Being guided by sustainability concepts will mean investing in many aspects of the business, but that doesn’t mean economic considerations have to move to the bottom of the list
Sustainable
PROCUREMENT
Shaping the future
Achieving sustainability goals
Only with Procurement on Board
Businesses are increasingly being judged by their sustainability strategies, which are drawing more and more attention from clients, business partners, investors and staff. This goes for procurement as well, where meeting sustainability criteria is becoming more of a priority than saving costs.
Climate catastrophe is no longer an abstract term in the US state of California, which has suffered devastating forest fires for years now. These fires always break out in summer and fall and are steadily becoming more intense. Although there are various reasons for this, many experts are united in believing that climate change and global warming are a major contributory factor. They are seeing the same pattern with storms, floods, and droughts around the world. Events like these bring the threat home to us all and underline the fact that we all have an inescapable responsibility to help create a more climate-friendly society. From governments and members of the public to businesses, we all need to play our part.
The pressure on businesses in particular has become so great in recent years that having a sustainability strategy is unavoidable. The Bosch group, for example, will be climate-neutral from 2020 onwards by purchasing green energy and offsetting its use of carbon. Consumer goods giant Henkel has already reduced its plastic consumption for bottles of its Persil brand by 30%.
This kind of radical change also affects procurement, of course; few other areas are as relevant when it comes to putting sustainable corporate goals into practice. Previously, procurement focused on quality, time, and – top of the list – costs, with the aim of keeping the latter as low as possible.
Achieving sustainability goals means changing this approach to procurement and adding other areas of responsibility, as focusing purely on costs is at odds with the desire for more sustainability, risks a business’s reputation, and also hampers any efforts to contribute to the wellbeing of society as a whole. Very few businesses these days can afford to be linked to working conditions for seamstresses in Bangladesh, for example, so they need to reprioritize their procurement goals and draft a roadmap toward sustainable procurement in the future.
What exactly is sustainability?
Before managers can address this issue, they first need to decide what sustainability means to their company. Overall, most of these ideas fall within one of three pillars: Environment, Social, and Governance. (ESG criteria)
A sustainable approach to the environment is undoubtedly the pillar that most people are talking about at the moment: companies should ensure production is carbon neutral or at least low-carbon where possible, as well as not having an excessive impact on soil and water. The overarching goal is not to use the earth’s natural resources at a faster rate than they are renewed.
The social pillar deals primarily with working conditions. Although this is underpinned by respect for human rights, it should be obvious that employers have to guarantee their staff more than that; i.e. a living wage and working conditions that allow people to enjoy a healthy and socially acceptable life within their own community. That also applies to their suppliers, who must also not use child labor or pay low wages, wherever they operate.
The governance pillar stands for fair business models, e.g. how products are manufactured and from what materials. But stable and sustainable business models and resilient processes are also within businesses’ sphere of influence.
How can procurement help?
Achieving sustainability goals usually requires a fundamental transformation – As the direct contact to suppliers in the supply chain, procurement plays an important part in this transformation and in achieving sustainability goals. Procurement is tasked with strengthening the stability of the supply chain, making sure that suppliers meet sustainability criteria and that business partners don’t have any skeletons in their closets that could damage a company’s finances and
reputation.
This requires a fundamental change in approach. So far, procurement departments have mainly measured their success in cost leadership, focusing on meeting needs as cheaply as possible and paying very little attention to sustainability. In the future, sustainability aspects must be considered within the framework of an extended, sustainable TCO analysis.
Being guided by sustainability concepts will mean investing in many aspects of the business, but that doesn’t mean economic considerations have to move to the bottom of the list. The key is maintaining the right balance between financial and sustainability goals, which is reflected equally in the target agreements for procurement as a whole and for individual employees.
What steps can procurement take?
Diagnosis
The path to sustainability always starts with creating transparency. Managers must communicate clearly – internally and externally – on where the business is right now and where it wants to be in the medium and long term. Knowledge about sustainability in the supply chain currently tends to be patchy, making clear communication a major challenge. Overcoming this also involves a huge effort for some companies, because they have to correct past failures and address them going forward. Nonetheless, transparency is essential for implementing sustainability strategies successfully.
Procurement has to take the same approach, and the first step is for management to turn its focus inwards. If procurement has been driven by costs in the past, then you need to start there. Managers should identify any existing sustainability requirements and how consistently these are currently being implemented and monitored. The latter is important because even the most ambitious goals will achieve very little if you don’t know whether they are being achieved.
The main obstacle to realigning procurement is the fact that implementation lies outside the business’s sphere of influence; a bona fide sustainability program ensures all the suppliers along the supply chain are closely involved. Buyers must analyze existing targets that they have set for their partners and how they monitor them. Establishing whether the corresponding data is available and accessible may be a major challenge in itself, but this is also absolutely essential for sustainable supply chain management.
