What is Sustainable Sourcing in Supply Chain Management?

Sustainable sourcing offers a comprehensive approach to procurement that integrates environmental, social, and economic considerations into the process of obtaining goods and services. It involves selecting and working with suppliers who meet specific sustainability criteria to minimize adverse environmental and societal impacts while maintaining economic viability. 

There is a growing emphasis on sustainable supply chains as consumers and regulators increasingly demand sustainable goods. According to a study by PwC, 80 percent of consumers are willing to pay around 10 percent more for goods that meet specific environmental criteria, including local sourcing, use of recycled or eco-friendly materials, and delivery through supply chain with a low carbon footprint. 

This article provides an in-depth look at sustainable sourcing and explains how the Master of Science in Supply Chain Management Online at the University of Tennessee, Knoxville’s Haslam College of Business can prepare learners to adopt sustainable sourcing practices in their organizations. 

Consider the Key Components of Sustainable Sourcing

Sustainable sourcing involves choosing suppliers that prioritize these factors: 

• Environmental responsibility: Sustainable sourcing practices favor suppliers who aim to reduce the environmental impact of their production facilities by decreasing their carbon footprint, protecting biodiversity, using eco-friendly materials, and minimizing waste. 
• Social responsibility: Sustainable sourcing involves obtaining goods from socially responsible suppliers. These organizations uphold fair labor practices, ensuring safe working conditions and reasonable wages. They strive to protect human rights and support local communities. 
• Economic viability: Sustainable sourcing balances environmental and social responsibility with financial viability. This means seeking providers who provide competitive pricing, advocate for fair trade, and contribute to long-term supply chain resilience. 

What Are the Benefits of Sustainable Sourcing?

Organizations can realize three core benefits by adopting sustainable sourcing: 

• Business growth and innovation
• Cost savings
• Improved brand reputation
• Risk mitigation

Brand Benefits

Incorporating sustainability in the supply chain offers significant brand perception benefits that directly impact a company’s market position and customer loyalty. Consumers increasingly prioritize environmentally and socially responsible businesses, making sustainability critical for a business to remain competitive. Gen Z (born between 1997 and 2015) and Millennials (born between 1981 and 1996) make up a significant portion of global consumers and are the most likely to make purchase decisions based on social and environmental values. According to the PDI Business of Sustainability Index, 91 percent of Gen Z say they want to buy from sustainable companies, and 77 percent will pay more for sustainable products and services. 

Businesses across industries have announced new sustainable initiatives, resulting in brand reputation benefits. Kohl’s Department Stores have implemented a full slate of sustainability policies, publicizing them on their website to ensure public awareness. Data and AI solutions giant SAS has made sustainability an integral part of its brand identity.

Risk Mitigation

Sustainable sourcing can help businesses mitigate risks related to environmental regulations and supply chain disruptions caused by climate change. Sourcing from environmentally and socially responsible suppliers helps companies comply with evolving regulations and avoid reputational damage from human rights abuses or environmental destruction scandals. Sustainable sourcing practices contribute to mitigating physical climate change risks, like extreme weather events and long-term climatic changes, as they encourage climate-resilient practices (e.g., regenerative agriculture, responsible forestry). 

In addition, businesses can become less vulnerable by diversifying suppliers and reducing reliance on single-source or high-risk regions. For example, an agri-food company facing water scarcity in one area can develop redundant suppliers in different locations, enabling them to “load balance” and compensate for potential disruptions.

Cost Savings

Many businesses are wary of implementing sustainable procurement practices due to the potentially higher cost of sustainably sourced raw materials. However, research from the World Economic Forum shows that sustainable sourcing practices in supply chains can actually reduce costs by up to 16 percent. The Harvard Law School Forum on Corporate Governance also recognizes a sustainability dividend. Sustainable sourcing can help a business achieve long-term savings due to:

• Increased energy efficiency: Energy-efficient technologies can significantly reduce manufacturing and transportation costs, ultimately impacting product and service pricing. 
• Waste reduction: Sustainable sourcing allows businesses to reduce waste in many ways, such as reducing air shipping by placing purchase orders in time for ocean shipping and consolidating shipping to use Full Container Loads (FCL) instead of Less-than-Container Loads (LCL). These efforts ultimately lead to cost savings.  
• Better resource management: Sustainable sourcing practices can help businesses manage resources more efficiently, leading to cost savings. Strategies include optimizing raw material acquisition, accurately forecasting demand, and ordering only what is needed to avoid the costs associated with understocking or overstocking. 

According to MorganStanley, companies recognize that sustainable policies create long-term value.

How Organizations Can Implement Sustainable Sourcing Practices 

Businesses worldwide are looking to improve their sustainability. However, according to McKinsey, green steel, recycled plastic, and other materials with low emissions intensity are already scarce and will become even more challenging to find. This increases the urgency of implementing sustainable sourcing practices; companies will increasingly seek professionals to help them develop sustainable sourcing strategies. Earning an MS in Supply Chain Management from UT can help prepare you to meet this need. 

