Why Ethics in Supply Chain Management Must Be a Priority

  

Blog-Importance-Ethics-in-Supply-Chain-ManagementExpectations for ethics in supply chain management are a critical issue for organizations of all sizes and industries, as stakeholders expect companies to identify, manage and minimize their social and environmental impact. Most importantly, setting and adhering to standards for ethics in supply chain management helps to address human rights and environmental challenges, and it can also deliver bottom-line benefits in the long run.

Carbon emissions, waste products and unethical sourcing represent waste and inefficiency in the supply chain. Companies must view ethics in supply chain management not only as a business challenge but also as a corporate social responsibility. Unsustainable supply chain practices ultimately lead to business failures as well as long-term environmental and/or societal damage.

In many organizations, the supply chain management function is well-positioned to influence many other departments and oversee compliance procedures with regulations and rules that govern ethical sourcing, carbon reduction commitments and other environmental, social and governance (ESG) initiatives. And investors, governmental regulators and consumers are increasingly aware of these non-financial factors in evaluating the organizations they buy from and work with worldwide.

Today’s supply chains span the globe, and as consumer demand increases, the need to generate more products, resources and raw materials will keep pace. However, the unrelenting demand translates into increasingly negative environmental impacts through greenhouse gas emissions, water scarcity, toxic waste, water pollution, deforestation, poor air quality and excessive energy use. An ethical supply chain has visibility into its suppliers/partners and its holistic impact on the world.

In addition to environmental issues, ethics in supply chain management encompasses human rights. Understanding the sources of products and whether they involve forced labor or human trafficking is critical. But it’s particularly difficult to have visibility into labor conditions with deep-tier suppliers. Other factors, including fair pay, safe conditions, humane treatment and anti-corruption efforts, are also part of ethics in supply chain management. Businesses have a responsibility to insist upon and assess their own ethical operations as well as those of their suppliers.

How Ethics and Supply Chain Management are Related

Encompassing the entire process of creating and distributing goods, the supply chain links all business activities but can have a negative impact on the environment if not handled properly in alignment with ESG initiatives. From sourcing raw materials to developing new innovations and transporting finished products to their final distributor, the supply chain utilizes many valuable, non-renewable resources during each step.

Over 90% of the environmental damage caused by companies that sell consumer-packaged goods (CPG) comes from their supply chains, according to sustainability insights from McKinsey. And consumers are taking notice — in a recent survey, 60% of adults said a company’s sustainability was essential in making a purchase decision, and 34% were willing to pay more for sustainably produced products.

The most environmentally friendly package is the one that is not shipped or the product that’s not made. While some companies have accomplished this by transforming their business models — think Netflix switching from mailing DVDs to offering online streaming services — it is not always feasible for every type of company. But there are other types of digital transformation models that can help companies reshape the way they do business and rethink their product and service offerings. This may include process transformation through logistics network modernization; domain transformation with new technology-enabled offerings; or cultural/organizational transformation in adopting a digital-first mindset.

Building ethical supply chains isn’t just a requirement; it’s an opportunity. And to make the most of that opportunity, business leaders need to be in tune with their company’s supply chain.”
—Abe Eshkenazi, CEO, Association for Supply Chain Management (in “Why Business Leaders Must Make Supply Chain Ethics a Priority”)

The following common barriers often lead to unethical practices and should be considered as companies integrate ethics into their supply chains:

Limited Visibility

An ethical supply chain is one that has visibility into deep-tier suppliers. Companies often have little to no visibility into second-tier or deeper suppliers, so their supply chains could be harboring forced labor, child labor, poor working conditions and other human rights violations as well as environmentally damaging business practices. It’s critical to conduct audits and supply chain mapping to gain visibility, which also delivers significant business advantages. Without visibility, it’s impossible to build fault tolerance into the supply chain.

