Sustainable Procurement – What Is It & Why It’s Important
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While the Environmental, Social and Governance (ESG) sustainability movement is not new, it has gained significant momentum recently. Climate change, sustainability, diversity and inclusion are increasingly taking center stage – both politically and in the minds of consumers – meaning ESG (or, more specifically, ESG management) has shifted to the top of the agenda for almost all organizations.
Much of the drive comes from external factors. For example, in Germany, the Supply Chain Act now means that companies with 3,000 employees or more will be held accountable for exploitation of workers in their supply chains. Meanwhile, according to a recent Deloitte study, 45% of Gen Z consumers stopped purchasing certain brands because of ethical or sustainability concerns.
This shift in the zeitgeist has become more profound as society entered the 20s and can be expected to become a societal norm; this is a consideration that organizations will need to factor into plans and strategies, both in anticipation of broader changes in legislation and societal expectations.
Organizations not yet doing so will need to consider sustainable procurement strategies as part of their future business plans to develop more sustainable supply chains and logistics.
What is sustainable procurement?
Sustainable procurement is also widely referred to as sustainable supply chain management. It places Corporate Social Responsibilities (CSR) practices and philosophies into the organization’s procurement processes and strategies while ensuring the needs of the key stakeholders are met.
These should incorporate specifications and requirements to protect the wider global environment and societies. This should consider each aspect of procurement, whether it is how materials are made or ensuring that no illegal labor occurs at any point in the supply chain.
Why is sustainability important in the supply chain?
Implementing sustainable procurement principles helps transfer these values across the organization, including products and services. This has the additional benefit of helping to differentiate the organization from competitors regarding brand reputation while managing and improving risk management.
This empowers organizations to manage perceptions of the brand and have systems in place to gain insights into suppliers and awareness of any issues that could generate negative publicity and perceptions of the organization.
Supply chains are also responsible for most companies’ carbon footprint and environmental impact due to the considerable use of energy and the transportation of goods and materials worldwide.
What are the benefits of sustainable supply chain management?
The key benefits of sustainable supply chain management are:
- Compliance and reducing regulatory risk
- Reduction of ESG issues
- Management of brand reputation
- Increased business opportunities
- Innovation of offerings to the market
Compliance and reducing regulatory risk
Implementing sustainable supply chain management ensures that a business has a holistic view of compliance or regulatory risks related to ESG while enjoying the benefit of ensuring that the organization is always fully compliant as changes in regulations are made.
Organizations can achieve this by refining their procurement activities and putting the supply chain at the forefront when making changes. This could include ensuring that ethical and environmental considerations are present during the supplier onboarding process.
Seeking out partners who share the same ESG principles ensures that supplier compliance with regulations can be adhered to at all times and will have more comprehensive business benefits further down the line when changes to regulations occur.
Reduction of ESG issues
As discussed previously, numerous aspects of global supply chains provide challenges to organizations that wish to reduce or eliminate issues related to ESG. Managing delivery times and profitability can be particularly challenging with a worldwide supply chain.
Investing time and finance in sustainable procurement is essential for organizations that wish to avoid issues related to carbon footprints, shortage of natural resources, worker safety and exploitation, and geopolitical concerns.
However, investing in sustainable procurement supply chain management ensures that organizations reduce the potential for issues further down the line.
Failing to address these issues can damage relationships with senior partners and investors, foster a negative customer perception, reduce profits, and make attracting top staff members challenging.
Once this occurs, time and capital must be invested to regain trust and improve brand reputation, diverting money away from areas of the business that require investment while navigating the impact of reduced sales and profitability.
Management of brand reputation
An ever-increasing number of individuals are becoming more interested in how their products are produced and their origin. This has led to increased demand for more sustainable products and greater transparency in the supply chain.
Organizations need to consider that this trend will become more acute as Generation Z gains more spending power and shifts in demand will become increasingly profound.
Increased business opportunities
Organizations that anticipate and adapt to this shift in consumer demand before their competitors will reap the rewards. Greater numbers of consumers will be prepared to pay a higher price point if a business can cater for their ethics and demands for more sustainable products and services.
Developing and implementing a sustainable procurement supply chain strategy and effectively communicating with current and potential customers ensures that the business will be recognized as one invested in ESG compliance.
Innovation of offerings to the market
Enhancing the sustainability of the supply chain requires businesses to engage with suppliers who share the same ethos and requires greater levels of collaboration.
This level of collaboration leads to suppliers becoming essential partners and giving them more significant insights into your business goals ensure that they can enhance processes and services.
How can procurement supply chains be more sustainable?
In response to the global shift in expectations for organizations to have better considerations of ESG, a number of businesses have taken action to reduce their carbon footprint, cut down the amount of waste they generate and improve working conditions for employees.
This enhanced awareness of sustainable logistics and supply chain management within the business and its supply chain translates into a focus on ensuring that even the products produced are more sustainable and environmentally friendly.
This could include sourcing new forms of renewable energy, using more sustainable materials during the manufacturing process, and striving to achieve zero-waste production in the long term.
The following are initial ways businesses can develop a more sustainable supply chain that is ESG compliant.
Evaluate your carbon footprint & transportation
Transportation is one of the leading contributors to a business’ carbon footprint and is often the most significant barrier to implementing a sustainable supply chain. This can be overcome by refining their storage and distribution of goods.
