Companies across the board are contending with the impacts of inflation—and many are pushing aside their ESG commitments in the struggle to stay afloat.
“Inflation is causing a lot of trade-offs to be made against other priorities, including sustainability and broader ESG objectives,” Alex Saric, smart procurement expert at Ivalua, a cloud-based spending management solution, told Sourcing Journal.
The company’s most recent study, conducted in concert with Sapio Research in July, surveyed 850 procurement leaders from companies in the U.K., Germany, France, Sweden, the Netherlands and Italy. Saric said the results “demonstrate the difficulty that most have in balancing different, and often competing, priorities.”
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As inflation lingers, down significantly, but not totally, from its peak last summer, 90 percent of companies surveyed by Ivalua reported related business impacts, including supply chain disruption. More than three-fifths (64 percent) said the higher cost of doing business has hampered their efforts to become more sustainable, including engaging in activities to reduce carbon emissions, and a near-equal number said that inflation has impacted their ability to implement fair labor standards across the supply chain.
With margins growing thinner, concerns about the bottom line are trumping sustainability goals, Saric said, adding, “Once something becomes front page news, and top of mind for that organization, everything else seems to get sidelined.” More than half (57 percent) of survey respondents said they have been working with cheaper, rather than more environmentally conscious, suppliers, as a result of rising costs. More than one-quarter (26 percent) said they now weigh cost more heavily in supplier selection than they did in the past, and 50 percent have narrowed their focus to cost cutting as well as operational efficiency (40 percent).
Tightened budgets have driven some of the supply chain inefficiencies that brands are seeing, Saric added. “Payments are becoming a big issue for suppliers, compounded by rising interest rates and the cost of borrowing,” he said. “There is a lot more is pressure on suppliers and everyone’s dealing with in different ways, which is causing stretching and different issues with delivery and ensuring reliability of supply.” Smaller suppliers are especially vulnerable, as they typically have less cash on hand and depend on large contracts to invest in their business operations.
Meanwhile, 86 percent of businesses reported disruptions caused by the heightened cost of energy and fuel, and 84 percent pointed to rising prices on raw materials. The war in Ukraine is still causing bottlenecks in European organizations’ supply chains, according to 83 percent of survey respondents from France, 82 percent of those from Italy and 79 percent of those from Germany.
“Many organizations are also onshoring supply chain operations to reduce risk from geopolitical disruptions,” Saric said, “but those opting to onshore must keep some diversity in the risk profiles of their supply chains to reduce the impact of local disruption.”
Despite their preoccupations with cost, brands are well aware of the mounting regulatory pressures surrounding supply chain transparency, including mandatory reporting—and many feel ill-equipped to comply with new legislation, Saric said. “[Regulations are] a growing fact of life—we’re not in the laissez faire 1980s anymore.”
From the German Supply Chain Act, which requires that companies undergo human and environmental risk analysis, to the U.S. Securities and Exchange Commission’s proposed rules for climate disclosures, governmental interest in driving sustainability and cracking down on unfair labor standards is “creating an entirely new level of uncertainty” for organizations that are not used to tracking, much less reporting, their impacts. “This will leave organizations at risk of missing net zero targets, greenwashing, and failing to meet ESG regulatory requirements,” he said.
Procurement departments tasked with sourcing and costing have not been sufficiently empowered to focus on developing compliant supply chains or stringent sustainability reporting, Saric added. The current economic landscape has led organizations to prioritize cost-cutting, and many don’t have the flexibility built into their operations to build reporting into their procurement processes. “Agility and being able to change how companies operate and modify their systems on the fly is increasingly important,” he said. “The only certainty is uncertainty going forward, and that I don’t see that abating.”