Lack of Accountability

Once visibility is established, accountability is the next step. Companies are being held accountable for not only their own operations, but also activities outside of their control in the supply chain. Many business executives haven’t realized their responsibility to ensure ethics in the entirety of their operations. Companies are beginning to enforce ethical practices with their suppliers, preferring to engage with those that abide by regulations and ethical conduct codes over those whose sustainability practices are meager or nonexistent.

Unwillingness to Change

Some organizations believe managing their supply chains at this level is too difficult. But to prioritize ethics in global supply chain management, changes are almost always required in business relationships and processes, with an emphasis on ethics as much as financial performance. For manufacturers, digital transformation enables a move from creating and transporting physical goods to marketing digital products with a much lower environmental impact. It’s clear that “business as usual” won’t be a foundation for success in the future. Companies must be prepared to accelerate their digital transformation to be competitive in the future.

Benefits of Ethics in Supply Management

Companies need access to components, materials, natural resources, energy and transportation to succeed, and they do business at the pleasure of investors, consumers and regulators. But poor ethics in supply chain management can slow a company’s growth based on environmental and social impact, according to McKinsey.

Organizations that value ethics in supply chain management will create an environment for future participation in the global economy and also accrue benefits that build the bottom line, including:

Waste Reduction

Organizations must look for ways to reduce the demand for carbon output-related activities. According to the Ellen MacArthur Foundation, the circular economy is one approach — a model that designs waste and pollution out of the supply chain and keeps products and materials in use at the highest possible value. The environmental and social impact of this approach often aligns with the idea of a high-quality end product with a long useful life that’s designed to be repaired for extended use rather than disposed of. Succeeding in this circular mindset requires collaborative relationships to cultivate shared innovation and alliances.

Improved Quality Control

From tainted lettuce to conflict minerals to forced labor, it’s critical for companies to recognize the potential for unethical behavior in their supply chain.

An ethical supply chain requires visibility into multiple tiers of vendors and suppliers to ensure compliance with appropriate regulations. A significant benefit of that oversight is the ability to monitor and enforce quality control for products and services more effectively. It’s important to know where products come from and the conditions under which they were made.

With the growing emphasis on corporate responsibility, consumers and regulators won’t accept excuses from companies that say they didn’t know about problems in their supply chains.
Companies must know the source and quality of components and materials so they can facilitate recalls and other crisis responses. Deeper visibility into suppliers and improved quality control help to reduce liability and customer dissatisfaction.

Improved Efficiency and Cost Savings

Implementing minor operational improvements can result in a significant improvement in supply chain efficiency. For example, you can:

  • Minimize overproduction and inventory management by aligning supply and demand planning with artificial intelligence and predictive analytics tools
  • Reduce the carbon impact of transportation by optimizing routes and modes to reduce the number of shipments
  • Work with a logistics provider with international experience to take advantage of consolidated shipments and other measures
  • Use vendors with responsible, sustainable practices that align with your values

A trusted logistics partner who has an established network, sustainable processes and familiarity with practices in different regions can deliver efficiency improvements that provide environmental benefits without compromising quality or service.

Positively Impacting the World

Establish a leadership position based on your commitment to ethics in supply chain management. Many major companies have already committed to meeting carbon emission improvements in their own operations and with their suppliers and partners. Monitoring and managing your commitments to environmental and human rights improvements in your supply chain is critical.

However, with oversight from shareholder advocates and governmental regulatory agencies, companies can’t expect to get away with making false claims about their ethics efforts. The most visionary companies don’t simply follow the regulations put in place — rather, they look for opportunities to lead by making decisions that positively impact ethics in supply management and thus make a difference in their community and the greater technological world.

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About the Author

David-House-croppedDavid House joined Tech Data in February 2017 via the Avnet Technology Solutions acquisition and serves as the Vice President of Supply Chain Management Services for Global Lifecycle Management (GLM). David has more than two decades of experience in the technology industry and is focused on developing and implementing global supply chain strategies that prioritize service delivery excellence and world-class customer experiences.