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Short term perspectives could undermine supply chain resilience: EY

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Cost savings and compliance with regulation remain the top drivers of improvement in supply chain sustainability among major companies in the Americas, even though a holistic view of the end-to-end value chain could result in improved long-term financial returns.

  • Supply chain executives at 525 large global companies (over $500 million in revenue) were surveyed by Ernst and Young (EY) on sustainability.
  • Supply chain disruptions exposed the lack of preparedness across global value chains amid staff shortages, COVID resurgence and changes in consumption.  
  • Most companies appear to be focusing on cost savings and complying with regulations, rather than taking a long-term view of building supply chain resilience, which can be profitable and beneficial to their ecosystem.

The survey showed companies that prioritise short-terms gains from cost savings and compliance with regulations, are foregoing long-term gains from improving sales, increasing employee and customer loyalty, and enhancing their corporate brands.

For the companies with limited or no supply chain sustainability strategy, EY recommends setting and committing to sustainability goals, increasing the use of technology, and incorporating the impact of the end-to-end value chain as key steps.

Survey results reflect that short-termism still a problem

Visibility through the supply chain was at the top of the list of priorities for supply chain executives in 2022, after being among the top two concerns in prior years, resulting from post-pandemic labour shortages, consumer behaviour and COVID resurgence.

Yet, cost savings and compliance were the top drivers for improving supply chain sustainability by survey respondents, which implied a focus on short-term profits at the expense of the long-term benefits of investing in end-to-end supply chain sustainability. 

The inability by some companies to track, measure and effectively manage end-to-end movements of materials and operations reflects poor planning to mitigate climate change, or other shocks to their ecosystem, as seen by the recent supply shortages.

Half the companies surveyed only report basic key performance indicators (KPIs)  on supply chain sustainability, with a third citing a lack of a business case to justify investments, and 20% saying they have no strategy at all. 

Sector perspectives showed wide variety of engagement

By sector, consumer packaged goods (CPG) companies were the most focused on cost savings and efficiency as a driver of improving supply chain sustainability, although they did also report focusing on looking for ways to reduce resource consumption.

Healthcare and life sciences were viewed as sustainability leaders, with ‘ensuring diverse and sustainable sourcing’ being a top priority for 57% of respondents. Clearly defined ESG goals and pathways was a top supply chain priority for this sector.  

The mobility sector had the most digitally connected supply chains, with 27% of those surveyed expecting to be fully autonomous by 2030. Over half in the manufacturing sector set mandatory sustainability criteria when selecting suppliers.

More than any other sector, energy respondents lacked a business case, and executive buy-in, as reasons to increase supply chain sustainability, being mostly solely motivated by the need to reduce carbon emissions, with 44% expecting it to take more than five years.

The lack of a sustainability strategy was cited by 28% of government and public sector respondents as a top barrier in increasing supply chain sustainability, even though the sector identified defining and reaching ESG goals as a top priority across the value chain.

Unsurprisingly, technology companies were most advanced in using cloud, automation and blockchain to improve sustainability in their supply chains. The sector also had a longer-term outlook compared to the rest, with a majority of companies claiming significant progress in reaching their ESG goals.

Leaders blazing sustainability trail see the whole picture

Only 10% of survey respondents stood out as having a mature approach to supply chain sustainability, reporting a high level of visibility and transparency, enabled by technology and autonomous operations.

Almost half report seeing improved employee satisfaction among this group, reflected in decreased employee turnover, and better customer loyalty. These companies also saw benefits to their brand through more sustainable supply chains.

Incorporating these intangibles, along with expectations of higher revenues, and share prices, enabled these companies to have a longer-term view of calculating financial returns, which could be used by the laggards to justify their business cases. 

EY’s recommends five actions on supply chain

Based on survey responses, and its own research, EY provides five action items to help companies devise or update their sustainable supply chain strategies.

For companies lacking an existing strategy, EY recommends establishing a business rationale for how supply chain sustainability fits in with organisational goals. Additional steps include establishing company materiality, formulating science- based targets and committing to sustainability goals.

As the research showed, leaders in the field use technology to improve communication, and share data and insights.

EY recommends that companies broaden their definitions of financing returns, especially looking at ROI to include increased revenues, market share, and brand loyalty rather than just reducing costs or the risk of penalties.

The next key recommendation is to adopt a comprehensive approach that goes beyond sourcing alone,  to include innovations in logistics, and include circular economy principles.

Finally the one thing all companies should do is take advantage of tax incentives and grants, which can provide unexpected funding for supply chain sustainability.

While these recommendations attempt to solve the specific issues raised by the survey respondents, they fall short of emphasising the need for companies to take a world view of managing supply chain sustainability.

Supply chain sustainability has become a top goal for companies across all levels, with the adoption of technology to support supplier audits, establishing codes of conduct, and supply chain mapping gaining in importance regardless of size.

While differences between the global north and south will decide which factors receive greater attention globally, placing importance on human rights and diversity will be vital components of supply chain resilience.

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