Supply Chain Finance: The Missing Link to Sustainability?
How are Supply Chain Finance (SCF) and Sustainability related?
This question is one that needs to be better understood and clarified. Research on Social Business in Haiti made us realize that there is a strong link between supply chain design and its structural parts of materials, finance and information flows with triple bottom line (TBL) sustainability.
In-depth discussions with the social business owners informed us that social businesses are specifically designed to fulfil all three areas of sustainability. These businesses are not charities: they have to be economically viable. However, social and environmental improvements are also at the core of the social business model. The philosophy they follow is that a charity dollar has just a single life, while a social business dollar actually has endless lives as it can be invested over and over again. That really hit a nerve.
Sustainable Supply Chain Design – Financial flows play a key role!
Social businesses have to take their sustainable priorities and design a supply chain to meet their needs. Sustainable supply chain design (SSCD) involves the structural pieces of the supply chain (material, finance and information) but focuses on sustainable outcomes. Considering the social businesses we spoke to, and how they design their supply chains, we derived five main conclusions of practical interest:
- When designing your supply chain, you should consider (environmental, social and economic) equally – rather than prioritizing economic before considering social and environmental – and all three flows in the supply chain – material, information and financial – should be designed consciously.
- Design of your supply chain should also define both the outputs and outcomes of what you do. Outputs are products, such as affordable items for ‘bottom of the pyramid’ (BoP) markets, while examples of outcomes include better education and improved hygiene.
- When designing, don’t think about the flows too linearly. There might be forward and backward momentum for all three flows: materials, information and financial. As an example, it might be necessary to install a financial intermediary such as a microcredit institution in order to make the business model work.
- Remember to consider stakeholders in all three areas of sustainability – economic, environmental and social stakeholders. These stakeholder groups also can help with the previous tasks, such as clarifying your outputs and outcomes and thinking more creatively about potential parties to manage forward or reverse flows.
- Be aware that support chains – either for information or financial – might be designed in ways that mean even if you don’t achieve fully sustainable outputs in the first step, you might still reach sustainable outcomes.
The following example illustrates that last point of consciously designing the support chains so that sustainable outcomes (if not outputs) can be reached.
Among the individual cases, we analyzed was a social business that had set up a chicken farm, in order to generate funding for a school. When looking at it from the perspective of the supply chain structure, the chicken farm was providing an auxiliary financial support chain. The outcome intent – education (via the funded school) – had no direct link whatsoever with the main material flow involved, i.e. chicken meat production.
A larger scale corporate example of exactly that mechanism of ultimately reaching sustainable outcomes (despite not yet sustainable outputs) is in the area of passenger flights. Whereas your output as an airline and a provider of air transport is inherently unsustainable environmentally, with an auxiliary chain of funds to a climate protection organization such as Atmosfair, you can still get to a sustainable outcome. Atmosfair (www.atmosfair.de/) is a German initiative that allows users to calculate their carbon footprint for flights and to donate a commensurate sum of money according to their CO2 calculator. When paid, they invest that sum into projects that offset your CO2 emissions.
So, what about the link between SSCD and SCF?
Ultimately, SSCD is about being creative and more open-minded both in terms of stakeholders as well as the flows that are to be designed. We still think too much about the physical chains in SCM, however as supply chain finance comes more into the forefront, we are finding that the information and financial flows are key to getting to triple bottom line (TBL) sustainability!
Based on what we’ve discussed, the SSCD-SCF link can be quite easily drawn in terms of looking more closely at – and having a greater appreciation for – the financial flows in supply chains. SCF is a fantastic means to drive this further! The interconnection between sustainability and SCF needs to be understood, because often suppliers – particularly those more that are tier 2 and beyond or further upstream in the supply chain – can be those with the most acute need for funding in order to improve their environmental and/or social sustainability.
There are programs where innovative supply chain financing initiatives with its suppliers are aligning incentives, promoting transparency and embedding its shift to supply chain sustainability. Puma has a strong commitment to health and safety, human rights and environmental conservation. Puma has a recognized best in class supplier audit program and incentivizes suppliers for sustainability initiatives and provides financing options to ensure that the supplier has the capabilities to meet its needs. Puma’s efforts provide a fantastic opportunity for other companies that want to leverage SCF for sustainability. Companies tend to reward those suppliers who perform well rather than focusing more on those suppliers who are struggling to help them move forward.
From a practical point of view, that’s completely understandable, as the risk is so much lower when you reward those performers who are best in class instead of providing funding to those who struggle with more uncertain performance outcomes! However, we would also like to see firms look at the scenario of utilizing SCF as an enabler to supply chain sustainability.