That's mighty green of you

25 Oct 08

In the past few years, regulation – not just that dedicated to the security sector – has had an increasing impact on the bottom line. Drivers include European Union (EU) legislation and Government policies.

Recently-issued EU directives, for example, require disposal costs of white goods, automotive goods and an increasing number of other products to be included in a company’s P&L (profit and loss) statements.

In tandem with this, the expectations of customers, consumers and other legitimate Stakeholders continue to rise. Environmentally-friendly and sustainable attitudes – termed the LOHAS, or Lifestyle of Health and Sustainability – are now spreading among consumers. Consumers and analysts attribute increasing value to the environmental and social performance of products and services, and to the companies that produce them.

While carbon and environmental footprints are a growing concern, much of the footprint that can be attributed to a company lies in other parts of its supply chain. As Stakeholders become increasingly insistent that ‘promises made’ by chief executives should be ‘promises delivered’, those same chief executives will need to extract more innovation from suppliers – as well as the company itself – to deliver on commitments to sustainable performance.

The business benefits to be had from a sustainable approach to procurement include positive impacts on costs, risks to the business, options and preferences. Costs, for example, are reduced by factors ranging from enhanced compliance with Government regulation, lower consumption of energy and other resources through to increased returns from capital investments.

Risks are going to be lowered by a strengthened brand, an enhanced reputation, improved community relationships and/or reduced grounds for litigation. The risk of supply discontinuity can also be lowered by applying environmental performance metrics and targets into the supplier performance assessment process or during the contract renewal process, as these help to mitigate the risk of suppliers’ non-compliance.

Options are broadened thanks to the increased scope for innovation and other new routes to revenue protection and generation. Preferences are widened, with the company being more valued by potential and existing companies, insurers and credit sources.

Pressure on procurement

Purchased products and services can account for more than 60% of an average company’s costs. When your supply chain’s environmental and social footprint equals or exceeds that of your company’s, the business’ resulting exposure to supplier activities becomes enormous – as does its vulnerability to adverse environmental and social impacts caused by any suppliers.

In today’s business world, it’s often the chief procurement officer that’s in charge of procurement. However, accountability for a company’s ability to demonstrate sustainable procurement generally rests with the chief executive for three salient reasons.

One is that the chief executive is obviously responsible for the business’ overall performance. Therefore, he or she needs to be fully aware of – and at all times managing – any risks of damage to the business, its income and reputation. Including, importantly, those risks caused by short-sighted attempts to cut costs in procurement.

Second, the chief executive is responsible for the business’ overall response to Stakeholder expectations. As the procurement budgets of the world’s biggest companies exceed the Gross National Product of many nations, this makes procurement a major concern – not just at the company level, but also among external Stakeholders.

Hence a somewhat more ‘engaged’ approach is required of the chief executive in order to deal with the myriad risks and opportunities created by growing awareness and expectations among consumers and customers that business’ will procure responsibly at all times.

Rising consumer interest

Evidence of growing consumer interest in green products and services emanates from a report published by the Co-operative Bank. Entitled ‘The Rise of Ethical Consumerism in the UK: 1999-2006’, the report highlights the tripling of our ethical consumerism market over the period surveyed.

Conversely, nearly 60% of respondents to a survey conducted for the report said they had decided not to buy at least one company’s products or services in the previous 12 months because of that organisation’s behaviour.

The third reason as to why CEOs are accountable for sustainable procurement is their duty to build the value of the company. Value can be added through reduced costs, reduced risks, revenue protection and/or revenue growth.

Success on any or all of these routes is enhanced by companies led by CEOs focused on achieving sustainable performance through integrity and innovation. The CEO cannot delegate his or her accountability for sustainable procurement. Typically, they’ll delegate responsibility for making this happen to the chief procurement officer.

The pressure on the latter to deliver the required results – from a CEO whose risk exposure in relation to supplier activities is as great as any the company itself presents, but whose control over those activities is much less – is likely to be intense.

The chief procurement officer’s role is essentially a balancing act – addressing and aligning the conflicting interests of keeping supply chain costs, operating costs and lead times to a bare minimum, maintaining or increasing quality and optimising that all-important balance sheet. After all, the concerns of procurement are not only the cost, quality, technical specification and availability of products and services bought.

Externalities such as disposal costs and carbon dioxide implications must also be taken into account as consumer expectations and Government regulations relentlessly drive up their significance in business terms. For example, both existing and planned legislation penalises high energy consumption and rewards reductions in emissions. Such legislation is typified by the EU 2012 directive.

A wider perspective on procurement is also needed to recognise where higher capital outlay might be offset against higher performance and lower costs, and risks of operation or use.

Choices open to companies

Companies have three strategic choices open to them in relation to sustainable procurement. First, they can adopt a reactive strategy, only moving towards a more sustainable direction when forced to do so by regulation or loss of business. Companies that adopt this strategy constantly maintain a high risk of losing competitive advantage, incurring fines and other penalties and losing customers and staff.

An alternative strategy is to keep pace with regulation. Such a strategy would allow revenue protection, but fails to encourage any new revenue generation. The third possibility is a strategy of anticipation, through systematic evaluation of the company’s procurement options followed by the implementation of measures designed to maximise the business benefits delivered through procurement.

One of the most challenging aspects of moving a company towards more sustainable procurement is identifying appropriate suppliers of the products and services required by the organisation. In seeking out these suppliers, companies will often turn to environmental consultancies for help.

