Embracing Sustainability Regulations: Strategies for CPG, Retailers, and Suppliers in a Changing Landscape

Proactive collaboration will be key to balancing compliance with these important initiatives while fostering a supportive environment for suppliers. Suppliers, by embracing efficient transformation strategies, can thrive within this new context, leading to enhanced sustainability practices across the industry.

The difference between the supply chain and the value chain lies in the part of the chain that is considered. The supply chain refers to the “upstream” part of the chain, encompassing the connection with sourcing and procurement. The value chain covers the whole lifecycle of the product, extending towards consumption and circularity angles. Sustainability-related regulations are pushing companies to better track and control the whole value chain, and this has not only strong implications for CPG and retailers but also represents an increasingly serious set of requests for their suppliers.

Starting in the EU, ESG regulation will be a key topic for CPG companies and retailers in 2024. The European Green Deal and Circular Economy Action Plan focus on carbon emissions, sustainable sourcing and packaging waste, with a great emphasis on circularity. Any of these angles clearly show the need for information flowing from the supplier. Whether it´s proving and certifying the sustainability of specific materials, ingredients or manufacturing methods (wood product been harvested from a sustainably managed forest, raw cotton grown on a farm certified to its respective government-controlled organic standard, non-use of rare earth metal, etc.), providing detailed data on packaged composition (percentage of recycled plastic), or facilitating information for further recyclability; the list can go on and on. Ironically, the more the focus moves towards the customer, the usage of the product and the end of life of a product, the higher the pressure goes to the upper side. Sustainability is all about traceability, and traceability starts with suppliers.

We have only just begun, and the risk is clear – suppliers (and the suppliers of the suppliers) are at risk of not being able to respond to these incessant requests in a timely manner. On the other hand, CPG companies and retailers will be continuously revalidating their supplier base as prohibitions, limitations or targets embedded in the regulations evolve, obliging some to find new suppliers because their existing ones do not meet regulatory requirements.

What should companies do now?

• Adjust the nature of the relationship with core suppliers, rebalancing it towards a more strategic collaboration as opposed to a transactional one. This creates a better framework to foster the implementation of sustainable sourcing practices with adequate levels of investment and promotion of innovation coming from suppliers.
• Dedicate more resources to materialize and embed collaboration with suppliers into supplier management processes and integrate sustainability-related risk assessment into purchasing decisions.
• Reassess supply chain and operations through new lenses that incorporate compliance flexibility and allow for forward planning by taking anticipatory action ahead of regulators’ prescribed deadlines. This could help to set better prices or secure business relationships with less vulnerable suppliers, reducing the risk of supply chain disruption. Some companies may make the strategic decision to rely more on regional supply chains and less on global ones, but the opposite decision could also be taken.
• Deploy technology designed for flexibility. Promote the implementation of solutions that clearly prove to simplify supplier onboarding, ensure data quality, provide a strong data governance framework enabling traceability, respond to the sustainability data management needs and timings for each market and guarantee the adequate participation of the different stakeholders via intelligent workflows.
• Create an adequate feedback framework, moving from the linearity concept of value chain to a value circle where data does not only flow in one direction.

Suppliers’ bonds with CPG companies and retailers will become more flexible and efficient. Focus and investments are required to create the necessary capabilities to deal with the regulations to come in a cost-efficient manner.