Tag Archives: ecovadis

‘Green’ Procurement: Getting its ‘Value Creation’ Game On to Drive Supply Chain Sustainability (Part 2)

27 Jul

In Part 1 of this series on sustainable procurement, I laid out my vision of the heart of a sustainable, green supply chain that runs through its procurement function.  It’s simple to show how every product has a hidden human health, environmental and social impact along the entire supply chain.  However, it’s been challenging to bring sustainable procurement into a central decision making role in line with organizational business goals.  The results to date have been a mixed bag, as I alluded to when I mentioned Aribas new Vision 2020 report and companion dialoguing process, now underway.

Sustainable Procurement: back to management!

On the heels of the Ariba effort comes a promising benchmark report recently released by HEC-Paris and Ecovadis. Entitled Sustainable Procurement: back to management! this study (available for download on Ecovadis’ site) has risen to rescue and tempered my fears of devolving sustainable procurement.  In fact, the report may suggest a positive “tipping point” in favor of sustainable procurement.  The efforts behind the 2011 edition of the HEC/EcoVadis Sustainable Procurement Benchmark were carried out between the fall of 2010 and early 2011.  This benchmarking process started in 2003 and the 5th conducted since that time.

The objective of the benchmark is to provide a snapshot on what’s trending in the area of Sustainable Procurement practices.  According to the authors, the following overarching questions were explored:

  • How has the vision of the Chief Procurement Officers (CPOs) evolved?
  • What tools and initiatives seem to be the most effective over time to drive changes?
  • How is Sustainable Procurement progress measured?
  • What are the remaining challenges faced by most Procurement organizations?

The study identified three main drivers behind Sustainable Procurement initiatives: Risk Management, Value Creation, and Cost Reduction.  These findings mirror some of the trending areas and critical issues identified in the Ariba report.  HEC and Ecovadis suggested that these three drivers’ shows that many organizations are now facing new expectations in terms of Corporate Social Responsibility and Sustainability from the Procurement Departments of their clients and, suggest that having a sustainable procurement program in place can become a competitive advantage.

 Sustainable Procurement Remains High on Executives Agenda

  1. 92% of the surveyed Companies consider Sustainable Procurement a “critical” or “important” initiative, even though for the 1st time this year, “Risk Management” took over as a priority initiative.
  2. The major progress made in 2011 is on the support from the Top Management (+24%) thus demonstrating that Sustainable Procurement is attracting more and more interest from Executive Committees, and significant progress was made in implementation of tools and organizational changes.
  3.  Significant organizational changes have been implemented: 45% of companies already have “dedicated teams” and 57% report having trained a majority of procurement staff on Sustainability.
  4. Whereas in 2007 only 1/3 of companies were using formalized methodologies for assessing their suppliers’ sustainability performance, in 2011 two-thirds of them are now implementing dedicated tools (either internal or leveraging 3rd parties).
  5. Finally 92% companies have increased (56%) or maintained (36%) their budgets related to Sustainable Procurement, which should yield more changes in the future years.

Tools for Sustainable Procurement on the Rise

The HEC/Ecovadis study found that basic tools such as “Suppliers Code of Conduct” ,  “CSR contract clauses” and “Suppliers self-assessment“ were now the rule rather than the exception among companies surveyed by a ratio of 2 to 1,  but interestingly were still found to  limited value in terms of risk management.  What I found encouraging was that the study found maturation in the types of tools used, including “Supplier Audits” and “Supplier CSR information databases“.  This type of work has clearly been evident in what I have reported in the past, especially among multi-national companies with contractor manufacturing operations in developing economies (like China, India and Brazil).  These advanced tools offered more opportunities for suppliers to engage directly with buyers, allow for data verification, and offer direct recommendations for supplier CSR and sustainability improvement.  Over half of the companies surveyed had advanced to this next level.  Finally, when asked what the most effective uses of resources were in developing a Sustainable Procurement Program, respondents mentioned 1) top level support, 2) creation of cross functional teams and 3) training, as key success ingredients.   All three of these success factors had shown substantial improvement over the past several benchmark cycles, according to the study.

