SUSTAINABLE PROCUREMENT

Greenish blue globe showing transition of procurement companies towards Green Procurement | EmpoweringCPO

With the current level of commitment from all major countries for climate change mitigation, the world is on target to warm by 2.7 degree centigrade by end of this century as compared to the pre-industrial levels. Even this rise some climate scientist feel can be disastrous because this may lead to high extreme temperatures, ferocious weather, substantial rise in sea levels and permanent damage to many ecosystems. There is no doubt that going forward the regulations will be more stringent to ensure voluntary commitments are honored. Procurement organizations worldwide can contribute a lot in this effort, they will have to transition into Green Procurement organizations, this is not only crucial but the only way for the coming years.

What is Sustainable Procurement?

Sustainable Procurement is looking beyond the traditional financial evaluation, it involves taking into consideration the environmental goals and social benefits. The decision is based after evaluating life cycle cost of a product or service being purchased and its impact on environment and associated social risk and benefits.

Benefits of Green Procurement:

In transitioning to green procurement the organization can reap following benefits:

  • Helps in improving risk management capabilities that may arise because of either risk to customers or company brand. This initiative helps in identifying and screening suppliers that may pose reputational risks, such as manufacturers that use toxic material or a supply chain partner that is exploiting child labor.
  • Carbon regulated markets are gradually increasing and suppliers will face additional carbon costs in future. Majority of product related emissions for most companies occur outside their operational boundary. Suppliers with high carbon footprints are exposed to risk of increased operational cost and could even face shutdown.  Sustainable Procurement related initiatives help companies prepare for the looming regulatory environment and explore long term cost saving opportunities.
  • Many institutional investors are gradually considering sustainability in procurement and supply as part of their valuations of a company’s medium to long-term prospects for return on equity. Specific sustainability-related metrics are included in their portfolio allocations.
  • Helps in complying with social regulations. The process also facilitates in development of local business community and helps build more sustainable supply chain for future.

EmpoweringCPO Sustainable Procurement Strategy & Process:

For a typical Procurement Organization it may be difficult to switch to greener product or service, the goal of procurement department should be to improve upon, compared to their current product or service. The path adopted or option selected can be relatively better, it may not be the greenest, but can be greener compared to the product or service being sourced currently.

To start with the first step is to conduct thorough spend analysis, the objective here is to identify and prepare plan for executing sourcing projects with an agenda of improving sustainability goals of the organization. At the end of this exercise the categories are identified that should be executed in 4 – 6 phases, each phase is of 6 month each. The criteria used for identifying these categories are based on the following:

  • Environmental or Social impact are clear and huge.
  • Plenty of green alternatives are available.
  • Cost or Price of the sustainable product or service is lower or equal as compared to that for the current specification.
  • Focus is on categories that can be supplied by local vendors.
  • Categories for which Ecolabels are available.
  • Even if Ecolabels are not available identifying categories for which International standards and specifications related to sustainability goals are available.

Once the categories have been identified the next step is about executing the sourcing projects. In this part of the text the procurement interventions that are necessary to achieve the goals of sustainability have been elaborated. The below table points out the key interventions for all the major sourcing steps:

#Strategic Sourcing StepTraditional ProcessKey Procurement Interventions to achieve Sustainability Goals
1Requirement & spend data collectionCollecting spend data (pricing,
specifications, terms etc.)Validating, cleansing & classifying data Providing a savings estimate for the project
Understanding current specification & researching for alternativesThis is the initial planning phase and hence is very important to understand the current specifications and through preliminary market analysis finding out what all other different products or services are available to achieve sustainability goals
2Benchmarking & supply market analysisIdentifying scope – business units and locations

Identifying current vendors & new vendors to be included in process

Performing industry analysis for an overview of the market

Shortlisting vendors with strong credentials for sustainabilityAs part of the sourcing strategy, the important step is to shortlist vendors for the RFP, one of the key criteria that is considered is capabilities of vendors, possession of Ecolabels or Environmental Management Systems (EMS) certifications
3RFP development & sourcing strategyDeveloping a detailed RFP that includes supply/service requirements

Finalizing RFP with key stakeholders (Purchasing, Legal, Finance)

Distributing RFPs to vendors

Developing sustainability specifications:

  1. During this phase based on applicable Ecolabels and standards available specifications are developed for the RFP
  2. Instead of just conveying specifications to the vendor the functional requirement is also elaborated as this allows vendors to be creative instead of just following the specifications
  3. The dos and don’ts during production process that may be applicable are also listed down, example mentioning about non-use of certain hazardous material, labor standards etc.
4Vendor evaluation (Non Price)Providing RFP/Process Q&A support to suppliers

Reviewing & analyzing supplier responses based on evaluation criteria

Shortlisting finalists for negotiations

Scoring and ranking on sustainability questions: In terms of evaluating vendors on the Non Price parameter, along with other questions their answers to all the sustainability related questions are also thoroughly reviewed and scored to rank vendors
5Supplier negotiationDeveloping negotiation strategy, scripts and facilitating online or offline negotiations For online negotiations:

  1. Training suppliers and conducting practice event
  2. Coordinating and executing live bidding event
Sustainability related interventions during this phase are very limited
6TCO Analysis, vendor selectionSelecting suppliers based on quality/service and total cost

Measuring estimated and realized savings

Life Cycle Cost Analysis: As compared to the traditional approach of evaluating based on TCO; to achieve sustainability goals the bids are evaluated based on Life Cycle Cost analysis, this takes into consideration the following cost components:

  1. All cost associated with purchase like product cost, delivery, installation, and commissioning
  2. Operating costs including water, gas, spares, maintenance, employee health and social coverage etc.
  3. End of life cost like decommissioning and removal.
7Contracting & ImplementationDeveloping  implementation & transition plan, contracts, & performance metricsSustainability related contract performance clauses: During preparation and finalization of the contract all the finer points that are significant to achieve sustainability related goals are included. Some of the examples that the suppliers are asked to perform are:

  1. Vendor are asked to deliver goods in bulk so as to save on transportation.
  2. Goods should be delivered outside peak traffic hours.
  3. Supplier should take back and re-use the packaging material.

 

We can elaborate on our proposed sustainable procurement strategy applicable for your company.

Learn more about EmpoweringCPO’s Sustainable Procurement Strategy.Contact us today

Subscribe to our Blogs

Sign up now for our blogs and infographics for the latest insights on procurement and strategic sourcing.

Contact Us

Get in touch with us, we would like to hear from you

  • This field is for validation purposes and should be left unchanged.