An A-Z of Sustainability: V is for Value Chain

This week we’re talking about value chains, so let’s start with a definition. Management consultants will tell you that “supply chain” covers buying raw materials, turning them into finished goods and transporting them to customers, whereas “value chain” is about how value is added along the chain and so includes R&D, design, marketing and after sales services. The Greenhouse Gas Protocol (see C for Carbon Footprint) defines “value chain” in its Corporate Value Chain (Scope 3) Standard as “all of the upstream and downstream activities associated with the operations of the reporting company, including the use of sold products by consumers and the end-of-life treatment of sold products after consumer use”. Or to put it simply, everything linked to your business that happens upstream and downstream of your own operations. Or even more simply: suppliers and customers!

Value chains can be quite long and complex and where you are in the value chain will make a big difference to where you focus and your degree of influence. If you are mining material out of the ground right at the beginning of the value chain you are going to have a different take on things compared to a retailer selling products direct to customers. But why you should look at the value chain is still the same – you have the ability to influence (at least in part) what happens right along the chain and so when looking at material sustainability issues for your company in terms of risks and opportunities, the impacts in the value chain matter.

Your downstream value chain

I’ll spend most of the time talking about suppliers in this article but a few things on customers first. Where you are in the chain will dictate who you view as your customer. As a retailer it’s easy because you are selling to the consumer or end user. As a manufacturer you may be selling to the retailer, so is the customer the retailer or the end user? In your wider commercial thinking you’ll be looking at both – brands advertise to consumers; they don’t just rely on their relationships with retailers to sell their products. Both need to be considered in your sustainability thinking too, because there are impacts that you can influence at each stage. How you deliver your products to retailers, order quantities and secondary packaging are all aspects that involve the retailer. The primary packaging, ingredients, efficiency of the product, and what happens to it after use all involve the consumer. In some cases, you can unilaterally make the changes needed, whereas in others it will involve agreement with the retailer or consumer education. What happens at the end of life is increasingly important as more attention is put on circularity and as we saw in a previous article waste is increasingly viewed as a valuable resource.

For those selling to retailers or providing components for big manufacturing companies to make final products you are likely to see demands coming up the chain for information about how you operate and manage your impacts. We are not just talking about environmental impacts here either, but the social aspects, such as fair pay and health and safety, are just as important to them as they represent risks to their brands and reputation.

Focussing on the supply chain

Turning to your suppliers now and it is really the same idea – you should be interested in

what is happening in your suppliers from an environmental and social perspective. There are significant risks to your business if a key supplier is facing increased energy costs because they have not invested in energy efficiency or moved to renewables, or because they have significant safety issues leading to them facing enforcement action that interrupts production. In addition to these commercial impacts there are also reputational risks, particularly if you are a well-known company or brand. When a story breaks about exploitative labour practices in a factory, it’s always the brand that they are producing the goods for that is in the headline.

We’ve seen in previous articles that suppliers are likely to be a significant part of your carbon footprint too, particularly if you are a manufacturer or retailer. Your ability to meet your targets is going to be very dependent on what happens with suppliers. And as more focus comes on the biodiversity crisis, you are going to see more interest in the impacts on nature in your supply chains too. This isn’t just voluntary either, the Modern Slavery Act in the UK has required companies in scope to make declarations about their supply chain for several years and in the EU, the Corporate Sustainability Due Diligence Directive (CSDDD) became law this year and will start to apply from 2027, forcing companies to “identify and address potential and actual adverse human rights and environmental impacts” in their value chains.

How to engage your supply chain

This may all be starting to feel overwhelming, so how do you approach all of this with suppliers? Well firstly you don’t need to consider all suppliers. Most companies will have a wide range of suppliers but there will be a relatively small number that account for the majority of your spend. These should be your initial focus. You may already have a definition of “key suppliers”, or “critical suppliers” not based just on spend, for instance a supplier who is the only source of a particular raw material or component. It’s worth adding these to the initial list too. So now you have a list to start to consider engaging with, but what is it you want to know?

Different companies will come at this differently depending on what issues they see as material, so there is no one size fits all here. But typically, there are two big drivers: human rights and climate. Nature and biodiversity are coming up the agenda quite quickly too. Usually, the desire to get human rights information from suppliers is one of risk avoidance whereas for climate it is usually hard data on emissions to feed into your reduction plans.

Either way before you start to engage with suppliers start by asking what you are going to do with the information you get back. Are you just logging information so that if there is an issue you can point to the fact that you did your bit and asked suppliers, are you going to use it to assess your suppliers’ current performance and help them to improve, are you going to use it in future supplier selection and deselect suppliers who don’t comply? On climate data, do you just want reassurance that they are signed up to something like SBTi targets, are you looking to get their scope 1 & 2 information or their upstream scope 3 too? How will you verify the data you get? How will you integrate it with average industry data you already have? Will you include emissions reduction requirements in your contracts? Thinking through these sorts of questions will help you frame the questions you want to ask your suppliers, and usually, the starting point is to send out questionnaires.

In addition, think about the ones you are likely getting from your customers. You are already probably getting multiple requests, all in different formats and asking slightly different questions, all of which takes a lot of time to answer. Can you make things easier for your suppliers? Has your industry association pulled something together than you can use or if not, can you start the ball rolling to coordinate requests across your industry? After all, you don’t want to add lots of costs for your suppliers and nor do you want poorly thought through replies.

Whichever course you take it is worth piloting with a few suppliers first, talking to them upfront and getting feedback on the process afterwards. When you roll out further you could consider setting up a webinar for all suppliers to explain what you are trying to do and why, and what’s in it for them. On the latter point you’ll need to decide how much is carrot and how much is stick, but for a lot of smaller suppliers this could be, for instance, about giving them access to help reduce emissions through idea exchanges or simple education. If you have done a lot of work reducing your scope 1 & 2 emissions for instance, sharing this to inspire action in their operations can be a powerful place to start.

Supplier engagement, indeed value chain engagement overall, is not a quick fix and you should view it as a multi-year programme. The type of suppliers you have, how far back into the value chain you go, and the influence you have given your purchasing power, will all influence what you can hope to achieve. It’s an area that is definitely worth benefiting from others’ experience, and using someone like CEN Group as a partner can really help. At the basic level, your work can help give reassurance on potential risks to you and your stakeholders, but it can be so much more, helping reduce impacts along the value chain and sharing knowledge and experience to improve businesses and create real commercial value.

About the Author

Chris is a senior strategic leader with over 25 years’ commercial experience including sales, marketing, strategic planning and major business change initiatives at AkzoNobel and ICI. He has a wide knowledge of sustainability and how to integrate this into business having held senior sustainability roles at AkzoNobel for 12 years, including as Global Sustainability Director Decorative Paints and AkzoNobel Planet Possible Programme Manager. Chris is now an independent sustainability consultant and a pension trustee director.