A Guide to Building Environmentally Sustainable Procurement Capabilities
The term “sustainable development” was coined in Our Common Future, released in 1987 by the Brundtland Commission, a UN-backed organization created to unite countries in the pursuit of sustainable development. As defined by the Commission, there are three main pillars of sustainable development: economic growth, environmental protection and social equality.
In recent years, initiatives such as the Paris Agreement on Climate Change or the Modern Slavery Act in the United Kingdom signify a much bigger role for sustainability in the global landscape.
Over the last 20 years, sustainability is becoming more important to businesses and governments across the world. Even the recent developments of economies trying to withdraw from the Paris Agreement on climate change are not impeding its further expansion towards becoming a mainstream concern. The economic opportunities created in the transition that is needed towards responsible businesses and cleaner energy are attractive, and the risk of ignoring the challenges if no action is taken is discouraging.
For Procurement groups, economic growth continues to be the target when working to attain more sustainable efforts and development. Social equality as a foundation of sustainable development addresses the cultural well-being of people. Having said that, Procurement functions still have a long way to go.
Procurement’s Ability to Support Sustainability Objectives Is Lagging
Ensuring that supply markets are accessed economically but also safely and ethically is top of mind for CPOs. According to The Hackett Group’s 2016 Sustainable Procurement Study, the need for sustainability stems not only from the requirement to comply with regulations, but also, from the imperative to generate business value through reduced costs, risk management and improved brand value (Figure 2). Many of these objectives align very closely with traditional procurement goals.
Depending on the industry, some issues are more pressing than others. But overall, most procurement functions rank higher the business and social aspects of sustainable procurement (e.g., reduction of supply risk, corporate social responsibility, regulatory compliance).
The ability to efficiently and effectively report on, comply with and manage sustainability-related activities and regulations is important for all procurement executives. However, only advanced functions are able to go beyond this baseline and leverage sustainability as a source of business value. When measured against our Procurement Capability Maturity Model (Figure 3), the majority of organizations’ capabilities areas are at the basic “achieving” level, with many still in the “lagging” category.
In order to reach the Exceeding and Leading levels, procurement organizations need to address sustainability more broadly. Sustainability programs have five principal characteristics:
1. Governance. Clear sponsorship at the highest level of the enterprise has been obtained at more than half of procurement organizations showing clear progress; however, cross-functional governance capabilities — essential for aligning and implementing roles and responsibilities — are lagging at most companies.
2. Information. Companies today actively gather sustainability data due to the need to track and report compliance. But data structures and key performance indicatory (KPI) capabilities are immature. There is typically a lack of consistency and a narrow scope in the choice of metrics used.
3. Skills and talent. Training on sustainability matters has been addressed to some extent, but other critical talent management elements throughout the employee lifecycle are rarely designed to promote desired behaviors. For example, only 24 percent of organizations have aligned recognition and compensation with their sustainability goals.
4. Processes. Conducting risk assessments is the most mature process capability, while supplier management is broadly in need of improvement, not only to ensure compliance but in particular to access to innovation. Despite progress in recent years tying sustainability processes and objectives into procurement, there is still much room for improvement.
5. Technology. Sustainable procurement activities lag in automation, particularly with regard to supplier self-service. Having said that, this is another area where the digital transformation taking place in Procurement will be able to improve efficiency and effectiveness. We expect to see a dramatic improvement across all capabilities through the enablement of advanced analytics and predictive capabilities in the near future.
A Lack of Alignment Between Sustainability Objectives and Procurement Processes
The first (and perhaps highest) barrier faced by procurement functions is poor alignment between processes and stated sustainability objectives. Half of organizations have established only basic linkages between sustainable activities and procurement processes such as supplier selection.
In addition to poor communication, low levels of standardization in sustainability-related activities is a problem: 60 percent of organizations lack a comprehensive, standard, enterprise-wide approach. Since the absence of standardization extends beyond sustainability activities, all companies can profit from defining and formalizing standard, integrated processes which can be enforced company wide.
To ensure that day-to-day activities are in alignment and that sustainable objectives are embedded in procurement’s activities and culture, processes should be integrated across all tasks, including strategic sourcing, sourcing execution and stakeholder management. Mature organizations have already done so and are now at work integrating supplier relationship management (SRM), innovation, purchase-to-pay, quality management and continuous improvement processes as well as their broader supply chain.
