Enhancing Supply Chain Performance with Sustainable Procurement

As we transition into a low carbon, hi-tech economy in the next 30 years, we will see a dramatic shift in the products we make and how we make them. There are two engines within a company that will determine its success or failure in the future – product development and procurement – i.e. what a company makes and what they buy. It determines the specifics of a product and its supply chain and implicitly – the impact the company has on the world around us.

This shift is driven by three main things – customer demand for more sustainable products, evolving geopolitics and regulations. Procurement plays a crucial role in enabling companies to respond to each of these three drivers quickly and cost effectively. For example, estimates show that buying strategically today, can lower impacts by as much as 80% for certain product categories. That’s without making any technical change to the products that are sold. In the next 10 years, 70% of buyers will be either Millennials or Gen Z – who are often extremely conscious of the sustainability of their purchases. The ability of procurement teams to identify, understand and implement these opportunities, to a large extent, determines the progress companies make towards manufacturing the products that customers demand.

With growing tensions between the U.S., EU and China for critical supplies and manufacturing capabilities, most companies are looking at “glocalizing” supply chains – a rapidly growing trend to bring critical supply chains closer to home and reduce dependence on more volatile geopolitical relationships. Understanding these risks, which sometimes sit in deeper tiers and redesigning supply chains to mitigate them is another key driver for sustainable procurement strategies.

Governments understand this and in order to accelerate the pace of sustainable business, have enacted several regulations like Europe’s Carbon Border Adjustment Mechanism or CBAM, which levies a carbon tax on imports of certain goods based on their impact. The Corporate Sustainability Reporting Directive or CSRD is another European regulation that requires reporting and monitoring of supply chain risks, amongst other sustainability requirements. The Securities and Exchange Commission enacted a similar requirement for publicly listed companies in the U.S. The Construction Products Regulation also requires disclosures of key construction products and the Ecodesign for Sustainable Products Regulation (commonly known as the Digital Product Passport) requires reporting across 100+ supply chain and sustainability criteria for a broader set of products. This builds on top of long-existing regulations like REACH, RoHS and Conflict Minerals Act, which cover topics like hazardous materials and sourcing of materials from conflict zones.

Understanding Sustainable Procurement

Sustainable procurement means different things to different sectors but broadly they include social, environmental and economic aspects to varying degrees. Materiality assessments help companies understand what are top priorities for their business and provide a framework of how to approach a sustainability strategy. For example, water intensive product manufacturers may consider water conservation and pollution to be a key priority where as energy intensive product manufacturers may consider efficiency, electrification and green electricity as priorities in the supply chain. Eliminating PFAs or other hazardous substances from the supply chain could be another priority for products that come in contact with humans. This legislation also prescribes a lot of the requirements such as the recently passed anti-forced labour law in Europe. Securing supply at best cost would be another priority in an increasingly volatile geopolitical environment for companies that are exposed to such risks. Some manufacturers may be restricted to a set of approved suppliers, so collaboration on these topics is the only viable path, while others focus on supplier selection to advance their sustainability priorities.

Here, it’s important to make a distinction between ESG and sustainability. While ESG, in the context that it is used today is primarily about understanding environmental, social and governance risks to a business, sustainability takes a “double materiality” approach – what could potentially affect the business, but also how the business affects society and the environment. While ESG, being more investor focused, has seen some backlash in the U.S. and to some extent also in the EU. On the other hand, sustainability, which has been around much longer, is only becoming more important for businesses for the reasons described above. I see one as focused on risk and the other about opportunity.  

The Benefits of Sustainable Procurement

A 2024 Forrester study found that 24% of industries indicated that incorporating sustainability criteria into procurement decisions was now a top priority, and for good reason.

Once implemented, sustainable procurement offers numerous advantages.

Enhanced Reputation: A sustainable procurement strategy positively impacts a company's reputation, especially when fair labor rights are considered. Being associated with net-zero emissions and fair pay is far better than being linked to child labor and pollution. Statistics show that sustainable procurement practices can lead to a 15-30% increase in brand value.

Effective Risk Management: Negative associations with a brand can harm its reputation and revenue. Apart from potential customer loss due to a negative image, non-compliance with environmental regulations can result in additional costs. Investing in sustainable procurement helps mitigate risks related to brand image and sustainability.

Cost Reduction: Sustainable procurement not only saves costs but also actively reduces them. McKinsey's data indicates that strong ESG credentials can drive down costs by 5-10%. Measures such as operational efficiency, waste reduction, lower energy costs, reduced overspecifications, decreased consumption, and lower social and environmental compliance costs contribute to cost reduction.

Revenue Growth: Sustainable procurement not only saves money but also generates additional revenue. McKinsey's research reveals that top ESG performers grow 10-20% faster than their competitors in respective sectors. This growth includes revenue from new environmentally friendly products and services, recycling programs, and more.

Future-Proofing: Social, economic, and environmental factors continually reshape supply chains. By prioritizing these factors in procurement strategies, companies can safeguard themselves against supply shortages and other challenges such as currency rate fluctuations, climate change, and more.

In an environment with increasing pressure from consumers, investors, and governments to adopt environmentally responsible practices, sustainable procurement is a "must have" for companies looking to thrive. By considering social, economic, and environmental factors in procurement decisions, companies can contribute to a more sustainable and responsible future. Embracing sustainable procurement practices is not only the right thing to do, but it is also a strategic move that can lead to long-term success and competitiveness in the market.