How sustainable supply chains can blunt economic 'black swans'
After the 2020 pandemic fades into the rearview mirror, what will be remembered — after COVID-19 itself — will be the shortages. First it was toilet paper, then face masks, hand sanitizer, cleaning products, pasta noodles, lamb chops, and on and on. Shelves were empty and getting what you wanted was never guaranteed. In a word, supply chains were disrupted.
A "black swan" had landed.
Expecting upheaval to come from climate change, the financial industry has become more and more invested in helping businesses create more resilient supply chains. Supply chain expert Kevin Dooley published a paper last June that looked at improving resilience to manage climate change risks. Much of that research can be applied to our current pandemic situation.
Dooley is a distinguished professor of supply chain management at Arizona State University’s W. P. Carey School of Business. He is also chief scientist of the Sustainability Consortium, created in 2009 to transform the consumer goods industry. By partnering with leading companies, nongovernmental organizations, universities and government entities, the consortium works to help companies define, develop and deliver more sustainable products.
Created by Arizona State University and the University of Arkansas, the organization has for more than 10 years employed a science-based system, where research insights into almost 130 product categories are offered to companies — a place where retailers can work with competitors in a noncompetitive way. Retailers using the consortium's tools include Walmart, Amazon, Sam’s Club, Marks & Spencer and Walgreens.
Dooley recently discussed how financial institutions can help improve supply chain resilience.
Editor's note: Answers edited for length and clarity.
Question: In the past 10 months, we’ve all seen the effects of supply chain disruption. Have you noticed any kind of a sea change in companies’ attitudes toward the issue?
Answer: No. If you were to draw a curve — and it's not a line, it's a curve — it's not huge, but it's accelerating. Companies are taking their initial steps of just asking themselves, "What the heck is sustainability; what does it mean for us? What's the first steps we take?" All the way to the bleeding edge of the leading companies like Unilever or Patagonia or whatnot, there's been continuous progress. It's actually probably surprising that the pandemic hasn't really interrupted that growth in interest, in investment at all. Has it accelerated it? No, but I think that's for practical purposes. A lot of sustainability work in the corporate world and in industry involves supply chain — and supply chain people are very, very, busy.
So there's a bandwidth issue, but there's not an interest issue. Now, our company is seeing the connection between COVID and what might happen from climate change as we've suggested in our postpublication interviews and stuff. I think the leading companies already knew that. Climate resiliency, at least right now, the perception is it's a five- to 10-year time. So, how many companies have a five- to 10-year planning period? Some of the big companies and leading companies and excellent companies do. Absolutely. But a lot don't.
Q: How does the financial industry benefit from helping businesses create more sustainable supply chains?
A: So if we're talking about textile manufacturers in China, (they may) have inefficient equipment and perhaps somewhat dangerous equipment that they're using for textile productions. And so they're creating water pollution, they're creating carbon emissions and air pollution, or they're potentially causing risks to worker health and safety. They need money. And a lot of those improvements that might pay off pretty quickly if you're talking about retrofitting — boiler equipment and kind of basic production equipment, with new filters and calibrating it and all that kind of stuff, or you're talking about switching to LED lighting — it still takes an upfront investment.
Somebody has got to have the cash laid out. If you're a farmer and you know that a smart irrigation system would be really awesome in terms of both reducing costs and increasing yield and be the better sustainability solution, you’re going to have to lay down money for a new irrigation system. Most of your small- or medium-size organizations, whether it's a small hold farm or a textile mill in China, or a farmer in the U.S., the credit rate that you can get is low, but it's still relatively high. It's certainly very high compared to big companies who are your downstream customers like a Walmart or whatnot. … And the supplier has to demonstrate that they're engaged in sustainable practices, have improved over the last (period) … and have engaged with Walmart. And with that they get a loan. … So, yes, we want to upgrade our manufacturing equipment, or we want to create a worker health and safety training program. You know, we may need some cash to do that.
Again, for a small company that cashflow period can be problematic. And so instead of waiting 90 or 120 days to get paid, supply chain financing system says, we'll pay you three days. And you'll pay a tiny, tiny, tiny percent fee for that. And again, it's because the big partner downstream is putting up the cash to get that low-interest loan.
Sustainability in the finance industry — the initial discussions focused on the footprint of the finance industry, which is primarily, from a current standpoint, the servers that they run and stuff. It's all honestly trivial compared to the impact that financial services and institutions can make by the services they provide, by the choices they make about where to allocate funding. That's where there's profound potential for impact.
Q: From reading your report, it seems that business as usual going forward is going to be more like life during wartime, as in a permanent state of disruption. Do you agree with that?
A: There are just some inevitable delays and disappointments when a disruption occurs. I wouldn't necessarily call it a war zone like you did in your question. But I think it's still a lot of uncertainty about what certain changes will mean to business and supply chain.
So for example, there could be massive climate migration. We just really don't know what that does to labor forces, what it does to the consumer markets, what it does to supply chains. … We have, for example, increased productivity in fisheries off of eastern Canada. The water patterns are changing, and it's actually increasing the productivity or the population that's capturable of the fish. That's an example where climate change has actually produced a positive impact in a business supply chain. It's created more supply of fish, you know, more supply typically means that prices decline. So what's the impact, and were people in the supply chain ready for that excess supply and decrease? That's a micro example of how production is highly local and supply chains connect those local areas of production. Climate change impacts winemaking. As many winemaking regions move northward, we're still gonna make wine. It's going to be in a different land. It's going to be in a state or even country shifted northward depending on where you are in the world. What does that mean to supply availability risk? What does it mean to labor pools? Do the old owners simply move and acquire new land? And so yes, I think that there's increased uncertainty. … In some cases no matter how much insurance you buy by increasing capacity or establishing long-term contracts, inevitably things will not go completely smoothly, no matter how much you plan.
Q: Tell me about some of the strategies businesses will need to adopt, like bridging. Are any name-brand companies you know of adopting them now?
A: You have to be adaptive and smart and creative. And that's where people typically think about the insurance for a supply chain being an additional factory or a warehouse, or building an inventory, but that's where this other strategy of bridging (comes in), where you work with your suppliers to make them stronger and more resilient themselves. … You establish a strong relationship, whether it's contractual or relational, so that when supplies dwindle, you're at the top of the priority list. …You want to be the customer on the buyer's list that they're a priority customer: "We're taking care of them first."
Top image by Tumisu courtesy of Pixabay