Why manufacturers are prioritizing sustainable supply chains

Motivations to prioritize sustainability and decarbonization have shifted, specifically in manufacturing. Notably, changing consumer sentiment and culture, growing technology and product innovation, and evolving dynamics of supply chains are driving trends for the industry to prioritize sustainability initiatives.

In fact, “20% of the world’s largest companies have made net-zero commitments, representing sales of nearly $14 trillion,” with more than 400 large U.S.-based companies also committing to net-zero targets of their own. While many major manufacturers and other consumer companies have made voluntary commitments to achieve net-zero emissions, recent mandates from government entities—such as the Climate Corporate Data Accountability Act (CCDAA) in California and the SEC’s climate disclosure rules—will begin pushing others in the industry to start tracking their emissions. A critical component in all of these commitments is the decarbonization of supply chains, one of the largest sources of carbon emissions for manufacturers or retailers.

Industry challenges to decarbonizing supply chains

Supply chains are a major source of emissions in the manufacturing industry. While quantities vary greatly based on the specific product, 75% of a company’s average total emissions are coming from that company’s supply chain. These emissions are also some of the hardest to quantify and mitigate due to:

Complexity and poor visibility into supply chains: In a 2017 supply chain survey, 70% of respondents described their supply chain as “very or extremely complex,” and 77% said they had “no visibility or a restricted view.”

Uncertainty in emission estimates: Calculating indirect emissions from a supply chain generally relies on estimates or generalized calculation methods.

Reliance on suppliers and consumers: Meaningful progress on tracking and reducing supply chain emissions requires participation from a company’s suppliers and consumers, which can be costly and challenging to enforce or incentivize.

Long lead times to reaping the benefits from decarbonizing supply chains: There will be a large learning curve for many stakeholders within the organization. Because savings aren’t realized quickly, there can be a general fatigue felt by major players in the organization.

Resource requirements needed to support decarbonization: The rapid acceleration of decarbonization has created a bottleneck around the resources needed to make that transition.

Despite these challenges, decarbonization is possible and will require organizations to create a decarbonization roadmap with tactical next steps outlining the path to realizing supply chain emission reduction goals.

The benefits of driving supply chain sustainability

As companies learn more about the benefits of sustainability investments, cost savings and profit centers driven by sustainability investments are becoming more apparent. These returns can be manifested by direct cost reductions, avoidance of future costs, or through realizing new profit centers created by sustainability initiatives.

Cost savings from operational efficiencies

When assessing sustainability or decarbonization opportunities along the supply chain of a manufacturer, we typically see that many of the easy win opportunities are also opportunities to reduce costs. Optimization and efficiency are both key drivers for making supply chains more sustainable and reducing costs for manufacturers.

Avoidance of future costs

Assessing supply chain sustainability and climate risk helps to spotlight, mitigate, and avoid high-risk investments or vulnerabilities in supply chains like where risk of disruption or material unavailability exists. Building supply chain sustainability in collaboration with suppliers and vendors also strengthens supplier relationships, which can further reduce risk and lower costs.

Early investment in the business processes and supplier relationships needed to track, manage, and reduce supply chain emissions allows for a controlled transition to robust data collection and decarbonization strategy over a realistic time period, reducing the costs to implement and the risk of non-compliance penalties.

Opportunities for greater profitability and reinvestment

Investment in supply chain sustainability opens additional sources of data for companies that can be used to monetize and improve operational analytics. Supply chain emissions data can be sold and used as a benchmarking resource for sustainability product vendors and ESG investors.

Improved consumer reputation

As consumer preferences are increasingly drawn toward products and services with meaningful ESG commitment, investments in the decarbonization of supply chains are important for companies to capture or maintain a customer base.

Strategic elements to help reach net-zero goals

To meet these ambitious decarbonization goals from both internal and external stakeholders, companies will need to develop and execute a sustainability strategy roadmap using the elements below. A sustainability strategy is inclusive of all material emissions, including scope 1 (direct emissions), scope 2 (indirect emissions from energy purchase), and scope 3 (other indirect emissions including supply chain emissions), and also requires compliance with all necessary climate disclosure and operational guidelines.

Assess current state and determine areas for improvement

We recommend that the formulation of a sustainability strategy to execute against should begin with an assessment of current-state operations and areas for improvement and will provide tactical next steps to realize intended decarbonization targets.

Prioritize sustainability goals and metrics

A holistic approach that considers a firm’s entire value chain is the only way for companies to truly reach intended net-zero goals. A supply chain sustainability assessment will identify focus areas for supply chain sustainability improvement by interviewing key operations personnel, collecting data, and performing analysis to identify strengths and weaknesses of the company’s supply chain environmental impact.

