Why The Time Is Now for Sustainable Procurement
Posted by Tanja Reilly, Senior Executive in DACH for EcoVadis in Sourcing / Supply Chain on April 22, 2019
Earth Day (April 22nd) is a celebration of commitment to creating a safer, healthier and cleaner world, making it a natural time to reflect on the power and value of sustainable procurement programs.
Over the past several years, few topics have been as critical for global corporations as sustainability – investors, consumers, executive teams and other organizational stakeholders have realized that corporate responsibility doesn’t just build a better world, but also drives financial value. With that, global businesses are committing to key sustainability objectives such as reducing greenhouse gas emissions, eliminating slave labor, avoiding plastics, conserving water used in production, tapping into renewable energy sources and more.
Procurement teams are in a unique and important position to drive such initiatives forward as these improvements are only possible through actions taken in the supply chain.
A quick look at the regulatory landscape
In addition to consumer and investor pressure on businesses to become more sustainable and create ethical products, more laws and regulations related to environmental, labor and human rights, and anti-corruption concerns are coming into the spotlight and enforcing more responsible business practices.
Germany introduced its CSR Directive Implementation Act in response to the EU Directive 2014/95/EU, which requires companies to report on environmental, social, and labor and human rights risks and practices not only in their own operations, but also in the supply chain. In France, laws such as Duty of Care (Devoir de Vigilance) as well as Sapin 2, are holding large companies responsible for due diligence on environmental, social and ethical practices of subsidiaries and suppliers. There are also reporting requirements for conflict minerals in the US and in the EU, California Transparency Act, the UK Modern Slavery Act, as well as similar laws being enacted or considered in Australia, Switzerland and elsewhere.
With the pressure for sustainability improvements and corporate accountability mounting from all sides, companies must look beyond internal operations alone and measure CSR performance across all business relationships, especially trading and supply partners.
Procurement at the pivot point
Procurement owns relationships with an organization’s vendors and is therefore in the best position to establish transparency and sustainability requirements for supply chain activity. Purchasing volumes can account for up to 60 percent of revenue for an organization depending on the industry, making it clear that procurement plays a central role in a business’s sustainability effort.
And there’s a payoff: procurement teams are most concerned with cost savings and risk management, both of which can be addressed by sustainable procurement. Despite a perception from some buying organizations that sustainability requirements for suppliers cost more, these programs can actually help companies uncover new ways to trim costs (e.g. using a total cost of ownership strategy) and identify key risks (and related costs) to avoid.
At the heart of this success is building trust with suppliers and being transparent about procurement‘s expectations and the disclosures required by partners. Communicating these things can feel like a daunting task considering one business can have dozens of different business functions and purchasing categories to manage, given the global nature of today’s interconnected value chains. As these networks expand, traditional strategies for managing supplier risk, such as creating an explicit code of conduct and demanding compliance with federal and local regulations, don‘t go far enough to ensure risk prevention.
Clear steps to sustainable procurement
Instead, successful implementation of a sustainable supply chain lies first in identifying stakeholder requirements. Many companies perform stakeholder dialogs for this, which reveal both expectations and priorities that can be used as a basis for developing a sustainability strategy and align ing it with the company’s road map. Then, it’s important to set clear goals and intentions and pull in different departmental stakeholders to map out a plan of action. This has become a vital step, as most procurement teams, understandably, don’t have inherent expertise in sustainability to handle it on their own.
The next step is to choose which tools and methods will be used to collect and understand suppliers’ sustainability performance. Easy-to-use, quantitative indicators such as sustainability ratings, which are integrated into procurement software, will accelerate and scale up sustainable procurement programs so they can drive real impact. These indicators also go beyond simply assessing an issue to give procurement teams a real plan of action for how to address that critical risk. This is the foundation for a supplier performance monitoring program that aligns with the company sustainability strategy, and it helps business es identify risks and opportunities using reliable indicators.
Managing a sustainability program along the value chain indeed requires a significant amount of upfront investment but with the right tools and strategies can produce an exponentially positive ROI. Sustainable procurement initiatives reduce the risk and magnitude of non-compliance costs and lower spend in operational areas, such as logistics, energy, water and manufacturing. These actions also help companies avoid misconduct by suppliers, protect brand reputation and help companies recognize and avoid disruptions early.
The most exciting opportunity, however, lies in the fact that sustainability is becoming a critical component of business strategy and growth. Beyond avoiding risk, companies are proactively building their sustainable supply chain program s as competitive differentiator s and a means to collaborate and innovate with suppliers to deliver the best, ethical products to market — and improve their brand image in the process.
The time is now for sustainable procurement
Putting off a sustainable procurement program hurts the organization’s bottom line in the long term. It’s no longer a question of if or when, but of how quickly a business can get an effective program deployed – which depends on a variety of unique internal factors.