Category Archives: Sustainability

How Much Should Sustainability Cost?

A recent post over on the Procurement Leaders blog asked “how much should sustainability cost”. According to the author, he commonly hears two views and suspects a third, specifically that:

  • cost is not the issue as it is really an investment with a potential impact on the top-line that merits the effort and expense
  • it should cost as much as it takes to avoid a scandal

and, most likely in some firms:

  • cost is not the point as it is simply not worth it

Regardless of your view, the author notes that it is worth thinking about what the acceptable cost of sustainable sourcing is, given that, earlier this year, Cargill payed a US 2.2 Million (sustainability) premium to co-operatives on a delivery of cocoa, with about 50% filtering down to cocoa bean farmers in Cote d’Ivoire.

One could argue that it was an investment as the money could be used to further sustainable farming techniques. One could argue that it was paid to avoid a scandal, given the number of articles that have appeared lately on the plight of cocoa farmers along the Ivory Coast, as sometimes you can avoid a scandal simply by not being one of the worst offenders. One might even argue that Cargill might secretly think it is not worth it, and just paid the money to make the whole issue someone else’s problem. (“We paid extra so the co-operatives could be sustainable. It’s their problem if they’re not.”)

I agree that it’s worth thinking about, but I don’t think that any of the answers the author provided, or suggested, are right. I think the cost of sustainability should be:

  • Less, in the mid to long term, than not doing it at all.

If you’re sustainable, you’re using renewable resources. While the cost of a renewable resource may be high at first, as there are up front costs for the new equipment and processes required to produce or harvest it, over time these costs should reduce dramatically. On the flip-side, it’s almost impossible to point to a non-renewable resource where costs are not skyrocketing. So if you’re switching to a truly renewable resource, within a few years, say 5 on the outside, the cost of doing so should be less than sticking with a non-renewable resource. If it’s not, then either the resource isn’t renewable, the harvesting process is inefficient or wasteful, or someone, trying to take advantange of the sustainability frenzy, is charging you a green premium for which there is no justification but greed. (In that case, find another supplier or do it yourself.)

That’s the doctor‘s view. Anyone want to provide a differing one?

Sustainability Requires More Than High Level Planning Guidelines

A recent article in Supply & Demand Chain Executive on how “CEOs pursue business opportunities where corporate and societal priorities converge”, summarized a recent Accenture study that noted how many CEOs are looking for sustainable profitability and ways to create value in line with societal goals.

The article, which noted that the Accenture study found that

  • 70% of CEOs realize that Sustainable Value Creation strategies must be evaluated using different criteria than traditional opportunities due to the longer time horizon required to generate returns and
  • 91% of CEOs face difficulties in identifying societal issues that link to competitive advantage and in measuring the societal and business performance of ‘sustainable’ initiatives

is promising in that it indicates that CEOs are now open to strategies that create value in a sustainable manner, but disappointing in that the five implementation imperatives to help companies create sustainable value that it summarizes are reduced to the point that they are nothing more than fluff that will result in the creation of bad strategy in your average organization.

Consider the following pieces of advice:

  1. Recognize the Opportunity
    This is obvious. If the organization does not understand that it should be sustainable and conscious of societal desires, it’s not going to even go down the sustainable path.
  2. Recalibrate Your Radar
    If the organization doesn’t change the way it thinks, then it’s not going to seriously consider sustainable strategies. Also obvious.
  3. Research, Develop, Repeat
    A good strategy does evolve over time. An organization that doesn’t realize this gets left behind. But stating fact is not helpful.
  4. Rewire the Organization
    Sustainable strategies do often require a different modus operandi. It’s not business as usual to go sustainable.
  5. Reinforce the Value
    The CEO must take a leadership role. But that’s true of any initiative.

They are not likely to produce good strategy. Why?

  1. They do not address the fact that the organization must also recognize the challenge to be overcome.
  2. They do not address the fact that the organization first has to understand what sustainable means. Otherwise, the radar can’t be recalibrated.
  3. They do not indicate what the measures are that will indicate success.
  4. They do not address How? It’s difficult to successfully engineer massive organizational change.
  5. They do not address how the CEO reinforces this value vs. other organizational values.

Organizations need lots of help, and lots of depth, to get sustainable. High level fluff is not going to help them.

Six Key Lessons for Sustainable Supply Management

A recent article over on the CPO Agenda on “Platforms for Growth” that discussed the challenges for Supply Management involved in procuring goods and services for decommissioning oil rigs had some great lessons for Supply Management professionals involved in projects in new or emerging areas of spend. While cost control is important, it’s even more important that Supply Management prevent their organization from becoming the subject of media headlines — as this is never a good thing. Plus, early approaches to category strategy can set a pattern within an organization and even drive market structures across the industry that, once established, become difficult to change. Thus, it’s important to get spending in new categories right.

Think Strategy
Supply Management needs to be a part of all of the strategic decisions of the organization as true commercial advantage can only be obtained if Supply Management is involved early enough in projects to influence raw material and service requirements. Not only does the design stage lock in up to 80% of the cost, but it can lock in up to 100% of the market risk. If the design locks in a raw material in tight supply as necessary, such as tantalum, instead of a more available material, such as aluminum (for capacitors), and unrest along the African coast suddenly makes 15% of the global supply unavailable, the organization will be in for a major price shock.

