In the contemporary business landscape, sustainability continues to be emphasized as a core strategy to deliver value. That value now extends beyond what a company is doing to drive sustainability within its own operational footprint to what is being done to support sustainability across the value chain. Here, we find that companies that embrace the concept of sustainable supplier relationship management — or SSRM — have the opportunity to extend beyond compliance-oriented activities and contribute toward meaningful, strategic growth.
Let's first define sustainable supplier relationship management. Supplier relationship management, the predecessor of SSRM, rose to prominence as a formalized practice in the 1980s as part of the broader movement toward supply chain management and strategic sourcing. As environmental awareness and corporate social responsibility began to influence business strategies more prominently in the late 1990s and early 2000s, the concept of sustainable supplier relationship management started to gain traction.
While SSRM varies by organization, it can loosely be defined as the strategic integration of environmental, social and ethical considerations into the selection, management and collaboration with suppliers to ensure long-term value creation. It extends beyond traditional cost and efficiency considerations to include ethical sourcing, environmental stewardship and the well-being of workers throughout the supply chain. The shift from traditional SRM to SSRM reflects a key notion that long-term business success is inextricably linked to sustainable practices. If executed properly, SSRM can simultaneously benefit societies, businesses and the environment.
Below, we explore some of the benefits of SSRM as the first in a series of articles we will publish on this topic.
- Value Creation
In some industries, the prevailing notion is that "sustainability" and "value creation" are fundamentally at odds with one another. The idea is that sustainability efforts, while good for people and planet, are not necessarily good for profit, particularly when those efforts extend beyond the organization's own footprint.
The fact is that when the right sustainability levers are applied — even within the supply chain — considerable value can be extracted. Most notably, managing supplier relationships with a focus on sustainability can lead to significant cost reductions over time. Sustainable practices often involve optimizing resource use and reducing waste, thereby decreasing material costs and improving operational efficiency. In certain circumstances, sustainable materials can even cost less than their less sustainable counterparts.
Another often-overlooked benefit of SSRM is its ability to impact consumer perception and spending. Have you ever chosen the ethically sourced or sustainably farmed product over another despite a potentially higher price point? Many companies already have sustainability measures in place with suppliers but are not actively touting these measures to customers, whether they be individual consumers or other businesses. If good work is already taking place, why not get credit for it?
As consumers continue to become more environmentally and socially conscious of the products they buy, they continue to seek out companies that are aligned in the commitment to sustainability. According to a recent study by Statista, between 2018 and 2022, retail sales of products with sustainable-related claims grew by 6.4 percent annually, an advantage of 1.7 percentage points compared to products with no claims.1 By launching new products or services that appeal to this ever-growing consumer base, or marketing more effectively the good work that is already being done, SSRM can act as a significant revenue accelerator.
- Risk Mitigation
Sustainability-oriented supplier management also plays a crucial role in third-party risk management (TPRM). Companies are increasingly prone to risks associated with regulatory changes, environmental disasters and social accountability. For example, suppliers not compliant with new environmental regulations can pose a financial risk due to fines and sanctions, and suppliers actively contributing to human rights violations in the supply chain, whether knowingly or not, can pose a significant reputational risk to any company they are supplying.
In addition, partnering with suppliers on sustainable procurement practices can protect companies from materials price volatility. Often, alternative and recycled materials are less susceptible to the market dynamics affecting virgin materials, including environmental regulations, extraction costs, international demand shifts and other factors. As most supply chain and procurement professionals can attest, any opportunity to reduce volatility from the purchasing process is always welcome.
By fostering sustainable practices in the supply chain and proactively partnering with suppliers to assess and account for potential risks, companies can anticipate and adapt to these challenges more effectively, thus ensuring compliance, safeguarding against potential disruptions and protecting against reputational damage. Putting SSRM into practice not only creates a more sustainable supply chain, but a more resilient one as well.
- Brand Enhancement and Competitive Advantage
As previously mentioned, consumer preferences are markedly shifting toward sustainable products, services and business lines. Businesses that engage in SSRM are better positioned to enhance their brand value by aligning with these consumer expectations. While demonstrating a commitment to sustainability can strengthen brand reputation, lip service will only take companies so far. Savvy, ethically-minded consumers want to see action, and SSRM is one of the most impactful tools a company can deploy. Competitive differentiation comes from doing, not saying, and SSRM is fundamentally about partnering with suppliers to drive results. Moreover, SSRM practices can attract investors who are increasingly looking to fund companies with robust environmental, social and governance (ESG) criteria, further increasing a firm's competitive advantage.
- Building Stronger Supplier Relationships
At its very core, SSRM is about working with suppliers, not against them. The procurement function has long been associated with little more than controlling costs and carrying out transactions, but that is no longer the case. Today, procurement plays a strategically important role in organizations by effectively collaborating and partnering with suppliers.
Sustainable practices necessitate close collaboration and communication with suppliers to ensure that sustainability goals are met, innovative products are launched, and ever-present risks are mitigated. This collaboration leads to stronger, more resilient, mutually beneficial relationships. Suppliers are more likely to invest in meeting the needs of companies they perceive as committed partners, which can lead to innovations in product design, production efficiency and sustainable solutions that benefit all stakeholders involved. Simply put, the effective implementation of SSRM can help an organization become the customer of choice for its suppliers.
- Future Readiness
Adopting sustainable practices into supplier relationship management prepares businesses for a future where sustainability becomes the norm rather than the exception. Regulatory pressures, environmental constraints and social demands are only going to increase over time. With many of these pressures falling squarely on companies' supply chains, SSRM is uniquely positioned to add value and is an essential preparatory measure for future challenges and opportunities.
Embracing sustainable supplier relationship management is a game-changer for forward-thinking supply chains and the businesses they serve. In the next installment of this series, we'll explore the nuanced stages of the SSRM maturity model and equip you with the insights to evaluate where your organization currently stands. Stay tuned!
Footnote
1 Statista. "Sustainable consumption in the United States: Intention versus action." Accessed July 10, 2024. https://www.statista.com/study/135969/sustainable-consumption-in-the-united-states-intention-versus-action/.
Originally published 06 August 2024
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