Sustainable supply chains: why placing ethics over profits pays off

The race to be ethical used to be clearly led by "born-green companies" - organisations that from day one prioritised corporate social responsibility (CSR) in their supply chains.

Lush, the UK-based handmade cosmetics firm, is one such company. Founded in 1995, it now has over 800 stores worldwide, uses factories in more than 40 countries and saw sales of £321m in 2010/11. It's no surprise that Lush is often cited as example of why ethical supply chains and financial success aren't mutually exclusive.

In contrast, larger corporations have a much harder time convincing a cynical public that their social and environmental credentials haven't been lifted off the back of the nearest bandwagon. Even with the best of intentions, the sheer size of a major corporation's supplier network - sometimes involving thousands of suppliers - makes it hard for them to make quick, effective and transparent improvements.

Lush has calls its supply chain approach "creative buying", where a business looks beyond lowest price and bottom line, and instead buys the best, safest and most suitable products in accordance with their ethics.

To do this, companies can't only look at what they buy and the associated cost. They need to also be comfortable with those from whom they buy. Organisations should seek assurances that their suppliers are also firms with an ethically sound CSR policy. Clear and transparent CSR programmes allow a level of trust to be built into the supply chain for both the purchaser and supplier.

Green policies aren't about appearances, marketing and sales. A credible environmental CSR policy places supply chain processes and practices at its heart. Doing so can reap a whole range of benefits from reduced transport costs, less waste, increased efficiency, lower material costs and even access to government incentive programmes.

But this is the area where the largest disconnect between intentions and actions often exist. It's far simpler to change branding and marketing - and present a company as environmentally and ethically aware - than it is to reconfigure or rebuild an entire global supply chain.

To deliver on the promises made in CSR policies, companies need to effectively monitor performance. However, this is a massive task and research from Procurement Leaders has shown that firms do not have structures in place to ensure their supply chains hit standards, with many companies relying on suppliers themselves to self-audit. A firm may talk about a sustainable supply chain, but if they aren't auditing their suppliers how can they back up their claims?

When an organisation gets things right, however, the rewards can be substantial. For example, in 2010 PepsiCo uncovered over $60m in energy-saving opportunities as a result of a carbon management and energy assessment programme it undertook with its suppliers.

Effective auditing not only sends a strong message to suppliers, it increases transparency and helps identify problems that need remedying. Whilst the cost of a thorough auditing process may seem prohibitive in the short-term, the long-term benefits of a well-designed process will almost always pay off.

There are inevitably pitfalls on any path, however worthy and while customers may want more green options, they may not always like the resulting product.

SunChips, a US crisp manufacturer, had to withdraw most of its environmentally sound packaging just 18 months after launch as customers complained about the new noisy bags and sales dropped by 11%. For most of its products, non-recyclable bags were brought back. Consumers often want green as an added value to what they are buying, not as a substitute for something else (in this case a quiet crisp packet).

The internet and social media leave almost no dark rocks for corporations to hide under. Supply chains and their ethics are firmly in the spotlight and will rightly remain so. Those firms that water the shoots of green growth we've seen in recent years will be amply rewarded and not only in reputation, but also on the balance sheet.

Tom Seal is head of research at Procurement Leaders Network.

This content is brought to you by Guardian Professional. Become GSB member to get more stories like this direct to your inbox