Many companies focus solely on their tier one suppliers when it comes to supply chain sustainability. Yet to holistically tackle ESG performance, procurement teams must evaluate their operations at tier two, three, and beyond, as each level of the supply chain carries different risks. Cotton is a great example. In light of recent concerns over forced labor in cotton sourcing, many brands now want to address the issue at the most upstream source (the farm or gin), when in reality it’s the textile and spinning mills where traceability is lost.
What Is Multi-Tier?
Often, sustainability risks are buried deep within a company’s supply chain. Apparel brands may overlook human rights risks at its cut-and-sew factories; automobile manufacturers may source semiconductors and materials from suppliers who violate emissions targets; electronics companies may unknowingly support pollution and environmental degradation in Southeast Asia. To mitigate these risks, companies must collect reliable data at multiple levels of their supply chains.
A multi-tier strategy involves looking past your first tier of suppliers and critically assessing your full supplier network for ESG performance, right down to the source. This will allow you to track certification status, trace products back to their origin, and ensure that materials are legally sourced and ESG-compliant.
Why Is This Important?
According to Deloitte, only 15% of CPOs have visibility beyond their tier one suppliers. With this kind of limited visibility, companies cannot proactively measure and fully manage ESG risks in the supply chain. As BSR noted, “traceability is the backbone of a system that aims to verify social and environmental claims (e.g., certified organic, carbon-neutral, and no forced labor).”
Here are the top supplier sustainability metrics companies should be considering in their multi-tier strategy, as identified by supply chain executives in a World Economic Forum report:
- Water usage
- Plastic usage
- Fair wages
- GHG emissions
- Adherence to international codes of conduct
- Fair labor practices
- Product safety
- Land usage
With only a handful of companies having visibility beyond tier one, it may be tempting for brands to put multi-tier on the back burner. But if today’s climate tells us anything, it’s that regulatory pressure for ESG is on the rise. U.S. and global regulators will continue to actively enforce anti-corruption laws, such as the Foreign Corrupt Practices Act (FCPA), and standardized ESG disclosure for all publicly-traded companies is just over the horizon. Bottom line, if events follow the trends of the last global financial crisis, regulators will enforce ESG more heavily in 2021, not less.
Remember, 80% of ESG impacts are found in the supply chain. Having a multi-tier supply chain strategy will be key to meeting these emerging ESG regulations.
How Has The Pandemic Affected Multi-Tier?
COVID-19 has made multi-tier assessment even more critical to a company’s continued success. From climate change to labor and raw material shortages, global disruptions affect corporations daily. For the past several years, at least one company out of twenty has suffered a supply chain disruption costing at least $100 million.
It comes as no surprise then that 87% of supply chain professionals intend to invest in resilience within the next two years. For instance, mining and manufacturing companies can lose a significant percentage of their earnings if regulatory fines, natural disasters, or elevated pollution levels bring their operations to even a momentary halt. McKinsey sums it up nicely – “creating a comprehensive view of the supply chain through detailed sub-tier mapping is a critical step to identifying hidden relationships and nodes of interconnectivity that invite vulnerability.”
Companies taking the lead in multi-tier supplier assessment focus on traceability and visibility:
- Unilever aims to eliminate deforestation related to palm oil and create a deforestation-free supply chain by 2023. To do so, they will use emerging technologies, including satellite monitoring, geolocation tracking, and blockchain to collect trusted data.
- Ralph Lauren intends to eliminate hazardous chemicals in its product lines by 2025 in alignment with the Zero Discharge of Hazardous Chemicals (ZDHC). These standards push companies to evaluate how they select, purchase, and manage supplier goods.
To help organizations meet ESG requirements and gain multi-tier visibility, SupplyShift’s platform lets you cascade assessments down the supply chain, so you can track whether suppliers are meeting your standards at every tier.
Sustainability, Resilience, and Business Continuity
Regardless of whether a company is aware of supplier ESG violations, it will shoulder the backlash for what happens in its supply chain. For instance, if an apparel brand sources from a third-tier supplier with poor labor policies, it’s the apparel brand—not the supplier—that will get in trouble with consumers, regulators, and investors.
Continuity and sustainability, in short, will always be two sides of the same coin. If you prioritize multi-tier visibility, you can better manage sustainability, supplier, and operational risks, ensuring that your supply chain continues to run smoothly.
Finally, multi-tier visibility helps companies respond to black-swan events such as COVID-19. Companies that choose to assess their suppliers and sub-tier suppliers have their fingers on the pulse of their supply chains. As a result, if disruption strikes, they can respond quickly by sourcing from new or more sustainable suppliers.
If multi-tier visibility offers so many benefits, why aren’t more companies on board? “Most companies lack a platform designed to provide visibility and traceability across the entire supply chain,” the World Economic Forum noted. “They typically try to combine legacy ERP solutions with home-grown visualization and analysis. But these systems weren’t built for that purpose, and their ability to automate traceability and visibility with multiple ecosystem partners is limited.”
This is where SupplyShift comes in. We give companies the tools they need to measure and reduce their ESG impact at all levels of the supply chain. From Scope 3 calculation to supplier diversity, equity, and inclusion (DEI), we’ll help you get supplier sustainability insight all the way back to the source.
Now that you’ve learned why multi-tier is so important, visit our corresponding article to see how to approach your multi-tier supplier assessment strategy.