supply chain: Ethical sourcing: Integrating ESG requirements with supply chain management

supply chain: Ethical sourcing: Integrating ESG requirements with supply chain management

As we move into 2023, it is evident that most Indian consumers—and businesses wanting to sell to those customers—want to make certain that goods and services are sourced ethically and sustainably.

A growing number of consumers have become educated and involved on Environmental, Social, and Governance (ESG) initiatives and they are allowing their activism to influence their purchasing habits. According to one recent study, 97 percent of Indian consumers surveyed believe that social and environmental issues are more critical than ever, and 85 percent of people in India would be willing to cancel their relationship with a brand that does not take sustainability and social initiatives seriously.

Despite this growing sentiment, most businesses continue to have only limited visibility into their tier one suppliers. Their longer-distance view into their suppliers’ suppliers is unclear.

Supplier visibility: A major requirement for ethical sourcing

As organizations evaluate their supplier base, some cases of strong sustainability and environmental policies and procedures will be noticeable. Many suppliers will already be making public statements about their operations as part of their quarterly and annual reports. Businesses should begin by assessing the maturity of their suppliers’ initiatives to determine which of them need to be reviewed. By screening manufacturers and automatically flagging changes in their profiles based on news stories, first-party data and public information; technology can improve supplier visibility. Supplier relationship management software frequently employs a supplier survey mechanism to collect information from internal staff and external partners, such as critical capabilities and certifications. This enables organizations to easily detect potential risks and monitor supplier compliance.

Engage with challenging suppliers

Most businesses have long-term strategic relationships that necessitate high levels of engagement, meaning constant back-and-forth feedback on processes and standards to ensure they are as effective as possible. When problems arise, communication becomes even more critical. Organizations should communicate their own brand standards and ethical position to problematic strategic suppliers informally as well as in more formal sourcing documents and supplier agreements.

The goal should not be to cut off suppliers who do not adhere to the highest ethical standards. After all, there are valid reasons for choosing the supplier in the first place, such as quality, cost, performance. Rather, it’s better for purchasing organizations to bring those suppliers along and align them with their own brand values. Understanding where the suppliers are, explaining your goals and priorities, and then engaging with the suppliers to foster continuous improvement are all necessary steps.

Consolidate to reduce risk and improve spend management

Through the process of strategic supplier engagement, a long tail of less important suppliers accumulated over time may emerge. Consolidating suppliers can lower the risk for ethical violations in the supply chain, while also increasing an organization’s influence over the supplier’s business practices. Consolidation can limit supply chain flexibility and lead to shortages but reducing the supply base’s long tail can help companies manage spending and reduce risk. They must walk a tightrope between having too few and too many supply chain partners.

Accepting transparent technologies

Supplier recommendations, relationship management and global trade compliance can all be aided by technology. Much of this technology has been around for quite some time now. However, there is also a newer breed of blockchain-based services designed to increase transparency between an organization and its suppliers.

Leveraging blockchain-based distributed ledger to manage suppliers enables purchasing companies to validate the lot, lineage, and provenance of a product, capturing every step in the product life cycle on a tamper-proof ledger. For example, using Internet of Things (IoT) sensors and a blockchain-based track and trace solution (from raw materials through to finished product) would allow an organization to determine whether any in-coming components originate in a problematic region and prompt a discussion about the component’s origins. This immutable record of each component’s journey to the final product could validate origin claims and prevent shipment disruptions when it comes to compliance with existing and emerging laws. Furthermore, there is growing demand for supply chain risk software, which frequently employs AI and machine learning to monitor and detect vulnerabilities in an organization’s supply chain partners. This can be additional software that must be integrated with existing supply chain systems.

Advertise your supply chain

Consumer pressure is not going away, and risks of inaction include corporate reputational damage and legal liability. Several startups are emphasising ESG and ethical sourcing as key differentiators from larger competitors with more established and complex supply chains. Ultimately, brands are now selling their supply chains as much as they are selling a product or service.

Businesses must provide more transparency into the working conditions and environmental impacts of their suppliers as they rush to comply with new regulations and consumers become more aware of sustainability practices and demand ethically and environmentally conscious sourcing. That means businesses can’t afford to neglect any unethical practices that may exist in their supply chains.

(The writer is Chief Sustainability Officer and Group Vice President, Supply Chain Management Product Strategy, Oracle)

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