Procurement and Sustainability

Climate change increasingly has been on the minds of business executives of Fortune 1000 companies. More political instability in already volatile regions can inhibit expansion or hurt existing operations. Higher temperatures and weather anomalies can impact the supply of a resource a company desperately needs. In the broader context of sustainability, not replenishing a resource could lead to its depletion and a company losing an asset. Over the coming years, the role of a procurement officer may become all the more stressful as more people in the world grapple with the prospect of less readily available goods and services.

Because of concerns arising from the prospect of increasingly limited resources, procurement officers are sometimes pressured to develop sustainable procurement operations in order to keep costs down, ensure supply stability, or a combination of the two. However, many businesses have not engaged in a sustainable procurement program. Of those that have, many do not experience economic returns. Below, we will explore the relatively low interest in, and perceived insufficient return on investment from, sustainability programs. We will then showcase examples of successful procurement operations that have a sustainability component, followed by the benefits of a successful, sustainable procurement endeavor.

Where We Are

For the procurement world, sustainability is seen as a soft mandate, meaning there is a tacit, voluntary goal to make a purchase environmentally friendly. The soft mandate implies many companies to do not take it upon themselves to work on sustainability programs. A recent Consero survey of procurement leaders reinforces this belief; a plurality (43%) of respondents said they do not have a sustainability program to reduce costs. The procurement market’s tepid response to environmental challenges could be driven by the fact that a third of respondents in the same survey engaged in a sustainability program and did not experience cost savings.

More broadly, the business community has detailed reasons why sustainability has not become top of mind. The metrics that exist to measure a sustainable business model or program are many and can be confusing, preventing them from yielding useful guidance on the operations of the business. In the past, consumers have not strongly factored environmental impacts into their purchasing. Importantly, companies are faced with a variety of threats (increasing costs and cyber risks to name a couple), and executives do not know where to place environmental concerns on the spectrum. In aggregate, the mandate is considered soft because there is a lack of direction and success.

However, the soft mandate may be changing to a hard one. An overwhelming majority (93%) of CEOs believe sustainability is key to maintain business success. Ninety percent of CEOs will start using new technologies to address environmental concerns over the next five years. On the demand side of business operations, consumers have started to change attitudes to sustainability. In 2008, 61 percent of consumers reported awareness in buying green products, up eight percent from 2007. Similarly, 2008 saw a six percent increase in buying energy efficient devices from 53 percent in 2007.1

As a result, global trends are pointing to sustainability, not away from it. It is important then to understand how companies can best use sustainability programs to cut costs. Below are some examples of procurement operations that have been sustainable and successful.

Procurement In Action: Successful Sustainability Efforts

Sustainable procurement plans often carry a stigma of being a sunk cost. In essence, these plans are viewed as something a business has to do today even though the costs outweigh any immediate benefits. However, some companies and business environments have overcome this issue effectively. Several examples of these include the French and Hong Kong governments and the company, Bayer—case studies for which are set forth below.

In France, the Ministry of Education was required to purchase more re-manufactured toner cartridges for printers. The change in the percentage of reused toner cartridge was quite large; in 2006, only six percent of cartridges were re-manufactured as opposed to 40 percent in 2011. As a result of this program, the Ministry was able to buy re-manufactured toner cartridges that were 30–40 percent cheaper than the conventional alternative. They were also able to hire 25 more people in the first three years of the operations.2

France’s case study points to some interesting takeaways for procurement officers. First, supply of reused cartridges was able to meet the demand. Second, the cost savings allowed the entity to recruit more talent to help with operations relating to and outside of procurement. Third, the organization increased its environmentalism while reducing costs. Fourth, France’s government is one of many that are hoping to decrease their environmental footprint. Such trends may help standardize sustainability expectations in other areas of procurement.

Hong Kong’s government is another example of government-created sustainable procurement standards. In 2008, the city gave out three contracts to replace all conventional traffic lights with 85,000 LED traffic light bulbs. The change has resulted in a savings of USD $48,500 per year.3 As a result of Hong Kong’s efforts, suppliers changed their products to make sure the lights were compatible with the existing Hong Kong infrastructure, and they found themselves benefiting from similar internal initiatives.4 There is an implication then that the suppliers in procurement operations are starting to change their behavior, meaning the procurement officer will increasingly operate with eco-friendly practices.

Suppliers in procurement operations are starting to change their behavior.

The Bayer company offers an additional useful case study. The company is spread across a variety of businesses and products, requiring a procurement operation carrying a cost of €20.3 billion. After they unveiled their sustainability program in 2009, the company was able to train over 800 of their suppliers on sustainability practices.5 As a result, they were able to address the diverse sustainability challenges in a complex global supply chain. They also created standards that benefited the entire industry and began to yield meaningful results—both financial and otherwise.

Specific Benefits

Applying the case studies above to a larger context, one can foresee many broad benefits from a sustainable procurement initiative. This section details potential benefits and provides recommendations on how to implement a sustainability program.

There are several possible benefits from a sustainable procurement operation, including but not limited to: cost savings, increased talent acquisition, a domino effect for other departments and businesses, and improved perceptions by the public. With respect to cost savings, it is clear that effective execution of a sustainability program and the right circumstances can have a potent positive impact on the finances of the business.

The cost savings can increase profitability or allow you to divert more money to other parts of your organization.

The cost savings can increase profitability or allow you to divert more money to other parts of your organization. Indeed, increasing talent acquisition is part of this chain reaction. One of the primary worries for a sustainability program is making sure it succeeds. If you are successful with the first initiative, the cost savings may allow you to employ talent that can specifically advise on future sustainability programs, resulting in higher marginal returns.

Effective sustainability programs can also influence responses in other core areas of procurement and the supply chain. At the largest level is the domino effect for all aspects of supply. If a company creates multiple programs that are environmentally friendly, then they may help establish a market expectation to supply sustainable products. The standard may well spread to other suppliers, resulting in a level playing field that is uniformly more environmentally friendly. Lastly, such a systematic change may alter the public’s perception about your company. As consumers become more environmentally conscious, companies lagging behind on meeting that demand may see their profits suffer. Companies staying ahead of the game through innovation will likely see benefits from an expanding consumer base.

Sustainability programs tend to have a large-up-front investment with rewards paying off once they are implemented. An already thinly spread procurement budget may not be able to absorb such a large cost at the beginning. Acknowledging this predicament, a good practice for those interested in sustainability but of inadequate near-term resources may be to target sustainability programs that are cheaper or can be implemented over a few years. The French Ministry’s program, for example, developed gradually over three years. Hong Kong started with a relatively small aspect of their public works services. Working similarly in stages or over a period of years may yield modest yet quick successes that save the company cash without requiring full buy-in on major P&L risk. Consequently, the procurement officer may be given the go ahead to work on larger sustainability projects once some early success is proven.

Conclusion

Many corporations have a strong reputation for fostering innovation while cutting costs. Sustainable projects for procurement are one of the next steps in the evolution of the business world. While the investment may be large at the beginning, the payoff for the company, and the world, could well be worth it.