There are numerous risks to supply chain sustainability, yet companies often address risks and sustainability separately, even making the further mistake of choosing one risk as the primary focus. This leaves the company and the supply chain vulnerable to disruption, because risks are integrated and directly impact supply chain sustainability.-BY Kim Persaud

Supply chain risk management has always been a significant challenge for supply chain managers, but it is more challenging now for many reasons. Complicating factors include sudden supply chain disruptions, lack of transparency due to the globalization of the supply chain, geopolitical issues and natural disasters. Sudden issues coming to light, such as environmental and ethical problems, can leave companies without critical suppliers or goods and services. All of this adds up to supply chain sustainability being intricately linked to supply chain risk management, yet the sustainability and risks are often addressed separately, rather than together. This is despite the fact that a breakdown in the supply chain for any operational, environmental, or social reason can threaten business financial health and sustainability as a whole. Risks should be viewed holistically, without focusing solely on one or the other because the threats themselves are often interrelated. They include environmental risks, health risks, safety risks, ethics risks, community risks, and reputational risks.

Integration of Risks

One of the dangers today is that a single focus of importance is stressed among supply chain risks, such as environmental sustainability, and this pushes other threats into the background until something happens. Yet environmental sustainability is only one risk among a broad set of risks in the extended supply chain. The globalized supply chain, and even domestic supply chains, have many suppliers and other influences, and a threat may become a reality at any point in the chain. The pandemic proved that supply chain risks are integrated and varied, and many are unanticipated. For example, the pandemic led to labor unrest and shortages, border closings that disrupted logistics, production shutdowns, and businesses failing simultaneously as geopolitical trade restrictions on critical materials such as technology chips, natural disasters, rampant inflation, and a focus on social justice occurred.

When a business develops a separate plan for each type of risk, there is a distinct danger of an inadequate response being initiated, due to a narrow focus. For example, a manufacturing plant may have suppliers located in a region with a history of flooding. The strategic plan to keep operations going during a flooding event would be to develop suppliers outside the region that supplement the main suppliers, or to have a fallback plan for materials or parts substitutions.

What are the risk categories? The management consulting firm Arthur Little points out that sustainability includes different aspects and is not strictly about one thing. Indeed, environmental factors are critical to supply chain sustainability, such as sustainable sourcing, carbon footprint, depletion of non-renewable resources, and biodiversity conservation. But, says Arthur Little, supply chain sustainability risks also include protecting the health and wellbeing of employees, contractors, and people in supplier businesses and also the well-being and safety of people in local communities. This includes fair wages, safe work, protection from discrimination; and protection from child labor and modern slavery. Another set of risks is ethics risks that include fraud, bribery, embezzlement, or other forms of misconduct. There are regulatory risks associated with legal compliance and reputation risks that lead to financial loss.

Establishing and Managing Supply Chain Priorities

The Arthur Little recommendation is to develop a supply chain risk management framework with a defined risk appetite. The framework will include a supplier engagement strategy for “collaboration and communication between numerous functions and stakeholders across the supply chain.” The end goal is to determine the capability and capacity of the organization to engage with suppliers in ways that improve supply chain sustainability and establish an organizational sustainability culture. It is important that assessing suppliers includes due diligence focuses on sustainability supply chain risk and the “supplier’s overall ability to be a reliable supplier that fits in with a company’s strategic priorities.”

In other words, supply chain risk planning is integrated into the organization’s strategic and operations planning, based on priorities. The Board of Trustees is involved in establishing the organization’s mission, which includes priorities based on purpose, within the context of the sustainability risks in the supply chain. How many times have the media reported a company was utilizing suppliers hiring child labor, polluting the environment, or facing severe shortages of critical resources, and Board members were taken by surprise? A Board framework for helping Boards deliver on purpose was developed by the University of Oxford and its partners. The SCORE framework says the Board should first develop a “simple” purpose that is easily understood by the organization and supply chain. The statement should acknowledge the negative impacts that need mitigating to retain public and operational support.

The second part of SCORE is “connect.” The articulated purpose is connected to a business strategy that makes choices, such as abandoning a product because sourcing and production cause an environmental or human rights issue. The connection to business strategy also drives the allocation of resources and capital investments. The “O” in SCORE is for “own.” The Board puts the “appropriate structures, control systems, and processes for enacting purpose” in place. The Board creates and oversees the internal communication strategies to ensure the purpose is communicated throughout the organization, including employees. The “R” is for “reward,” which means holding senior executives accountable through the compensation schedule, by tying metrics to rewards. The “E” in SCORE is for “exemplify,” which refers to exemplifying purpose, and how it is achieved in qualitative and quantitative terms. Sustainability performance in the supply chain should be reported in terms of risks and risk mitigation, integrated with financial performance.

Look at the Big Picture of Supply Chain Sustainability

Supply chain sustainability in a disruptive environment needs a comprehensive approach to risk management. Risks are integrated now, so strategic and operational planning should consider this integration to minimize supply chain disruption and be prepared for a fast recovery.