Sustainable Procurement Creates Value

This is not the first study that has come along that demonstrates value and return on investment from sustainable procurement.  I wrote earlier of a joint study by Ecovadis, INSEAD and PriceWaterhouseCoopers that demonstrated similar results.  In that study, payback from most green procurement activities was huge. Companies surveyed were able to benefit quickly from risk management reduction and potential revenue growth opportunities, due in part to sustainable procurement.  The study also found that there were additional ‘value creation’ opportunities that could be realized if procurement departments collaborated more closely with the marketing and R&D departments upstream on the projects.

Also, a study in 2009 by a company named BrainNet (Green and Sustainable Procurement: Drivers and Approaches”)  looked at sustainable procurement and value creation and found that “… procurement with an ecological and social conscience is not a cost factor, but a value factor…Companies that pursue a consistent approach to green and sustainable procurement receive an above-average return on capital deployed.”  The study produced what they describe as an “evolution curve for sustainable procurement” that describes the maturity of various approaches of sustainable procurement.  This curve compares well with the most recent EcoVadis/HEC findings and suggests that there may be a widening gap between leaders and laggards.

Sustainable ‘green’ procurement embraces a holistic approach, one that encompasses organization, people, process, and technology to create greater product value along the entire supply chain.  This type of value creation can managed by establishing firm triple bottom line based metrics from upstream suppliers to downstream users and using the procurement function to support product and process innovation and accounting for total cost of ownership (TCO).

What’s Next?

According to the most recent HEC/EcoVadis benchmark report, it is clear that new green and social business models depend upon innovation, and a gap still among many organizations to implement a truly Sustainable Procurement vision.  This was clearly in evidence by the lack of mentions by Chief Procurement Officers that I discussed last week in the Ariba study.

The HEC/Ecovadis report suggests that when implementing Sustainable Procurement practices, a three phase process can get the ball rolling, starting first by orienting and energizing the procurement function through:

“1. Communication activities: Building awareness among employees regarding the approaching change, the benefits and the steps to be implemented.

2. Training and Performance support: ensuring that the initiative is being understood among those who are to execute the change or be part of it, and leading to buy-in of the key stakeholders.

3. Rewards and recognition: ensuring that employees – and suppliers – who embrace change are properly recognized and rewarded. This final step is when implementation is not only measured, but also celebrated.”

I’m going to say it again…and again. All sustainable business roads lead through the procurement function.  The procurement function is the perfect nexus and a critical organizational player that touches product designers, engineers, multiple tiers of suppliers and subcontractors, manufacturing operations, logistical warehousing and distribution and the end users.  Yes indeed, things are looking up for sustainable procurement…it’s ‘game on’.

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Got Sustainable Procurement? Yes! No! Maybe. Supply Chain Surveys Read the Tea Leaves (Part1)

21 Jul

Courtesy LeoReynolds via Flickr CC

To paraphrase  a timeless Bob Dylan song, “The Times They Are A’ Changin’” is no understatement.  You can read the details from across the globe in the news every day and are rapidly happening simultaneously on political, economic and social levels. And business is also making radical changes in the sustainability and corporate social responsibility (CSR)  frontier.

“Then you better start swimmin’
Or you’ll sink like a stone
For the times they are a-changin’.”- Dylan

One area that appears to be in movement is Procurement. You know, those folks on the third floor in the back that order stuff?  Well, wrong! I’ve maintained that the heart of a sustainable supply chain runs through its procurement function.  That’s because every product- every single purchase- has a hidden human health, environmental and social impact along the entire supply chain.  My previous posts have discussed how the procurement function is a vital cog in product value chain.  Purchasing staff are the “gatekeepers” that can access powerful tools and serve as a bridge between supplier and customer to assure that sustainability and CSR issues are taken into account during purchasing decisions.  2010 was a watershed year for sustainability initiatives and supply chain management and I predicted that 2011 would see greater progress.

