The Invisible Connection Between ESG and Supply Chain Resilience
When the COVID-19 pandemic first hit, many organizations discovered that their supply chains were far less resilient than they had previously believed. Some disruptions, such as India’s March 2020 decision to restrict the export of many common medicines in order to ensure supply for their domestic market, bolstered the argument for sourcing locally. Other disruptions, such as those caused when a supplier with limited output prioritized one customer’s needs over another’s, laid bare the consequences of weak vendor relationships.
As a supply chain manager, there are many things you can do to improve the resilience of your supply chain. Gartner, for example, recently provided six suggestions, including multi-sourcing and creating inventory and capacity buffers.
Often left out of the conversation, however, is another way to evaluate suppliers that can have a significant impact on supply chain resilience: ESG.
ESG gives you transparency into your suppliers
As we explained in our article on why ESG needs to be on supply chain managers’ radar, ESG stands for Environmental, Social and Governance. ESG is a concept of sustainability and corporate responsibility that looks at a range of behaviors to see where an organization stands on each. ESG can be assessed through an SRM (Supplier Relationship Management) platform like LUPR, using data and metrics. These assessments can then be supplemented with ratings and reports from existing databases, such as those available at CSRHub and integrated to ESG dashboard within LUPR.
One of the overriding goals of SRM is to establish strong supplier relationships with companies that will withstand the test of time. You want to work with companies that are likely to be able to weather the inevitable economic storms and continue to meet your needs. Transparency into how a supplier operates is vital for assessing a company’s ability to be there for you for the long term. ESG provides this transparency.
If you’ve been working with a company for a while, you already have a record of the quality of their product and their on-time deliveries. But what do you know, for example, about how the company treats their employees or the ethics of the company’s leadership team? ESG answers questions like these.
ESG can help you ensure that your supply chain is healthy and resilient
Knowledge is power. As a way of getting a unique “peek behind the scenes” at how a supplier operates, ESG is an excellent tool for improving the resilience of your supply chain.
The reality is, there are very strong connections between the behaviors examined by ESG and supply chain resilience. But while the connections are there, too often they are “invisible” to supply chain managers. Using ESG is an easy way to gain a competitive advantage in your market. To understand this “invisible connection” let’s take a look at four aspects of ESG:
Transparency – A high transparency score indicates that the supplier listens to and has strong relationships with all of its stakeholders, including shareholders, employees, managers, customers and the community. This can be important if, for example, the company needs to expand in order to meet growing demand. If their poor behavior and lack of transparency has made them unwelcome in the community, this expansion can be difficult. Amazon learned this lesson a few years ago, during their failed attempt to create a headquarters in New York.
Ethics – If a supplier has a strong leadership ethics score, that tells you that this company most likely deals fairly with all of its stakeholders (including you!).
Employee relationships – How an organization treats its employees will have a direct impact on employee turnover. High turnover, of course, can affect product quality, delivery and support, overall morale and your relationship with the supplier.
Corporate Board – A strong Board is less likely to put up with a rogue CEO whose behavior and decisions negatively impact the company’s stakeholders—including its customers.
The visibility and accountability that ESG provides also increases trust, which in turn leads to stronger supplier relationships. Strong relationships are a vitally important part of a resilient supply chain.
Having a resilient supply chain can mean the difference between success and failure—especially during uncertain economic times. ESG is an excellent over-overlooked tool to help companies achieve this resilience...and gain a competitive advantage in the process.
Need to get a process in place for using ESG to increase the resilience of your supply chain? Give us a call and let us understand your specific needs. Our experts can walk you through how LUPR provides a clear view of your suppliers’ ESG and other useful insights.
Sean Harley is the CEO and Co-founder of LUPR - SRM platform based on Salesforce
Bahar Gidwani is the CTO and Co-founder of CSRHub - CSRHub provides access to corporate social responsibility and sustainability ratings on companies