Sponsored content: Consulting firm Navigant sets out a roadmap for creating a green supply chain and explains why sustainability can be a game-changer in procurement
The momentum for a strong corporate sustainability strategy is present and growing. Shareholders, corporate boards, and employees are demanding ambitious and management-endorsed sustainability strategies. These strategies are not bound to an organisation – they also cover the supply chain, alleviating unpredictability between suppliers and buyers. Setting ambitious strategies is a good start, but realising these ambitions is the main challenge.
Supply chain management is complex due to the large number of players, the lack of available data (transparency), and that companies can only indirectly influence decisions made by suppliers and the resulting effects.
Navigant distilled seven best practices from leading companies challenging their suppliers to become more sustainable. These are essential lessons for companies looking to develop and implement a sustainable supplier engagement programme.
1. Commitment throughout the organisation is the foundation
Commitment from the board and the sustainability and the procurement departments is essential when engaging suppliers to start discussing sustainability issues.
Committing to an overarching and holistic target-setting approach like the one provided by the Science Based Targets Initiative helps create buy-in throughout an organisation. To achieve science-based targets, almost all parts of an organisation need to be involved and need to have greenhouse gas (GHG) reduction targets. GHG reduction targets related to purchased products and services and endorsed by a company’s board are key for a procurement department to start conversations with suppliers about the supplier’s impacts and reduction options.
Alignment between the sustainability and the procurement departments is often suboptimal. Yet, collaboration between these departments is indispensable for a successful supplier engagement programme. The sustainability department typically has the most knowledge on sustainably aspects and is responsible for target setting, while the procurement department has the relevant relationships with suppliers. More often sustainability and procurement functions are merged, resulting in senior sustainability procurement managers, for example. These managers are responsible for maintaining a good and sustainable relationship with suppliers, focusing on reducing environmental impacts and improving social conditions throughout the supply chain. Besides reducing environmental impacts, a driver for these new functions is to limit environmental risks to secure sourcing and guard the brand reputation of the buying organisation.
Sustainable procurement: "As a procurement representative I need the support of my sustainability colleagues to receive practical insights and disussion points for my supplier interactions. I want to understand the main impacts and feel sufficiently comfortable to bring them up in disucssions."
2. Smart pre-selection of suppliers makes supplier engagement manageable
Large companies often have thousands of suppliers from various sectors and countries, which is a major challenge in designing and implementing an effective and efficient supplier engagement programme. The first step in programme design is to reduce the number of suppliers you work with, focusing on those suppliers that contribute to the largest part of the company’s carbon footprint. Often, a small number of suppliers are responsible for the largest part of a company’s supply chain GHG emissions. Focusing on these suppliers is key because that is where emissions can be reduced most efficiently.
3. Supplier engagement starts with open communication and showing common benefits
The best start to collaborating with your suppliers on sustainability is open communication. Try to understand the position and stakes of your suppliers and make sustainable supplier engagement more marketable for them. Working together on sustainability can be positioned as better marketing to clients. Moreover, you can stress the business continuity benefits from supply security. Supplier recognition and awards can also help to establish participation.
From commodities to engagement: "We started a journey: from commodities to partnerships with our suppliers, broader than just sustainability."
4. Long-term relationships and co-creation are effective ways to engage with suppliers
Suppliers can be targeted in different ways to make a company’s supply chain more sustainable. At first, it sounds logical that a sustainable supplier engagement programme will be the best strategy to enhance the sustainability of suppliers that deliver strategic items because there are limited or no alternative suppliers. However, we recognise the trend of developing long-term relationships with commodity suppliers, where price is usually the main differentiating element. In line with this trend, some companies select suppliers based on shared values and beliefs, as this is a solid basis for developing joint projects.
5. Incentivise suppliers in a way that fits your company and your suppliers
How you incentivise your suppliers should fit with your company size, culture, and position in the value chain, among others. The following are the most often used ways to collaborate (described further in Table 1):
Inducing competition among suppliers
Enforcing or derivations thereof
6. Scaling up supplier engagement through sector efforts
To make a real difference, it is essential to scale up supplier engagement efforts. The large number of suppliers from a wide variety of sectors and countries make this a challenge. A sectoral approach and using large companies as magnifiers can be solutions to this issue. For example, about 10 automobile and parts manufacturers have joined forces to define key performance indicators (KPIs) for climate and water for their suppliers through the CDP Supply Chain Programme. Suppliers need to report their impacts and efforts to CDP, preferably making them public.
7. Monitoring should be designed with goals in mind
Monitoring upstream impacts, like GHG emissions, is crucial to a successful supplier engagement programme. Most companies are still searching for effective and efficient ways to monitor progress towards targets. The main lesson learned up to now is that monitoring should be designed by using the supply chain target (e.g., the climate target) as the starting point:
Define a clear and common baseline and develop a policy when the baseline needs to be adjusted.
Understand what is needed to achieve the target as this will determine the KPIs you want to track and monitor.
Agree on specific actions that can be monitored with suppliers.
Keep it simple – sometimes actions can be tracked without extremely detailed data collection.
Front-running companies are exploring ways on how to best engage with their suppliers to realise their sustainability ambitions in the supply chain. Taking responsibility for the impact arising upstream makes business sense and is good from an environmental point of view. It strengthens supply security and prepares a company for the upcoming low-carbon economy, both topics with high investor interest.
Navigant, a Guidehouse company, believes that sustainability can be a game-changer in procurement policies. It is important for companies to anticipate these upcoming changes by starting to develop a sustainable supplier engagement strategy and reap the benefits of a green supply chain.
Authors: Jeroen Scheepmaker, Associate Director; Annemarie Kerkhof, Managing Consultant; Caspar Noach, Associate Director