It can be achieved by distributing stock from shipment hubs as close to the final destination as possible. This should also be complemented by ensuring that lorries are as loaded as effectively as possible with all space taken up.
Analyze your products’ lifecycle
Investing time in analyzing the supply chain provides an opportunity to identify current issues in the supply chain related to sustainability. Time should be spent looking at different aspects of the product lifecycle to determine where changes need to be made based on where the most significant carbon footprint is generated.
Source sustainable suppliers
A business may have the best intentions regarding ESG, but these can be for nothing if it collaborates with suppliers who do not share the same ethos. Collaborating with suppliers not aligned with your company’s vision can negatively impact your reputation and require time and investment to repair your image.
Ensure that the supplier is aligned across each of the core ESG metrics, such as greenhouse gas emissions, types of energy used, gender diversity, injury rate and whether they have been externally audited for ESG.
Optimize and reduce inventory
The storage of goods in warehouses significantly contributes to business’ carbon footprints due to the energy consumed. This can be counteracted by organizations forecasting, optimizing and reducing inventories by ensuring that they have a holistic view of data related to stock.
How HICX ‘cut its teeth’ on ESG in the early 2000s
“HICX is passionate about ESG compliance because it’s how we came into the market over 20 years ago,” explains Costas Xyloyiannis, HICX CEO, in an interview on the subject.
Costas reflected on how, in 2001, a multinational pharmaceutical company became one of the first customers for HICX, as he recounts, “The CEO was very forward-thinking when it came to sustainability – and had signed up to the UN Global Compact, long before ESG sustainability had become such a mainstream topic”.
In addition to the benefits of demonstrating good corporate citizenship, the initiative allowed the pharmaceutical company to improve standards within its supply chain while absorbing the burden of implementation.
The CPO at the time was tasked with ensuring that all suppliers, some 150,000 of them, complied with the principles set out in the UN Global Compact. Naturally, the CPO’s first question was: who are all the suppliers?
Next, as part of the supply chain governance process, came the challenge of checking whether they were all compliant. This led to thinking about the need for segmentation – because 150,000 suppliers cannot be audited at once. Thus, the journey began.
Pioneers of ESG supply chain strategies
As a result of these needs, HICX built its first database-driven platform that enabled the CPO initially to have visibility into, then segment, and finally track while being able to demonstrate progress at boardroom level.
“The business had multiple divisions and ERP systems – so first we automated supplier data collection across the globe,” Costas recalls. “Then, at a certain stage, the CPO reconsidered auditing all 150,000 companies, as it appeared that the ESG sustainability initiative would not necessarily apply to every supplier in the same way. Subsequently, with the foundations of the solution, they segmented their suppliers into three groups – each of which either received a letter, a survey, or was the subject of an audit,” he adds.
In this way, ‘The Global Supplier Database’ was born – an early iteration of the signature platform provided by HICX today. Development of the solution continued.
Next, a process was introduced whereby all procurement teams could load their data into the product every month and report on their activities. “The CPO loved the system because it was the only way he could gain visibility into the supply chain in such a manner – and at the time, he additionally used it as his cross-divisional spend tool and then started enriching it with Dun & Bradstreet parent/child data and other types of external information,” Costas continues.
Around this time, the customer set up additional corporate functions, such as waste management, information security, and data privacy, which were all up-and-coming compliance topics in the early 2000s.
The CPO needed to ensure these were managed well within the supply chain. Costas recalls how the CPO had started to feel his role was becoming more compliance-centric rather than Procurement, and eventually, “he put his hands up and said, ‘I am a Chief Procurement Officer, not a Chief Compliance Officer!’”
However, what the CPO had found out was a clear idea of what Procurement could own – in this case, the ability to provide insight into compliance risks – due to the visibility the function could deliver in combination with its close relationship of stewarding and managing supplier relationships and leveraging the cross-functional nature of the Procurement function.
Visibility at the heart of sustainable procurement
Costas reiterates his belief that visibility into the data is at the heart of every initiative, whether that’s sustainability, ESG compliance, diversity, inclusion, health and safety, or anything else. Without it, organizations cannot identify how to make an impact or measure progress.
Just like in those early days, if you don’t know whom to email or call at the supplier, you are a bit stuck. Asking around a company of 40,000 employees, ‘who knows the right person?’ at the supplier is not the solution.
Fast forward to the 2020s, and we see how sustainability can be managed at scale, thanks to procure-tech platforms like HICX that enable easy workflow processes, automation, master data management and integration with other systems, among other features.
Crucially, though, there is the opportunity for suppliers to participate in initiatives in a supplier-friendly manner, which is an essential requirement to obtain accurate data as, ultimately, organizations wholly rely on their suppliers for the information they need.
How HICX assists businesses in achieving sustainable procurement
This represents the intersection of ESG sustainability and supplier experience. It is a practical example of the ‘supplier experience – data quality’ flywheel. ESG sustainability requires up-to-date information from suppliers.
By ensuring that suppliers can find the relevant forms, easily submit the required information, or obtain an appropriate level of support where necessary, both the volume and the quality of captured information increase.
The information, in turn, helps to optimize workflows and processes further to improve supplier experience management on an ongoing basis. As the amount of data needed from suppliers increases in line with corporate initiatives, especially around ESG sustainability, this methodology provides a sound foundation to build that information exchange – to the mutual benefit of both organizations and suppliers.
Article Updated June 2023
