When it comes to sustainability, a company’s responsibility doesn’t end at its own factory gates. Instead, companies also need to analyze their suppliers’ production methods and procurement channels and take them into account in their assessments. In doing so, it becomes apparent that sustainability, digitalization, and increased efficiency go hand in hand in supply chain management.
Achieving resource-efficient, greenhouse gas (GHG)-neutral production is an objective that many companies have now firmly enshrined in their corporate strategy. Political requirements such as the EU taxonomy and the German government’s Supply Chain Due Diligence Act (abbreviated LkSG in German), as well as societal expectations, are ensuring that sustainability is increasingly being pushed from the outside. Executives are under increasing pressure to act.
Sustainability isn’t synonymous with environmental protection – the term also encompasses aspects such as human rights, social responsibility, and community involvement. As a result, companies aren’t only faced with the challenge of developing GHG-neutral products. Instead, they will need to ensure that their entire value creation process is environmentally, socially, and financially sustainable. This not only encompasses their own operations, but also the activities of their suppliers and partners.
Sustainability Affects the Entire Supply Chain
Viewing companies as self-contained entities is no longer in line with the times. Manufacturing companies operate in widely interconnected networks with numerous suppliers, transport service providers, and subcontractors. This means that when it comes to sustainability, we have to look at the production company in its entire context, taking all of its relationships and interdependencies into account. This results in a high level of complexity that can hardly be managed without interconnectivity and digitalization.
There are no longer any areas that affect a single company location in isolation – almost every company draws on a supply chain or is itself part of a procurement network. One issue that deserves special attention in the industry is GHG emissions from purchased parts. This applies, on the one hand, to the energy mix used by suppliers to produce in their respective countries. On the other hand, transport costs are also an important factor on the road to greenhouse gas-neutral products. For example, it simply won’t be possible to sustainably ship goods or parts from locations in East Asia over distances of more than 10,000 kilometers in the foreseeable future. Instead, we can expect to see the supply chain becoming shorter as the price of carbon rises (a phenomenon known as “near-sourcing”).
Supply chains are currently developing their own self-reinforcing tendencies. No company can risk being eliminated as a supplier because of an unsatisfactory sustainability rating. The goal is for each link in the supply chain to be able to demonstrate its GHG neutrality. Suppliers who hope to be able to add the additional costs of auditing and certification to the price of their products are mistaken. This is because these expenses are unavoidable in order to continue to exist in a market. The funds to cover these costs have to be generated elsewhere, for example through efficiency programs, automation, or by eliminating unnecessary shipments.
What Are the Key Factors in the Green Supply Chain?
When it comes to supply chain management, lean, digital, and green are linked particularly inextricably. Value chains need to be systematically digitalized if sustainability is to be implemented swiftly and efficiently. At the same time, companies cannot afford to lose sight of their competitiveness when planning their green supply chain. In addition to initiatives within the sustainability and digital transformation, measures to increase efficiency in operational and administrative units are therefore still necessary.
Digital, sustainable, and circular business operations require all the links in the value chain to be closely integrated. This increases the importance of the supply chain and means that some parts of it have to be completely reimagined. To achieve the goal of a GHG-neutral footprint, the seamless interconnection of value creation processes is absolutely crucial. To achieve this, companies must embrace transparency, data sharing, and data integrity, and systematically prioritize a focus on continuous improvement.
Furthermore, in addition to the coronavirus pandemic, the Ukraine crisis has recently highlighted how fragile and susceptible to disruption our global supply chains are. It is becoming apparent that an entirely new caliber of risk management is needed. As such, companies need to optimize established supply chains not only with a view to their GHG footprint. The question of how secure their supply is at a given location in the face of geopolitical factors also needs to be reconsidered in many cases.
Sustainability Can Be an Opportunity
It is clear that the availability of sustainably generated energy will play a major role in site selection and how production networks are designed. A positive side effect is that companies with strong sustainability ratings are, in many cases, more resilient in the face of external influences and disruptions.
Sustainability doesn’t only mean new obligations and tasks. Europe currently has the chance to set international standards. A key requirement for this is to make it possible to leverage real-time data with the help of digitalization. This will enable companies to optimize their energy consumption and thereby develop measures to increase their energy efficiency over the long term.
