How sustainability will define procurement
To sustain. To continue. To keep going. For those having enjoyed 2021’s summer of sport, it will be a familiar pundits’ question: can they sustain this run of form? Can she sustain this pace? If yes, success. If no, loss, failure, an end to continued participation.
The meaning of a word
Until now, sustainability was used within business parlance in two distinct ways: one that addressed the first meaning: the ability of the business to continue its growth and development without set-back, without stalling. Let’s call this Performance Sustainability. And the other refers to an appreciation of a business’s green or environmental credentials: ESG Sustainability.
These meanings have now converged.
It is now time to view Performance Sustainability as synonymous with ESG Sustainability. A growing, successful business must be one with environmental, social, and financial performance goals at its heart.
Questions are being asked of procurement, and soon they will become demands. So, what do we do?
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We are what we buy
Most organisations are, in large part, a product of what they buy: a collection of goods and service supply chain decisions. As such, procurement teams are uniquely positioned – and have the skill-set – to help redefine organisations’ sustainability through different, and hopefully better, procurement decisions and processes.
Carbon, or Green House Gas (GHG) impact is defined by three Scopes of emissions (see below). While procurement can influence across Scopes 1, 2 and 3, Scope 3 emissions can frequently account for up to 80% of an organisation’s impact, and it is here that procurement has the biggest responsibility. Using the GHG Scopes as a proxy for wider sustainability issues, it is easy to see why procurement is so relevant. It is also important to note that, until recently, Scope 3 has typically been ignored or omitted from action plans and reporting. This segregation of ‘my impact’ and ‘my suppliers’ impact’ has now, thankfully, ended.
In short, we are increasingly accountable for our suppliers’ approaches, policies, and decisions.
3 SCOPES OF EMISSIONS
- Scope 1: Emissions / impacts from the assets you own (company facilities / vehicles)
- Scope 2: Purchased power, heating, cooling for own use
- Scope 3: Bought goods and services used in product or to do business and downstream use and treatment or produced goods and services
Procurement just got harder
Over the years, procurement has generally evaluated supplier offers using a balanced scorecard of price and service. Commodity or leverage items swing the pendulum one way; niche or strategic items, the other.
Then sustainability started to make an occasional appearance and, following the introduction of Social Value in 2012, UK public sector tenders in 2021 looked to ensure that 10% of credit was directed to societal value beyond the direct economics. While Social Value guidelines exist, they can be confusing, hard to objectively quantify, and are open to interpretation. Similarly, sustainability covers a wealth of considerations that even the most progressive and well-resourced businesses can only hope to address over time, with the right prioritisation.
This third dimension has just made good procurement a whole lot harder – especially when this new parameter has multiple dimensions, few standards, limited data, and a limited track record of best practice examples.
The Triple Bottom Line
Efficio starts with an interpretation of the Triple Bottom Line. A concept developed by John Elkington in 1994, it values performance against three parameters: not just Profit as convention tells us, but also Planet and People (to neatly give us a memorable alliteration). Triple Bottom Line theory holds that if a firm looks at profit only – ignoring people and the planet – it cannot account for the full cost of doing business.
From this we draw several conclusions:
- Sustainability is not (or does not need to be) selfless: The 3 Ps are not mutually exclusive, and the bond between better supporting your people and the environment around us is getting more inextricably linked with profitable and stable business performance
- Sustainability is broad: it doesn’t mean the same to everyone and we must prioritise
- Sustainability requires a mental shift and a repurposing of our tools, skills, and measures
As we shall see, when thought through well, the Triple Bottom Line can quickly become a commercial plan, a prioritised plan, and an operational plan.
The Triple Bottom Line
People: Social Sustainability
- Diversity and equality
- Fair Treatment
- Ethical labour and governance
- Health, safety and security
- Relieving poverty
Planet: Environmental Sustainability
- Replenishing natural resources, ensuring chain of custody
- Renewbale energy
- Sustainable water and land use
- Limiting or eliminating emissions and pollution
- Limiting or eliminating landfill waste; utilising circular economy
Profit: Financial Sustainability
- Supply security
- Price stability
- Profitable growth and competitive advantage
- Efficient processes
- Perception as positive employer
No time like the present
The rate of new sustainability legislation is accelerating. Each year, we face a matrix of requirements by governing bodies (local, national, and international) impact type (carbon, plastic, water usage, ethical labour, diversity). Many of these requirements – for example, net zero commitment – have long lead-times, and for good reason. This is not to allow a grace period, followed by a period of business planning, ending in a last-minute sprint for the line, but because this is hard. Really hard. Much of the science tells us we are already behind, and, for most organisations, they haven’t even started yet. Other demands can come quickly – especially at a local or national level, such as for packaging.
The takeaway here is that there is first mover advantage in planning and acting early:
- There is strong customer and brand value from leading in sustainability
- You avoid being at the back of the queue when the new markets form that will be needed to develop and support more sustainable practices
- You allow your organisation time to adjust and adopt new skills and mindsets that will inevitably be needed
We talked about sustainability being commercially the right thing to do and, as procurement, we need to value improvements. Here too we’d benefit from thinking about value more broadly. Cost Reduction remains the easiest and most quantifiable method, but there are others, including: Product & Margin Development, Brand Value & Customer Requirement, and Financing.
New supply requirements support new cost reduction opportunities to mitigate or off-set sustainability investments.
Demand challenge, innovation and TCO are critical.
