Leaders must strike the right balance between their own needs and the needs of others....
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There are moments when we see the world as it is, not as we had previously imagined it to be. When the large container vessel Ever Given jammed in the Suez Canal for less than a week in March 2021, the estimated cost to businesses was more than $70 billion. Even the most blinkered of consumers began to wake up to the fact that everyday products we buy with little thought often depend on incredibly complex global supply chains.
Worse, the Suez traffic jam came on top of the unparalleled impact of the global pandemic, with lockdowns causing massive growth in demand for home-working technology, in turn spurring shortages in critical technologies such as microchips.
As if that were not enough, rising pressures in the form of new regulations, civil society expectations, employee demands and consumer pressures are forcing business leaders to pay much greater attention to issues such as climate change, biodiversity loss, labor standards, modern slavery, and, wider still, new expectations around equality, diversity and inclusion.
This complex, interlinked set of market shifts had been building for some time, but like all exponential developments it has been a case of global changes (to quote Silicon Valley guru Tim O’Reilly, quoting Hemingway) moving “gradually, then suddenly”.
Our own Tomorrow’s Capitalism Inquiry, launched in 2018, has underscored a trend that we summarise as the 3Rs. Ever since the travails of companies such as Shell and Nike in the 1990s, in the early days of the latest round of globalization, we have seen a frantic scramble to ensure that supply chains are responsible, transparent and accountable.
In parallel, waves of standards have attempted to bring order to the chaos, but if even brands like Tony’s Chocolonely – founded explicitly to produce ethical chocolate in an industry plagued by evidence of modern slavery – can get into trouble over child labor, as it did recently, then it is clear that pretty much every brand in the world still has some way to go.
Unfortunately for business leaders seeking a quiet life, the responsibility agenda is still expanding, with issues like data privacy increasingly energetic. At the same time, we see growing evidence that two other R-words are also now coming into play—resilience and regeneration.
“The focus on resilience can only grow with geopolitical trends growing and real-world evidence of climate chaos pressing in”
We have been involved with the evolution of many of the standards that have emerged to shape supply chain management. Since 2007, for example, one of us (John) has been a member of the EcoVadis scientific committee, helping steer the evolution of what is now the world’s largest sustainable business ratings platform.
Today, some 100,000 businesses around the world are rated on the platform, compared to just 100 back in 2008. Procurement professionals have had to get their brains around an ever expanding, list of potential problems to mitigate, from ensuring no supplier maltreats its workforce (which may be within its remit) to stamping out illegal deforestation or fisheries (which generally isn’t).
Happily, huge improvements have been made on improving conditions in key markets, from cutting negative emissions and other forms of impact through demonstrating the return on investment (ROI) for sustainable procurement practices.
As Sylvain Guyoton, Chief Rating Officer at EcoVadis, recently told one of us (Louise): “When we started in 2005, companies came to us mostly to manage [reputational] risk, and only secondarily to find cost reductions through sustainable practises.”
Still, this trend coincided with a considerable surge in outsourcing to low-cost countries, which meant that many major corporations had to face up to issues in their supply chains—driving ultra-rapid growth for EcoVadis and some of its competitors. But it became clear that many suppliers had a vested interest in misleading even their main customers, so detective work was needed by activists, journalists, rating agencies and regulators.
As a result, data collection, analysis and engagement have all become more challenging. And the boom in demand in relation to non-financial performance data has gone into overdrive with the huge surge in interest in environmental, social and governance (ESG) and impact investing.
Since 2020, the resilience of supply chains has come into sharp focus. On the upside, several reports or ESG commitments were proving resilient as the pandemic’s shock waves spread.
Anecdotally, too, companies that looked after their people and had adopted better-than-average social practices had an advantage. Some companies reliant on low-paid migrant workers also found it much more difficult to restart their businesses as lockdown rules relaxed in some geographies.
As, inevitably, the COVID-19 crisis is followed by a global energy crisis, companies already focused on resource and energy management, and which therefore have lower footprints in terms of energy and water, will be more resilient.
As the lessons sink in, combined with increased pressure from regulation across the world in terms of reporting, higher standards and lower emissions, the move to strengthen resilience in supply chains is intensifying.
To date, however, we have seen a “rebalancing of supply chains, rather than a rebuild”, according to Sylvain Guyoton of Ecovadis. Yes, there are signs of a shift from just-in-time to just-in-case, but only up to a point. In Europe, for example, talk of re-shoring supply chains back to the country where a given company is headquartered has largely not happened. That said, near-shoring (moving production from, for example, Asia to Eastern Europe) has.
The focus on resilience can only grow with geopolitical tension mounting and real-world evidence of climate chaos pressing in. And now a small but growing number of major businesses are spotlighting their commitment to a third, R-word: regeneration. Among them, Walmart, PepsiCo, Unilever and Nestlé.
Other, less well-known business leaders moving in this direction include Patagonia, the sportwear brand, Interface, the world’s leading modular carpet manufacturer, and Acciona, the Spanish multinational infrastructure group, the global infrastructure and renewable energy company.
Acciona (interest declared: a Volans client) is actively putting regeneration front and centre in its corporate strategy. It has recently partnered with B Lab Spain to provide training in ‘measuring what matters’ to support the small and medium-sized enterprises in its supply chain in making decisions related to their ESG performance.
Clearly, effective procurement today is about much more than driving down costs and managing risks. EcoVadis speaks of a shift from ‘Risk Mitigation to Performance and Impact.’ As this process takes hold and starts to drive innovation, the potential for positive change is significant.
Creating the conditions for the simultaneous and continuous environmental, societal and economic flourishing and value creation sits at the heart of regeneration. Regenerative supply chains are based on circular flows of material and a deeper level of engagement with the local regions and communities in which they operate than is the norm today. Rather than aiming simply to reduce or offset harm regenerative businesses collaborate with their suppliers to develop innovative approaches and solutions that deliver social and environmental benefits by design.
There will be no true responsibility—and no longer-term resilience—without regeneration.
That said, there is no one-size-fits-all model for making supply chains both resilient and regenerative. Navigating the necessary shifts will require collaboration across multiple functions within organisations and, critically, also with partners up and down the value chain. But who said tomorrow’s supply chain management was going to be easy?
The disruption of production from smartphones to furniture wrought by the COVID-19 pandemic has brought home the importance of global supply chains to every customer. But what have been the fundamental shifts and advancements in supply chain management over the period? Inflation, e-commerce and geopolitcal conflict are all driving change. In Issue V of I by IMD, we explore what is next for supply.
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