermine any potential gains from moving into these markets. As a result, a company’s overall commitment to corporate citizenship can be seriously discredited if low standards of business conduct are found to persist in their supply chain.

Supply chain sustainability

Corporate buying practices can impact suppliers’ ability to improve their business conduct. Downward pressure on cost and efficiency can force suppliers to contravene some of their own ESG standards in order to meet their buyers’ commercial requirements. At the opposite end of the scale, companies can use their purchasing power to help instill good ESG practices in small and medium-sized companies across the developing world.

Today, successful supply chain managers must increasingly think beyond short-term financial considerations to building relationships that can deliver long-term value along the entire supply chain. This includes incorporating sustainability issues into the company’s sourcing and purchasing practices. In fact, companies that do engage with their suppliers around these issues constitute one of the most important drivers for spreading corporate citizenship principles around the world.

The business case

Incorporating environmental, social and governance considerations into supply chain management can deliver a range of business benefits:

• Risks are better anticipated and managed (risk is spread out across different players)
• Reduced operational risks such as disruption to supply, increased cost and lack of access to key raw materials
• “Informal” or “social” license to operate within communities, legal systems and governments that otherwise might be antagonistic
• Reduced costs and enhanced efficiency and productivity
• Improved working conditions can reduce turnover and improve quality and reliability
• Environmental responsibility improves efficiency and profitability
• Corporate brand and values, and customer and consumer confidence and loyalty are protected and enhanced
• Process and product innovation. Empowered suppliers uncover opportunities for developing sustainable products and services
• Examples from leading companies show that good supply chain management can increase shareholder value

Contact

Anita Househam
UN Global Compact
househam (at) un.org