Sustainable Procurement: The Value Proposition

What it is: sustainable procurement defined

Sustainable Procurement is, “a process whereby organizations meet their needs for goods, services, works and utilities in a way that achieves value for money on a whole of life basis in terms of generating benefits not only to the organization, but also to society and the economy, whilst minimizing damage to the environment”. It can also be defined as being about leveraging the buying process to support wider economic, social and environmental objectives in ways that offer real long term value.

All organizations buy goods and services whatever their business. But could they be buying things better and in ways that minimize their impacts and risk? Good procurement is sustainable procurement and there are new standards in place, such as the BS8903 Sustainable Procurement standard, that support procurement best practice.

Companies that get this right not only save money but also de-risk their supply chains and significantly reduce their environmental impacts. It is proven to make good business sense that has adds positive bottom line value. A recent report released by PWC and INSEAD[1] undertook quantitative analysis of value drivers of Global 500 companies achieved through sustainable procurement confirmed this and the results are summarized below:

1. Cost reduction

On average, reductions in costs equivalent to 0.05% increases in revenue were achieved in the Global 500 companies reviewed. This was achieved through reduced energy costs, reduced consumption and reduced social and environmental compliance costs. A sustainable procurement program was also calculated to achieve up to 6 times payback in cost reduction across the spend.

2. Risk reduction

On average financial costs of 0.7% of total revenue and decreases of 12% in market capitalization were avoided through achieving risk reduction against the procurement spend. Financial impacts that were avoided were: impact on brand value from bad supplier practices (e.g child labour, local pollution); economic cost of supply chain disruptions (e.g non-compliance with environmental regulations). A sustainable procurement program was also calculated to achieve up to 85 times payback through risk reduction outcomes.

3. Revenue Growth

On average additional revenue of 0.5% of total revenue for organizations was achieved through innovation of eco-friendly products/services, price premium or income from recycling programs. It was also calculated that a sustainable procurement program achieves up to 58 times payback through revenue growth outcomes.

The numbers and business benefit therefore speak for themselves and are being achieved consistently where best practice is applied.

How to do it: our proven spend analysis approach

The first step in any procurement improvement program is to understand the spend. A large file of spend data is typically extracted from the underlying Financial Systems which is then modeled and analyzed to provide a variety of spend analysis views and financial spend outputs.

Our sustainable procurement approach also calculates the environmental impacts for each procurement spend category and provides transparency on hotspots or spikes of environmental impacts e.g. carbon, resource usage, pollution, water use etc. with particular suppliers or specific products and services. It also identifies the social hotspots and areas of risk in the spend which include child labor, health and safety, gender inequality, human rights, pollution etc.

This triple-bottom line analysis approach is unique as it requires specialist software and skills to undertake the analysis. It is also of interest to the Executive and Senior Management team as it usually provides this financial, environmental and social transparency against the spend of the organization for the first time.

Our approach is best practice and proven and has been applied to a number of large clients. The outputs are then taken forwards into a sustainable procurement implementation program that is focused on achieving bottom line value and environmental and social improvement outcomes.

The spend analysis activity is typically a short focused 3-5 week activity working closely with Finance, Procurement and the Environment/Sustainability teams. The outputs from the data modeling and analysis are a spend analysis report and supporting excel model. The analysis always identifies areas of inefficiency, cost savings, risk reduction and environmental and social performance improvement.

 


[1] Value of Sustainable Procurement Practices: A quantitative analysis of value drivers associated with Sustainable Procurement Practices. PWC and Ecovadis in collaboration with the INSEAD Social Innovation Centre.: 2010

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