Executive Briefings

Mix of Benefits, Additional Costs Flow from 'Green' Procurement

Analyst Insight: In recent years, an increasing number of organizations have sought to make their supply chains more environmentally friendly. According to APQC's Open Standards Benchmarking in procurement, 48 percent of organizations initiated "green" procurement policies as of fall 2011. As organizations feel more pressure to monitor their environmental impact, they must consider the potential effect of enacting green procurement policies on their bottom line. - Becky Partida, knowledge specialist, APQC

APQC's research indicates that organizations with green procurement policies do not automatically incur higher costs throughout the procurement cycle. Instead, these organizations experience a mix of benefits and additional costs throughout the purchasing process. Benefits include the need for fewer full-time equivalent (FTE) employees to develop sourcing strategy, lower costs and fewer employees needed to order materials, and more efficient order processing. Additional costs are associated with developing sourcing strategy and appraising and developing suppliers.

Organizations with green procurement policies spend more to develop their sourcing strategies, but they need fewer employees for this activity. At the median, these organizations spend $.37 more per $1,000 in purchases than organizations without green procurement policies. At first glance, this difference may not seem significant, but for organizations making $1bn in purchases annually, this represents an annual difference in cost of $370,000. Despite the additional costs associated with sourcing strategy development, organizations that have initiated green procurement policies need roughly one fewer FTE per $1bn in revenue to develop sourcing strategies than organizations without green procurement policies.

Organizations with green procurement policies have more efficient processes for placing and processing orders. At the median, these organizations spend $.93 less per $1,000 in purchases and require nearly 50 percent fewer employees for this function than organizations without green procurement policies. Organizations with green procurement policies also have shorter purchase order cycle times and higher numbers of purchase order line items processed per full-time employee. At the median, organizations with green procurement policies need a little more than half a business day to place a purchase order, whereas organizations without green procurement policies need three business days for the same activity. Organizations that have initiated green procurement policies also process over 200 percent more purchase order line items at the median than organizations without such policies. Green procurement policies may play a role in these stark differences, but it is also possible that these organizations have already reached a level of efficiency that allows them to focus on their environmental impact.

At the median, organizations with green procurement policies spend $.15 more per $1,000 in purchases on appraising and developing suppliers than organizations that have not initiated green procurement policies. This means that, for organizations with $1bn in purchases annually, appraising and developing suppliers costs $150,000 more. The data does not indicate a direct cause for these additional costs, but it is possible that the difference could be related to the more stringent requirements green procurement policies place on suppliers, which would result in organizations investing more resources into assessing supplier performance.

                                         The Outlook

APQC's research indicates that, of the organizations that do not have green procurement policies, 23 percent intend to initiate them within the next two years. It is clear that the push for organizations to be aware of their environmental impact is not going away. Organizations considering green procurement policies must weigh the potential for additional costs against the customer benefits of being seen as good environmental stewards and the potential for more efficient procurement processes.


Keywords: Purchasing Process, Sourcing Strategy, Environmental Impact, Sourcing & Procurement Solutions, SC Finance & Revenue Mgmt., Supplier Relationship Management, Technology, Environmental, HR & Labor Management, Business Strategy Alignment, Supply Chain Analysis & Consulting, Global Supply Chain Management, APQC

APQC's research indicates that organizations with green procurement policies do not automatically incur higher costs throughout the procurement cycle. Instead, these organizations experience a mix of benefits and additional costs throughout the purchasing process. Benefits include the need for fewer full-time equivalent (FTE) employees to develop sourcing strategy, lower costs and fewer employees needed to order materials, and more efficient order processing. Additional costs are associated with developing sourcing strategy and appraising and developing suppliers.

Organizations with green procurement policies spend more to develop their sourcing strategies, but they need fewer employees for this activity. At the median, these organizations spend $.37 more per $1,000 in purchases than organizations without green procurement policies. At first glance, this difference may not seem significant, but for organizations making $1bn in purchases annually, this represents an annual difference in cost of $370,000. Despite the additional costs associated with sourcing strategy development, organizations that have initiated green procurement policies need roughly one fewer FTE per $1bn in revenue to develop sourcing strategies than organizations without green procurement policies.

Organizations with green procurement policies have more efficient processes for placing and processing orders. At the median, these organizations spend $.93 less per $1,000 in purchases and require nearly 50 percent fewer employees for this function than organizations without green procurement policies. Organizations with green procurement policies also have shorter purchase order cycle times and higher numbers of purchase order line items processed per full-time employee. At the median, organizations with green procurement policies need a little more than half a business day to place a purchase order, whereas organizations without green procurement policies need three business days for the same activity. Organizations that have initiated green procurement policies also process over 200 percent more purchase order line items at the median than organizations without such policies. Green procurement policies may play a role in these stark differences, but it is also possible that these organizations have already reached a level of efficiency that allows them to focus on their environmental impact.

At the median, organizations with green procurement policies spend $.15 more per $1,000 in purchases on appraising and developing suppliers than organizations that have not initiated green procurement policies. This means that, for organizations with $1bn in purchases annually, appraising and developing suppliers costs $150,000 more. The data does not indicate a direct cause for these additional costs, but it is possible that the difference could be related to the more stringent requirements green procurement policies place on suppliers, which would result in organizations investing more resources into assessing supplier performance.

                                         The Outlook

APQC's research indicates that, of the organizations that do not have green procurement policies, 23 percent intend to initiate them within the next two years. It is clear that the push for organizations to be aware of their environmental impact is not going away. Organizations considering green procurement policies must weigh the potential for additional costs against the customer benefits of being seen as good environmental stewards and the potential for more efficient procurement processes.


Keywords: Purchasing Process, Sourcing Strategy, Environmental Impact, Sourcing & Procurement Solutions, SC Finance & Revenue Mgmt., Supplier Relationship Management, Technology, Environmental, HR & Labor Management, Business Strategy Alignment, Supply Chain Analysis & Consulting, Global Supply Chain Management, APQC