by Kumar Singh, Research Director, SAPinsider  

The Growing Importance of Supply Chain Sustainability

As supply chains become global and complex, every company faces environmental, social, and governance (ESG) issues within their supply chain network. While the most talked-about aspects are environmental problems include climate change, carbon emissions, pollution, and waste management, social and governance issues are also rising. Social problems are product liability, consumer activism, and the rising risk of modern slavery and labor issues. Governance includes business ethics, privacy, data security, board effectiveness, and a company's corporate culture. ESG issues have always been important because they contribute to the sustainability and management of a company’s long-term health. The term ESG originated from the investment community's concern with sustainable investments. However, sustainability has long been a topic in procurement, and the recent increase in importance has been driven by consumers who no longer expect companies to sell goods at the lowest price only with no regard for where the product originated and how it landed in their hands. There is a heightened public awareness of where raw materials are sourced, how they were shipped, and what impact it created on the environment in that process. This also leads to an increasing need for supply chain transparency related to labor and human rights. ESG has also become more prevalent as the formal frameworks for ESG have advanced. Over the past few years, some of the most prominent standard setters have issued guidance to help companies implement and compare their ESG efforts against the industry benchmark. New and innovative products have been launched that have helped accelerate adoption in this area. A long-standing player in the space is EcoVadis, the world's largest and most trusted provider of business sustainability ratings. SAPinsider recently invited Elise Caves, a Product Manager from EcoVadis to discuss the critical aspects of sustainability from the context of supply chain and procurement. Right off the bat, she confirmed our hypothesis about the growing importance of sustainability: "We've seen a huge uptick in the importance of sustainability, or ESG. In collaboration with the Stanford Graduate School of Business, we just published our annual Sustainable Procurement Barometer Report, where we asked the question: How important is delivering on corporate sustainability goals to your procurement organization? 63% of executives said it's imperative. That's exciting. But what's interesting is that we asked the same question in 2019 for the same report, and only 25% of them gave that answer. So, we've seen an explosion of interest in this topic in the last few years. It's important to realize that people are starting to see the benefits of sustainability, specifically sustainable procurement, for supply chain resiliency, avoiding supply chain disruption, and meeting the expectations of stakeholders throughout their company." You can watch the full video of the discussion here: Discussion with Elise Caves

 The Role of Sustainable Procurement in Supply Chain Sustainability

 Procurement is one of the most prominent among all the sub-functions within the supply chain that impact ESG goals due to its strategic nature. The purchasing department plays a critical role in the sustainability of a business since procurement represents a significant percentage of costs for an organization depending on its industry. Developing sustainable procurement is incorporating social, economic, and environmental factors into the organizations' processes and systems for procuring goods and services. A sustainable procurement practice involves complying with environmental laws and targets, removing hazardous materials and waste from the supply chain, and thoroughly screening suppliers on social, labor and ethical practices.  Despite the perception from some buying organizations that sustainability requirements for suppliers cost more, these programs can actually provide a way for companies to cut costs, identify and mitigate key risks (and associated costs), and create value.  Reputation has been critical to a company's bottom line, but standing alone doesn't drive sustainable procurement. Sustainable procurement solutions are a focus area for EcoVadis as well, and Elise reinforced our take on its importance: "At EcoVadis, we have been engaging with procurement teams on sustainability for over a dozen years. It’s been exciting to see ways that customers are going beyond the compliance mentality, and using the data to drive new value creation and, ultimately, positive impact. One of the findings from the annual sustainable procurement barometer report was that during the COVID crisis, 63% of buyers and 71% of suppliers said that sustainability had helped them be more resilient during the crisis.”

