As companies and organizations become more engaged in sustainability efforts internally and across their supply and value chains, the complexity of doing business gets, well, more complex.
Establishing metrics and designing tracking and documentation processes linked to goals can be complicated, and subject to flux when there are multiple stakeholders and suppliers spanning multiple locations across the globe.
Those engaged in global supply chain management usually have a clear understanding of the moving parts across their organization’s supply chain and sector landscape. For those newly undertaking work in cross-sector partnerships, or implementing organizational sustainability goals and commitments, it often takes time to get fully up to speed.
Here we detail some of the basic supply chain management terminology including “Upstream,” “Downstream,” and “Extended,” as well as important components.
At the same time, we emphasize the reality that managing for sustainable impact may modify supply chain nomenclature like “Optimization,” to mirror the complex economic, environmental, social challenges companies are facing. Enter in the newer addition of "Ethical" (Ethical Supply Chain) to the vocabulary of supply chain management and Supply Chain Sustainability (SCS).
Before we can talk about the growing terminology you might hear when discussing sustainability across the supply and value chains, we need to have a foundational understanding of the description and components of a supply chain to start.
What is a Supply Chain?
A conventional supply chain is a network of businesses and enterprises, as well as processes, that contribute to the creation, distribution, and ultimately the sale of a product.
These chains are often linear in that they start with suppliers and vendors who provide the raw material inputs for goods. Manufacturers procure those inputs and convert them into a product. A distributor, in the form of wholesaler, retailer, or e-commerce partners among others, then takes the product from the manufacturer to the customer.
Supply chain management as an organizational function is charged with overseeing this entire complicated process.
As explained by the Chartered Institute of Purchasing & Supply (CIPS), a global organization serving the procurement and supply profession, supply chain management includes 6 components.
Component 1: Planning
Planning includes what CIPS describes as “make vs buy” decisions – the kind of strategic planning that helps companies better understand whether it should manufacture what it needs or buy domestically or internationally.
Component 2: Sourcing
Sourcing is focused on identifying, evaluating, building, and nurturing relationships with suppliers that will provide goods and services.
Component 3: Demand/Inventory
This component includes managing inventory and manufacturing schedules to meet consumer demand.
Component 4: Production
This emphasis in Supply Chain Management includes ensuring the right volumes and quality of production.
Component 5: Warehouse and Transportation
This component refers to storing and delivering the product. In some models of Supply Chain Management, “transportation,” is attached to “production” (and thus these models include 5 components rather than 6).
However, the transportation of goods, including inputs to final delivery, has increased in complexity as supply chains expand globally, warranting its own area of focus.
Component 6: Return of Goods
Often shortened to simply, “Returns,” this component refers to ensuring an effective returns process for customer satisfaction.
What Is "Upstream" And "Downstream" In Supply Chain Management?
Picture the linear supply chain as a river. Then the concepts of upstream and downstream make sense.
As Thomas Insights reports, the “Upstream” in a supply chain includes all activities related to the organization's suppliers: those parties that source raw material inputs to send to the manufacturer. The “Downstream” in a supply chain refers to activities post-manufacturing associated with distributing the product to the final customer. In many ways, Upstream is the “supply” and Downstream is related to “demand,” and supply chain managers are responsible for coordinating and managing both including three main flows:
- The flow of materials
- The flow of money
- The flow of information
Supply Chain Managers Often Focus On Optimizing The Supply Chain
Effective supply chain management across these six components helps ensure customers receive the goods they need on time and at or above their quality expectations. At the same time, good and efficient supply chain management helps organizations reduce procurement and operating costs while optimizing profitability.
This word “optimizing” you may hear often, and framed through supply chain management practice also means “improvement.” Essentially every link in the supply chain upstream and downstream costs money and when optimized and improved, an organization can reduce the amount of money that link costs.
How do Supply Chain Managers Optimize for Sustainability?
When we begin to factor in sustainability, be it ESG commitments, aligning strategy with the UN Sustainable Development Goals, implementing SCOPE emissions reductions, examining biodiversity commitments, or meeting certification requirements, costs are no longer the only variable in play.
In fact, to “optimize” takes on a whole new meaning when sustainability is also a guiding force in supply chain management.