So I was incredibly excited when I recently got my hands on a relatively new white paper from Ariba, entitled “VISION 2020 -Ideas for Procurement in 2020 by Industry-Leading Procurement Executives”.  According to the conveners of the document, the “objective [of the effort initiated in 2010] is to initiate a dialogue on the future of procurement and to create a roadmap for how to get there.”  For that, they connected with leading practitioners and executives from around the world and across a variety of sectors to share their ideas, best practices and to read the tea leaves as to where procurement might be in 10 years.

And while the initial report laid out some pretty intriguing and widely varying trends and predictions about the state of procurement in the corporate function, I was unfulfilled.  I was all ready to read about how the emergence of sustainability in the marketplace was going to drive procurement decisions.  I expected to hear how top flight companies around the world were collaborating with their supply chain, implementing staff training on ‘green purchasing’ practices, and implementing sustainability driven supplier audits and ratings scorecards.

Boy, was I wrong!  Only ONE  mention of the word “sustainability” (thank you Dr. Heinz Schaeffer, Chief Procurement Officer, Northern and Central Eastern Europe for AXA), and no mentions of “responsible sourcing”, “green supply chain” or “sustainable sourcing”.  I would have expected more from chief procurement representatives from the likes of KeyBank, Maersk, Sodexho, and former execs from Hewlett- Packard, General Motors, and DuPont.  Most of these companies are generally considered leaders in the sustainability space.  So why would there be a disconnect between what companies are doing in design, manufacturing and product life cycle management and the procurement function?

Before we go too far, its helpful to define what “sustainable procurement” is.  While there is no singular definition for it, I like the definition offered up by the  UK-based Chartered Institute of Purchasing & Supply (CIPS).  CIPS definition is  “a process whereby organisations meet their needs for goods, services, works and utilities in a way that achieves value for money on a whole life basis in terms of generating benefits not only to the organisation, but also to society and the economy, whilst minimising damage to the environment.”.  And what CIPS defines as  ‘whole life basis’ is that “sustainable procurement should consider the environmental, social and economic consequences of design; non-renewable material use; manufacture and production methods; logistics; service delivery; use; operation; maintenance; reuse; recycling options; disposal; and suppliers capabilities to address these consequences throughout the supply chain” [emphasis added].

It’s a good thing that the authors from Ariba stated that “The [2020 Vision]report is intended not as an end, but rather as a point of departure for much discussion and debate around where procurement can and should be setting its sights for the year 2020 and beyond.  In fact, Ariba invites readers to “join the debate and to extend the discussion with new ideas by joining the conversation.  I have and I hope you will too.  But I think I’ll start right here first.

Key Findings of Interest:

The report identified six key trending areas and take-aways among the participants who have weighed in so far, namely:

  1. Procurement devolves- with spend management requirements shrinking, companies are being forced to optimize what resources they have and make better informed decisions.  More work at the business line level will occur, possible eliminating the central procurement function entirely.  Money and metrics will drive most decisions as companies face leaner profit margins.  There will be a need to engage end customers more and more and leverage relationships.
  2. The new supply management emerges– some traditional sourcing functions may become outsourced.  Strategy “will tie directly to an enterprise’s end customers and it will be more cognizant of the diversity of desires and requirements within the customer base”.
  3. Skill sets change.  The Chief Procurement Officer and staff must have broader skills that allow them to not only create opportunities for revenue enhancement internally and optimized “spend”, but also be more in touch with end customer values-driven needs. Procurement staff need to be tuned into multiple tiers of the supply chain, dive deep “inside the supply chain and bring [issues] forward to the designers within [individual] companies”.
  4. Instantaneous intelligence arrives.    Market pricing will become more transparent [the Cloud forces transparency to some degree].  Companies will have to rapidly extract innovation and other value from supplier bases, and build exclusive commercial relationships with leading suppliers that share both risks and rewards.
  5. Collaboration reigns- There will be as the report notes a “big emphasis on driving and taking innovation from the supply base… the supply role will be less ‘person-who-brings-innovation-in’ and more ‘person-who-assembles-innovation-communities-and-gets-out-of-the-way’.  Suppliers are being asked more often to participate in early design and product development as a way to leverage risk and control overall product life cycle management risks.
  6. Risk management capacity and demands soar– as companies are already realizing, effective procurement relies on response to risk management variables (financial, ethical, and operational performance).  Companies must create “360-degree performance ratings and provide greater transparency into market dynamics, potential supply disruptions, and supplier capabilities”.  A few participants noted that  there will be a “big expansion in the kinds of risks companies address in their supply chains, considering, for example, such things as suppliers’ sustainability, social responsibility…”.

