Procurement – the pivotal link in your Sustainability Transformation

When organisations start to think about how to improve their Sustainability performance they often turn to their Engineering functions to start decarbonisation projects or to Human Resources to ensure that Diversity, Equity, and Inclusion (DEI) considerations are being embedded in people processes.

However, arguably their first priority should be to turn to their Procurement function – the opportunity to deliver improvements by embedding key Sustainability principles into the way the organisation interacts with its supply base are huge, far reaching, and can be rapid. Five key themes stand-out from successful initiatives we have been involved in:

1.    Enhanced Environmental, Health, and Safety (EHS) performance

2.    Improved business and financial performance

3.    Regulatory, legal, and customer compliance

4.    Reputation and risk management

5.    Increased innovation

1. Enhanced Environmental, Health, and Safety performance

A key focus of any Sustainability programme is likely to be to reduce the environmental impact of the organisation’s activities, and protecting the Health and Safety of staff and other stakeholders – the Procurement function can take a critical role in addressing all of these elements.

 A good place to start is to understand how Procurement can contribute is to assess Greenhouse Gas (GHG) emissions reduction. One of the simplest changes is to move all electricity contracts to renewable sources, reducing the company’s indirect emissions (known as Scope 2 emissions) as well as potentially benefiting from unit price reductions as renewable tariffs fall.

Direct GHG emissions from the company’s own activities (Scope 1 emissions) can be addressed by decarbonising the energy sources used for internal operations, for instance by changing company cars and vans to Electric Vehicles (EV) or replacing out-dated oil or gas boilers with high efficiency heat pumps powered by renewable electricity sources. The list of potential improvements is extensive and requires active Procurement involvement to maximise the benefits, including capturing reduced costs.

The biggest opportunity though for many organisations is to address the indirect emissions from its value chain embedded in its products or their use (Scope 3 emissions). For Procurement this will mainly focus on Upstream Scope 3 emissions from suppliers contributing to the production of goods and services, although many will also be able to contribute to reductions in downstream indirect emissions arising from product distribution, and disposal and recycling of materials at product end-of-life.

Aside from GHG emissions, there are many other ways that the Procurement function can help to identify other improvements to the EHS elements of the organisation’s Sustainability agenda by helping to identify measures which address reductions in water consumption, substitution of hazardous materials, increased use of recycled materials, and procurement of equipment which can reduce personal and process safety risks.

With such a vast range of potential improvement opportunities available, it is critical that the Procurement function is actively involved from the earliest stage in their evaluation, prioritisation and realisation through joint working groups with other functions, most notably engineering and operations.

2. Improved business and financial performance

Good Procurement teams will always aim to optimise an organisation’s purchases on across the interdependent criteria of cost, volumes, capabilities, schedule, and quality of the goods and services being bought. By looking at these aspects through a Sustainability lens they can identify further opportunities.

Many of the improvements highlighted by analysis of emissions will also have cost reduction potential and deliver a lower Total Cost of Ownership (TCO). For example, by improving raw material volume planning the organisation can provide better forecasts to suppliers, reducing transactional and inventory holding costs, and facilitating the use of lower cost modes of transport.

Similarly, suppliers with strong Sustainability performance tend to be more advanced, are frequently lower cost, and are more stable thereby further reducing key elements of TCO, whilst improving stability within the organisation’s operations.

Sustainability is Smart business.

3. Regulatory, legal, and customer compliance

Procurement functions have a critical role to ensure that an organisation is compliant with the relevant regulations, laws and requirements of the jurisdictions in which they operate and source goods and services from, and the suppliers with whom they work.