You can’t develop products today without understanding customer sentiment and usage patterns. An "Extended Supply Chain" essentially emphsizes management approaches that ensure goods supplied are in accordance with market needs. This entails better understanding of demand specificity, not just about the products themselves, but also what consumers are demanding of company behavior as well. And that has become prominant.
We are now coming to understand the idea of sustainability as managing with consideration for not only optimizing profit, but also exhibiting ethical and responsible behavior regarding economic, environmental, and societal impacts as well.
And this is responsive to growing consumer pressure for demonstrated corporate social responsibility (CSR) that meet all three, giving way to the growing use of “Ethical Supply Chain” as part of the expanding vocabulary of Supply Chain Management and Supply Chain Sustainability (SCS).
What is an Ethical Supply Chain?
An ethical supply chain focuses on the need for CSR, working to produce products and services in a way that treats its suppliers, stakeholders, employees, communities along the supply chain, and the environment, ethically.
Consumers are also increasingly demanding verification along the entire supply and value chains that a company’s partners and suppliers are adhering to the same commitments. This comes often in the form of documentation, third party verification, or even stringent adherence to certification programs.
The following are some questions that consumers are asking about brands and their supply chains:
- Does each link in the supply chain take care of its employees, offering fair and livable wages and benefits, sustainable workloads, and fair and equitable access to employment and treatment on the job?
- Is the sourcing of materials from renewable sources or and/or sources that include low-impact extraction methods? Does the company verify or certify adherence to environmental values via chain of custody of inputs?
- Do you trust your suppliers and supply chain partners? Do they keep their word regarding ethics and adherence to corporate commitments regardless of possible additional costs?
- If unethical behavior is discovered, how will it be remedied? Is there a documented and transparent process in place? Will each partner in the supply chain actively work to make sure it’s corrected?
How to Manage Supply Chains for Sustainable Impact?
Sustainability leaders have found that one of the most challenging tests of corporate commitments and initiatives built around sustainability includes supply chain management.
This is due to the need to optimize at the procurement level the lowest cost possible inputs in often volatile markets, while simultaneously being attentive to sustainability goals, requirements, policies, and initiatives that may be counter to minimizing costs as the dominant driver. This duality is often at odds.
In more recent years, supply chain optimization and management of supply chains for sustainability also include the ability leverage downstream supply chain stakeholders as well.
For example, many of the sustainability leaders we work with and who participate in our regular roundtable discussions, note that their ESG strategies, metrics, monitoring, and reporting are made even more complex regarding the packaging of their final products. Although producers do have a great deal of influence regarding packaging decisions for their products, unless a company produces its own packaging internally, the packaging industry tends to operate independently.
"Packaging" is typically classified based on its type of use (primary packaging, secondary packaging, tertiary packaging, and ancillary packaging). It is also differentiated based on the types of materials used, such as paper, paperboard, plastic, glass, metals, and emerging alternatives (e.g., mushrooms), including recycled and eco-friendly options.
Each segmentation in packaging has its own supply chains, and is immersed in its own broader sustainability landscape. For example, paper and paperboard production is reliant on recycled as well as virgin wood fiber and typically operates under several certification schemas such as SFI, FSC, and in Europe PEFC. There are also several verification and certification programs for glass, plastics, and metals packaging as well.
Thus, managing for ethical supply chains and supply chain sustainability now extends to inclusion of downstream producers (packaging), and their supply chain management approaches. When we view this extended supply chain in totality, particularly in establishing goals, metrics, monitoring, and documentation, it is obvious we are collectively in the middle of breakpoint change, where supply chain managers must consider this multifaceted challenge daily, and there are no easy answers.
What we do know is that forms of inclusive and open innovation, creative supply chain design that includes more robust landscape mapping for sustainability, and partnerships upstream and downstream and with external collaborators, is showing tremendous promise for building resiliency and maximizing sustainable impact.
It is becoming more apparent that given consumer demand and shared goals to address wicked problems like climate change across the globe, those businesses who fail to innovate their supply chains for sustainable impact will more than likely fall by the wayside.
Editor’s Note: This post has been updated for accuracy and current best practices.