Daily Archives: August 1, 2008

Start with Sourcing

Sourcing … lies at the nexus of a number of functions and business units, and is therefore in a position to influence action across an organization; it can be a strong leverage point for starting a green initiative. By working with senior leaders in other functions, sourcing executives enable a successful, holistic, multifunctional strategy for reducing environmental impact while cutting costs and building better relationships with suppliers and communities.
  Martha Turner & Pat Houston, Strategy & Business

This is a great quote … and why this blog is about Sourcing Innovation. Successful sourcing is the only way to simultaneously make a significant impact on the balance sheet and on the environment while improving operations and supplier relationships. As the article points out, green sourcing is not a departure from the way sourcing is currently practiced, it’s an augmentation. The goal of sourcing is to find the best possible deal for the company from a Total Value Management perspective – which takes into account all costs from the initial extraction and acquisition of raw materials and services to the final disposal of the product. And green sourcing, contrary to popular opinion, usually saves money, if not lots of money, from a total life-cycle analysis. (3M has saved over $1 Billion by going green. To date, Kaiser Permanente has achieved a recurring annual savings of 9 Million across 30 initiatives, and not one required a cost increase.)

Consider energy-saving virtualization technology. It might cost a little more up front, but it will save bundles in energy costs. Or consider investing in renewable power plants based on solar, wind, or hydro power. They might cost more to build than another coal furnace – but you don’t have to buy fuel year after year after year. And, most of all, consider using easily reclaimable and recyclable materials in your products. Then you get to reuse the materials again and again and again – and if you set up an end-of-life program where customers can return the products to you free of charge, you could save a bundle down the road. And consider the example of soy-based lubricants given in the article. At first glance, petroleum seems the cheaper choice, at $1,500 for an annual purchase of 300 gallons, compared to $3,195 for soy. But petroleum has costs that are not immediately obvious: $300 per year in waste costs, $2,400 in costs for spill administration, $1,000 in fees to minimize the waste from spills. When these factors are taken into account, the monetary cost of using petroleum-based lubricant for a year is $5,200–and that’s not considering the less-quantifiable environmental cost of using a nonrenewable resource. With no such add-ons, soy is clearly the more cost-effective choice in addition to being more environmentally friendly.

A well thought-out sourcing plan that takes into account the environment and green initiatives does more than just allow a company to reduce and control costs. It allows companies to capitalize on the growing awareness of green issues, helping them attract customers, motivate current employees, and recruit new employees. It enables companies to respond more effectively to regulation, or even to anticipate it. Finally, green sourcing allows companies to deliver on the promises made in corporate social responsibility (CSR) reports.

In addition, green sourcing encourages the same kind of in-depth, widespread awareness of practices and processes that companies have gained from adopting Lean Six Sigma, process optimization, collaborative decision-making, and other quality-oriented methods. If you think back twenty-five years to when these initiatives were just starting out, you might recall that the common “wisdom” was that better products cost more, when, in fact, we later found out that they didn’t — they costed less as they lasted longer, had lower defect rates, reduced warranty and return costs, and made for a better brand image, which allowed a company to attract and retain more customers.