A Three-Point Approach to Measuring Supply Chain Sustainability

Sustainability measurement and reporting is becoming institutionalized in large companies. Over 80% of companies listed in the S&P 500 published a sustainability report in 2015. However, there remain wide discrepancies in the content, structure, and quality of sustainability reporting. This is particularly true when it comes to reporting on the sustainability performance of supply chains.

Large companies typically have very complex supply chains with wide-ranging impacts. This means that there are potentially thousands of indicators that could be used to report on supply chain sustainability. A key challenge, therefore, is determining what and how to report in this area.

An essential starting point is in defining a sustainable supply chain. In a recent MIT SMR article, I argued that a sustainable supply chain “must operate within the thresholds imposed by nature and society.” Unfortunately, references to these thresholds are rare. New approaches are needed.

Measurement and Reporting Framework

Figure 1 provides a framework to measure and report supply chain sustainability. Eight key considerations are organized around three categories focused on sustainability context, collaboration, and communication.

First, any effort to measure and report on supply chain sustainability must explicitly consider the broader context in which the chain exists. This means that performance must be linked to environmental and social thresholds across the chain. These linkages distinguish sustainability measurement and reporting from other forms of reporting.

The key contextual considerations are:

• Consider all key impacts. Identifying impacts can be challenging due to differing economic, environmental, and social conditions across the supply chain. Nonetheless, global, regional, and local impacts, both positive and negative, must be considered. Value chain mapping is a useful starting point for identifying impacts and setting priorities.
• Set science-based goals and targets. Sustainability goals and targets must come from something beyond the supply chain itself. Translating science-based thresholds, like those in the planetary boundaries framework, to the supply chain level can be difficult, but it can be done. For example, PwC calculates that carbon emissions must be reduced by 6.3% per year until 2100. Start there.
• Develop context-based indicators. Indicators track progress, or lack thereof, toward goals and targets. Context-based indicators, therefore, express performance relative to science-based goals and targets. These are in the early days of development, but thoughtful examples of context-based carbon, water, waste, and social indicators are provided by the Center for Sustainable Organizations.

Second, extensive collaboration with key players across the supply chain is needed to measure and report on sustainability performance. Sustainability is simply too big to tackle alone. Key players will vary by chain, but might include many supply, manufacturing, transportation, warehousing, and retailing companies. Key recommendations for collaboration include:

• Include all key supply chain players. Accounting for all key players is the only way to identify hotspots and to avoid shifting impacts between players. Consider that the first environmental profit-and-loss account for the sportswear company PUMA found that its supply chain partners generated 94% of the company’s total environmental impact. The vast majority of these impacts were beyond first-tier suppliers.
• Build capacity across the chain. Good data is the foundation of all measurement and reporting. However, key players may lack the capability to generate reliable and valid data. Companies such as General Electric Co. have well-established programs to support suppliers in improving environmental, health, and safety issues. Similar efforts are needed to develop and report on key sustainability indicators.
• Align data collection and analysis systems. All key players must have compatible data collection and analysis systems. To avoid double counting, boundaries must not overlap. Collaborative technologies, such as cloud-based reporting, may help, particularly for real-time reporting. However, this is not just a technical issue; relationships are critical.

Third, the sustainability performance of the supply chain must be effectively communicated. This is important given the increasing transparency expected in supply chain management. Enhanced communication may also encourage key players to take action to improve their performance. Key communication considerations include:

• Be radically transparent. Reporting should allow interested stakeholders to see where major impacts are occurring in the supply chain. Wherever practical, make the data and analysis underpinning the measurement and reporting publicly available. Many examples of how and why Unilever embraced radical transparency in its supply chain are available.
• Stay focused. This may appear to conflict with the need to consider all key impacts. However, that is to ensure nothing major is missed. Given the effort needed to measure and report at the supply chain level, it is critical to stay focused. CDP’s focus on carbon and water is a good example.

Be Realistic as You Proceed

Supply chain management involves everything required to get a product into the hands of a customer. This involves procurement, production, distribution, and retailing. If we include reverse supply chains, then even more activities, such as product recovery, reuse, recycling, or disposal, must be considered. This broad scope can make measuring and reporting on sustainability performance difficult.

Each step in the framework also presents challenges. For example, science-based goals and targets are clearer for some issues than others. Data quality may vary greatly throughout the chain. Expectations differ widely between stakeholders. Moreover, there are undoubtedly other ways to structure supply chain sustainability measurement and reporting.

The framework is intended to summarize the essentials; it provides a compass, not a road map. That said, measuring and reporting supply chain sustainability is rarely about adding decimal places to impact calculations.

The most important points are to link supply chain performance to the wider world, identify hotspots, and take action. Any indicators and reports are unlikely to be perfect initially — but that’s OK. The key is to get started and work with key players across the chain to improve over time.