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How ethical sourcing can improve supply chains
Ethical sourcing can benefit supply chains, as it ensures suppliers' accountability and transparency, aligns with ESG goals, drives customer satisfaction and minimizes risks.
Nearly all organizations require goods and services from other businesses to fulfill their mission, whether it's a manufacturer making physical goods, a retailer selling apparel or a nonprofit distributing food.
Organizations must source those required goods and services, relying on their sourcing strategies to align how they procure those goods and services with their objectives. They consider multiple factors when sourcing, giving varying weight to the supplier's cost, quality, reliability, location, business practices, risk and more, to decide whether to use that supplier.
Some organizations also consider whether a supplier meets certain ethical standards -- a practice known as ethical sourcing. It requires organizations to select suppliers based on standard criteria, such as cost and reliability, as well as on ethical issues, including their labor, environmental and community practices.
While ethical sourcing ensures that suppliers meet certain ethical standards, it can also bring significant business value, including greater supply chain transparency, improved accountability and increased resiliency.
"Ethical sourcing is both a set of practices and a strategic perspective on how you're going to engage your supply chain to deliver value for customers," said Daniel A. Pellathy, faculty of practice with the Haslam College of Business at the University of Tennessee-Knoxville and director of operations for its Advanced Supply Chain Collaborative.
Organizations committed to ethical sourcing typically consider a supplier's commitment to environmental, social and governance (ESG) goals. Yet, they also want to see the supplier engage in fair labor practices, respect human rights, demonstrate integrity and positively affect the communities where it operates.
"It's the idea of optimizing or really delivering on our sustainability and ESG goals through our procurement process and our engagement with suppliers," said Laura Rainier, senior director and analyst at Gartner. "How do we ensure our ESG and sustainability goals are represented and achieved through our supplier engagement and supply chain work?"
The business value of ethical sourcing
Organizations decide to pursue an ethical sourcing strategy for various reasons. These drivers include the following:
- Regulatory and legislative pressure. "Those have significant impact. Those really do change behavior," Pellathy said. He pointed to the EU's Corporate Sustainability Due Diligence Directive as one such pressure.
- Organizational culture and goals. Organizations that look for more innovation, improved visibility and stronger partnerships with their ecosystems often turn to ethical sourcing to achieve their objectives.
- Customer expectations. For example, 80% of consumers said they were willing to pay more for sustainably produced or sourced goods, according to PwC's 2024 Voice of the Consumer survey.
- Corporate expectations. Many companies, due to their own regulatory requirements or customer expectations, seek business partners who can adhere to ESG and other ethical standards. This means those business partners show that they, their partners and suppliers meet expected standards. Investors, too, look for companies that can demonstrate they pursue ethical sourcing standards as investors see them as good bets, Rainier said.
These drivers lead to benefits, which increase the business value of ethical sourcing. These benefits include the following:
- Reduced customer backlash. "It is clear when a company breaches customer expectations of how the company should behave, customers will punish you. And those kinds of exposures do have costs -- costs to shareholders and costs to companies as well," Pellathy said.
- Minimized climate risks. Ethical sourcing's focus on environmental conditions can cut risks associated with climate events and climate change, Rainer said.
- Reduced potential for disruption and reputational harm. Suppliers with fair labor policies, good governance, compliance with regulations and international standards, and more are at lower risk of worker strikes, regulatory action and negative attention.
- Supply chain agility. The visibility from tracking supplier data for ethical sourcing lets organizations see options if and when they need to pivot.
- Promotes innovation. Ethical sourcing shakes up the norm and forces organizations to look at their entire production stream from a different angle, Pellathy said.
- Fosters long-term success. Ethical sourcing requires commitment to working with suppliers over time to achieve ESG and other goals. This pushes organizations out of a short-term, transactional mindset into one that considers the long-term sustainable value of the company, Pellathy said.
- Improved resiliency. When combined, these benefits improve an organization's resiliency, according to Mark Thomas, president of Escoute Consulting and Hall of Fame member with the governance association ISACA. Improved resiliency is perhaps the most significant business benefit of ethical sourcing.
"From a business perspective, it's reinforcing the foundation of your house before the storm hits," Thomas said. "Companies with ethical sourcing tend to have stronger controls, better labor practices, more stable operations. All that reduces disruptions, increases your competitiveness and enhances agility. You can make a left-hand turn quickly because of the visibility you have across suppliers."
