Sustainability means all the risks in your supply chains

Roger OakdenGlobal Logistics, Logistics Management, Procurement, Supply Chains & Supply NetworksLeave a Comment

Road to sustainability

What does sustainability mean to you?

To address new circumstances, commercial organisations have always had to change their business model, products and processes. However, the added  challenge in this century is the increasing range of factors to be be considered. The various factors have often been incorporated under the heading of Sustainability. But sustainability can mean different things.

An example is a situation that has unfolded over the past two years at Australia’s largest dairy processor. To grow the business, a strategy was developed to sell added value products into China. To attract more dairy farmers to supply milk for the increased demand, the higher sales margins would fund increased payments to the milk suppliers. Unfortunately the increased sales did not happen, so the company unilaterally cut the price paid to farmers for their milk and made the cuts retrospective.

The outcome was that farmers either reduced the size of their herds, sold their farms or moved to supply other milk processors. Over 2017 and 2018, the company expects to receive a 43 percent reduction in milk supplies. Falling sales, but with continuing manufacturing capacity, has resulted in a loss for 2016-17. There is a risk of additional borrowing to pay the (now) increased price to milk suppliers, so increasing corporate debt. The outcome is that the sixty seven year old business is now for sale.

Actions taken by the dairy processor company directly affected its long term viability, as suppliers are a key input to any manufacturing business. The term ‘sustainability’ can be used in place of ‘viability’, but there are two problems:

  1. the term ‘sustainability’ does not have a generally defined and accepted meaning, because it depends from which aspect an organisation (or country) is viewing the potentials for failure
  2. in business organisations, sustainability has typically been viewed only as an environmental topic

For these reasons, when discussing long term viability, either define what sustainability means for your business or, do not use the term sustainability. Instead, refer to the risks that could affect the longevity of your enterprise and its competitive advantage(s).

Risks to the viability of your business

The core risks to a business are generally identified as: economic, environmental and social (some call them profits, planet and people). However, to gain a full understanding of the potential risks, the list needs to be expanded to include: physical, technological and industry-specific regulation. Examples under each risk heading are:

  • Economic: business objectives are a combination of: enhancing brand and business value, increase profitable revenue and reduce the cost of doing business. These can be affected by international and domestic government economic policies and actions
  • Environmental: consider the ‘re’ terms applicable for your business: recall, repair, returns, recycle, refurbishment and re-manufacturing. Also the effect on a business model that changes from consumers who buy to users who rent; this will affect product design and the supply chain structure to handle multiple recycles
  • Social: includes the needs of a changing consumer society e.g. the origin of products and ingredients (‘clean and green’) and labour conditions in supply chains. Changing demographics and perceptions about employment and the retention of quality employees. However, a recent Institute of Directors survey in Australia identified that directors of companies (mostly older, white males) view the provision of childcare as a low-order priority; yet it is a critical factor for attracting female talent into an organisation. The same situation occurs in Japan and other countries
  • Physical: the availability and price of utilities and the efficiency of their usage. This addresses water, gas and electricity, including the installation of company owned renewable power; use of eco-friendly packaging
  • Technological: includes telecommunications and the potential of disruptive technologies i.e. the introduction of Blockchain technology into the transaction and physical flows of supply chains
  • Industry specific regulatory changes factors i.e. emissions standards
  • Business continuity: implementing short-term resilience against shocks that could affect the viability of a business e.g. natural disasters

All these factors are present through your supply network; but with an added factor – the inter-connections between industries. That is, how events in one industry (or company) can randomly affect demand and supply factors in other industry sectors that supply your business – these are the emergent results of a complex adaptive system, that we call a supply network. When analysing the supply chain risks to a business, most most organisations cannot influence the actions of suppliers. But, where possible, they should negotiate to improve the supplier’s viability, as this reduces risks to the buying organisation; also design mitigation plans for responding to risks in each supply chain.

But, when addressing the risks associated with all the above factors in a supply chain context, the design and operation of supply chains is too often an issue.  Operations are only transactional; the emphasis is on cost down (not the total cost of ownership); little trust between parties and no desire or ability to innovate with suppliers and customers. To improve the long term viability of a business, this situation will need to change.

It requires implementing a total (holistic) approach to a supply network and the organisation group that is responsible for the flow of items. However, change of this nature will only get traction when people believe the matters and factors identified for long term viability are strategic to the business and to their jobs – this month’s ‘good idea’ will go nowhere.


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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More…

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