What Board Members Need to Ask Management About Supply Chains
To put it mildly, it hasn’t been an easy time for anyone in logistics. The COVID-19 pandemic continues to keep supply chains tangled, and risks, including extreme weather events, have begun to look less like outliers and more like harbingers of an unpredictable future.
It’s unsurprising that a world beset by unprecedented levels of health and environmental risks is becoming inhospitable to the supply chains on which businesses have relied for decades. Board members have a duty to face up to the reality of today’s unsustainable supply chains. A recent international survey of senior decision-makers revealed supply chain disruptions cost companies an average of $184 million annually, with U.S.-based companies feeling an even bigger pinch with average annual losses of $228 million attributed to supply chain issues.
But, while the current challenge is daunting, board members should be encouraged by the emergent best practices on developing sustainable and resilient supply chains. The best path forward remains making sure management adopts and executes a new plan for supply chains that is appropriate for each enterprise.
Sustainability and resilience
Before any board member can start asking management the right questions, they must first understand the two priorities nearly every business has for its supply chain: sustainability and resilience.
Sustainability usually refers to how well the current supply chain adheres to widely accepted standards of ESG that allows it to function into the foreseeable future. While a comprehensive, set-in-stone standard on which everyone agrees doesn’t yet exist for every ESG metric, some common sense applies. If a vendor engages in exploitive labor practices or improperly disposes of environmental waste, they harm the sustainability of a supply chain because neither of those actions are tenable in today’s world, let alone the world of the future.
Resilience describes how vulnerable a supply chain is to disruption. Anyone who has tried to purchase a computer, a piece of furniture or any other consumer item suffering from a COVID-19 pandemic-related shortage knows the importance of supply chain resiliency. But building and strengthening supply chains remains difficult and the goal of fully eliminating risk is both costly and impractical. One thing that is clear is that there’s often no one-size-fits-all solution. For example, having redundant production facilities might protect a supply chain from disruption if a tsunami wipes out a factory that has a backup, but it doesn’t help much if pandemic safety measures limit how many workers can unload shipping containers at a dock.
The good news for board members is that the twin goals of sustainability and resilience rarely conflict. While these two concepts share plenty of DNA when it comes to execution, they are different enough that enterprises will have to occasionally strike a balance between the two when managing supply chains. As such, board members need to make sure that the supply chain management plan they adopt pursues both goals, and not just one.
Asking the right questions
How can board members make sure management keeps the business on track for both sustainability and resilience? Asking themselves and management a few specific questions is a great place to start the conversation.
How is management driving transparency and visibility?
Understanding where to improve supply chain management starts with having clear, agreed-upon metrics that encompass all relevant players in the supply chain. That means management should not only have a handle on how the company measures sustainability and resilience, but also how each vendor in the supply chain does so. Of equal importance is the diversity of the suppliers themselves — a sometimes tricky proposition since boards naturally have less control over vendors than their own enterprise.
Technology can help keep everyone on the same page with, for example, a shared platform tracking metrics and key performance indicators, often in real time. The right technological solution can also give the board insight into what parts of the supply chain are most vulnerable to a disruption. By leveraging emerging technologies such as AI forecasting, blockchain and robotics, companies can help build supply chains with the nimbleness and resiliency to meet future challenges.
Another board transparency concern involves employees and the public, particularly when it comes to supply chain sustainability. The spotlight shines brighter than ever on the effect supply chains have on both the natural environment and societal issues. According to a recent EY Future Consumer Index, 47% of consumers surveyed consider the negative production costs (either social or environmental) when making a purchase decision and 42% of respondents will only buy from brands that align with their personal values, even if that means switching from well-known brands.
Making sure management has a plan for promoting sustainability wins helps dispel worries among consumers (as well as investors and employees) that the business is lagging in an area that carries a great deal of importance with the public.
How can the enterprise close the “say-do” gap?
Once the board and management agree on how to ensure transparency and visibility, they need to work together to help ensure the company performs the work required to meet its supply chain management goals. Board members should keep management focused on the big picture: does the C-suite understand the expectations of stakeholder audiences? Are they attuned to the sustainability and resilience commitments the company has made? Are proper mechanisms in place to manage the risks that exist? It’s important that they ask these questions without micromanaging the executive team.
Closing the “say-do” gap is simple in concept — make sure the enterprise makes measurable progress toward the sustainability or resilience goals it has set. However, in reality, it often trips up boards and management alike, particularly with regards to sustainability. That’s because many companies (rightfully) understand the importance good environmental stewardship carries with government regulators, investors and the public at large, and fall into the trap of viewing their sustainability goals solely through the lens of public perception. But when boards and management get carried away with grandiose goals that outstrip their capabilities, it turns the “say-do” gap into a chasm that diminishes a company’s credibility. Board members can help avoid this by pegging sustainability goals to an honest assessment of the company’s capabilities, something they can only accomplish through clear, constant communication with management.
Does the board know what questions to ask?
Last (but certainly not least), board members should assess whether they possess the collective knowledge to hold management accountable. There’s no shame in board members admitting they lack experience in a subject as complex as supply chain management, especially when plenty of options exist to level-up a board’s ability to oversee supply chain sustainability and resiliency.
Individual board members can avail themselves of business school classes on end-to-end supply chains, for example, or work with external advisors who can help the board solve the supply chain issues specific to their company. In some cases, members may want to include a supply chain expert on the board itself. This makes the most sense when the company oversees a complex supply chain with hundreds of vendors spanning the globe, since the board will likely face frequent and unique supply chain challenges.
If these questions share a common theme, it’s that board members and management need to embrace a culture of complete honesty and transparency with each other about their supply chain sustainability and resiliency vulnerabilities. The increased scrutiny of how companies impact the environment and communities they touch, combined with the pandemic’s massive disruption, has elevated supply chain management and investment to an existential problem. Board members have a fiduciary responsibility to make sure management has a plan in place — and asking the right questions will help ensure everyone stays on track while meeting these goals and building more resilient and sustainable supply chains for the future.
Amy Brachio is an EY Global Business Consulting Leader. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.