Environmental, social, and governance (ESG) issues are increasingly important to consumers and making headlines more often, as shown by allegations of “greenwashing,” the rise of resellers, and state legislation banning single-use plastic bags.
ESG issues affect consumer perceptions and willingness to buy. They also affect every part of the plan-make-buy-move-fulfill supply chain. If Chipotle’s E. coli event is any indication, Wendy’s will need more than three years to recover revenue levels after its 2022 bout with E. coli that contaminated all the lettuce it received from its single source supplier. That’s a costly error in both ESG and supply chain management.
Despite the risks of ignoring ESG, the consumer goods and retail industry struggles to justify the costs of implementation. The industry needs to know that strong ESG and strong profits are both achievable by increasing visibility, optionality, and collaboration throughout the end-to-end supply chain.
Supply chain visibility improves decision making and ESG
All too often new product, expansion, or financial decisions are made without considering the effect on every link in the supply chain. According to Tiffany Pankratz-Umbehr, Senior Managing Director at SGS Maine Pointe for CG&R, “Omitting part of the supply chain from the decision making process leads to missed opportunities for increased efficiency, productivity, cost savings, and ESG.”
For that reason, SGS Maine Pointe’s CG&R experts create a digital twin of the supply chain, against which decisions can be tested for their overall effect. While it is easy to assume that an ESG initiative will raise prices beyond what consumers are willing to pay, running the scenario through the digital twin may reveal advantages that offset the cost to the company. For example, before a company adds an endless number of green products, hoping to ignite consumer loyalty, it can test each product against both ESG considerations and the total supply chain cost to determine which has the greatest likelihood of sustainable success.
Although supply chain visibility is essential, it is only the first step in incorporating ESG into the company while still achieving profit goals. The information gained must be evaluated against the available options and the company culture.
Optionality improves supply chain flexibility and ESG
Consumers overwhelming support ethical sourcing, yet have little or no insight into whether products are ethically sourced until a scandal breaks. That leaves retailers with a dilemma: if they choose ethical sourcing, who will notice and why pay the difference? The conversation changes when ethical sourcing becomes part of the overall strategy for strengthening the supply chain through supplier and geographic optionality.
Supplier optionality evaluates off-shore, near-shore, and in-shore suppliers against numerous criteria, including impact on the environment and people, logistics, energy consumption, safety of intellectual property, regulatory constraints, and willingness to negotiate. By considering all its options, a company gains the opportunity to increase not only the sustainability of its supply chain but also its ESG ranking, a win-win result.
Capacity and geographic optionality require a similar process in determining the best way to grow capacity and locate manufacturing, warehouse, and fulfillment facilities. Can the company increase productivity at an existing location in the same footprint? Should the company instead expand their existing footprint or build a new facility in a new location? If the latter, where in the world is best?
When SGS Maine Pointe optimized the current footprint of a furniture manufacturer through technology, reporting, and rigorous management practices, delivery costs fell 27% and EBIT increased 23%. The company achieved the growth it wanted without needing to build new or consume additional energy for transportation, both positive results for ESG.
Collaborative approach mitigates labor shortage and improves ESG
Both the consumer goods and the retail industry struggle to fill jobs, with more than 100,000 openings each in 2022 in the US alone. For multimillion-dollar companies looking to grow, those statistics are daunting, affecting procurement, logistics, and operations.
The labor shortage causes many companies to look deeply at hiring, training, retention, and all the other practices that create a company culture. The company culture affects the company’s ability to bridge the labor shortage and, therefore, its ability to reach any goals, including ESG.
According to Pankratz-Umbehr, many initiatives in the CG&R industry fail because they work on paper but not for the company’s unique supply chain and unique culture. Only a culture that looks for collaboration and participation from every function in the supply chain can accurately establish costs, reduce risks, secure benefits, and build the commitment necessary for any undertaking to succeed, from automation and streamlining to ESG. She says, “You have to look at your strategies holistically, because what affects upstream will affect downstream and vice versa. You have to penetrate those silos.”
By including all functions and stakeholders in the conversation, looking at all options, and visualizing the entire end-to-end supply chain, consumer goods and retail companies are much more likely to reach both ESG and profit benchmarks.