These findings should be used to set realistic and achievable criteria. Striving to be carbon neutral by 2030 may sound good and be great for marketing, but businesses need to be clear on whether goals can be achieved and how, before they announce them. All business units then need to align themselves with these overarching goals and develop appropriate measures to help achieve them.
Although exact sustainability goals will vary from business to business, and there is no “one size fits all”, generally the more specific they are, the better
Roadmap
Although exact sustainability goals will vary from business to business, and there is no “one size fits all”, generally the more specific they are, the better. Businesses could start by setting a clear recycling quota for their products that will be achieved by a certain date. Another good starting point for increasing sustainability is to reduce CO2 emissions, and this goal should also be as specific as possible. Fixed amounts – such as “40 percent lower by 2030” – are more helpful than vague pledges about reducing emissions in general. Other suitable goals are changing the in-house energy mix by purchasing green energy or implementing offsetting measures.
The final roadmap should have a clear plan for what is being tackled over the coming months and years and when. This includes a detailed timeline that sets clear priorities for the measures, as starting lots of sub-projects at the same time is not productive. The roadmap should also state clearly who is responsible for the individual measures.
In order to keep an eye on the status and the degree of achievement of the individual measures, fixed milestones should also be defined. The change management process should be anchored in the roadmap. Through regular communication and appreciation of partial successes, those responsible can succeed in involving the entire team and activate the voluntary commitment of each individual employee.
Implementation
Companies need to know exactly who their suppliers are, where their production facilities are based, and how sustainably they operate – also for tiers 2 and 3, not just tier 1. A code of conduct should set out individual sustainability criteria that all suppliers must adhere to. In addition, wider sustainability goals can be agreed with specific suppliers on an individual level, guided by the relevant conditions. It is vital that procurement departments set fixed KPIs for sustainability and communicate them clearly to suppliers – although the carrot can be used as well as the stick. Bonus systems can also be used to create incentives for meeting or even exceeding sustainability criteria.
Once these key figures have been agreed, maintaining ongoing communication with suppliers is important, as they need a point of contact for their questions about sustainability.
Businesses should also set up an early warning system for potential sustainability risks in the supply chain. This system should collect data from a range of sources including the relevant country organizations, for example, as well as reports from trade associations, banks, market analysts and government agencies
An important consideration is that sustainability can also affect the stability of the supply chain. If there are signs of armed conflict or political unrest in a particular state, businesses with an appropriate early warning system can respond quickly. It takes time and effort to set up these systems as it takes a lot of sources to generate enough relevant data to carry out proper analyses.
Only time will tell whether suppliers will support the requirements or attempt to circumvent them, and setbacks and lessons learned will be an inevitable part of this journey.
Procurement levers for increasing sustainability in the company
- Volume from low-carbon regions
- Emissions intensity
- Reduction in absolute emissions
Energy efficiency - Energy mix
- Product recycling rate
- Employment opportunities created for the community
- Tax contribution
- R&D and infrastructure investment
- Associated fines for non-compliance
- Workers health and safety
- Wage level
- Equal rights compared to local standard
- Trainings provided
Permanent support
Effective and sustainable procurement management requires two things within a business: cultural change and training. Cultural change is brought about by a fundamental change in approach away from focusing purely on costs and/or quality and moving towards greater sustainability. All employees need to be on board, even if this is to different degrees. For most employees, it’s a case of internalizing the sustainability criteria, so they can apply them in their daily work. For procurement, the priority is to adapt the existing target and bonus agreements so that every employee is also working towards specific sustainability KPIs instead of merely quality, time and savings targets.
Specially-trained employees must be assigned with monitoring the sustainability criteria. Rather than being the powerless representatives often found in businesses, these employees must explicitly be granted clear powers to intervene if they come across breaches and, therefore, the power to replace uncooperative suppliers in the supply chain. Procurement is the ideal choice for this task as regular – and unannounced – visits to suppliers’ premises are an effective inspection method.
However, their role is not to simply police compliance, but to act as a partner for suppliers and provide them with the advice and tools they need to operate more sustainably. A program of training sessions on sustainable production, for example, can help, and forums where suppliers can share knowledge and share best practice, are also highly effective.
As well as taking more time and effort, the process of becoming more sustainable is also harder to quantify based on results than other measures, such as making savings. Some effects are also difficult to trace back; for example, it is hard to determine whether an enhanced reputation is because of sustainability factors or other reasons. That’s why it’s important to ensure procurement departments are properly supported. Management must model the strategy from the top down and drive the process forward, because success will only come in the longer term.
