The days of companies simply paying lip service to sustainability are long gone. For example, in February, Delta Air Lines announced it will commit $1 billion over the next 10 years to become the first global carbon-neutral airline.
Volvo Car Group is no less ambitious as it plans to put more than 1 million electric vehicles on the road by 2025.
Sustainability is an integral cog in delivering strong business performance in today’s business climate. At a minimum, consumers expect companies to manufacture goods using fair labor practices, supplier-friendly business protocols and sustainable materials. Competitive companies, however, know that they must aim much higher. The backlash for failing to meet this demand or simply “phoning it in” can be severe.
There is also increased scrutiny from regulators, particularly in Europe. From environmental impact to how quickly suppliers get paid, regulators are paying closer attention to nearly every aspect of the business. Companies must not only prove their commitment to sustainability is being executed deep within the supply chain, but they must also have the mechanisms in place to ensure transparency and accountability.
Empowering buyers and suppliers to invest in sustainability
Corporate sustainability initiatives have to meet multiple, often opposing, criteria. They must deliver positive environmental and social change while enlisting and supporting (rather than alienating) external stakeholders like suppliers and investors. The challenge, of course, is accomplishing these initiatives within the bounds of fiscal responsibility and current economic volatility.
Supplier finance is one way companies overcome this challenge, but even that’s receiving closer inspection. Historically, supplier finance has often been offered as a mitigant to extended supplier payment terms that improve the buyer’s cash flow. But, while this may help the buyer free up capital to fund sustainability initiatives, longer payment terms can still harm suppliers if the extension is unreasonably long and the program poorly implemented.
This is causing many companies to consider new supplier finance alternatives that more closely align with their broader corporate sustainability initiatives, which often include supplier health and empowerment. How can they help their suppliers navigate economic uncertainty or geopolitical volatility? How can they give suppliers the support they need to adopt socially and environmentally friendly business practices? To fully achieve their goals, companies need to be able to invest in sustainability in a way that benefits and strengthens the entire supply chain – from the largest supplier to the smallest.
Supplier-focused supply chain finance is a mutually beneficial approach that prioritizes the supplier experience. It enables buyers to achieve their cash flow goals and sustainability objectives, while also providing the same benefits downstream to suppliers. By giving suppliers an option to receive early payment, suppliers can accelerate cash flow and free up capital to invest in their own economic, social and environmental sustainability initiatives.
Here’s a real-world example: Leading European retailer ICA Gruppen wanted to expand its corporate sustainability program – particularly its investment in local suppliers and strengthening supplier health. To accomplish this, ICA implemented a supplier-focused supply chain finance program that offers suppliers access to reliable early payment. The program is economically and socially sustainable in that it not only increases the retailer’s volume, but it also empowers the retailer’s supply base to make powerful investments in their own businesses to fuel growth and innovation.
As a direct result of participating in its customer’s supply chain finance program, one local supplier was able to invest in a new production line, increasing capacity and enabling ICA to transfer more volumes to a local business. Today, that supplier is now on track to double their revenues and become a SEK multi-billion company, which in turn strengthens the local economy and the community as a whole. An added benefit was that the program supported a local company, cutting down on the carbon footprint that stems from transportation emissions when purchasing from a long-distance customer.
Sustainability success requires financial agility
There are two things that differentiate supplier-focused supply chain finance from alternatives and that have a direct impact on supply chain-wide sustainability. First, supplier-focused supply chain finance is designed to benefit suppliers of all sizes and credit ratings – not just a buyer’s largest, most strategic suppliers.
Second is its multiple funding sources rather than reliance on a single financial institution. This is crucial in today’s economic and geopolitical climate. The collapse or failure of supply chain finance programs that rely on a single funder continues to be widespread amid changing trade policies and banks’ decisions to pull out of certain jurisdictions. Having access to multiple sources of funding ensures supply chain finance is available to all suppliers.
Sustainability has underscored the irrefutable connectedness of today’s supply chains. The success of a buyer’s sustainability program or initiative is directly linked to how it enlists and empowers suppliers to reach its goal. As sustainability puts more demands on the supply chain, both buyers and suppliers will require more financial agility to rise to the call.