Now if I read in between the lines, I can easily pluck out a number of key procurement trends from the 2020 report that transfer well to sustainability and responsible sourcing.  Risk Management.  Collaboration.  Design phase (life cycle) engagement of multi-tiered suppliers.  Key performance metrics. Responding to consumer demands. Supplier performance ratings. 

Courtesy babycreative via Flickr CC

One takeaway for me appears that there may be a disconnect still between the procurement function and other functions within organizations. So is the procurement function still operating in obscurity in most organizations?  It all depends who you talk to but also on your skill at reading the tea leaves.

Rest assured that compared to only a few years ago, more companies that are seeking to manage the life cycle environmental impact of their productsfrom design and acquisition of materials through the entire production, distribution and end of life management.  They’re finding sustainable procurement to be a valuable tool to quantify and compare a product or component’s lifetime environmental and social impact early on in a products value chain while positioning the company for smart growth in a rebounding economy.  We may be at a sustainable procurement “tipping point” and Part 2 will present the results of a very promising benchmark report recently released by HEC-Paris and Ecovadis, which tells a much different story.

The times they are [indeed] a’changin’.

It’s Payback Time- Measuring ‘Value’ in Sustainable Supply Chain Procurement & Management

4 Jan

Over the holidays, a recent study was brought to my attention by Spend Matters Jason Busch (@spendmatters).  The report reminded me of the scene in the movie Jerry McGuire, where the sports agent coaches his client, and he shouts through the phone “Show me the Money!”.  Well, despite late 2010 surveys that suggested that companies may pull back sustainability efforts, I suggest that CFOs read this first before pulling the plug.

PwC, Insead and EcoVadis collaborated recently to construct a quantitative model to link Sustainable Procurement practices and positive economic impact. A link to the white paper download is here. The three companies went about asking the question: “Is Sustainable Procurement a true value creation initiative to be welcomed not only by customers but by shareholders and financial markets as well?” The quantitative model was created by the analysis of the three main drivers and their respective impacts on the company’s annual procurement spend, market cap and revenue. Their impact was then compared to the implementation cost of a Sustainable Procurement program.

Among the reports key findings:

  1. The payback from investing in risk reduction activities in the supply chain targeting the financial impact on “brand value from negative supplier practices (e.g., child labor, creating local pollution);economic cost of supply chain disruptions (e.g., noncompliance with environmental regulation,” etc. is eighty-five times the cost associated with the initial risk reduction investment.
  2. Additional revenue through innovation of eco-friendly products/services, price premium or income from recycling programs yielded a 58 percent payback.

Talk about showing the money!  Geesh, where do I sign up?!

The study found sustainability- driven cost reduction from energy reduction programs for instance, could fund the entire cost of a procurement initiative.  This would allow companies to benefit quickly from both risk management reduction and potential revenue growth opportunities.  The study also found that there were additional ‘value creation’ opportunities that could be realized if procurement departments collaborated more closely with the marketing and R&D departments upstream on the projects. In most cases, this requires a process modification to involve procurement experts in the design of new product and/or services.  Findings in three primary areas were covered in this report (cost reduction, risk reduction and revenue growth).  Key ‘value drivers’ for sustainable procurement and economic indicators are shown in the table below:

Cost Reduction

Reduced Internal Cost: In 2008, water conservation, energy efficiency, green building projects and other eco-friendly initiatives yielded Baxter International Inc. a total of US $11.9 million in environmental income, savings and cost avoidance.

Reduced Specifications- In 2007, Wal-Mart launched “CO2Scorecard” aimed at saving 0.6 million tons of CO2 and US $3.4 billion in costs through reduced packaging content.