How Sustainable Procurement Helps Organizations

The benefits of sustainable procurement are manifold, which has propelled this topic to the top of the agenda for many buying organizations, as Elise highlighted. "Having sustainable procurement topics at the forefront has been something that has helped buyers be more resilient, be ready to innovate when necessary, and have a better understanding of the buyer side of their supply chain and what they're already doing on these topics.". Sustainable procurement also generates benefits for buying organizations in the following three key areas:  Risk & Reputation – In today's world of overload of information availability and social media, the association of a supplier with an organization with bad practices like child labor or pollution can have a negative financial impact on the organization and its brand value. This is just one example of how procurement plays a significant role in risk and reputation management. Sustainable procurement helps get visibility into aspects to better manage these risks prudently. Revenue and Cost Reduction - Sustainable practices are rooted in more efficient use of resources and reduction of waste, thus ultimately driving down the total cost of ownership (TCO) of purchased goods and services. Moreover, sustainability performance is key to product differentiation, which can help grow sales and/or boost margins, as well as increase brand equity and loyalty. Future-proofing - The Covid crisis taught us that sustainable procurement practices can help an organization build resilience in its supply base and be better prepared for social, economic, and environmental shocks. Additionally, as Elise indicated, it helps generate innovation which is critical for organizations today to stay competitive and continuously enhance customer experience.

Tools for Building Sustainable Procurement Capabilities

A sustainable procurement program enhances a company's overall risk mitigation and procurement metrics, making it a valuable function for CPOs to add value to their business and provide input to its overall strategy. With this recognition comes the need for tools and services that can help address these needs. While there is a comprehensive portfolio of tools available in the market today, certain features are critical to have in a sustainable procurement tool. Some of the key features are:

• Mapping and predictive profiling of multi-tier supplier networks to quickly gain visibility and discover hidden risk concentrations, as well as opportunities to create positive impact.
• A platform for engaging suppliers and assessing all sustainability/ESG related practices and risks.
• An assessment methodology that covers all sustainability criteria (including environmental, labor, and ethics), is relevant to their category, and ideally is based on a “performance scorecard” approach, with benchmarks and detailed feedback for suppliers.
• A system to monitor global events that will impact the company's supply networks with updates and alerts of changes to supplier-related ESG risks
• Content - e.g. such as how-to guides and E-learning courses, etc. - to help suppliers build their knowledge on relevant sustainability topics
• Corrective action plan tools that allow suppliers to collaborate with one or more buyers to prioritize and track improvements.

Integration with other business applications and ERP tools like SAP is also a critical feature. Elise emphasized this as well in her quote: "When you're making a purchasing decision, or understanding supplier performance, that often happens from within an ERP tool. And what we see with some of the best companies is this integration into their whole procurement system, and into their company. So buyers can get real data on how their suppliers are doing when it comes to sustainability, where their weak points are, and where they've grown over time. And they're able to use that to understand their performance, ...and in the end to have all that information at their fingertips without having to leave the platform where they're doing that work."

What Does This Mean for SAPinsiders?

Procurement channels are among the first places to focus on when optimizing operations and improving sustainability. Since supply chains account for most of the costs and sources of inefficiency, they also emit more emissions than internal operations. Sustainability is not easy to achieve in practice. Monitoring, communicating, and collaborating with hundreds or thousands of suppliers at once is no easy task.  Here are some effective strategies for implementing sustainable procurement: Take a performance approach to monitoring. Sustainability is a journey, and it is essential to evaluate and respond appropriately to your supplier's progress and achievements. This enables you to reward good practices and reinforce their commitment to sustainability, and help underperformers to improve. Complement this with risk mapping to prioritize your engagements, and sometimes on-site audits. Increase engagement by offering incentives - this can be monetary such as increased commercial volume, or selection criteria for a preferred supplier or innovation programs, or via a recognition program - such as a ‘most sustainable’ by category or region award presented at a supplier event. Your incentives do not have to be monetary, but they should value your partner's time. Integrate sustainability into the procurement workflow. No amount of evaluating suppliers and prospects will be adequate unless the results are integrated into key procurement decision points and processes - such as sourcing, tenders, SRM, contracting, etc.  Processes must be streamlined across all parties involved, not just internally, so digital integration is a must.  Adoption and integration can be maximized once sustainability becomes a ‘weighted’ criteria - alongside other procurement factors and metrics - within those decision tools - such as an SRM supplier scorecard, RFX qualification criteria, or a weighted awarding factor. You and your team must not just evaluate, but use the insights to drive your business forward. Be an example for your suppliers. It's essential to practice what you preach, and that's true here. Ensure your employees and your operations are sustainable and eco-friendly. If it's not a priority for your team, then your suppliers and partners will follow suit.