October 16, 2023 | Procurement Strategy
Amid growing environmental and climate change concerns, sustainability has become a hot topic of debate among business leaders. The objective is not merely to meet increasingly stringent regulations and reporting requirements but to pursue responsible business practices and create a robust, future-proof ecosystem.
Additionally, with new-age customers preferring to buy sustainable, environment-friendly products, businesses understand sustainability can give them an edge over competition. It can also foster a culture of innovation and help them design innovative products and services.
Not surprisingly, businesses of all sizes are now investing more time and effort in their sustainability initiatives.
In fact, sustainability has become a key priority not only for businesses but also for individual functions within the business. A key function in this regard is procurement that has to regularly deal with suppliers, distributors and other supply chain partners.
The question now is: What is a sustainable procurement strategy? And how vital is procurement’s role in the overall sustainability strategy of a business?
The common answer across industries is that procurement has a key role in implementing the sustainability strategy.
A key reason for the greater role of procurement is the realization that a major portion of a company’s total emissions originate from third parties in their supply chains.
Also read: How Procurement Advances Sustainability
While procurement has traditionally focused on negotiating with suppliers and containing costs, the sustainability dimension expands its scope of work to include environmental, social and governance (ESG) aspects. This implies that procurement must look beyond cost considerations and consider environmental and social aspects in different processes and decision-making.
The objective of a sustainable procurement strategy is to integrate responsible business practices and sustainable corporate behavior into procurement processes, policies and decisions. In this process, it can strike a fine balance between sustainability, profitability and stakeholder expectations.
Sustainable procurement organizations must transition from traditional practices to green procurement strategies. Among other things, this shift requires an in-depth understanding of the environmental impact of different products and services.
For example, a sustainable procurement strategy can impact the selection criteria of a supplier. Procurement should shortlist a supplier not merely based on cost savings but also considering the sustainability understanding and performance of the supplier.
Instead of choosing Supplier X who promises to offer the lowest costs but has no plan to lower emissions, procurement should shortlist Supplier Y who is equally committed to reducing emissions and minimizing the environmental impact.
There are three aspects of a sustainable procurement strategy:
The first thing that is likely to be discussed by business stakeholders is the cost associated with the sustainability initiative. Does the cost associated with a sustainable procurement strategy justify the investment in the mid to long term?
By deploying a sustainable procurement strategy, businesses look to minimize the impact of procurement processes on the environment. This requires procurement to play an active role in reducing emissions, waste and energy consumption. The initial choice of suppliers as well as close collaboration with suppliers become vital in these endeavors.
Businesses need to deliver on the social goals that are laid down in the sustainable procurement framework. These can include protecting human rights, preventing child labor and determining workplace safety within the organization and in their external partners’ facilities.
Implementing a sustainable procurement strategy may seem daunting at the outset. The biggest challenge is to get all stakeholders onboard and agree on a common framework. Even a minor disagreement or contradiction can hamper the implementation of the strategy.
Educating and training internal teams as well as external partners about how to successfully implement a sustainable procurement strategy can also pose a challenge.
Cost is another key factor that can create a rift between stakeholders. There may be a difference of opinion about the returns on investment, especially in the short term. There may also be a challenge in setting measurement tools or key performance indicators to assess sustainability performance over time.
Once a business gets past these initial hurdles, sets clear guidelines and gets all stakeholders aligned, it can successfully implement a sustainable procurement strategy and reap the benefits in the mid to long term.
1. Define the strategy and build a business case for sustainable procurement. Identify focus areas and specific standards and regulations that affect the function. It is also vital to align different teams and ensure that internal teams and management agree on the business case and benefits.
2. Set realistic targets and communicate these to internal and external stakeholders. For example, procurement may look to achieve X% reduction in emission levels or consumption of resources over a period. Conduct a current state analysis and compare it with set targets and future requirements. Current analysis will help identify gaps in procurement processes and practices.
3. Make an action plan to close gaps in current and desired performance. Identify procurement categories that have the highest impact on sustainability performance. Make sustainability a part of the procure-to-pay process. One way to do this is to incorporate sustainability in the RFP evaluation criteria. Also ensure that all teams undertaking procurement understand the action plan and act accordingly.
4. Identify hotspots in the supply chain and suppliers that have a significant impact on sustainability. Engage regularly with these suppliers to monitor their sustainability performance. Identify specific areas of improvement in their operations. Also make them aware of the implications of sub-optimal performance.
5. Finally, track supplier performance against established KPIs at regular intervals, review the targets and revise them, if needed. It is also important to stay updated with any changes in industry regulations.
While implementing a sustainable procurement strategy may seem challenging at first, it can be rewarding in the long term. It requires defining a clear business case and action plan, identifying and working closely with key suppliers and regularly tracking sustainability metrics and performance.