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The issue: organizations continue to accumulate a great deal of process baggage, brought on by emerging laws and regulations. The costs of compliance have multiplied, suppliers feel burdened, and the final outcomes are void of strategy and sustainable value. The result is a check-box approach to compliance, which produces very little (if any) gains for either buyer or supplier. With the supply chain a key strategic differentiator for most companies, the time is now for procurement to rethink its approach.
Transitioning from a compliance-driven model to a strategic approach that measures, rewards and integrates great supplier performance can have a massive impact on procurement outcomes, and deliver a substantially higher return on investment. Outside of the financial gains, there’s the added benefit of keeping suppliers motivated and invested, and ultimately, making a positive impact on the global supply chain.
Here are four key strategies procurement leaders can implement to turn compliance into sustainable value creation.
1. Align company strategy from the top-down
A successful transition toward sustainable performance management requires a top-down approach and buy-in from the c-suite. Aligning overall business strategy with the company’s sustainable mission creates a holistic sustainability philosophy throughout all company activities and operations.
A strong example of this is Nike’s “Rewire” program. The program takes a proactive approach to performance management with a checks and balances system that’s used within Nike and in contract factories. By shifting the organization toward a matrix structure where managers report to multiple departments, Nike was able to create integrated accountability across the entire organization and infuse sustainability into business decisions much earlier in the design process.
For procurement organizations having a difficult time selling the sustainability vision to management, one approach is to lead with the business benefits: According to Oxford, 90 percent of the companies with sound sustainability practices have lower cost of capital than those that do not. And according to the World Economic Forum, sustainable practices can reduce supply chain costs from nine to sixteen percent, on average.
2. Invest in new tools for supplier engagement ('measure to engage')
A supplier performance mindset is achievable only when suppliers have a target to shoot for, and understand why they’re being evaluated. Compliance programs with only pass/fail criteria don’t incentivize suppliers to truly own their part of sustainability, and often leaves procurement having to chase down under-performing and non-compliant suppliers.
The most sustainable procurement operations implement a rich scoring system that ranks and benchmarks suppliers, making it easy to identify top-performers and reward accordingly. Instead of doing the minimum possible to “comply”, suppliers get the motivation they need to take on sustainable practices and buyers gain deeper insight into their supplier base, enabling them to make smarter business decisions and mitigate risks.
Going back to Nike, in addition to quality, on-time delivery and cost, the company evaluates suppliers on sustainability performance through its manufacturing index and gives each supplier a score between 0 and 100. Depending on how well suppliers are performing in each sustainability category – environmental, social, lean implementation and health and safety issues – they’re given awards for gold, silver, bronze, yellow or red. Having such a robust scoring system engages suppliers with a clear upside goal and gives them the extra push they need to take ownership of their own outputs and make real progress toward sustainability.
3. Connect the dots for confident decisions
To really move beyond compliance, procurement needs to translate supplier scores into actionable data that confidently directs decisions and behavior, both from a process and software perspective. When business decisions and sustainability performance are truly interconnected, behavioral change and performance improvements come to fruition a lot quicker – for both buyers and suppliers.
Coca Cola Enterprises provides a perfect example of this practice in action. The beverage manufacture integrates sustainability scores directly into its SRM platform so when buyers use the system to evaluate and select suppliers, sustainability performance is front-and-center for their decisions and behavior. This gets suppliers into the mindset that they’re being measured on their sustainability performance, which encourages them to follow through on their sustainability promises.
4. Improve and innovate together for sustained success
A long-term vision for sustainability must include lean principles aligned with sustainability best practices, such as reducing waste, valuing the workforce and reducing downtime.
Apple’s SEED Program is designed to empower workers through education by making direct investments into their suppliers’ employee development. Since 2008, more than 861,000 workers have taken advantage of the program, which offers free courses and iPad-based learning programs in subjects from economics to English. The result is a supply base with a more educated workforce that’s better prepared to ensure fair labor practices and maintain sustainability standards, paving the way for sustained success in sustainable value creation.
Why make the move toward performance-oriented sustainable procurement?
Investing in sustainable procurement is necessary for remaining competitive in today’s rapidly changing marketplace. Consumers are becoming more sensitive to sustainability issues and are demanding deeper transparency into the products they buy. Product information that was once nice to have is now required for making it in today’s dynamic and volatile industries.
The financial ROI is also compelling – sustainable practices can contribute to a 15-percent to 30-percent increase in brand value and cost reductions of 9 percent to 16 percent. More importantly, it’s also the right thing for the world, as natural resources are diminishing across the globe. In fact, the Food and Agriculture Organization of the United Nations is predicting that by 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity. That’s just one of many scary resources issues facing our world today.
Going beyond compliance and breaking through to performance-oriented sustainable procurement can generate value that not only gives your company a leg up on the competition, but also makes a real, positive impact on the global supply chain.
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