Transcript
You're listening to Supply Chain from KPMG, a KPMG podcast series that addresses your supply chain needs from strategy to execution.
Mary Rollman: Hello and welcome to the KPMG supply chain podcast. My name is Mary Rollman, and I lead supply chain at KPMG. Our topic today is ESG and supply chain, or better, can supply chain leverage ESG to create value for the organization? I'm joined by the lead of ESG for the supply chain organization at KPMG, Blythe Chorn. Blythe, would you like to introduce yourself?
Blythe Chorn: Thank you Mary, happy to be here today. My name is Blythe Chorn, and I lead supply chain ESG at KPMG. I've been in the space for nearly 20 years, helping our clients to identify ways to improve supply chain performance, identify efficiencies and drive resiliency in the supply chain through improved ESG performance.
Mary Rollman: Excellent. Well, why don't we build on that introduction Blythe because I think with our executives that are listening today the question is, why should ESG be a top priority or top of mind issue for supply chain executives? Do you have a thought about why?
Blythe Chorn: Definitely. You know, it's a really interesting question right at this moment in time in particular. When I first started in this space a lot of the reason that supply chain executives cared about ESG issues really came down to reputational risk, challenges around poor labor rights, in the supply chain in particular, and how that reflected on the reputation of a company. That understanding, I think, has evolved significantly in the last 20 years. Today we face a completely different environment where we see in our clients’ organizations is that supply chain leaders who may have never thought about ESG before, are really faced with a number of new regulations that are forcing them to think about compliance with ESG expectations in their supply chain. So, an example of this would be the Uyghur Forced Labor Protection Act here in the US. The UFLPA regulation that sets restrictions on sourcing raw materials from the Uyghur region in China because of the concerns about forced labor in that region. and we're seeing that the US Customs Protection Agency is enforcing that regulation by actually seizing imports coming into the country and creating delays in supply chains of up to 6 months before documentation can demonstrate that materials have not come from that region of China. And so, what we're seeing is supply chain executives are having to think about issues such as forced labor, but also climate change and
emissions, water use, child labor, a plethora of ESG topics that may feel quite unfamiliar to them but are having real impacts on their ability to remain compliant and keep their supply chains moving. But also are impacting costs, on-time delivery, and suppliers’ financial performance and resiliency. And so, because of the regulatory environment that we're in today, but also because of what we've learned over the last 20 years in terms of how some of these ESG issues ultimately impact suppliers, reliability, resiliency, ability to meet inventory plans and on time delivery expectations these topics are really becoming top of mind for supply chain executives.
Mary Rollman: I imagine we talk a lot about risk when we talk about supply chain. Supply chain leaders every day are managing risks, large, huge risks, smaller risks. I'd love to hear from you more about what companies are doing to manage some of these risks that seem to happen slowly and then suddenly.
Blythe Chorn: Certainly I think the regulatory risk that I mentioned is top of mind across supply chain leaders. And I think there is a sense amongst the executives that we work with, that those risks are exactly as you described, Mary, kind of slow and in the background. And then all of a sudden, the new regulation passes, and we have a fast phase in period, and it becomes top of mind very quickly. But we're also seeing a number of other different types of risks emerge in the supply chain that are becoming more frequent, perhaps harder to predict and creating bigger impacts in the supply chain. And I'm thinking of some of the geopolitical risks for sure that we've all been working through over the last few years. But also risks related to labor. We're starting to see labor migration as a result of climate change and the increasing difficulty of living in certain regions of the world resulting from climate change. And that becomes a challenge then for suppliers who are located in these regions to find and access the right labor which is creating risks again of resiliency and the ability to meet buyers’ expectations. We're seeing risks associated with energy sourcing. I give it the example often of Vietnam, where we have a lot of electronics and apparel sourcing happening. But that country is largely dependent on hydropower, and as a result of climate change we've seen significant droughts in Vietnam over the last few years that are creating a negative impact on the country's ability to rely on hydropower and creating more and more electrical grid instability, which means fundamentally, plants and manufacturing facilities are not able to operate at full capacity and to plan, and that's creating real delays in the supply chains of the apparel industry and the electronics industry. So, there's a lot of risk that is emerging, that we haven't thought about traditionally.