A key part of this is ensuring that suppliers correspondingly comply with these obligations and in-turn cascaded them down to their suppliers. This can be made easier by working with suppliers with strong Sustainability credentials, and encouraging and developing others to be similarly compliant with the relevant legislation, whilst enhancing their positive impact on the environment and communities within which they work. Key legislation in the UK which has Sustainability implications includes:

·      Modern Slavery and Human Trafficking Act (2015)

·      Conflict Minerals (Compliance) (Northern Ireland) Regulations (2020)

·      Proceeds of Crime Act (2002)

·      Bribery Act (2010)

Organisations with revenues of more than £36 million p.a. are obliged to file a Transparency in Supply Chain (TISC) statement to confirm that they have undertaken all possible measures to ensure their supply chains comply with Modern Slavery legislation.

In many industries, customers will add further requirements on to their suppliers to enhance Social Value, above and beyond legal obligations and regulations, and these need to be cascaded down through supply chains. By understanding what these are, and how they could evolve in the future, organisations can get ahead of the game and better position themselves for future tenders and related sales initiatives, enhancing their chances of success.

4. Reputation and risk management

Clearly working with suppliers that fall foul of relevant legislation is going to have a detrimental effect on an organisation’s reputation, but even liaison with organisations which are legally compliant, but transgress other accepted norms or fall short of the expectations of stakeholders, can have a significant negative impact.

For example, many cultural and sporting bodies have recently attracted significant criticism for accepting sponsorship from major oil companies, whilst there is ongoing concern about the prevalence of gambling companies sponsoring football teams and the message it sends to impressionable supporters.

In the past Nike attracted criticism by using overseas suppliers who employed workers in factories and conditions which fell far short of what would be acceptable in the West. At the time this had a significant detrimental impact on Nike’s brand and became known as the ‘sweatshop controversy’. In his biography, Shoe Dog, Nike-founder Phil Knight describes his sense of betrayal because journalists never mentioned the improvements that Nike had made or how they worked with suppliers to improve health and safety – the criticism had an internal impact in addition to the external reputational damage. To their credit, Nike used this criticism to improve all of their factories and has subsequently been recognised by official at the United Nations as one of the gold standards by which apparel factories are measured, and have made their innovations available to competitors to improve the working conditions of their suppliers.

5. Increased innovation

To maximise competitiveness, all organisations need to be continually seeking, identifying and adopting new ideas to incorporate into their products, services, and operations – this is particularly true for those who are also actively pursuing their Sustainability agenda. Whilst some of these ideas might come from internal sources, such as R&D or product management teams, the majority are likely to come from external sources, and particularly from suppliers, both old and new.

Strong procurement teams will maintain an active watch to identify new innovations that their companies can use to address different aspects of Sustainability. For example: lower Scope 3 emissions raw materials, components, and services to be incorporated into their own products; more efficient equipment and processes to use within production, or those that can help decarbonise; suppliers who might be more local, or who might have leveraged elements of DEI to become more innovative in the way they approach their own business.

By ensuring that the Procurement is fully briefed on the company’s Sustainability objectives they can help to identify these opportunities through their suppliers research, ongoing discussions, as well as including Sustainability innovation  as an assessment criterion in tenders.

How to Start?

With such a wide array of potential opportunities available, how can an organisation prepare and enable the Procurement function to deliver improvements aligned with the themes highlighted above? Six key activities have stood out in the most successful Procurement transformation initiatives we have been involved with:

1.    Train all staff involved in Procurement related activities to understand the organisation’s Sustainability agenda and how to identify potential improvements

2.    Build Sustainability into the overall Procurement Strategy and implementation plans with joint working groups involving other functions

3.    Embed Sustainability criteria in all sourcing processes and tender evaluations, following through during supplier onboarding activities

4.    Set-up business systems to capture necessary data to track performance and to be used in future tender exercises

5.    Build-out the organisation’s ecosystem through collaboration and co-development with key suppliers

6.    Undertake regular structured assessment of suppliers capabilities and performance to ensure compliance and to help identify further opportunities

Integrating best-in-class Procurement practices with key Sustainability principles and mindsets in this way can deliver rapid improvements which act as a foundation for longer-term developments. This is in contrast to overly aggressive cost reduction initiatives that can be counterproductive to achieving the twin aims, and may actually reduce the benefits for all concerned parties.