Supply chain: The intersection of ESG and the new customer

Editor’s note: This is the first article in a four-part series on actions supply chain leaders can take to improve cross-functional collaboration and create new more flexible and resilient supply chain models. New articles will appear on June 29, July 6 and July 13.

With the increased focus on environment, social and governance (ESG) in supply chains by customers, investors, employees and the growing number of laws, supply chain leaders are forced to adapt or die. According to a recent report released by Ernst & Young LLP based on a survey of 525 senior supply chain executives, 80% of firms are increasing their focus on ESG initiatives; however, many still lack the business case, end-to-end supply chain visibility and technology to realize their sustainable supply chain objectives.

No company can meet its ESG goals on its own. You need the cooperation of your suppliers and partners to provide transparency and reliable data. Supply chain leaders that adapt and thrive in the new landscape can go beyond risk mitigation to bring their organization a competitive advantage.

In this four-part series, we will analyze trends and provide guidance on how the supply chain function can utilize and leverage your position, influence, and data to help your company achieve a competitive advantage. The series, based on extensive discussions with over 30 multi-national companies spanning numerous industries, will share insights on the following topics:

• The intersection of ESG and the new customer

• The hub for creating constellations of value (June 29)

• Strategic data sharing for ESG progress and reporting (July 6)

• From risk mitigation to competitive advantage (July 13)

Companies in every industry are under increasing pressure to understand and mitigate often conflicting risks in their supply chain to increase resiliency, meet the needs of the new customer and operate a responsible supply chain regarding ESG that meets the growing number of regulations. As supply chain leaders know all too well, no company is an island. Across the broad spectrum of ESG topics, every company in your supply chain, from logistics providers to raw material sources, are part of the solution in meeting your ESG goals – and almost always part of the problem when there is an incident.

In every aspect of ESG – environmental impact, labor conditions, data privacy, corruption – your company is liable to some extent for the actions of companies in all levels of your supply chain. The supply chain function is critical in managing this liability and establishing an acceptable and consistent risk tolerance across your organization. Environmental impacts, data security, and labor practices must be integrated into your corporate strategy and enterprise risk management process at the highest level. It is imperative that supply chain leaders examine their organization’s current strategy and assess risks, ensuring that ESG and the new customer needs are accounted for and that your reputation, integrity, and stakeholder expectations are factored into the equation. The task is made much more challenging because the specific relevant risks within the broad E, S and G pillars can vary dramatically from company to company in different markets and industries.

Companies are adjusting their due diligence practices to account for the growing focus on ESG. Forward thinking companies and supply chain leaders realize that two significant trends are intersecting in a way that will define the leaders and laggards:

• First, there is a move toward new business models as companies seek to meet the needs of the new customer and create more happy and loyal customers.

• Second, there are increasing regulations and a growing stakeholder focus on how companies manage their ESG responsibilities.

The supply chain function in organizations plays a critical role in both areas. Supply chain leaders need to understand the intersection as well as their role in shaping how their company capitalizes to improve business performance.

The new customer

In the past five years, there has been a significant shift in customer expectations across industries and geographies. Customers now demand real-time information and more control over their supply chain experience. Based on a 2022 survey of 1,370 people in 12 countries conducted by the Digital Supply Chain, the new customer seeks personalized products and services, transparent pricing, and adherence to social values. The emergence of the “new customer” requires companies to adapt their supply chains to meet these new demands, or else face potential risks.

Business models are rapidly changing to meet the expectations of the new customer. Brands are supplementing their traditional wholesale channels by going direct-to-customer in categories ranging from liquor to razor blades. Platform businesses are expanding from ridesharing and vacation rentals to at-home food delivery. Even traditional market leaders in product segments such as eyewear are under pressure from innovative brands, forcing them to explore direct-to-customer (DTC) sales channels.

Read part 2: The supply chain is the hub for creating new constellations of value

Read part 3: Unlocking competitive advantage through strategic data sharing

Technology is driving the change in two distinct and interconnected ways. Most important, individuals now expect technology to deliver a frictionless purchasing experience. They also expect visibility into where their product is and when it will be delivered. Many individuals go one step further and want to know where a product is made, the related working conditions and its impact on the environment. They are consciously beginning to integrate ESG considerations into their purchasing decisions. They expect a high level of visibility and transparency from the companies they do business with.

Second, these new customers are also “new employees” in the sense that they bring their personal expectations and, in many cases, their socially conscious selves into the workplace. They want to work for companies that have a high level of visibility and transparency, and they want their company to require this from their suppliers.

The intersection with ESG

Meeting the needs of the new customer is blurring the lines between B2B and B2C. Just as consumers expect more transparency, companies are demanding the same from their suppliers. What are the labor conditions in your factory? What are you doing to reduce your carbon-emissions? How mature are your controls for managing business and ESG risks?

Companies are seeking to develop a lasting and more intimate relationship with customers through the collection and analysis of data about their choices and preferences. The goal is to go beyond simply satisfying customers to developing and retaining “happy and loyal customers.” The direct-to-customer business model shift is one of the primary ways to do this. A happy customer is willing to pay the same or more for your product and then shares their positive experience with others. A loyal customer always comes to you first for what they have been buying and looks to you first for any related product or service.

For a growing number of consumers and business customers, ESG is now one of the brand attributes that influences their purchasing decision, therefore creating happy and loyal customers requires the integration of ESG into the supply chain function. For companies buying from companies, it is now abundantly clear that no one company can meet their ESG goals without the collaboration of their suppliers and logistics providers. In more and more industries ESG criteria are part of the B2B supplier selection process.

Supply chain leadership is at the center of this powerful convergence. Savvy supply chain leaders will work to capitalize on the intersection of the new customer and ESG by becoming the hub of new flexible supply chain models and new data sharing strategies. The result will be creating a long-term competitive advantage for your company.

The next articles in this series will provide practical guidance on actions supply chains leaders can take now.

About the authors:

Craig Moss is executive vice president of Ethisphere and director of the Digital Supply Chain Institute David Kurz is senior fellow at the Digital Supply Chain Institute and associate clinical professor at Drexel University

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