Supply chain managers and business professionals with supply chain expertise can help organizations shape their sustainable sourcing strategies by: 

• Assessing current procurement practices: The first step in implementing sustainable sourcing is evaluating the business’ current procurement practices to understand the impact of its sourcing decisions. This information can be used to identify areas for improvement. 
• Setting clear sustainability goals: Once the organization knows how to improve, set specific, measurable objectives. For example, you could set targets to reduce the business’ carbon footprint. 
• Evaluating suppliers: Evaluate all the business’s current and future suppliers based on their environmental and social performance. 
• Building collaborative supplier relationships: Working with suppliers is key to achieving sustainable procurement goals. Supply chain managers can help by ensuring suppliers understand what is expected of them and working with them to identify opportunities and address any challenges. Some businesses also incentivize sustainable practices by offering financial rewards or preferential contract terms. 
• Use technology to ensure transparency: Organizations can use various tech tools, such as blockchain and artificial intelligence, to track and manage their supply chains, improving visibility and traceability. 

Challenges in Sustainable Sourcing 

Sustainable sourcing is critically important in today’s business landscape. However, supply chain management professionals must be ready to mitigate several key challenges. 

• Limited supply of “green” materials: According to McKinsey, production capacity for many low-emissions materials is expected to fall far short of future demand. This will negatively impact businesses that have pledged to reduce their supply chain emissions, as they will either have to pay a premium for green materials or risk falling short of their targets. 
• Global supply chain complexity: Modern supply chains are inherently complex, involving multiple suppliers, manufacturers, and stakeholders worldwide. This makes it difficult for procurement departments to ensure traceability and gauge suppliers’ actual sustainability performance, which, in turn makes it difficult for sourcing departments to monitor their organization’s overall sustainability performance. 
• Trade-offs between cost-effectiveness and sustainability: While sustainability tends to pay off in the long term (as explained above), organizations often have to pay more for goods and services in the short term to reach their goals. 

Case Studies in Sustainable Supply Chain Management 

TIME Magazine and Statista recently created a methodology to measure the world’s most sustainable companies in 2024. The organizations at the top of the list have made significant strides in cleaning up their supply chains and building their businesses around a sustainable model. 

Schneider Electric, ranked first on the TIME list, has set the ambitious target of achieving carbon neutrality by 2025. Schneider Electric manages its own sustainability impact program to monitor its performance and has also decreased emissions throughout its supply chain. The company assists its customers in lowering emissions and enhancing energy efficiency through its Sustainability Business.

Meanwhile, US biotechnology company Illumina recently launched its most powerful gene sequencer, reducing packaging waste by 90 percent compared to the previous model. Italian luxury fashion house Moncler ranked third on the list for using recycled materials, recycling over 80 percent of its nylon scraps in 2023, and utilizing 100 percent renewable energy at its directly managed offices, stores, factories, and logistics hubs. 

Future Trends in Sustainable Sourcing 

The sustainability space is constantly evolving. Key future trends to look out for include: 

• More stringent regulatory requirements: Regulatory shifts are significantly driving sustainability changes. In the US, the Trump administration may roll back or eliminate many regulations—it recently announced it would not enforce an SEC rule requiring public companies to disclose climate-related risks in annual reports, for example. Even so, long-term trends should move toward increasing regulation as the devastating impact of climate change escalates. Expect additional regulation worldwide and at the state level (e.g., the California Climate Disclosure Regulation). 
• Advancements in sustainable materials: Companies are increasingly focusing on developing and adopting eco-friendly materials that can significantly reduce environmental impact. Examples include green building materials like Hempcrete, a bio-composite building material that combines the inner woody core of the industrial hemp plant with a lime-based binder. Meanwhile, shipping companies are looking to greener fuel sources, like liquefied natural gas and hydrogen, to reduce their carbon footprint. 
• Greater emphasis on the circular economy: There is an increasing shift towards products and processes that reduce waste by reusing, refurbishing, or recycling products and materials, creating a circular economy. However, supply chain professionals and leaders must be wary of companies “greenwashing,” i.e., falsely presenting themselves or their products as environmentally friendly in line with global trends. For example, retailer H&M is being sued for “false and misleading” sustainability marketing. According to the lawsuit, H&M created the illusion “that old clothes are simply turned into new garments, or that clothes will not end up in a landfill,” which is misleading, as “recycling solutions either do not exist or are not commercially available at scale for the vast majority” of the company’s products.

Businesses are increasingly prioritizing sustainable sourcing to meet customer and regulatory demands, reduce risk, and ensure long-term profitability. However, sustainable sourcing is a complex process, with various challenges and risk factors to be aware of. As such, organizations increasingly need supply chain professionals with the knowledge and expertise to advocate for and drive the adoption of sustainable sourcing practices. 

UT Knoxville’s Global Supply Chain Institute offers pathways for supply chain professionals to advance their sustainability knowledge and efforts through programs such as the online MS in Supply Chain Management. If you’re looking to advance your career and become an advocate for sustainable sourcing practices, contact the UT enrollment team to learn more about the online supply chain management master’s program and how it can help you reach your career goals.