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Sustainable Supply Chains Requires Effective Supply Management Capabilities!

Globalization has created the emergence of sophisticated supplier networks, creating management challenges as exposure to volatility and complexity of global sourcing has emerged.  While Western organizations have met short-term cost reduction and flexibility goals through outsourcing, it has been at the expense of lower transparency into suppliers’ operational processes within these far-flung areas of the globe. Many enterprises have limited or no visibility into their second-tier or third-tier suppliers, due to subcontracting activities that occur without their knowledge.  Opaque supplier networks leaves supply networks exposed to environmental or labor practices that are non-compliant with enterprise sustainability objectives and codes of conduct.  Increased risk to the brand, and associated financial impacts due to consumer reactions, has occurred in such cases. Walmart, Nike, Gap, BP, Baxter, Apple, Aldi, and others can attest to the dramatic impact of sustainability risks on their brand image and customers. This has brought about a recent understanding the role of transparency in sustainable supply chains, in support of a diverse set of stakeholder needs.

Gualandris et al. (2015) note that simple monitoring through a self-managed set of narrowly defined evaluative activities is no longer enough to meet stakeholder demands for accountability in the supply chain. Organizations must move towards a multi-faceted view of stakeholder accountability through increased transparency of activities in its extended supply chains.  And there are also financial reasons why transparency is becoming more important. Sustainable and transparent supply management has been recognized as a core ingredient for driving organizational financial growth.  Those who limit transparency risk incidents, which can bring public awareness around unfair/unlawful labor and environmental practices followed by loss of brand value and sales.

As a result, sustainability has become a serious issue for retail behemoths and brand names. In July 2009, the retail giant, Walmart, announced they were unrolling a sustainable product index and required its supply base of 100,000 global suppliers to comply with 15 requirements across four major categories (energy and climate, material efficiency, natural resources, and people and community). This effort was launched in direct response to Walmart’s public image as a “bad corporate citizen who doesn’t treat employees well and isn’t acting as a good citizen of the planet”.  In the same year, Nike reorganized and decentralized its Corporate Social Responsibility (CSR) department and established sustainable supply chain management as a mid- and long-term corporate strategy. Through its internal re-organization and material sustainability index initiation, Nike’s efforts to create supply chain transparency set a new bar for its competitors, and largely “re-made” its supply chain’s public image as a network “sweatshops” established in the social media in 1996.

Further attention was drawn to sustainable supply management as a result of the California Transparency Act in 2010. This legislation established regulatory mandates on manufacturers and retailers operating in California with annual global sales exceeding $100 million to disclose efforts to eradicate slavery and human trafficking from their supply chain. As sustainability impacts the cost of doing business in low cost countries, a question that arises is whether a return on investment occurs for those that build transparency into their supply chain. In establishing the capabilities to ensure a transparent and sustainable supply management network, are any tangible financial benefits associated with doing so? And can we separate the financial returns that arise in sustainable supply chains, from supply chains that are simply well managed? Pagell and Wu (2009) hint at this problem, in defining sustainable supply chains:

To be truly sustainable a supply chain would at worst do no net harm to natural or social systems while still producing a profit over an extended period of time; a truly sustainable supply chain could, customers willing, continue to do business forever.

But could there be an endogenous factor at play, mainly that organizations with superior financial results also happen to have better supply chain management practices to begin with? Stated differently, perhaps transparency of supply chains is simply a function of better management practices, improved systems, and more mature governance mechanisms, which in turn enables organizations to track, measure, and manage their global suppliers in a transparent manner?  In a recent paper, we identified results that suggest that this is indeed the case.  Sustainability cannot occur unless organizations establish a solid supply management function, buttressed by strong transactional purchasing systems, effective sourcing strategies, and collaborative supplier relationships.