Amid spiralling raw material prices and huge environmental pressures, sustainable procurement has now come of age
The “Goldilocks” era – a post-Cold War period of low interest rates and low inflation – has yielded to a new phase of globalisation defined by economic turbulence and higher prices for almost everything. With the developed world seemingly in a downturn, fuelled by the US sub-prime mortgage crisis, supply management strategies are being disrupted in ways that were unforeseen a few years ago.
The causes may be numerous, but a key factor is the rise of the “Bric” countries – Brazil, Russia, India and China. This development has led to a worldwide rush to secure the resources for further growth and almost no raw material has escaped the soaring prices that inevitably followed.
Since late 2004, for example, the Reuters/CRB Commodities Index shows that prices have doubled to reach historic highs. In little over three years, a situation where procurement leaders had the “wind at their backs” as a flood of ever-cheaper goods from the East came to Western markets, has been reversed.
As well as inflating prices, this resource-grabbing is putting a profound strain on our planet. The new era of global economic volatility is also one in which environmental issues have risen to the top of the business agenda. After years of fine words but few actions, sustainable procurement (aka, “green purchasing”) is finally coming of age. Procurement leaders who in the past were congratulated for negotiating the best prices will quickly find themselves out of step unless they adopt a new toolkit.
Along with traditional tools, such as challenging every supplier’s price increase, and more recent ones, such as hedging strategies for energy, currency and other risks, you’ll need some new ones to address the environmental and social considerations that are at the heart of the sustainable procurement agenda. Here are three strategies that can help you to meet your objectives during these difficult times.
First, use less. Smart CPOs are seizing on the opportunity to become “demand management champions”, leading a reduction in resource use in their organisations. They know that cutting consumption brings a predictable result: cost savings and less environmental impact. After all, even if the price of a product has risen by 20 per cent, consuming half what you did last year will still deliver a cost saving in absolute terms. And reducing total organisational consumption is arguably easier than managing price fluctuations.
A successful demand management champion will also apply lean or Six Sigma principles to wring waste out of operations and the supply chain. Additional benefits can include fewer carbon credits that need to be purchased and lower percentage-based taxes and fees.
Second, look for recycled materials. Many procurement leaders are pursuing an aggressive strategy of substituting cheaper recycled raw materials and recycled-content finished goods wherever possible. This reduces exposure to across-the-board inflation and supports a sustainable supply loop. The recycling industry is developing quickly as a result of increased demand. If something isn’t available yet, it soon will be, so keep your eye on the market.
Third, switch from acquisition to service. One of the most innovative “green sourcing” strategies available is to move from a goods acquisition-based model to a services-based deliverables model. A good example is the way document management companies such as Xerox, Ricoh and Toshiba are contracting with their customers. Rather than buying machines, customers pay a monthly fee for all of their document management needs.
This model can be applied across many categories so that the supplier is motivated by profit to use less of the earth’s resources while providing a high level of service. Implementing the model is as easy as embedding it in your next request for proposal.
CPOs who adopt sustainable approaches can support corporate social responsibility goals and potentially reduce operating costs. Procurement is uniquely positioned to lead organisations through these turbulent times.
Previous downturns have often seen our profession’s value as a cost-cutter rediscovered by our boardroom colleagues. But now there’s the environmental dimension to manage as well. Rising to this challenge can only boost our profile and improve our access to future opportunities.
Jordan Sampietro (jsampietro@hotmail.com) is CEO of Sustainable Procurement Strategies in Santa Clara, California
