Balancing climate ambitions and cost pressure : Exploring customer influence on supplier’s decarbonization efforts in the steel supply chain of an industrial technology provider

Abstract

Reducing the greenhouse gas emissions that accelerate climate change and biodiversity loss requires urgent and cross-sectoral action from organizations. However, a significant share of product-related emissions occurs beyond the immediate operations of an organization. Companies seek to reduce supply chain emissions through supplier selection, but also increasingly by developing suppliers’ capabilities to decarbonize. Suppliers’ capabilities to decarbonize are crucial, yet they remain under-researched. At the same time, many external factors — such as regulation and available infrastructure — strongly influence emission reductions. The research aim is to assess the current state of suppliers’ decarbonization efforts, identify key drivers and barriers, and develop understanding of the customer’s influence on suppliers’ decarbonization efforts.

The study was conducted in collaboration with a Finnish industrial technology provider that designs and delivers industrial solutions and technology, ranging from individual equipment to full scale mills. This research examines six of the company’s first-tier suppliers who purchase steel and manufacture various industrial components and steel structures. The study was carried out as a qualitative multiple-case study. The primary data consists of semi-structured interviews with the suppliers. This primary data complemented with interviews with the technology company’s procurement function as well as public data — such as supplier websites and other materials provided by suppliers.

The findings reveal that suppliers’ emission-reduction efforts remain focused on their own operations, reflecting the finding that customer requirements mainly concern suppliers’ internal operations. External pressure — including from customers — to reduce emissions is perceived as emerging, but weak, and suppliers view decarbonization largely as voluntary work that currently has little impact on winning orders; purchasing decisions are still driven by other criteria such as price and delivery time. As a result, short-term financial benefits remain a key criterion for emission-reduction measures, since suppliers are expected to achieve cost savings simultaneously. On the positive side, suppliers expect that reducing emissions will provide a competitive advantage in the future.

The study identifies three mechanisms through which customers can accelerate suppliers’ climate action. These are (1) customer as a requirement setter; (2) customer as a capability builder; and (3) customer as a market force. First, customers often set minimum environmental requirements that suppliers must meet. To date, these requirements do not include any concrete emission-reduction thresholds. Second, customers can build suppliers’ capabilities by providing information and tools to support emission reduction. This study found that suppliers with weaker initial knowledge find customer support particularly valuable. Third, customers can create demand for low-emission suppliers and products by prioritizing them in purchasing decisions. However, in the industries served by the suppliers, only few customers are currently willing to pay more for lower-emission products.

This research supplements the sustainable supply chain literature by focusing specifically on emissions that accelerate climate change and by providing insights from the supplier’s perspective. It offers empirical evidence on the capabilities required for decarbonization and the role of customers in developing these capabilities. In addition, the study provides knowledge from a less-researched context — the steel value chain of an industrial technology provider.