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Organisations need to adopt a procurement model that supports efficient use of natural resources and ethical sourcing to foster the ESG agenda.
In brief
- Irish organisations need to turn the focus on waste reductions, improving efficiency of materials usage, and reductions in carbon footprint at every point in the supply chain.
- Need of the hour is to examine how a sustainable supply chain can affect profitability, market share, and stock price.
- To improve visibility and traceability of supply chains, organisations need to employ digital tools, data analytics and collaboration platforms.
Organisations need to look beyond cost savings and efficiency gains when measuring the return on their investment in supply chain sustainability. Opportunities to increase market share, enhance brand reputation, and improve environmental performance must also be taken into account when developing a holistic business case for investing in new procurement models.
The wider investment case is compelling. Supply chains represent the new frontier in sustainability. More than 90% of an organisation's greenhouse gas emissions¹, and between 50% and 70% of operating costs, are attributable to its supply chains.
In other words, a business can make very significant improvements to its environmental performance without making any internal operational changes. In effect, changing the procurement model can be seen as a means of outsourcing sustainability improvements for the organisation.
This is, as yet, easier said than done, however. EY research conducted among major organisations in the Americas revealed a number of significant challenges facing supply chain executives who are seeking to alter their procurement models to protect access to resources, bolster resiliency and pursue sustainability goals.
The research shows that very few of them have the visibility, technology, and comprehensive programmes in place to measure progress against those goals. Challenges to their initiatives include the scale of the upfront costs involved and the lack of a clear business case to support the expenditures.
This failure to establish a clear business case is likely due to the fact that the organisations concerned are employing procurement models designed with the aim of minimising costs and maximising efficiency all along the supply and value chains.
Strengthening the procurement model
The pursuit of those goals produced highly complex supply chains whose fragility was exposed during the COVID-19 pandemic and since. Shortages of basic foods on supermarket shelves as a result of localised weather events in particular countries have served to highlight the weakness of a procurement model that concentrates global sourcing on a small number of key suppliers and territories.
Unfortunately, the success of the model in driving out cost also makes it very difficult to change. Any modification, however progressive, tends to result in additional costs. Justifying that is near impossible where cost minimisation is the effective raison d’etre of the procurement function.
A new model and approach need to be adopted where other elements of value are taken into account when assessing the supply chain. That model is one that supports more efficient use of natural resources, progressive decarbonisation, and ethical sourcing as part of the organisation’s wider ESG programme.
Roadmap for a new model
Organisations wishing to adopt such a model should redefine the way they calculate return on investment for supply chain sustainability. In doing so, they should take the following key areas into account:
- Cost reduction and efficiency remain prime considerations, but the emphasis must shift from pure price considerations to waste reductions, improving the efficiency of materials usage and transport, and reductions in carbon footprint at every point in the chain.
- The potential for additional revenue generation must also be taken into account. Organisations should examine how a sustainable supply chain can affect market share, stock price and profitability.
- The procurement model should facilitate the management of regulatory and compliance risks as well as the development of more resilient sourcing strategies.
- Intangibles are the other aspect. Sustainable supply chains can improve customer loyalty, brand reputation, innovation, employee quality of life, and retaining talent. This must be included in the development of any business case.
Having adopted this approach, it is then a question of mapping a pathway to the adoption of the new model. That pathway should include the following three key steps:
Summary
The benefits for some organisations investing in new procurement models to increase supply chain sustainability stretch beyond cost savings and include increased productivity, profitability and better management of operational risks. Organisations that take benefits into account when making the business case for expenditure on supply chain sustainability will gain a significant advantage over their competitors.
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