While well-equipped to assess environmental attributes and issues in a given supplier or supplier community, such consultancies do not normally contain the business operations expertise required to also assess how well a supplier meets the supply chain needs of its client.

Conversely, business consultancies tend to possess an in-depth understanding of supply chain issues, but lack the expertise to tailor a potential supplier’s sustainability credentials to its client’s business. Genuinely sustainable procurement achieves coherence between sustainability and business issues. Decision-making for sustainable procurement embraces all of the different types of cost surrounding different options.

For example, deciding to terminate a contract with a long-term supplier because it’s not co-operating or meeting sustainability criteria can be a difficult decision – because the switching costs may be significant, or that switching will involve a loss of know-how.

Alternatively, a supplier may have the potential to supply a more sustainable product but needs an injection of capital to do so. Here, a route forward could involve a joint investment arrangement by the supplier and procuring company. There’s no doubt that client organisations benefit significantly from working with advisors who have the capability and experience in both sustainability and procurement to help them identify the most appropriate suppliers and strategies for their business needs.

Controlling supplier standards

Many companies underestimate the difficulties of controlling supplier standards at long distance. The longer and more articulated a supply chain is, the harder it is to control entirely. At least in part, the difficulty is often due to the ‘sustainability gap’ between the production markets where goods are made and consuming markets, with marked differences in expectations surrounding Health and Safety and the environment.

It’s often the case that senior executives don’t realise how big the sustainability gap really is in their own supply chain until it’s too late – and their business suffers from public exposure by, for example, non-Governmental organisations or other campaigners.

To address this issue, several companies – among them Procter & Gamble, Unilever, the Imperial Tobacco Group, Nestle, Cadbury Schweppes and Dell – are members of a group called the Supply Chain Leadership Coalition. The group encourages suppliers to release reports about carbon emissions and strategies for battling climate change.

Difficulties can surface in a company adjusting its existing procurement processes and organisation, and trying to manage the related change. Altering the requirements for the procurement of goods and services can have a significant impact in many areas: on processes and systems for supplier selection, qualification, verification and performance assessment, on logistics and maintenance processes and on the skills and competencies required of procurement staff.

Irrespective of any changes decided and planned, challenges can arise due to internal cultural or organisational barriers to adopting a full life-cycle cost perspective so that the external costs of procurement (disposal costs, carbon dioxide implications and the like) are properly internalised.

Aligned, motivated, transformed

Having an aligned, motivated and transformed internal organisation is no guarantee of success. Market access to the sustainable version of some products and services can be difficult and, sometimes, it’s far from easy to discern a sustainable product from its competitors. In such situations, some innovative thinking around procurement procedures may be required. For instance, inviting suppliers and/or manufacturers to assess the availability of a given product or service on the market so as to be involved in the definition of the sustainability criteria, and to negotiate collaboration agreements.

There are effective steps that can be taken towards more sustainable procurement. The organisation needs to identify:

• Stakeholder expectations – among clients, customers, suppliers and regulators;
• the level of ambition within your company for this way of doing business;
• any barriers that prevent your company from adopting a sustainable procurement strategy;
• how it measures up against other organisations that are either leading or lagging behind in the field of sustainable procurement.

When it comes to Stakeholder expectations, a ‘sit and wait’ approach is usually not the best tactic to adopt. Working with suppliers that don’t conform to Health and Safety or employment standards isn’t only costly (for example, the costs associated with legal action and non-compliance with regulation), it can also lead to serious disruption of trust and loss of customers. Recovery thereafter is difficult.

Aligning values with policies

Proactive companies know that aligning corporate values and goals with purchasing policies enhances Stakeholder support, builds customer appreciation and, ultimately, can help win over new clients. An increasing number of retail consumers, for example, are shifting their buying preferences towards companies that have both visible and valuable track records in the sphere of corporate social responsibility. These environment-minded consumers will support companies able to provide sustainable goods and services.

Being proactive in meeting customers’ expectations of the company’s social and environmental performance means injecting an ‘outside-in’ approach to procurement strategies. To ensure their purchasing is consistent with consumer requirements and expectations, proactive companies don’t wait for customers to ask. Rather, they question those same customers for their experiences of sustainable procurement policies.

Aspects of ambition include how far you’re prepared to push your company in grasping the opportunities afforded by sustainable procurement. By way of example, a company with a reactive strategy – and, hence, quite a high tolerance for risk – is satisfied with patchy intelligence on sustainable suppliers and incomplete criteria for assessing their appropriateness to the business’ needs. Such a company keeps suppliers at a distance, rather than pursuing competitive advantage through collaboration and mutual support.

By contrast, a proactive company seeks the benefits of anticipating the changing requirements of customers, regulators and other Stakeholders. Such a company uses sustainability for either product or service differentiation. Sustainability ambitions are integrated within the business strategy and procurement – as well as other – activities, and fully communicated both within and external to the company.

From barriers to benchmarking

Barriers to the introduction of sustainable procurement arise, above all, from the leading perception that this is a difficult strategy to implement. There’s also the notion of a higher cost associated with sustainable products and services when compared to alternatives.

A reactive organisation starts and ends by scouting its existing supplier base in search of already available products and services in the sustainable category. Often, supplier switching policies simply aren’t an option. The purchase price of products or services is the only metric used to conduct a cost-benefit analysis, and to evaluate the overall economic merit of sustainable products. Environmental benefits calculations are seldom built into the analysis.

Proactive firms know that if they have significant procurement spend, they can push the market towards the development of a more sustainable offering. Thus the development of new products and services is pursued in tight collaboration with new or existing suppliers.

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