Pearson on Excellence: Sustainable supply chains can give companies a triple advantage

In recent years, companies have nodded respectfully toward the concept of supply chain sustainability. Ethical supply chains have been seen as a “nice to have” rather than a “must have.” Now, however, the landscape has changed. Companies without responsible, ethical supply chain practices will begin losing their ability to grow and compete.

There are a number of factors behind this change. Customers “vote with their wallets” when companies fail to put measures in place that protect their own employees and the employees of contractors and sub-contractors. Investors are placing greater weight on sustainability, factoring ethical behavior more and more into their valuations. And current and prospective employees—especially Millennials born between 1980 and 2000—consider sustainable practices to be essential.

To remain competitive, companies need to recalibrate their strategies as they relate to ethical behavior. They have to move from an orientation toward compliance to a focus on differentiation. Companies engaged in responsible supply chain efforts often refer to their “license to operate,” implying that they have established trust with local governments and communities by complying with regulations and establishing health and safety programs that given them tacit permission to do business.

What leading companies do, however, is earn a “license to grow.” They use ethical business practices to set themselves apart from competitors.

Consider Patagonia, the global clothing retailer that is a pioneer in sustainability. For decades, the company has pledged one percent of annual sales to the preservation and restoration of the environment. A portion of these donations goes to domestic and international grassroots environmental groups. The company’s good works have hardly hurt the bottom line: Patagonia has doubled its scale of operations and tripled its profits since 2008.

By establishing responsible and profitable supply chains, companies can gain what we call a triple advantage. They can, we believe, increase revenues by as much as 20 percent; decrease costs by up to 16 percent; and reduce their carbon footprint by up to 22 percent. We estimate that companies following this path can strengthen their brand value by up to 30 percent.

To do this, companies need to take a more holistic view of sustainability, demonstrating that doing the right thing can create a compelling business case. This supports investment and helps earn the license to grow.

A holistic view of value creation through ethical supply chains encompasses four major elements:

Revenue Growth. Companies should explore the creation of new business models and new kinds of collaboration to develop untapped markets. They should innovate to develop new products and services that reflect changing customer preferences.

Cost Reduction. Paths to sustainable cost reduction include improving energy efficiency, streamlining supply chain and logistics, and collaborating with suppliers and customers to find more efficient and more effective ways of getting things done.

Brand and Reputation. Companies should both focus on and showcase their sustainability innovations. They can work with governments, non-governmental organizations, and the media to increase the transparency of these efforts. They can also undertake programs to engage employees and investors as programs unfold.

Risk Mitigation. Better management and mitigation of supply chain risk protects the company’s license to operate. Sustainability considerations that can affect the company’s profitability and its reputation should be integrated with corporate risk management and receive attention at most senior levels. In some cases, the company may want to diversify its business model, exiting some businesses and entering others with better prospects for revenue growth and fewer social or environmental risks.

One of the best ways to accelerate sustainability is to build a collaborative network linking internal stakeholders, suppliers, sub-contractors, sub-sub-contractors, and the end consumer. Consider an electronics company that decides to reduce the size of a given product. Collaboration starts with the internal engineering team, who may have to re-think product design. The new design means that suppliers have to be informed and the dimensions of packaging reconsidered.

It might be possible to join forces with another company—even a competitor—to cut the cost of transportation. Retailers selling the product are involved in issues of shelf size and store layout. The end consumer may benefit from a product that is more energy-efficient and should be made aware of that. The more collaboration at all levels of the supply chain, the more ways to generate social, environmental, and economic gain.

Ultimately, companies need to stop thinking about sustainable business practices as noble gestures and start thinking about them as strategic weapons. To do this, they need to make a clear business case for investments in sustainability. Fortunately, other companies have shown what works in the area of sustainability.

Companies can use decision support tools to identify the most effective triple advantage practices, avoiding expensive trial and error techniques. With the triple advantage improving revenue and brand reputation while decreasing cost and risk, acting ethically can provide companies with a real competitive advantage.