In these difficult economic times, it is tempting to focus purely on short-term objectives and forget about longer-term priorities. Until last year’s credit crunch struck, environmental issues – and particularly carbon emissions – had been rising steadily up both the corporate and purchasing agendas. But, in recent months, pressure to cut costs, improve cash flow and keep supply chains functioning have pushed sustainable development to one side.
This is a concern not just for environmental pressure groups and campaigners, but for business and political leaders as well. Speaking at the launch of the World Economic Forum’s Global Risks 2009 report in London last week, Raj Singh, chief risk officer of Swiss Re, said the “immediate financial crisis” threatened to stall decisions and investment by both governments and companies designed to tackle climate change.
“We cannot lose sight of some of the longer-term risks that are real, and climate change is one of those,” he said – a point that was also made forcefully by new US President Barack Obama in his inauguration speech.
The procurement community clearly has a big contribution to make in increasing the usage of greener materials and products, cutting out waste and reducing carbon emissions. However, even before the world’s most developed economies began sliding into recession, buyers were struggling with the business case for sustainability.
Subjective measures
According to a recent report by CAPS Research in the US, green initiatives with a “verifiable payback or ROI” calculated using traditional financial criteria are “are largely non-controversial and broadly encouraged”. But those that promised longer-term savings or whose benefits could not easily be quantified were far less likely to be given the go-ahead.
Despite some progress in using total cost of ownership models to make a financial case for sustainable sourcing, objective and accepted standards and metrics are still thin on the ground, the report noted. “The business case for many green initiatives is more qualitative than quantitative,” wrote its author, Bryan Ashenbaum, an assistant professor of supply chain management at Miami University.
He argued that “the assessment of green strategies needs to move beyond the short-term focus on immediate costs”. But given that this is exactly what many buyers are targeted and measured on, it is hardly surprising that most procurement functions are not very far down the road when it comes to sustainability.
How far do you go?
At the annual conference of the European Institute of Purchasing Management (EIPM) in Archamps, France, last month, more than 100 practitioners came together to compare notes on their green sourcing strategies and learn how to tackle some of the more immediate challenges.
Paul Massih, vice-president of procurement strategy at Shell, opened his presentation with an honest assessment of its progress. “We are nowhere close to where we need to be with sustainability in corporate purchasing,” he said. “We have a long way to go.”
One of the main questions Shell was struggling with was how far down its supply chain it needed to pursue its green initiatives. “We don’t have an answer and I don’t think we will anytime soon,” he said.
But he noted that “there are very few second-tier suppliers around the world that are ready to support your sustainability programme”.
Shell, like other oil companies, was working hard to develop new, cleaner sources of energy, such as wind and biofuels, and procurement was taking a lead role, Massih explained. But new technologies wouldn’t really begin to have a significant impact until at least 2015.
Getting sustainability embedded in procurement and balanced against cost and other sourcing considerations would also take “a bit longer than we expected”, he said.
“This is not easy. It is hard work for procurement and the business. But you have to start somewhere.”
A long-term trend
This view was strongly supported by Jules Goffre, who leads AT Kearney’s European procurement practice. He argued that “the long-term view has been eclipsed in recent weeks” and that we had witnessed “a pendulum swing between topics that are ‘hip’”.
Despite this, “we think there is a long-term play for sustainability. It is not a fashion or a short-term trend… Sustainability is about balancing long-term supply and demand.”
Goffre highlighted research conducted by his consultancy which found that purchasers expected sustainability to account for 28 per cent of their performance targets in 2012, versus 15 per cent in 2007.
At the same time, the proportion who said they would deselect suppliers that failed to meet their sustainability criteria would double from 26 per cent to 58 per cent.
However, the survey also found that a majority of companies lacked essential building blocks: a sustainable sourcing strategy, written guidelines and policies, training and staff recognition, and robust supplier performance metrics in areas such as use of recycled materials, sustainable sources and energy, the impact of waste, and greenhouse gas emissions.
Opportunities as well as risks
Goffre’s opposite number at McKinsey, Nicolas Reinecke, agreed that “the carbon issue is not going to go away”, although in the current cash crisis he expected “more marketing than reality in the next few months” on sustainability issues.
There were three reasons it was here to stay, he said: European Union and other governmental regulations, rising energy costs, and greater competition among companies keen to prove their green credentials to consumers.
For CPOs, the carbon issue was an opportunity as well as a risk, because it offered the chance to reduce costs, increase revenues and attract talented younger people into the procurement function.
But Reinecke warned that measuring carbon emissions wasn’t easy, and suppliers’ own data was often unreliable. He suggested that companies could expect to pay €50,000-€100,000 per supplier to get transparency in their supply bases.