Because SRM has received heightened attention in the past several years, capabilities in this area continue to develop. The increased attention has improved companies’ abilities to effectively manage suppliers on sustainability matters and thus raise value delivery. Eighty percent of organizations currently include policies and guidelines during supplier onboarding (Figure 4), an improvement over a similar 2014 study. However, fewer organizations have a process for optimizing joint sustainability objectives, sharing best practices, coordinating incentives, measuring results or taking actions. This includes innovation generated from sustainable procurement activities.
Further, only a limited number of procurement functions have added sustainability to a comprehensive performance management process. Much more can be done to avoid an isolated measurement process which is not integrated in support of a full lifecycle management approach. Over a third of organizations struggle with metric selection and robustness of definitions for sustainable procurement activities. There is no consistent selection of metrics; definitions vary across the enterprise; and metrics, if there are any, are ad hoc and narrow in scope (only environmental, only ethical, etc.). Furthermore, even when metrics are tracked, they often go unreported and thus represent a waste of procurement resources’ time.
Improving Capabilities in Sustainable Procurement
Procurement processes
Procurement organizations looking to tighten the alignment between their processes and corporate sustainability objectives have numerous opportunities to do so throughout the category management process. Often, companies make the mistake of having a separate, somewhat isolated, sustainability-focused team. A better approach is to incorporate sustainability goals into the existing category management team’s processes and governance strategy. For example, in category planning and segmentation, the characteristics of sustainable procurement should be identified and principal considerations and goals should be taken into account. In the same way, activities and goals need to be tracked during category strategy execution, and performance should be assessed in the category performance-management portion of the process in order to ensure that all category objectives, including those related to sustainability, are met.
Supplier management
The strategic and tactical elements within the full scope of SRM practices should be addressed when managing suppliers. Embedding sustainability in supplier management practices requires a systematic review of the SRM framework, including strategy and governance, supplier stratification, performance management (for all supplier types) and supplier development. A review of tools available to manage SRM information should also be undertaken.
We recommend considering some of the following elements:
• Embed sustainability elements in SLAs. For example, child labor restrictions, limitations on CO2 emissions and usage of recycled materials can all be incorporated into supplier SLAs.
• Consider sustainable objectives in the one-, three- and five-year plans developed for strategic suppliers.
• Include relevant sustainability aspects in detailed supplier capability studies.
• Build sustainable procurement criteria into innovation-related activities to target and make maximum use of opportunities with the supplier base.
• Assign resources to help suppliers improve their own sustainability performance and capabilities.
• Encourage relevant suppliers to submit improvement ideas but make sure that the process to respond and leverage ideas is also applied to sustainability topics.
Performance management
Data structures and KPIs developed for sustainability are widely in need of improvement. Procurement functions should develop a well-defined and comprehensive set of metrics, track them formally and integrate them into the performance management process of the function (both internally and externally).
From a data-structure perspective, the following questions should be answered:
• What do we want to achieve when it comes to sustainable procurement? Identify corporate as well as procurement objectives to make sure they are in alignment, and identify the critical success factors and the drivers of performance.
• How will we know if we have achieved our objective? Metrics should be defined with both management of the fundamentals (e.g., cost reduction) as well as support for strategic initiatives (e.g., innovation) in mind.
• What are the short- and long-term measures of performance? Interim goals and desired results should both be defined.
Finally, procurement should examine its governance and management processes to ensure that sustainability issues are addressed, such as which roles have responsibility for achieving sustainability objectives and for carrying out the reporting process.
An Interconnected Sustainable World Enabled by Big Data
A great opportunity to further expand capabilities and performance can also be driven by procurement’s active participation in the company’s digital transformation. Sustainability can only profit from the efforts in creating a more interconnected / networked world where internal and external parties can exchange information and collaborate more efficient and effective, while making full use of advanced analytics enabling not only to generate insights but also predict future developments and its impact. The benefits will be huge.
Soon interactions with suppliers across the supply chain will be much easier, taking collaboration and sharing of information (performance, best practices, etc) to new levels. Advanced analytics will also help companies become less reactive and more proactive, based on predicted potential opportunities and risks. Developments such as blockchain will truly change the game for sustainability enabling visibility, accuracy, speed, early detection, and cost efficiency.
Looking Ahead
Procurement organizations need to do more with less, and sustainability is yet another area where the function needs to be able to deliver at an affordable cost. Good results are being achieved so far, but the business needs more as consumers and the public want more. Procurement has to raise the bar, and additional capabilities are required to meet the stated objectives.
In the future, only procurement organizations with mature sustainability-related capabilities woven into their entire service delivery model will be able to add sustainability to their portfolio of value-generating services.
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