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.