Supply chain management, as a center of excellence and market advantage within organizations, gained prominence as a professional vocation in the 1980s as a result of globalization and manufacturing outsourcing. Businesses benefited from the decreased cost of production by having manufacturing facilities migrated to low-cost labor regions, and from the higher efficiency of partnering with specialized suppliers. Over the last four decades, in-house supply chain management professionals focused on unleashing this power of the global market: driving a decrease in the cost of goods, increasing global access to goods and services, and remarkably improving their companies’ profit margins.
As profits increased, so did supply chain complexity. In our globalized world, manufacturers can look anywhere to find the specialization and services they seek, and modern supply chains now stretch across the globe. The diverse physical locations of parts and assembly services that go into goods often mean that the components of a finished good will have traversed multiple continents and been touched by many hands before it is complete. Critical shipping lanes, ports, air freight, rail, and truck transportation have also boomed as goods traveled longer distances, requiring many modes of transportation to arrive at the customer’s desired location. The need for supply chain logistics expertise has also grown exponentially, alongside supply chain complexity and scale.
However, this system prioritized cost avoidance and profitability above all other considerations. Outsourcing was, in part, a response to rising wages and regulatory controls in developed economies. Aside from evaluating the cost of compliance, other considerations were rarely assessed while making outsourcing decisions. In particular, the reasoning for why a regulation was put in place was typically not a decision-making factor: when we look with a historical context, we can readily observe that most product compliance regulations are a response to either catastrophic events or chronic health concerns in local populations resulting from long-term exposure to industrial chemicals or processing activity waste. Not only were manufacturing operations and jobs outsourced, so too were the underlying pollution, occupational safety, labor concerns, and product hazards.
Consequently, this created the need for new regulatory regimes that have reoriented around the complexity of modern supply chains and the associated harms that have been outsourced deeper into global suppliers. Today, regulations nearly always follow innovations by business and society; once business processes are established, industry standards align around those best practices, seeking to deter undesirable and unethical actions. This pattern of innovation and reaction — as well as the resulting cases that highlight the consequences of failing to meet industry standards — lead to codified laws. These laws, in turn, will codify rules that businesses and their suppliers are expected to abide by. Through this system, it ceases to be profitable to work with unethical organizations, despots, and dictators because mere affiliation of components from these types of vendors will result in products being seized at customs or unsellable in key markets.
Globalization 2.0 and the Rise of ESG
Increasingly, the corporate trends that facilitate outsourcing and globalization to maximize profits are coming under scrutiny from regulators due to environmental, social, and governance (ESG) concerns. Pragmatically, the supply chain entities most willing to take on the least profitable and most dangerous production activities are also those most likely to pay bribes, use slave labor, and use hazardous chemicals in the production of consumer products. To avoid public backlash, lawsuits, and regulatory noncompliance, ESG performance metrics have gained momentum for supplier selection and supply chain sustainability management.
ESG is an emerging concept, a still loosely-defined art adopted by the financial industry to account for non-financial risks and opportunities. Because coherent definitions are still a work in progress, investors and consumers have seen a pervasive rise of greenwashing: false or misleading disclosures intended to induce investment or brand loyalty tied to unvalidated claims of ESG performance. The incentive to make ESG claims is now central to attracting investors, as nearly all major private equity, sovereign wealth, and institutional investor funds consider ESG in advance of any partnership. This reality has created a tangible risk to both businesses and investors, related to the material concerns of the business and an inability to evaluate inconsistent disclosures across disparate entities. However, as was the case with globalization and outsourcing, regulations and ESG standards will follow business innovation. Accordingly, stiffer penalties, investor lawsuits, and claims of fraud are beginning to appear in response to false or unverifiable ESG claims.
As complex manufacturing companies seek to set ambitious sustainability goals, they must look deep into their supply chain to understand their global ESG footprint. This requires deeper visibility beyond their direct suppliers, down to parts of parts and ideally down to the chemistry and minerals within these parts. This is only possible with a trusted network of suppliers who share values, objectives for market access, and commitments to standardized ethical norms. This movement toward a sustainable network has recently been coined as Globalization 2.0, an appropriate name for the evolution to a better version of globalized sourcing.
Building an ESG Foundation for Supply Chain Sustainability
ESG assessments, and implementing ESG programs extends beyond the avoidance of financial risk, although a sustainable supply chain is one that ultimately protects the overall bottom line. It is a transformational process for most companies. The ESG movement resembles a new social compact between businesses and private citizens, recognizing the impacts of consumption and manufacturing activities that maintain it on human lives, the climate, biodiversity, and our shared resources. Understanding, measuring, and adapting to these emerging business and societal risks require a business to rethink and restructure operations in ways that predict scarcity. Moreover, society is calling on manufacturers to invest in protecting historically free or low-cost resources to avoid future price shocks. This is a pivotal, purpose-driven shift in global corporate ethos, requiring a data-driven and deep view of a product’s lifecycle to fully appreciate and manage the scope of what a manufacturer agrees to when committing to an ESG program.
In the context of durable goods manufacturers, this deep view requires data that originates back to mines of origin and flows freely up to end consumers. Innovative manufacturers are tapping into solutions that allow them to capture and communicate data from their suppliers for greater transparency beyond base regulatory requirements. Data-driven transparency allows manufacturers to proactively recognize risks and opportunities that exist beyond the four corners of their organization. Having this data empowers manufacturers to start building an ESG foundation that supports leadership teams to make informed decisions about who they conduct business with. This drives deeper sustainability growth across a manufacturer’s entire global supply chain and helps deliver more responsible products to the world. As operators in a rapidly changing, globalized economy, corporate imperatives are increasingly becoming tied to non-financial ESG metrics as key differentiators that will drive success and competitive advantages in the future.
Travis Miller is General Counsel for Assent. As an international trade and compliance attorney, he has spent over 20 years advising clients on legal and compliance issues. Miller joined the Assent team in 2016 and is focused on the legal implications of various product compliance, conflict minerals, ESG, regulatory compliance information security, and trade compliance rules. He also co-wrote the book on CSR law for the American Bar Association.