The output of a supply chain sustainability assessment will provide an outlook on sustainability improvements and build a roadmap to mitigate future risk regarding an organization’s emissions, waste, and other environmental opportunities identified. Given the impact of transportation networks on the environment, we typically identify network carbon emissions reduction efforts as an immediate focus area. Value creation from network carbon emissions reduction efforts typically include:

• Reduced carbon emissions due to optimized network, recommending more efficient use of space across the network, and optimized transportation lanes
• Cost reduction through recommending more efficient transportation lanes and production processes across a client’s holistic network
• Transit time reduction through optimized transportation, improving customer service and overall customer satisfaction

Secure stakeholder buy-in and create partnerships across the value chain

Both suppliers and customers will need to commit to their own sustainability goals to lower supply chain emissions. This makes reducing indirect emissions more difficult, as suppliers vary in maturity and access to the tools required to measure operational emissions. Once stakeholders are on board, companies will need to act as a guide and help educate suppliers through the process, being diligent and following up regularly to offer support.

Standardization of sustainability frameworks and clear requests for value chain partners can improve transparency and available information. These data requests can be time- and resource-intensive endeavors for outside partners, so standardizing the disclosure framework can help provide clarity. As the process becomes more developed, the collection and reporting of necessary supplier data can help guide supplier goal setting and align sustainability strategies across the entire value chain.

To drive improvements with value chain, we found organizations frequently find benefit in building a supplier sustainability engagement program. This type of program begins with a review of an organization’s sourcing and procurement function across people, processes, and technology to identify opportunities. Based on the identified opportunities, key deliverables can include:

• Modifications to supplier code of conduct for procurement activities
• Revised supplier scorecards and procurement processes
• Supplier incentivization recommendations to incentivize suppliers to achieve reduction targets and track actions
• Guidance on ongoing benchmarking against peers to ensure sustained improvements against industry competitors

Invest in sustainability data and reporting

Digital transformation is a high priority for many players in the industry as they compete to stay innovative and cutting edge in the market. As firms invest in new technology, there will be specific initiatives to build out reporting around carbon emissions to meet the standards set by the SEC and other regulatory agencies. Internal policies and procedures that set and follow assurance standards are steps that companies can take to set themselves up for success. The following actions have been implemented with clients to set up appropriate assurance policies and differentiate firms from their competitors:

• Highlight considerations of energy transition plans and GHG accounting guidelines in the accounting policy note to the financial statements, making it clear how energy transition plans have been considered in the development of accounting policies.
• Disclose climate and sustainability data methodologies, key assumptions, and calculations to provide investors with transparency on how the data was developed.
• Ensure the audit committee oversees all assurance providers and is involved in determining the type, scope, and procedures of assurance engagements necessary to support investor trust in the company’s reporting.

Understand the necessary technology to support sustainability supply chain strategy

Given the large quantity of data required, creating and tracking supply chain sustainability goals cannot be achieved in a meaningful way without the use of digital technologies for managing and storing the required data. Options for companies to track, manage, and report on their supply chain emissions include: dedicated sustainability or ESG systems, emission tracking add-ons or modules on other operational platforms, data automation, advanced analytics, and artificial intelligence. Through use of these technologies, a company can more easily support the decarbonization of their supply chain through:

• Data centralization and management: Maintaining relevant ESG data in one centralized location ensures consistent reporting and improves accessibility.
• Automation of data collection and management: Automation and standardization of data collection (versus manual spreadsheets) is critical to reducing the resource requirements and cost of emissions tracking.
• Integration of systems: An ideal ESG or decarbonization strategy includes integration of relevant data from systems throughout the business which provides a consistent source of truth while ensuring access to critical data for the groups that need it.
• Reporting and auditing: Reporting on emissions data, specific to an organization’s specific product or industry.
• Past performance analysis: Use of advanced analytic capabilities enabling the ability to see improvements year over year and show an organization’s progress compared to baseline performance.
• Tracking of renewable energy credits or carbon offsets: For firms that use mechanisms like renewable energy credits and offsets to achieve their sustainability goals, ensuring proper tracking and accounting of these credits is critical.

Conclusion

Decarbonization of supply chains has become an increasing focus for organizations due to changing customer sentiment, regulatory requirements, and organizational objectives. While there are challenges associated with decarbonizing supply chains, significant returns are also expected—including direct cost reductions, avoidance of future costs, and the creation of new profit centers through sustainability initiatives.

To start sustainability decarbonization efforts, organizations should develop a sustainability strategy roadmap and execute documented initiatives based on the intended value to the organization and wider stakeholder groups.