Result = Improved EBIDTA
PRODUCT & MARGIN DEVELOPMENT
Customer demand drives new and higher margin product development. They will pay for sustainability.
Customer requirements are changing and accelerating with demographic change.
Result = Higher margins
BRAND VALUE & CUSTOMER REQUIREMENT
Brand strengthened by positive sustainable activity, bringing in new customers, strengthening loyalty, or retaining business within updated requirements.
Tenders are beginning to demand sustainability credentials.
Result = Increased revenue
Agenda helps to secure better, more favourable investment partners and terms.
Banks and private equity houses are acting on this now.
Result = Investment Growth
Your first steps
The sustainability landscape is still wide open, so knowing where to start can be difficult. While sustainable procurement now has a standard in ISO20400, it stands as guidance notes and not an accreditation. The UN has 17 sustainable development goals but, again, they are not tailored to procurement and it can be difficult to draw from them the practical, value-adding steps that procurement can and should take.
To provide a sensible structure that allows organisations to start on the sustainability (and sustainable procurement) path, Efficio recommends a 6-step structure.
1. Sustainability Business Plan: define what sustainability means to your business
Organisations can’t do everything at once, so look to understand the key elements of sustainability that mean the most in your geography, to your customers, or to your leadership. Further weight them into prioritised approaches:
2. Translate in Value
Understand what your organisation values and will recognise. If cost reduction (or cost maintenance) is still key, rather than some of the value levers mentioned above, look for the win-wins that arise through demand challenge or effective total cost approaches. Innovation is also key here, and empowering procurement teams to think differently and act differently is paramount.
Furthermore, build a procurement pipeline of activity that supports a ‘save to invest’ approach. Drive cost reduction hard, where you can, to off-set areas that maximise sustainability value.
Hermes is making significant commitments and investments in moving toward net zero.
In 2022, we will have 30% electric vehicles in our parcel shops fleet, over 25% of our tractor units will be CNG, and we will continue to focus on delivering impactful carbon emissions reductions across the business year on year.
Not only is procurement facilitating these purchases, but its cost reduction activity allows us to really invest in areas that make the biggest sustainability impact.
3. Understand the role of Procurement and Supply Chain
Sustainability is now a board-level topic because it has reached a critical mass of demand. Demand both from within the organisation and outside of it, at the macro level and the individual. (See figure opposite.)
Consumer Requirements – End-users more and more place value on the environmentally and socially responsible option. Work with Marketing to promote ESG successes – be open and honest and avoid generics or ‘green-washing’.
Government Regulations – Mandatory requirements are coming thick and fast across ESG parameters. Work closely with Compliance or Sustainability leads to plan.
Financial Institutions – Sustainability scores are already affecting the ease and cost of lending. Work with Finance and Treasury to understand the financing pipeline.
Customer Requirements – Customers are demanding more from suppliers to support their ESG requirements. Work with Sales to understand their barriers to new business.
Business Leadership Targets – Leaders are looking to build brand, credibility, and legacy through Sustainability leadership. Get close to leadership strategies to support the strategic agenda.
Employee Recruitment – New recruits demand competitive salaries and rewarding work, as well as work-life balance and belief in the organisation, with strong ESG credentials. Work with HR and People teams to support positive recruitment messaging.
To support this agenda, procurement needs to be better networked and informed than ever before. It needs to understand how marketing will look to message sustainability improvements and what customers are demanding, as well as how HR is driving talent acquisition, and leadership is perceiving value.
4. Baseline and prioritise areas of high impact
This is one of the most daunting and fundamental steps; organisations need to baseline their current positions and then identify ways of quickly and easily ‘moving the needle’. There is a wealth of measurement, assessment, and accreditation organisations to support in this area (which Efficio is happy to sign-post), but much you can do yourself, at least as a first step. Matrix spend against likely sustainability impact (by impact area), and then overlay a sourcing roadmap to see what can be coordinated with sourcing activity and what might be done in other ways, for example Supplier Relationship Management (SRM). If your priorities are labour-related, then look to the people-led categories like facilities or professional services or recruitment. If carbon-related, then look to buildings, fleet, machinery, and data centres.
5. Incorporate sustainability into category planning
Building a sustainable procurement function does not require extensive restructuring or a new toolset. It will require new thinking, new measures, and new data, but these can be developed and assimilated with planning. Remember the guidance to start early. Efficio talks about sustainability KPIs and total cost approaches but, if nothing else, ask meaningful sustainability questions of your suppliers, and ensure your team is set-up from the start to evaluate sustainability and incorporate it into supplier selection.
6. Implement improvements across the supply chain
The fun part. We need to weave sustainability into the fabric of our specification development, supplier evaluation, reporting, our success recognition, our SRM, and more. Be data-led against the priorities and targets you’ve agreed, and try to step away from the cycle of reactive supply chain compliance reporting into a much more positive narrative. Work closely with suppliers to innovate, find new approaches, and drive real change that positions your organisation as a leader.
Much as we don’t one day decide to lace up a pair of shoes and run a marathon, the sustainability journey requires you to take the first steps, train, learn, and develop. Over time, we will develop the staying power that organisations need to react to changing demands and the ever-growing set of commercial, environmental, and political challenges we face.
Performance Sustainability is ESG Sustainability, and Sustainability is Procurement. As Procurement, let’s embrace this new opportunity to make a difference.
For more information on how we can help your business achieve its sustainability goals, please visit our Sustainability Improvement service page.
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