Additionally, these benefits build upon one another. For example, ethical sourcing gives an organization more visibility into its supply chain, as it requires suppliers to provide more detailed information about their own actions and those of their suppliers. That visibility helps reduce risk, as organizations can more easily identify problem spots in their supply chain and ensure compliance with regulations. It also eliminates blind spots, which can build resiliency.
Meanwhile, sustainability objectives have fostered innovation and efficiencies. Suppliers seek to work in new ways that lessen their environmental impact and reduce resource needs -- and thus costs, Ranier said.
Common challenges
Devising, implementing and adhering to an ethical sourcing strategy can be challenging. Challenges include the following:
- Changing the organization's culture to make ethical sourcing a priority.
- Getting business leaders to support the work needed to succeed.
- Implementing the policies, procedures and tools required to support ethical sourcing, and support it at scale.
- Determining what data is required to ensure suppliers adhere to contractual requirements, then gathering and analyzing that data.
- Establishing what metrics to use to determine success.
- Integrating supplier management systems with other enterprise applications to digitally collect, analyze and report data on its ethical sourcing efforts.
- Committing fully to the strategy. "The real downside to doing something like ethical sourcing is if you don't do it with integrity, it's eventually going to catch up with you, and it will reflect poorly on you," Pellathy said. Organizations that don't deliver on commitments to ethical sourcing open themselves to charges akin to greenwashing.
How technology enables ethical sourcing
Organizations looking to implement or advance their ethical sourcing strategies can and should invest in tools to support those efforts, Pellathy said. He suggested that organizations consider using the shared value framework, developed by Michael Porter, an economist and professor at Harvard Business School.
Beyond that, organizations should update their existing supplier scorecards and supplier management systems to measure and track suppliers on the ethical metrics they want to encourage and enforce.
Organizations can also use AI and other analytical technologies to gain insights into the data they collect about their suppliers, Thomas said. Those insights can help organizations mature their ethical sourcing efforts.
Furthermore, organizations that want to significantly advance their ethical sourcing strategies and practices may consider implementing a blockchain-based application to track supplies and other data from end to beginning in an effective, secure and immutable way, Thomas said. Organizations can also create and use digital twins to test different scenarios, such as the business effects of switching from a noncompliant supplier to a new one.
10 ethical sourcing strategies to implement
Strategies for implementing an ethical sourcing strategy and best practices for ensuring success include these steps:
- Get executive buy-in for the ethical sourcing strategy, as well as the practices and policies required to implement it. "This is not a bottom-up activity; leadership has to lead," Pellathy said.
- Get support from leadership at all levels to ensure everyday actions in the enterprise align with the strategy, practices and policies.
- Establish clear standards and objectives for suppliers to meet based on the ethical commitments desired for the supply chain, Pellathy said.
- Determine how to track supplier performance against standards, objectives and metrics. Include them in regular reports, such as quarterly reviews. "You want to use metrics that influence decisions," Pellathy said.
- Integrate the organization's ethical sourcing strategy into its governance practices to ensure procurement policies, procedures and objectives align with enterprise goals, Thomas said. Misalignments, such as putting contract costs above all else, can lead to failures in ethical sourcing objectives. "For example, we may say we value every person and every organization in our supply chain, but then when we're in negotiations, we try to squeeze every penny out of them. We say we value you, but then we devalue you during negotiations," he said.
- Establish incentives to reward business decisions that support ethical sourcing. For example, reward procurement teams that secure supplier contracts that fulfill both business needs and the ethical sourcing strategy, rather than the lowest price or fastest delivery time.
- Similarly, create an enterprise culture that recognizes and rewards decisions that support ethical sourcing.
- Establish a chain of custody that contractually obligates suppliers to require certain standards from their own suppliers.
- Set a roadmap for improvement. "Have a real plan to go from where you are to where you want to be in terms of practice, data, reporting, growth and innovation," Pellathy said.
- Demonstrate the value suppliers get from their engagement with ethical sourcing strategies. The focus on ethical sourcing should also benefit suppliers, Pellathy said, so prepare to measure and report on how it helps suppliers, such as helping them grow their businesses.
Mary K. Pratt is an award-winning freelance journalist with a focus on covering enterprise IT and cybersecurity management.
