Impacts of Sustainability Regulations on Supply Chains

November 16, 2022

Since the 1970s, with the creation of the Environmental Protection Agency (EPA), environmental issues have gradually grown in significance. Today, environmental issues have become a global concern with a focus on supply chain sustainability regulations.

The unfolding energy crisis in the EU (Natural gas) and the US (diesel fuel) has brought sustainability issues from low-to-moderate concern to a high priority. As supply chains transition to a post-pandemic marketplace, businesses must treat sustainability as a key strategic issue.

Sustainability ranks coequally with profitability and customer service. As the transition to the post-pandemic world finds itself in the beginning stages, now is the time to consider sustainability in redesigning your supply chain for resiliency.

The purpose of sustainability regulations in logistics and supply chains is to reduce the impacts of logistics and supply chain operations on the environment and society. More recently, as sustainability has grown in importance, stakeholders also view the economic aspects of sustainability regulations.

There’s no question that sustainability is a critical component in the logistics and supply chain space.

Therefore, we’ll explore the impacts of sustainability regulations on supply chains. That’s a broad scope that we can’t cover in one blog post. Covering regulatory control over supply chain sustainability requires extensive review and analysis.

To make sense of sustainability’s impact on logistics and supply chains, we’ll address the relevant issue in three parts. 

First, we’ll cover the types of regulatory control along with their costs and benefits. Then we’ll address the short-term impacts of regulatory control on sustainability issues. 

In next week’s post, we’ll focus on the long-term effects of the transition to sustainable supply chains. After that, we’ll provide a future outlook for the effects of regulations on sustainability on supply chains

Types of regulation

Before getting into a discussion of the effects of regulation, let’s briefly review the three types of regulation that affect businesses. 

First, we have governmental regulatory control. This represents the most widely used form of regulation. It is also the most formal, as it's backed by the full force of the government, with regulations having costs and benefits. Governmental regulations are mandatory and include both punitive and non-punitive measures. 

Finally, many governmental regulations issue outcome-based regulations. This gives business leeway to decide “how to” implement regulations based on conditions affecting them, which the government may not understand or appreciate. Government regulations tend to weigh in on the side of sustainability over economics.

Next, we have market-based regulations, which seek to foster sustainability goals via a market-based mechanism. Mechanisms include incentivizing market behavior via prices and economic efficiency to achieve sustainability goals. The emphasis lies in encouraging behavior modification through incentives as well as costs. 

One way to do that is via taxes and subsidies. Market-based approaches tend to consider costs and benefits, which typically result in a slower transition to end-state goals. That is, they work hand-in-hand with regulation.

Finally, we have non-regulatory controls that influence industry standards. Although they’re classified as non-regulatory, they regulate businesses if they set goals and objectives for the future that can have competitive implications. 

Businesses that adopt non-regulatory controls are apt to benefit at the expense of businesses that fail to do so. Non-governmental regulation sets aspirational goals rather than mandatory edicts. It relies on market competition and social costs to encourage compliance. This approach favors a balanced approach and possibly one that slightly favors economics over sustainability.

1) Supply Chain Risks Increase in Frequency and Intensity

According to various informed sources, supply chain risks are on the rise both in frequency and intensity. On the surface that bodes ill for supply chain stakeholders. Delving deeper into this issue, proactive shippers, 3PLs, etc., will find a proverbial silver lining in the cloud.

This change in supply chain management emphasizes anticipation over unpreparedness and responses that are proactive vs. reactionary. And being anticipatory and proactive are elements of resilience that you can build into your supply chain. That can eliminate, prevent, or mitigate risk.

In his book called Risk, GEN Mc Chrystal talks about this. He advocates changing your perspective of risk and viewing it as a part of normal daily operations. He refers to it as a Risk Immune System. His approach advises against treating risk as something foreign to supply chain management. Rather, he advises building processes that act more like an immune system that abates risk by employing existing capabilities. No new capabilities or special processes are called for.

One difference is taking care to ensure new solutions include sustainable ways to address risk. That means streamlining and optimizing business practices. It means considering moving warehouses closer to the customer. It means diversifying sources such as suppliers and fuels. And it means using IoT (Internet of Things) to facilitate proactive maintenance by fixing things before failure occurs.   

2) Infrastructure

Supply chains aren’t supply chains without infrastructure. You can’t transport, receive, store, and issue inventory without a proper infrastructure. Infrastructure represents the backbone of logistics and supply chain chains. Infrastructure includes roads, rails, bridges, dams, seaports, airports, and communications networks.

So, it makes sense for supply chains to function properly, infrastructure must be serviceable. More than that, as the backbone of supply chains, it must be in robust condition. However, today’s infrastructure in the U.S. is aging and dilapidated in places. 