And he predicted the emergence of many more service providers in this market, which could be worth hundreds of billions of dollars in a few years’ time.
One such service provider is Beroe, a market research and intelligence firm based in India. Its CEO, Vel Dhinagaravel, told the conference that 90 per cent of carbon emissions were typically generated in manufacturers’ supply chains, rather than internally, and the introduction of carbon taxes would force them to seek both greater visibility and reductions in the amount of CO2, nitrogen oxides and methane.
“After the credit crisis ends, there is going to be a rush for capable, sustainable suppliers,” he said. There was a need for CPOs to ensure that their companies were well positioned to take advantage when market conditions improved.
Individual responsibility
Jean-François Baril, senior vice-president of sourcing at Nokia, stated that “the major risk now is the financial impact on our supplier community”. The market leader in mobile phones expected a big fall-off in sales during 2009 and for some of its 80 strategic suppliers to go bust, he said.
Nevertheless, it was vital to keep environmental issues on the procurement agenda. “Whatever the weather, it is very efficient to think sustainability… It doesn’t cost to be sustainable and to work with the best suppliers.”
He added: “We have an incredible opportunity to demonstrate to our CEO, CFO and the boardroom what we can deliver.”
This might mean swimming against the tide for a while and resisting short-term pressures.
“When times are good, it’s easy to be a nice guy. But when things are tough, how do you handle the pressure? How do you work with suppliers?”
Sustainability started with individual behaviour, he argued. People had to be prepared to change their own habits. Baril described how he had swapped his gas-guzzling SUV for a smaller car two years ago because his kids were embarrassed to be seen riding in it.
At Nokia, being seen to be green was an important factor in attracting younger people to work for the company, as well as for its brand image, he said. “We are far from perfect, but I think we take it extremely seriously – and personally.”
Lost in translation
Olivier Lefaivre, vice-president of procurement processes and tools at Axa, the Paris-based financial services giant, said that although its buyers – who were typically aged 30-40 and MBA educated – took part in green initiatives such as recycling in their private lives, getting them to do the same in a work setting was not easy.
Although 250 had signed a code of ethics, sustainable development clauses had been included in contracts and questionnaires had been sent to suppliers, the strategy had been “defensive” and “not very effective”, he said.
Buyers couldn’t see how to balance good intentions with risk and cost requirements, while suppliers felt the burden of complying with multiple standards from different customers.
Lefaivre explained how, in 2008, Axa undertook a pilot project among 50 key suppliers, designed to develop a more objective and category-based approach to performance assessment and creating sustainable development action plans.
The results had been very positive, he said, and the pilot was being extended to 100 suppliers in 2009. Targets for Axa buyers on sustainable development were also being included in performance objectives for the first time this year.
But Lefaivre admitted that there was still too much cost and hassle involved for suppliers, and that the financial services industry needed to collaborate to agree a standardised approach of the kind implemented in the high-tech sector.
Audit fatigue
“Audit fatigue” among suppliers was a real problem, agreed Peter Laurence, a former supply chain director who is now MBA programme and research director at the EIPM. With auditing and compliance still the main focus of most companies’ corporate responsibility efforts, more pan-industry initiatives were essential.
A survey of 127 purchasing directors by the EIPM last year found that a third of audits focused on environmental regulations, with only 8 per cent on CO2 emissions. Employee health and safety and working conditions were the most common areas looked at.
But few firms sought to drill down very far into their supply chains, Laurence noted. “Most audits are at the first tier, but most of the problems are probably at the second and third tiers.”
The EIPM’s research suggested that procurement was increasingly involved and proactive in implementing more responsible practices, but that a lack of clear objectives and skills were the main obstacles.
More than eight out of 10 respondents said “integrating clear/measurable CSR objectives into traditional buyer’s objectives” was the main ingredient required to make further progress.
CHECKLIST:
How to get started with green supply chain strategies
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Start small, but do something. Recycle paper and electronic items, use suppliers committed to recycling, install energy-efficient light bulbs, and so on.
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Make sure that the green strategies you propose are aligned with your overall corporate strategies and goals.
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Incorporate green into purchasing processes and RFPs.
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Be proactive: define yourself and take the lead before non-governmental organisations and others do so.
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Make sure whatever you do, there’s no credible charge that you’re merely greenwashing
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Put together a cross-functional team to scale your green efforts across the company.
Source: “Green” Corporate Strategies: Issues and Implementation from the Supply Management Perspective, CAPS Research Critical Issues Report, November 2008 (www.capsresearch.org)
Geraint John (geraint.john@cpoagenda.com) is the editor-in-chief of CPO Agenda
