April 06, 2023 | Procurement Strategy
Recent years have seen environmental, social and ethical concerns come front and center of the global business landscape.
Businesses have realized that they must act now and monitor not just their internal operations but also their external suppliers and supply chains.
This, along with a significant change in consumer awareness and buying habits, has led companies to revisit their sourcing processes. They must monitor environmental, social and ethical conduct across their entire supply chain and partner with suppliers who share their concerns about ethics.
And, to begin with, they must ensure all their suppliers and external partners understand what ethical sourcing means.
Ethical sourcing indicates a company’s adherence to ethical conduct and values when it sources products or services from suppliers. In other words, it requires a company to do due diligence to ensure that products it sources are made through responsible and sustainable methods.
To this end, a business must map its supply chain and establish how (and from where) suppliers source their products.
Are there any unethical practices such as child labor or human rights violation prevalent at the product manufacturing facility? Do the factories provide a safe and healthy working environment? Are there any deviations from standard production practices?
Monitoring unethical supplier business procedures and practices has now become the core task of procurement.
However, the scope of ethical sourcing extends well beyond monitoring unethical practices. It requires procurement to check adherence to environmental, social and legal concerns. Monitoring scope 3 emissions, for example, has increasingly become a procurement responsibility, considering that supply chains are responsible for a major portion of a company’s environmental footprint.
Another issue that is high on the corporate priority list is building supplier diversity. And here again procurement must play a vital role. It must work closely with tier 1 suppliers to identify diverse suppliers and accelerate the diversity program.
A key aspect of ethical sourcing is to establish a code of conduct for suppliers. This is a document outlining the expectations and standards of behavior that suppliers must adhere to when doing business. It helps to ensure that suppliers are responsibly sourcing their materials and comply with the company’s values and expectations.
The code of conduct should specify standards that suppliers must adhere to. For example, it can include labor standards, human rights, health and safety standards, environmental regulations, diversity and inclusion, etc. It should also clearly mention the consequences of not complying with the code of conduct, such as termination of the contract with the supplier.
Procurement must also regularly conduct supplier audits to check compliance with the guidelines outlined in the code of conduct. Such an audit should include a detailed review of supplier operations and processes. It can also include interviews with suppliers’ staff members to test their knowledge and awareness of procedures mentioned in the code.
Additionally, procurement can also go beyond formal scheduled site visits. At times, it can audit a supplier without any prior information to the supplier. An unannounced audit does not give the supplier the opportunity to sweep things under the carpet.
Ethical sourcing can help a business gain customer confidence. 81% of respondents in a 2021 survey conducted by OpenText indicated their preference for buying ethically sourced products. The survey, conducted on over 25,000 consumers across 12 countries, also revealed 83% of respondents were ready to pay more for products that were sourced ethically without a doubt.
As is clear from the survey findings, consumer buying habits have evolved quickly in recent years. The new consumer in the new normal is more aware and socially responsible and expects the same level of social responsibility from the company they buy from. They also expect companies to be more transparent about how they source their products.
Businesses that meet these consumer expectations can thrive amid growing competition. To do this, they must align their procurement and supply chain organizations with larger, strategic business objectives.