To remedy these deficiencies, the federal government and state governments have and are entering into partnerships to rebuild and repair infrastructure. In doing so, addressing environmental concerns is a major factor made possible by partnership. 

Sustainable infrastructure reduces the impact on the environment and promotes resilience. Some examples are the use of solar and wind power to generate electricity. The redirection of traffic routes to reduce congestion is another example. And redesigning waste management through the reuse of waste and recycling is yet another example. These are just a few of the ways infrastructure supports sustainability. 

3) Use of federal and state taxes as incentives and disincentives

In changing behavior, levying taxes is a powerful tool. It’s powerful because it has the force of law behind it, and it directly influences corporate behavior. So taxes have a punitive as well as a beneficial effect. 

Tax codes seem to rely on the punitive aspects of modifying behavior. That’s likely because they have a quick short-term effect of ending or curbing non-sustainable practices. Costs to supply chain stakeholders are high, whereas the benefits are short-term. Once prohibitive taxes are eased, behavior will adapt and likely reengage in non-sustainable practices. 

4) The corrosive effects of inflation

Inflation affects sustainable supply chains negatively. It represents a cost that likely was unplanned, increasing the costs of regulatory compliance. In its early stages, inflation might not affect sustainability noticeably. But in the long term expect inflation to have a corrosive effect.

Businesses can absorb the costs initially, as they may not immediately register in daily business. Over time, that dynamic will change with the sharing of costs affecting the supply chain and consumers. When that happens, sustainability may take a back seat to maintaining profitability. 

5) Political disputes/conflicts lead to confusing regulations and policies

Disagreements between liberals and conservatives on sustainability regulation can lead to confused and disjointed regulations and policies.

This may occur as one administration switches to another, as we saw with the swing from the Trump administration to the Biden administration. Wild swings in policy direction can occur because of executive orders that override other executive orders. 

Legal changes legislated in Congress may also result in swift changes when one party controls both houses. Even so, any stakeholder may challenge laws in the courts, stifling and suspending implementation pending judicial review.

Costs of sustainability in the short-term can be high with little benefit to show for them. But the opposite may also be true where costs are less effective than planned because new regulations get caught up in the judicial system.

Using short-term tools such as executive orders is not as effective as intended. At best, regulations imposed with a short-term perspective have a mixed effect on ending or moderating non-sustainable practices.  

6) Pace of adoption 

The time allowed for adoption or the pace of adoption may affect regulatory control of sustainability. Should the pace of adoption be short, you can expect implementation and intended consequences may take longer to take hold. That could undermine the benefits of regulatory control.

In setting the pace of adoption, regulators should balance costs and benefits to ensure an even approach. An even approach takes both sustainability issues and economic ones into account to ensure costs do not exceed benefits. Striving for a balanced approach requires a thorough examination of all the factors that can affect implementation. And the pace of change can be a critical factor coming out of the gate.

7) Resiliency

In the post-pandemic world, resilience reigns supreme. Supply chains that can bounce back from disaster, disruption, or disarray will enjoy a market advantage. As you may realize by now, regulatory control can promote resilience. And indeed it should. 

The strategic objective is to move businesses towards sustainable supply chains in a way that keeps the supply chain operations. Thus, consideration of resiliency should be a primary concern of regulators. 

Resilience accounts for not avoiding risky events but bracing for them and snapping back without turmoil. Achieving resilience through built-in processes modified by regulations should be the strategic goal.

Again, seeking a balanced approach is a worthy approach that can enjoy wide support and facilitate successful implementation. Just as costs and benefits should guide the crafting of regulations, so should a strategic objective like resilience. After all, achieving sustainability goals is what it’s all about.  

Is your supply chain sustainable?

Sustainability has evolved from a tactical to a strategic issue. It now ranks with other strategic principles, such as profitability and customer service. More specifically, you can’t have a successful supply chain without addressing sustainable issues surrounding your supply chain.

Besides focusing on environmental protection, economic costs and benefits are a major concern of regulation. Any viable option must be sustainable from both environmental and economic aspects.

The benefits of sustainable supply chains are clear. But introducing regulations is a challenging task. To avoid burdening businesses with suffocating regulations requires a deft approach that balances green issues with economic concerns.

At American Global Logistics, we deal with many issues that affect performance and profitability. To ensure our clients have leading-edge supply chains, we focus on emerging trends and what they mean to our clients. We don’t just follow the trends, we identify them before they materialize.

We look at risks and opportunities in moving your supply chain in to the New Normal. In particular, we look at how we can convert risks into opportunities. That includes sustainability regulation.

Contact us to learn more about how we can help you transition to a more sustainable supply chain.

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