The ongoing spread of COVID-19 has exposed the vulnerability of global supply chains. While supply chain managers know the risks of single sourcing, especially for upstream components, in times of crisis, we realize the full extent of our dependence on certain geographies, industries, and transport routes. The Coronavirus pandemic has been one of many disruptions that reveals our need for agile supply chains – and for sustainability management systems that can help mitigate negative impacts during such crises.
Disrupted Supply Chains are the New Normal
Since the onset of the U.S.-China trade war in 2018, we have seen more global players shift their supply chains out of China or expand their existing China Plus One strategies. COVID-19 has accelerated these trends, and Vietnam and Cambodia are among those that emerged as attractive alternatives. Yet, many multinationals invested in relocating key supply centers, only to be struck with the EU’s partial suspension of Cambodia’s preferential trade access in early 2020. Looking beyond Asia, the increasingly complex scope of U.S. sanctions has affected American and non-American companies alike. A broader discussion on right-shoring has revived among academics and practitioners who question whether it is time to shift-back from global sourcing operations. These ongoing changes to procurement suggest that disruption may be today’s new normal.
When supply chains undergo major transformations, immediate logistical challenges are often prioritized over sustainability concerns. Companies focus on operational necessities, such as specialized equipment, IT infrastructure, and local talent, when choosing a new location or manufacturing partner. Yet, it is in times of immediate procurement risk when vulnerabilities in sustainability management could further destabilize supply chains. The decisions made in one crisis will impact the preparedness of sustainability management systems for crises to come.
Concentrated Sourcing Tests Long-Term Suppliers
Buyers need to be aware of the pressure that their suppliers face in this moment of disruption – and of its consequences for their sustainability management and performance. Coronavirus containment measures had factories closed in China, Malaysia, the Philippines, and beyond, including locations in Europe and North America. The remaining manufacturers now have to deliver order volumes that they were not prepared for, while already facing capacity constraints due to limited workforce availability or technology constraints.
Overly demanding production targets have posed a major risk, violating workers’ rights in industries as diverse as mining, apparel, or electronics. But even the most compliant factories in Asia’s overflow markets may be tempted to increase “voluntary” overtime to meet the sudden demand, creating forced labor risks that might be intensified by new migrant worker streams. This comes at a time when global supply chain due diligence laws are evolving quickly, with some of the most recent laws holding buy-side organizations accountable - and even liable - for supplier practices.
Similarly, suppliers that have handled their environmental responsibilities well at a small scale may face challenges with increased waste emissions, water management needs, and energy demand. In Vietnam, an increase in industrial production has already exacerbated major environmental problems, including levels of air pollution, water pollution, and deforestation. Buyers cannot ignore the additional production pressure that their orders put on individual manufacturing partners and sites – nor the heightened sustainability risks that this pressure introduces to their supply chains.
New Supply Chain Partners Introduce Sustainability Risks
These sustainability risks multiply when buyers are forced to switch suppliers amidst an ongoing crisis. Making decisions on who to work with requires dialogue and analysis that a supply chain manager might be tempted to de-prioritize in a state of imminent supply disruptions. Despite this pressure, it is paramount that buyers establish a shared foundation of clear expectations.
A number of immediate instruments are available that can help set the right tone for a new partnership. It is still possible to have suppliers sign a code of conduct upon contract closure. Another meaningful way to engage with suppliers is the use of contract clauses that set sustainability performance standards – for example, that an EcoVadis Rating must be completed within six months – and define milestones expected in subsequent years. Sustainability contract clauses can serve as a foundation for meaningful partnerships – especially at a time when many manufacturers’ social and environmental challenges are much greater than usual.
The Sustainability Implications of Increasing Complexity
Buyers not only need to integrate new risks into their sustainability management systems – they may need to manage them for countries from which they have never sourced before. It is not feasible that any single country absorb China’s manufacturing volume. Instead, supply chains will likely shift into multiple markets and grow more complex. Multiple sourcing can lower dependencies and vulnerabilities, but it makes it necessary to qualify additional suppliers’ sustainability risks in different locations and industries.
Decades of manufacturing experience in China have shown that buyers cannot blindly trust their suppliers to adhere to local law. For example, China Labor Watch found that overtime in some factories reaches up to 175 hours a month, despite legislative caps at 36 hours. Similarly, manufacturers continue to employ temporary workers in order to bypass workers’ rights. When entering new geographies, buyers will not only need to understand local legal systems but also how the law is followed by each supplier they work with. In addition, buyers will want to compare sustainability approaches to their suppliers’ in other countries. These requirements impose challenges on buyers’ sustainability management systems when monitoring multiple geographies, especially in a short time frame.
Building a Resilient Supply Chain Through Risk Mapping and Sustainability Performance Monitoring
OECD Secretary-General Angel Gurría has emphasized the need to reconcile due diligence with ongoing trade tensions and supply chain disruptions. Beyond navigating the COVID-19 crisis, globalized and interconnected supply chains will continue to face unforeseen risks, be it through trade challenges, geopolitical tensions, or the next pandemic.
And supplier monitoring and mapping will prove essential to mitigate those events. Before and during supply chain disruptions, buyers need to build strong partnerships, taking advantage of intelligent technologies to engage suppliers in monitoring and improving the critical management systems for sustainability performance. The EcoVadis Sustainability Intelligence Suite provides the necessary visibility and engagement capabilities to improve this performance and supply chain resilience: EcoVadis IQ can quickly provide predictive risk mapping across the entire supply base for social, environmental and ethical risks, giving buyers intelligence needed to proactively identify sustainability risks across an entire supply chain and indicating where to engage more deeply.
EcoVadis Ratings are then used to engage suppliers, benchmarking, monitoring and improving their sustainability performance. This is done by using a multi-tiered Rating scale, delivered on a detailed scorecard that provides rich feedback to help guide improvements. Companies are then able to pre-emptively identify and mitigate risks, thus better preparing for future disruptions to crucial products, geographies, and business processes – and positioning their sustainability management system for the long-term.
To learn more about the key elements of a comprehensive supply chain sustainability program -- which help reinforce resilience -- check out this application note.
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