Authors
Markus Bergauer
Senior Advisor
is Managing Director and founder of Inverto. Based on his extensive consulting experience in the fields of procurement and SCM, he helps companies in the capital goods and automotive industries to transform their procurement functions and to design and implement projects for sustainable performance improvement.
Katharina Erfort
Principal
is a Principal at Inverto in London and supports clients from the retail and food industry. Sustainable procurement is one of her particular interests.
Interview with BCG Managing Director Patrick Herhold
Interview on sustainability in a business context
Interview with BCG Managing Director Patrick Herhold
"It’s a journey we are all on together"
Patrick Herhold is Managing Director and Partner at Boston Consulting Group. He deals closely with the effects of climate change on the economy and helps businesses to handle them. In this interview, he talks about the importance of sustainability for businesses and what challenges it entails.
Young people are out on the streets demonstrating for better climate policy, while investors are demanding more and more sustainability. How important has the issue now become to businesses?
We are seeing sustainability becoming more and more relevant every year – not just in relation to climate, though. Sustainability is a much broader topic, essentially in line with Environment, Social, and Governance (ESG) criteria. This covers a whole range of topics. Social could mean that a sustainable business also has the long-term wellbeing of its staff in mind and doesn’t tolerate child labor under any circumstances. And one meaning of Governance is that measures to implement sustainability are firmly embedded at supervisory board level.
How do you explain the change of heart by businesses?
Overall, there’s been a real societal change in recent years. As a whole, both business and society are looking more and more closely at how their operations are impacting the future of the planet. Sustainability has been on the wishlist for a long time, but now it has become a requirement even for economically stable businesses. And the pressure is also coming from investors. Asset management company BlackRock has published a list of companies where it has used its shareholder rights to push for more sustainability. That’s a very clear indication for the business world as a whole.
Have businesses overlooked these trends for too long?
Yes and no. Forward-looking businesses may have spotted the trend earlier on, but social awareness of sustainability has only developed recently. There’s an array of businesses who would like to see more active regulation of the issue. Let’s take decarbonization of supply chains as an example. Nowadays, if an automotive manufacturer decided to focus on only processing climate-neutral steel, it would be taking huge risks in terms of costs and suppliers. Changing products and supply chains takes time – and, in many cases, it clearly rests on other regulatory framework conditions as well.
How does sustainability benefit business success right now?
Commercially successful businesses are very often the ones that operate sustainably, something we see in a range of different industries. In a climate context, those businesses with the lowest emissions have a significantly higher corporate value. That correlation is very clear.
Currently, the economy seems to be more concerned with COVID-19 than sustainability. Has the virus put the brakes on businesses’ efforts to increase sustainability?
Some companies are focusing more on other issues at the moment than on embedding sustainability more deeply in their corporate strategy. On the other hand, we are currently witnessing a new wave of sustainability projects being launched. In addition, sustainability is also a risk for businesses – as growing awareness affects all areas – and there is a clear influence in procurement and production, in terms of attracting and retaining good staff.
If businesses want to become more sustainable, where should they start?
A sustainability strategy often begins with the business purpose and a sustainability mission to underpin it, which determines the next steps. Businesses must analyze the relevant areas where they see opportunities to increase sustainability and develop initiatives. There is no tried-and-tested method here; individual businesses have to define their own strategies and design an action plan to support them. An automotive manufacturer, for example, would take a completely different approach than a consumer goods producer.
And then it is time for implementation.
And that takes time. If we take decarbonizing as an example for a sustainability goal, achieving this often involves a complex implementation process that cannot be done in just a few months. Depending on the circumstances, it may involve finding alternative suppliers, and some serious overhauls may be required in the production processes. As this kind of project ultimately affects all business areas, it’s important to embed the issue at management level. Implementing ESG aspects also involves setting long-term goals and tracking KPIs at all levels.
What do you see as the main problems?
The success of efforts to increase sustainability cannot be measured in the short term, like you can with a cost optimization, for example. That is why long-term incentives should be set by senior management through personal target agreements.
Is pursuing sustainability a tiresome task for businesses or a stimulating challenge?
I believe it’s the latter; the switch to greater sustainability in a company’s profile also gives them a competitive advantage. Awareness of the issue is already quite high in Europe, while it’s only just beginning to get off the ground in many other countries. I think that German businesses are acting as positive role models here and can set a benchmark. But it’s definitely a journey we are all on together.
The fact that rating agencies are now listing sustainability issues on a par with key financial figures is another major indication that developments are afoot here. This is reinforced by customer requirements, which will also take sustainability aspects into consideration to a greater extent in future. This development makes it clear that sustainability is becoming a significant indicator for all businesses in future. It’s definitely not just a passing trend.
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