Reduced Compliance Costs– The Waste Electrical and Electronic Equipment(WEEE) and Packaging taxes in the European Union paid by producers are essentially calculated based on weight and product category. However eco-design criteria are being taken into account in the calculation of these taxes (e.g., use of recycled raw materials in packaging). Cost reduction can be achieved through lighter and eco-designed products.

The study found that cost reductions per project represent on average 0.05% of the company’s total revenue, ranging from 0.005% to 0.36%- a small price to pay for conformity and enhance product revenue gains.  However, these cost reductions yielded a six times over payback for sustainable procurement initiatives.

Risk Reduction

Bad Barbie- In 2007, Mattel experienced a major crisis when a supplier used lead-contaminated paint on Mattel’s toys in addition to creating safety hazards with lead based magnets.  This fiasco caused the company to recall about 20 million products at a cost of over US $100 million. Stock price dropped 18 percent.    A big lesson learned was that Mattel’s brand reputation was significantly affected by events involving safety, environmental or social issues with poor supplier oversight and risk management. These events have also led to significant direct costs (recall of products, financial penalties) and/or indirect costs (decrease in market share, sales and market cap, product boycotts) for these companies.

Dirty Palms- As another example, the report showed that in 2006, Palm’s stock value dropped 14% in June 2006 due to suppliers not meeting the Restriction of Hazardous Substances (RoHS) directive.  This poor planning and oversight led Palm to withdraw the Treo 650 smart phone from the European market.

Overall, the study found an average 12% decrease in market capitalization after a supply chain disruption due to a sustainability issue.  Ouch.

Revenue Growth

The study found that enhanced opportunities for experiencing direct revenue growth area bit harder to quantify (due in part to so many external variables and market variations).  However, the companies did report that increases of to 0.01% to 2% of the company’s revenue could be realized, mainly due to linkages between enhanced brand’s reputation and implementation of sustainable practices in design, production, distribution and end-of-life management.

Green Procurement Strategies

The study noted the many challenges that procurement officers may have in effectively managing sustainable procurement challenges.  Particularly, upstream manufacturing of intermediate products can pose a challenge, but not necessarily close the door to change.

So when evaluating a best approach to green procurement, the report suggests that organizations consider first those “product categories that represent a high potential for cost reduction but that are not necessarily controlled by the procurement department such as energy, raw materials, chemicals used for production process, etc.”.  Other categories that can drive growth and reduce risk and that are controlled more closely by procurement might include purchasing of green energy, raw materials with a higher recycled content, etc/.

I have spoken before about how procurement staff can be the gatekeepers that can drive continuous improvement in environmental and corporate social responsibility up and down the product value chain. Here a few tips again on how to green the procurement value chain:

  1. Conduct a spend analysis and ID which product categories may have greatest environmental impact
  2. Engage  designers, production and transportation department staff and explore  the entire spectrum of the supply network costs and value chain of a  products life cycle.  Explore if the product, process or supplier is creating unnecessary wastes, risks or avoidable costs
  3. Identify alternative products to replace materials creating negative life cycle impacts
  4. Engage your suppliers and evaluate what steps they are taking to lower the environmental footprint of their products.
  5. Purchase products that disclose their environmental attributes (eco-labeling).
  6. Audit and engage suppliers to understand and more accurately evaluate their environmental performance. Collaboration and transparency with suppliers creates “reciprocal value creation” in the supply chain, where both suppliers and customers are better equipped and enabled to  recognize and quantify each other’s value contributions to a successful,  green supply chain.
  7. Work with suppliers to help them reduce environmental impacts through changes in product design and materials use.
  8. Engage in Product stewardship: Active management of all aspects of the product from raw materials to final disposal

So what’s the ‘bottom line’ on sustainable procurement?  The answer can be  lower costs, increased sales and revenue growth opportunities, enhanced  reputation and risk management, leading to increased market share.  These are all achievable targets that great, smart businesses should aspire to in 2011 and beyond.

Start making the business case- it’s payback time!