In the past, purchasers who thought environmental or social issues were important lacked the ability to act on those interests in any practical way at scale. Now, with the wealth of information available pertaining to an individual company's sustainability practices, buyers can act. As a result, companies that care about sustainability and climate change are using the power of their purchasing dollar to influence the operations of tens of thousands of vendors.
All of this adds up to a new era of supply chain management, where powerful price negotiation mechanisms, such as reverse auctions, are joined by powerful quality negotiation mechanisms, such as custom scorecards, RFP questions, and massive sets of comparison data from surveys such as the Carbon Disclosure Project.
Why are companies pushing sustainability requirements into their supply chains?
Collaboration: First, the more companies there are that are working on sustainability initiatives, the easier it is to perform the overall job. Companies that have made it past the first turn in their sustainability journey have come to realize that acting alone is not effective. All businesses operate as part of a system. Companies that are reducing their carbon footprints or other environmental impacts often benchmark performance with competitors or other leaders. This benchmarking generates a lot of information about how improvements can be made in areas such as product design, operations, and transportation. Solving climate change as a global problem requires as many stakeholders as possible doing as much as possible. This has resulted in both collaboration among competitors (for example, Nike's open-source efforts to share green rubber with the world) and collaboration with suppliers (Procter & Gamble's supplier sustainability efforts). The more oars in the water, the better.
Since the supply chain accounts for a large percentage of a company's total carbon emissions, more and more companies are requiring their suppliers to engage in sustainability practices, and this process is working its way through the entire value chain.
In addition to their environmental benefits, these programs also contribute to long-term business goals by combating variability, generating performance improvements, and mitigating risk. The Carbon Disclosure Project - a nonprofit organization that is exploring how more than 3,000 organizations around the world are responding to the call for action and transparency in managing carbon and climate change in their supply chains - revealed that 86 percent of companies generated commercial benefits through strategic sustainable procurement practices in 2010, compared to only 46 percent in 2009.
Risk Management: Companies have a vested interest in the long-term viability of their supply chains. So by working with suppliers to measure and disclose risks, buyers can make informed long-term planning decisions. One of these risks is the negative impact of climate change on the availability and cost of natural resources that are product feedstock. Another might be the regulatory risk that will increase production costs, especially among companies in high-carbon-footprint sectors such as manufacturing, agriculture, air transport, building materials, and forestry and paper. The upstream cost increases become increases in prices to buyers.
These risks and concerns are driving joint process improvement efforts between companies and their supply chain partners to improve collaboration and efficiency, reduce carbon emissions, and ultimately generate cost savings for members and suppliers. Two basic tenets have been developed that have proven successful when developing a supply chain sustainability program:
- 1. Engage suppliers. Clearly communicate what, why, and how. Suppliers need to know why customers want them to provide data and how they plan to use it both now and in the future. Open communication greatly increases supplier support and opens the door for mutual savings opportunities. Significant benefits can be realized from developing a relationship management strategy that learns from the leaders and encourages and informs the rest.
- 2. Use carbon as procurement decision criteria. It is critical to create criteria that can also take into account the actions suppliers are taking to improve their climate change performance, and not just their emissions record. The impact of carbon and climate change on business in the future may be an important screening factor as to with whom the company does business. Those companies that embed this into their procurement functions are ultimately more likely to gain the greatest benefit.
Sustainability in Practice
According to a recent McKinsey global survey, reducing carbon footprint and creating a greener supply chain has increased substantially as a key priority for companies, with 16 percent of respondents citing it as a top supply chain management goal for the upcoming five-year business cycle, compared to only 3 percent citing it as critical within the past three-year business cycle.
Leading-edge companies are making significant strides in developing industry standards for supply chain sustainability. For example, Jones Lang LaSalle recently served on a committee that developed a "Supplier Environmental Sustainability Scorecard" for Procter & Gamble. Designed to measure and improve the environmental performance of its key suppliers, the scorecard assesses the company's suppliers' environmental footprint and encourages continued improvement by measuring energy use, water use, waste disposal, and greenhouse gas emissions on a year-to-year basis. Procter & Gamble's Supplier Sustainability Board encourages more than 20 leading supplier representatives from its global supply chain - including Jones Lang LaSalle - to use the scorecard in their own supply chains.
"Environmental sustainability is a responsibility we all share," says Rick Hughes, chief purchasing officer at Procter & Gamble. "The scorecard is a tool we can leverage together to monitor and measure our improvements at reducing our environmental footprint."
Another example is IBM, which has one of the largest and most complex supply chains in the world spanning 28,000 first-tier suppliers in 90 countries. The company recently announced new management system requirements to advance sustainability across its global network of suppliers. IBM's first-tier suppliers are now required to establish and follow a management system to address their corporate and environmental responsibilities.
Jones Lang LaSalle has developed its proprietary OneView Finance (OVF) Sourcing Module for greening the supply chain. With more than two dozen of the firm's largest facility management client teams utilizing the technology, OVF Sourcing has more than 1,200 client-facing supply contracts initiated into the system across the globe, with more than 20,000 unique supplier records in its database. By rating supplier sustainability within this database to generate an overall supplier performance score, green suppliers can be connected to green clients, enabling them to better support their corporate sustainability goals.
"This global system and its related processes deliver a competitive advantage to Jones Lang LaSalle in both our execution with current clients and selling capabilities with prospective clients," says Marc Campbell, senior vice president of Strategic Sourcing at Jones Lang LaSalle.
This Phenomenon Will Speed Up
The inventor and businessman Ray Kurzweil has modeled how the exponential growth of technologies transforms industries - and the key to this transformation is information. Once an industry or system is translated to an information technology, Kurzweil's Law of Accelerating Returns indicates that the power of these systems will double every year. This compounding effect has great implications for the ability of supply chain professionals to incorporate environmental and social factors into purchasing decisions. Now that sustainable purchasing is an information technology, this practice is destined to accelerate exponentially in the coming years.