Redefining the Supply Chain Approach to Sustainability

Analyst insight: Demands for sustainability are putting new pressure on the supply chain as initiatives become more ambitious. This is changing the way companies think about supplier finance, particularly supply chain finance, and how it can help fund sustainability initiatives.

There are a lot of factors contributing to an increased focus on supply chain sustainability, but two stand out. The first is increased expectations from consumers. Millennials in particular want to know where and how products are sourced, and they’re more likely to support businesses invested in positive social change.

The second factor is more scrutiny from regulators. From environmental regulations to directives governing when suppliers get paid, regulators are paying closer attention to nearly every aspect of business.

But what does sustainability mean in the context of today’s increasingly global and complex supply chains? The term has become nebulous and deserves reinspection.

Sustainability can be broken into three distinct pillars: economic, social and environmental. Economic sustainability is related to a company’s long-term profitability, while social sustainability is how a company supports its employees, stakeholders, suppliers and community. Environmental sustainability of course focuses on a company’s environmental impact. Every pillar is equally important, and each is vital to a healthy, sustainable supply chain.

These pillars have started to reframe the way companies think about supply chain finance, and objectives are becoming more ambitious than simply optimizing supplier payment terms. Forward-thinking buyers are asking new questions, like: How can we encourage suppliers to employ environmentally sustainable practices? How can we reward better labor practices and provide essential finance in developing countries? How can we help suppliers weather economic and geopolitical volatility?

The writing is on the wall. Companies that don’t firmly commit to sustainability will be saddled with risk and liability in the coming years. As such, they need to be able to invest in sustainability in a way that benefits not just their business, but the entire supply chain — from the largest, strategic suppliers to the smallest.

One way to achieve this is through supplier-focused finance. Companies will turn toward supply chain finance partners that can empower them to achieve their cash flow goals while also meeting their sustainability objectives. This will provide the same benefits downstream to suppliers of all sizes, including those that historically haven’t had access to supply chain finance.

By giving suppliers a way to get paid early, supply-chain partners will accelerate cash flow and access to working capital that will allow them to invest in their own economic, social and environmental sustainability initiatives.

Outlook

Access to supply chain finance that’s supplier-focused will be a game-changer for buyers and suppliers alike. Sustainability initiatives will only grow in the years ahead, and reliable, scalable funding mechanisms will help tackle them with agility.