In a recent Spend Matters Perspective, Redefining Sustainability: Saving Money, Reducing Risk and Going Green, my fellow blogger tackles the critical issues of sustainability and green, issues that this blog has been tackling since day one. Although there wasn’t really anything new in this perspective for someone who is well read on the subject (and who also follows blogs like 2Sustain), he did a great job of summarizing the current situation, and how most companies (responding to the headlines) tend to over-focus on (EU and China) regulatory requirements or emerging (Walmart) consumer expectations and how only those organizations that go beyond the hot-button issues and take a holistic view realize the true, quantifiable, benefits that sustainability has to offer a procurement organization – cost savings and cost avoidance.
According to Jason, despite the savings, cost avoidance and risk reduction benefits that companies stand to gain from pursuing green and sustainable procurement strategies, traditional sourcing approaches and mindsets often fall short of what’s necessary to achieve results. The primary reason is that classic strategic sourcing models — which often rely on sealed-bids, multi-round negotiations or reverse auctions — are inflexible and in fact limit the options that are on the table when it comes to achieving green and sustainable savings and returns. Furthermore,
- Traditional sourcing approaches limit the ability of suppliers to suggest or propose alternatives to a standard specification
- Rote process allows for limited internal analysis, brainstorming and scenario modeling outside of specific steps in the process
- Strategic sourcing models typically — and for good reason — isolate the procurement function from the rest of the organization at specific points to enable open and transparent markets and pricing
However, cost savings and avoidance can often only be achieved through market competition in an apples-to-apples bid structure that allows the true TCO of each proposal to be calculated and understood. Furthermore, despite noting that traditional sourcing processes and tools can limit options rather than create new possibilities, Jason also notes that leaders use technology platforms to communicate information, capture data, run scenarios and weigh decisions. So obviously it’s not the tools that are flawed, since many leaders use the same tools as many followers, and it’s not the methodologies either, since leaders use RFXs, Auctions, and Scenario Optimization technology to accomplish bid collection, market competition, and true TCO analysis. So what is it? It’s the mindset, and the traditional application of the methodologies and tools by individuals who are not using the full power and extent of the methodologies and tools to “be all they can be”.
Fundamentally, good strategic sourcing can fully capture the costs and benefits of a sustainable sourcing option, compare it side-by-side with another sustainable sourcing option, and compare those costs and benefits side by side with non-sustainable sourcing options. Your processes do not have to be redefined, just refined to take a more holistic view. The first key to success is to not specify what you want, but instead specify what you want to do when composing an RFX. In other words, don’t specify the materials and fabrication process, but the desired functionality, interface, and minimum performance requirements. It’s the same approach you take when writing a good technology RFP (which DO NOT include the Spend Management RFPs that are just endless, or should I say useless, feature lists) and the same approach Tata Motors used when designing the Nano. They left the actual design and composition of all of their components to the suppliers. Instead of saying “two standard wipers, 12 inches and 11 inches, for driver’s side and passenger’s side, made of steel and teflon” they essentially said “a windshield cleaning and rain repellant system that plugs into an interface …” and instead of saying “a four cylinder 180 HP engine with … “, they essentially said “an engine capable of generating at least X HP …”. By taking advantage of supplier creativity and innovation, they were able to produce a better, more sustainable, vehicle at lower costs than they would have been able to design in-house.
The second key to success is to use a life-cycle-based Total Value Management ranking when evaluating bids that captures all cost and non-cost factors that are relevant (and that assigns each non-cost factor a virtual cost to generate traditional life-cycle TCO rankings that takes into account the non-cost factors to determine the optimal bids). It’s not just unit cost, shipping cost, duties and tariffs, and quality-related costs that come from waste and returns management, but avoided carbon-offset costs from a greener product, avoided maintenance costs because of a better product, avoided marketing costs because of a more-consumer friendly product, etc. And you look at the cost over an average product life-cycle, not just a contract life-cycle. If you plan to make, use, and / or sell the product for five years, you look at the expected costs over five years in figuring out your cost factors — not over the next six months. After all, as Jason notes, sustainability results from collaborative innovation, and this will often require longer term relationships with key supply partners and commitments to new, more sustainable, technologies and processes.
The Perspective outlines three additional strategies that leaders use to achieve sustainable sourcing results, as well as some of the cost savings that market leaders have achieved (and that they have, more or less, kept to themselves because they view it as a competitive advantage). It’s worth checking out.