Top environmental risks in supply chain management and their impact

One of the most vital pillars of successful supply chain management is the effective assessment and mitigation of supply chain risks. Effective supply chain risk management involves:

• Identifying the different types of risk you face
• Understanding their potential impact on your business
• Putting initiatives, processes, and management systems in place

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Taking these steps will improve your supply chain operations and reduce the effect of supply chain disruptions.

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Of all the risks you’ll identify across your supply chain, sustainability and the environmental impact of your suppliers are likely to be among the most significant. But these are also the areas where your procurement and sourcing teams can have a lasting positive impact in reducing carbon emissions and your business’s overall environmental impact, whether you operate a local or global supply chain.

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Environmental supply chain risks: What do the statistics say?

Data backs up the idea that your procurement and sourcing teams can have a significant impact by ensuring your supplier companies are following eco-friendly and sustainable practices.

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A 2021 CDP report highlighted that:

• Environmental supply chain risks will cost companies up to $120 billion by 2026
• Major brands, including L’Oréal and Walmart, want suppliers to be more transparent about what they’re doing to deal with these risks
• On average, supply chain GHG emissions are 11.4 times higher than operational emissions
• A lack of action leads to increased costs. Suppliers achieved savings of $33.7 billion by cutting 619 million metric tons of carbon dioxide from their operations

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Furthermore, a 2016 McKinsey study exploring the future of sustainable supply chains found that:

• Consumer packaged goods (CPG) companies will need to cut greenhouse gas emissions by more than 90% by 2050 if the world is to meet climate change targets
• More than 90% of the environmental impact - including 80% of greenhouse gas emissions - of CPG companies originate in their supply chains
• Fewer than 20% of supply chain managers said they had visibility of supply chain sustainability practices

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What are the top environmental risks in your supply chain?

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1. Reckless sourcing of raw materials

How your suppliers source and extract the raw materials needed to manufacture your products is a vital pillar of corporate social responsibility (CSR).

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Products like palm oil have become notorious in recent years through links to deforestation and other practices that can wreak havoc on biodiversity and local and global ecosystems.

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Even if you sell a relatively environmentally friendly product, it remains vital that you conduct thorough due diligence on your suppliers and fully understand where your products are coming from. This rings true with upstream suppliers, too. Who are the stakeholders within your direct suppliers conducting risk assessments and due diligence further upstream?

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Having a solid supplier engagement strategy will work wonders in ensuring you don’t fall foul of direct and upstream suppliers with dubious environmental practices.

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2. Environmental incidents

Environmental incidents pose a reputational risk and carry significant potential for supply chain disruption.

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For example, if one of your suppliers is guilty of negligent practices that lead to a chemical leak or a significant increase in greenhouse gas emissions, they could be subject to investigation and potential curtailment from local environmental authorities. If an investigation highlights long-running non-compliance with environmental regulations and initiatives, your business could suffer a backlash if you didn’t see what was happening right under your nose.

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Suppliers who are negligent in this area can also often be guilty of human rights infringements or providing unsafe working conditions, too, which can further compound both disruption and your potential public relations headache.

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3. Climate change

A significant element of supply chain sustainability and any robust CSR strategy is minimising the environmental impact of your actions.

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Yet, climate change remains a significant risk to your supply chain.

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The primary risk climate change poses is the increasing frequency of extreme weather events precipitating natural disasters. While hurricanes, typhoons, and snowstorms are beyond your control, you can mitigate against the risks these events pose by ensuring you build resilience into your supply chain.

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4. Waste management practices

Waste management and moving towards a circular economy model are becoming an increasingly vital element of supply chain management.

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While you and your suppliers are responsible for ensuring your waste management practices minimise environmental impact, risk mitigation in this area will also lead to significant cost savings.

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What effective waste management looks like differs across supply chains but could include:

• Minimising waste sent to landfill
• Reducing waste (and costs) through more efficient processes
• Reusing products
• Reducing greenhouse gas emissions by using recyclable sources for power generation

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5. Changes in your value chain

Whenever you bring a new supplier on stream, a supplier starts sourcing from an unfamiliar manufacturer, or you change the components that make up your products, you must assess or reassess the risk and the environmental impact of your actions.

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You can very easily find yourself with new environmental liabilities if a new factory or manufacturing plant isn’t as efficient as you expected it to be, for example, so ensure you’re switched on to risk every time you’re changing anything operationally.

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6. End of life product disposal

Even the most robust and well-made products have a natural lifecycle. While you can follow sustainable practices throughout your supply chain to minimise the environmental impact of getting a product into your customer’s homes, if it ends up in a landfill site at the end of its lifecycle, that’s still on your business.

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Keep the end of your product’s lifecycle in mind when choosing suppliers and manufacturers, and ensure it’ll be easier for consumers to recycle them to help you contribute further to a circular economy.

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Managing environmental risk throughout your supply chain

The best way to address environmental risk across your supply chain is by having robust supplier risk assessment and mitigation strategies while simultaneously ensuring you have a built-in resilience to any supply chain disruptions from things you can’t control.

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Supplier engagement to ensure you reach your goals will be vital. You may wish to encourage your suppliers to work towards ISO certification in environmental management and social responsibility. However, creating a clear supplier code of conduct and providing incentives for compliance will often be enough to ensure suppliers are working towards the same environmental goals as your business.