Admittedly, technology plays an important role in this respect. But there can and will never be an automated process that identifies areas of potential and then implements them. Deliberate, intelligent business decisions will continue to be needed in the future. For example, companies need to identify and eliminate the gaps between lean management, digitalization, artificial intelligence, and sustainability. To bridge these gaps, it’s critical that companies deploy blockchain technology and data ecosystems with software platforms such as Estainium (including the established data interface CatenaX).
Where Should Companies Start?
When it comes to the sustainable transformation of global value networks, clearly identifiable, reliable requirements already exist today. Keys to success include sustainable design (GHG-optimized design, etc.), clean production (GHG footprint of purchased parts), the shortest possible distances (reduced GHG emissions in the supply chain), and fair working conditions (LkSG).
More and more executives, however, are asking themselves at what point it makes sense to enshrine sustainability in their corporate strategy. Should they first leverage efficiency potential (i.e., lean factory), drive digitalization forward (i.e., smart factory), or focus on making their value creation process sustainable (i.e., green factory)?
The first answer to this question is that for those who haven’t yet actively addressed sustainability, now is exactly the right time – maybe even the only time. The second is that lean, digitalization, and sustainability are of equal importance. Prioritizing any one of these individual focus areas would call their interdependence into question, resulting in considerable competitive disadvantages over the long term.
When the first companies started investing in lean and digitalization, piecemeal solutions were commonplace. Those who led the way were able to set the pace. The others followed within eyeshot. The current situation, however, is fundamentally different. Those who haven’t yet worked on efficiency enhancement and digital transformation must now tackle several tasks simultaneously. After all, sustainability is simply nonnegotiable. In this respect, the scientific, political, and business communities have seldom before been in such agreement. When it comes to implementation, it can no longer be a question of if, but only of how.
The first step is to analyze one’s own initial situation and determine the company’s GHG footprint. At the same time, it’s important to take the interests of all of the company’s stakeholders, such as employees, suppliers, customers, and investors, into account at an early stage. Based on these findings, the company then has to come up with its own unique strategy. It is important that this strategy fits the company, because this is the only way to succeed in enshrining sustainability in the corporate culture in a manner that is credible and complements the organization’s objectives.
Sustainability Demands Authenticity
Creating sustainable corporate networks is one of the most important challenges that manufacturing companies will have to solve in the coming years. The transformation required to achieve this requires courage and foresight. Above all, however, sustainability must be viewed and implemented holistically. It permeates all areas of an organization and must be omnipresent in every decision. This is particularly evident in supply chain management. Modern corporate management now regards an ongoing dialog with value-adding partners and employees as a matter of course. The key is to convey both commitment and corporate responsibility in a clear and credible way.
It’s important to note in this context that sustainability cannot be imposed from above. Instead, it must be exemplified. In this context, transparency is the key to success in order to get people on board with the process. Management must envision what the big picture will look like in the future so that employees can act within the framework of this overall strategy. Employees want to know how the company is strategically positioned to successfully and effectively meet the challenges of the future.
Sustainability is neither hype nor a static idea. Companies that fail to act now will be held accountable by clients, customers, suppliers, and shareholders – not just for ethical reasons, but also for financial ones. The externally driven changes affect almost all aspects of a manufacturing company’s underlying business framework. In the future, they will ultimately make the difference between success and failure.
Every single company will have to undergo a transformation toward sustainability. Closely related to this are initiatives in the fields of digitalization and efficiency enhancement. Those that act now and stay focused on the aforementioned issues should be able to masterfully navigate the changes. In this context, sustainability is a top-down issue that must be persuasively explained by management and openly communicated to employees. If these conditions are met, sustainability moves from being a mere obligation to a business opportunity.
In their supply chain, manufacturing companies need to take equal account of financial, environmental, and social considerations. Only then will they be able to continue operating successfully in the future. Shareholders of public companies are pushing for sustainability to be enshrined in corporate objectives and for the achievement of these objectives to be incorporated into corporate management as a measure of performance. The transformation toward sustainable supply chains is in full swing. Greenwashing is no longer an option!
About the Author
Stefan Flicke is a Partner at Ingenics AG and provides deep knowledge of industry 4.0, smart factories and the future of industrial manufacturing to his clients. Contact: email@example.com