Mary Rollman: Yeah, a constant, a constant management activity for supply chains. So Blythe, you've mentioned risk and risk management as one of the priority areas for supply chain leaders. But also in there you mentioned regulations. And my question is, can regulations really do it alone? Meaning can it really have the impact that it should have by just putting new rules for companies to follow? Or is there an element of ownness that supply chain leaders should be taking on when it comes to some of these ESG initiatives, and what some may say, doing the right thing.
Blythe Chorn: No, it's a great question, because certainly I think the regulations can make us as supply chain leaders more aware of some of the risks in the supply chain and bring these topics to be top of mind for us. But if all we're doing is thinking about ESG from a regulatory perspective and something to be compliant with, I think we're leaving a lot of value on the table. So, my hope and expectation in the market is that we start to see that that this regulatory push starts to open up new opportunities line of sight to new opportunities for supply chain leaders, and I'll give a couple of examples of where we're seeing this happen. So, one we're seeing a large push from a regulatory perspective towards greenhouse gas emissions reporting. And there's a lot of questions about how fast this will move, and exactly which agencies around the world will mandate it. Certainly the EU has been very forward looking and requiring Scope 3, which is value chain emissions reporting, and we have some emerging regulations in the US on the same topic.
What we're seeing though, is that in better understanding suppliers’ greenhouse gas emissions performance, buyers are able to identify opportunities for increased energy efficiency which translates directly into cost efficiency. So when you look at a handful of suppliers’ greenhouse gas footprints, and the data that they're providing to enable you to comply with those regulations for reporting. It's also an opportunity to look at that data and say, where do I have outliers? Where do I have a supplier who looks like they have a footprint that is significantly larger than their peers and let us go talk to them about why. And what we find is there are tremendous opportunities in supply chain still for very basic energy efficiency work to be done, things like changing out air compressors and HVAC systems to more energy efficient systems and updating old systems, Another example of how we're seeing these regulations create value is in the idea of supply chain visibility. So, there are a number of regulations that are emerging globally, the UFLPA that I mentioned being one, but also regulations out of Europe, and other geographies that are requiring more due diligence in the supply chain to really understand where materials are being sourced from, and what the social and environmental conditions are associated with that production and movement of goods and products. What that those requirements lead to is better visibility into the supply chain, a better
understanding of not just who your tier 1, or even your tier 2 suppliers are but all the way back to farm or field or raw material extraction. And while that's very challenging to do, and we really don't have a silver bullet in the marketplace yet in terms of how to get that visibility, understanding where there might be risks and doing that supply chain mapping with supply chain partners to build that transparency really opens up the door for better efficiencies in the supply chain again. So I often talk to my clients about, even if all of these regulations went away tomorrow, who doesn't want better visibility into the supply chain? There's opportunities that we found for logistics, efficiency and load sharing. There's opportunities for vertical integration. There's opportunities for better risk management when we understand that while we have good diversification at tier 1 and tier 2, we may have real consolidation and a real risk at tier 3 or tier 4. Without that visibility we can't manage that, right? And so these regulations are really opening up the door for us to really improve how we operate the supply chain more broadly and find more efficiencies and more value.
Mary Rollman: Well, Blythe, the role of a supply chain leader is certainly not getting any easier, is it? There's always more value to capture, more risk to manage, more regulations to work through. So I want to thank you, Blythe, for taking the time today to talk to me. And I want to thank our listeners for taking the time to learn more about supply chain at KPMG. For more information about this topic or any other supply chain topic, you can check us out at KPMG/supply chain. And that's all we have for you today.
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