6 Ways Direct Material Sourcing Can Promote Sustainability

Sustainability is today a key priority for businesses of all sizes as environmental and climate change concerns continue to gain increasing attention across many sectors.

Many businesses understand their environmental and social responsibilities as well as why sustainability is the need of the hour. They also understand the growing inclination of customers to buy products that are sustainable and environmentally friendly. And they know that investors and regulators are keeping a close eye on this aspect of their operations.

Additionally, pursuing sustainability can help businesses foster a culture of innovation and design innovative products and services.

Smart businesses are therefore exploring different ways to pursue their sustainability ambition. They are also exploring how individual functions within the enterprise can contribute toward this objective.

This exercise has put the spotlight on functions such as sourcing and procurement, which have to deal regularly with external suppliers.

The popular opinion is that sustainability is a shared responsibility, and businesses cannot possibly achieve sustainability without a close examination of their supply chains and supplier operations. Regulations also suggest that there is a need to investigate environmental, social and ethical practices across the entire supply chain ecosystem to bring about meaningful change.

The Corporate Sustainability Due Diligence Directive, accepted in 2022 by the European Commission, holds large companies and firms within high-impact sectors accountable for not only their impact on the environment and society but also their suppliers’ impact.

Direct sourcing, which involves procuring raw materials, components and finished goods from suppliers, is expected to play a key role in the sustainability drive.

But how exactly can direct sourcing contribute to the mission?

Before we look at specific ways that direct sourcing can contribute, it is also important to understand the demand and supply dynamics of sustainable products.

The onus on sustainable sourcing has increased the demand for sustainable and low-emission inputs across industries, from raw materials to highly engineered components.

Materials such as green steel, recycled plastic and recycled aluminum that have lower emission intensity are in high demand, with production capacity likely to fall short of future demand.

As a result, businesses can expect to procure these materials at steeper price points in the future.

For example, by 2030, Europe is expected to be home to nearly 50 green and low-carbon steel projects, according to the Leadership Group for Industry Transition’s compilation of projects. The demand for green steel is still likely to be far more than the available supply in the region.

Aligning Direct Sourcing with Sustainability

Here are 6 ways to merge direct material sourcing with sustainability goals:

1. Choose Like-Minded Suppliers:

The formula for direct sourcing is simple – improve sustainability by selecting sustainability-focused suppliers. But this is easier said than done as it can be difficult to assess if suppliers are really practicing what they claim. The selection criteria must therefore include a careful assessment of environmental, social and ethical practices. This also means that teams can no longer make a supplier selection decision based on costs alone.

Instead, they must take a holistic look at the overall supplier performance including emission reduction plan, manufacturing processes, workplace safety, etc. One way to assess suppliers is to incorporate sustainability-related metrics in the RFP evaluation. At times, evaluation may also require on-site visits of supplier facilities and worker interviews.

Here is a checklist that businesses can use to identify the right supplier:

• Does the supplier have a plan to minimize their carbon footprint?
• Is the supplier aware of necessary regulations and has a system in place to adapt to changing regulations?
• Is the supplier willing to share information about their suppliers of raw materials and sourcing practices?
• How does the supplier handle waste and product end-of-life?
• Does the supplier offer safe working conditions in their facilities?
• Does the supplier have a plan to use eco-friendly materials and implement energy-efficient manufacturing processes?
• Does the supplier have any short- and long-term sustainability targets?

2. Streamline Data Management:

In addition to materials, direct sourcing teams need to ensure smooth flow of data and information between various stakeholders in the supply chain. This allows accurate assessment of the current performance of suppliers, which in turn supports decision-making. It also enhances the transparency needed to look through different layers of the supply chain.

Streamlining data management includes defining what data to collect from suppliers, how to collect this data and finally how to use this data to assess performance and improve sustainability.

By analyzing data obtained from different suppliers, direct sourcing can measure performance against sustainability metrics and identify areas of improvement. It may also be able to identify any unsustainable practices in operation.

Listen: Direct Material Sourcing in 2024: Strategies for Success

3. Set Clear Expectations:

Businesses must make their expectations clear when engaging a supplier. This can be done by framing a code of conduct that outlines the sustainability performance standards expected from the supplier throughout their engagement with the business. Additionally, set some realistic targets that suppliers must strive to achieve over a period. For example, lowering the emissions by a certain percentage.

4. Explore Recycled and Substitute Materials:

Sustainability-focused teams can look to use recycled materials while sourcing raw materials. By utilizing these discarded items, they can lower the demand for virgin materials and minimize their environmental impact. This can also reduce the amount of waste going to landfills.

Additionally, teams can work with suppliers to adjust the material mix. This can be done by replacing high- with lower-emissions materials. Alternately, they can redesign products to use less or different materials. One way of doing this is by developing circular products whose components and materials can be recovered for recycling or reuse.

5. Negotiate Low-Emissions Procurement Contracts:

Sustainability goals can also be aligned with contract management and negotiations, with traditional contracts giving way to new low-emissions contracts with suppliers. Businesses can first define targets based on their strategic goals for supply chain decarbonization. These targets can then be incorporated by direct sourcing teams in supplier contracts and reviewed periodically.

6. Leverage Technology:

Equip direct sourcing teams with technology, tools as well as training needed to integrate sustainable sourcing into procurement practices. This can include responsible business training and management plans. Additionally, by accessing a vast network of active suppliers, AI-powered technology can make supplier recommendations based on category, region and specific requirements. It can also identify new innovative suppliers, thereby unlocking the potential for supplier-driven innovation.

Read: How to Implement a Sustainable Procurement Strategy

Spread the Program Over a Period

The results of sustainability initiatives may not be immediately visible and direct sourcing needs to spread out the program over time. This approach can also help suppliers who do not have an in-depth understanding of sustainability parameters but are willing to take initiatives to improve their sustainability scores.

The key objective of working with suppliers is to educate, train and help them achieve continuous improvement, thereby reducing potential sustainability-related risks and enhancing performance.

Further, direct sourcing teams must monitor supplier performance and help them improve operations. They should also frame a rewards program to incentivize suppliers who show significant improvement.

By working with the right suppliers and the right data and technology, direct sourcing has several opportunities to make a real impact and improve sustainability performance.

Learn about GEP’s intelligent direct material sourcing software.