Influence the Plan
Not only does Supply Management need to be involved in all strategic decisions, but it has to come to the table with a good understanding of potential scenarios and a plan in mind. If, by working with marketing and external market research agencies, it understands that sales will be maximized at a certain price point, it can ensure that the selected design can be profitably produced for that price point.

Go for Global Category Scale
Even if the product must be customized for different regions, Supply Management should still attempt to aggregate global demand and award it to a small number of suppliers who are capable of producing variants for the global market to take advantage of economies of scale.

Build the Desired Marketplace
If the product or service being designed is (relatively) new, then Supply Management might be buying from an immature market. In this situation, the organization has the ability to influence market development, which occurs quickly once demand exceeds a critical mass. If Supply Management implements a category strategy that meets the objective of the organization, and it is the first major player in the market, the market will likely mould itself to that need. If the market strategy is low-cost, then the suppliers will focus on no-frill production and delivery. If the market strategy is the full service experience, suppliers will focus on creating end-to-end value added services. If the focus is on being the epitome of cool, then suppliers will focus on creating the most stylish and sleek product they can, with a price tag to match.

Do Your Homework
Market intelligence is the lifeblood of effective category management and the best way to influence the strategy, plan, and marketplace. Even if the organization does not agree with the proposed category strategy, it’s much harder to refute facts than opinions. Plus, it’s much harder for a supplier to exploit the organization in negotiations if Supply Management goes in armed with full knowledge about the current market state.

Examine New Buying (Structure) Options
Don’t limit your options to the current organizational buying strategy. Consider in-house, industry buying groups, vertical integration and even the creation of a Global Business Services organization. New markets sometimes offer new opportunities for doing things different. Take advantage of this.

Will Procurement Heads Also Be Responsible for Facilities and CSR?

A recent article over on the CPO Agenda on how the CPO is “an agent for change” pointed out that, at many organizations, the CPO is getting a broader realm of responsibility as she has to be well versed in change management to succeed at her job. In particular, many CPOs are now being tasked with logistics, risk, revenue, demand management, IT, sales support, property, CSR (Corporate Social Responsibility), and/or FM (Facilities Management) — with CSR and facilities becoming increasingly common.

The article highlighted three individuals in particular who were also responsibile for property and/or Procurement — Kath Harmeston, CPO of Royal Mail; Steve Jones, Director of Procurement and Property at Biffa Waste Services; and Patrick Dunne, Director of Procurement and Property at Alliance Boots — and how their role is not only cross-functional, but logical. Property and Facilities Management require great Procurement skills to keep costs down and value up, and combining the functions results in synergies that reduces internal management costs across the board. Plus, CPOs who are responsible for multiple functions get a much broader view of the business and the experience they gain gathers them a lot of respect in the C-Suite. As Kath Harmeston noted:

I was accepted as a budget-holder, a stakeholder and CPO at the same time. I was seen as quite a different animal — one that could see both sides, played a fair game and stood for accountability, traceability, auditability and transparency.

Similarly, CSR fits well with Procurement. Both Siemens and Clarks, where Barbara Kux is the head of Supply Chain Management and Chief Sustainability Officer and Matt Turner is the CPO and CSR officer, respectively, have combined the functions. It makes logical sense since Procurement directly dictates how sustainable the company is with what it buys and determines how sustainable the company’s suppliers are.

Reading the article, it appears only logical that, as more
companies figure out that the head of Procurement is the perfect candidate to lead these functions, more and more CPOs are going to be tasked with property, facilities, and sustainability as time goes on. What do you think?

BioPlastics – Another Easy Way to Conserve Petroleum Supply

There are two easy ways to conserve petroleum supply by over 10% annually in the US (and higher still in countries where petroleum is used as a major energy source for electricity production). The first is to stop burning oil for electricity. There is just no need to be using petroleum (products) for electricity production given the plethora of alternate options available, including natural gas, (clean) coal, nuclear, wind, hydro, and waste. If we didn’t burn oil for electricity production, oil refinement, process heat, and heat for industrial buildings, a good 13% of annual usage could be conserved.

The second way is a full-out switch to bioplastics. Right now, plastics consume at least 1 of every 10 barrels of oil in the US every day. That’s a lot. And considering that we can now produce a 100% plant-based PET product made from fully renewable sources that has a molecular structure identical to petroleum-based PET products, there is no reason not to switch to bioplastics. The only reason they are currently more expensive than petroleum based plastics is economy of scale. If everyone started investing in them, the costs would come down as the resulting investment would fuel R&D which would, in turn, create better materials that can be synthesized quicker, easier, and more cost effectively.

But it’s not going to happen until, as the author of this recent article in Environmental Leader on “turning plants into plastics” hints at, one of two things happen:

  • Supply Chain Sustainability Catches On in a Big Way
    And the leaders decide to move to bioplastics en-masse before oil-based plastics become prohibitively expensive. Or
  • Government Mandates the Move to BioPlastics
    The tax credits suggested by the author won’t be enough. The government has to mandate it, because, unless the tax credits make bioplastics significantly cheaper, the average organization will hold off on the switch.

Personally, I’d like to see the government ban non-bioplastics for all common uses in industry and retail. Just like I’d like to see them ban the use of oil for electricity production. Reserving oil for transportation (where electricity still isn’t an option most of the time), agricultural and construction machinery, and (family) home heating, where it would cost too much to retrofit millions of homes, would decrease petroleum need by about 25%. That’s 1 in 4 barrels saved for future use. This would not only extend the life-span of our oil supply, but keep costs down as well.