The Rise of Sustainable Sourcing
In order to thrive, businesses today must adapt to meet new regulations, emerging challenges and satisfy changing consumer preferences. Due to the devastating impacts of Greenhouse Gas (GHG) emissions – a by-product of how we’ve been making, shipping, and/or providing energy-intensive products and services – sustainability is higher on the agenda of procurement leaders than ever before.
Corporate Social Responsibility (CSR), an area that includes environmental and sustainability initiatives, saw the largest increase in CPO-level priorities in the past two years, up 22% according to Deloitte’s 2021 Chief Procurement Officer Survey. The report also found that 63% of high-performing procurement organizations formally track themselves against sustainability measures.
Keelvar’s own 2021 Voices of Sourcing Survey found that the supplier attribute that was going to increase the most in terms of importance over the next 5 years was likely to be related to sustainability factors:
Why Is Sustainable Sourcing Important?
Savvy companies are increasingly looking to define a sourcing strategy to lower emissions as a means of meeting climate pledges and widening their margins as customer preference for more sustainably produced products rises.
For the supply chain and procurement community, there is little time to lose in the battle to reduce GHG emissions, which according to the Intergovernmental Panel on Climate Change report (2021) are almost certainly to blame for rising global temperatures and degradation in air quality levels.
What Are The Challenges of Sustainable Sourcing?
Sourcing teams at large enterprises are well placed to be critical catalysts to foster sustainable supply chains. However, the challenges are numerous, and sustainability objectives must align with other important business goals so there is balanced decision-making.
For example, freight transportation and logistics are responsible for a hefty amount (~16%) of GHG emissions each year. Yet a surprisingly small number of Logistics Service Providers (LSPs) have (to date) made explicit promises to report on or decrease them, and despite helpful technology being available, many service providers have failed to invest in this area and are still unable to report GHG emissions accurately.
For those that have, this seldom extends beyond their own controlled sources (Scopes 1 and 2) to include Scope 3, which is the indirect emissions in a company's value chain that are caused by their suppliers' activities.
What Are Greenhouse Gas Emissions Scopes 1, 2 and 3?
Greenhouse gas emissions are categorized into three groups or ‘Scopes’ by the most de facto standard, international accounting tool, the Greenhouse Gas (GHG) Protocol.
- Scope 1 covers direct emissions from equipment or processes owned or controlled by the organization.
- Scope 2 addresses indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the reporting company. A company that acquires its electricity from renewable generation is much more environmentally-friendly than a company that procures from a coal-burning generator.
- Scope 3 includes all other indirect emissions that occur in a company’s value chain.
What is the challenge in accounting for Scope 3 emissions?
In effect, Scope 3 emissions are those that your suppliers emit into the atmosphere. Research has shown that Scope 3 emissions can often represent up to 70% of a company’s total GHG emissions - either upstream in the supply chain or downstream during the product delivery or usage lifecycle - and are typically far larger than Scope 1 and 2 combined.
However, these emissions are inherently more difficult for businesses to measure and control because they're not coming out of your own factories, but instead it's the production of raw materials you may be acquiring or the transportation services to move incoming materials or end products.
This is where the main sourcing challenges lie for companies in ascertaining their total emissions, and where intelligent e-sourcing technology that applies both optimization and automation has a big role to play.
What Are The Benefits of Sustainable Sourcing?
- Sourcing Sustainably Puts You Ahead of the Competition
You may have a clear picture of your sustainability strategy when it comes to the GHG emissions created within the walls of your own operations. But by not tracking the Scope 3 emissions created upstream of your suppliers and downstream in the distribution of your products or services, you could be missing opportunities to make substantial improvements to your business’s sustainability targets.
To date, relatively few companies are actively tracking and publicly committing to targets around Scope 1 and Scope 2 reductions, and substantially fewer are tracking Scope 3 emissions. But smart companies are now investing in e-sourcing tools and technologies that allow them to operate efficiently but sustainably because they recognize that not being sustainable is an existential threat to the survivability of the business.
- Appeal to Customers Who Prioritize Sustainability
There are myriad opportunities for generating cost reductions and increasing demand for business by appealing to the growing consumer awareness around the need for more sustainability.
In particular, there is a clear trend amongst younger consumers in particular to prioritize brands that are aligned with the sustainability agenda, and many forward-thinking companies that tackle sustainability successfully are seeing this as an opportunity for more business.
- Forge Stronger Partnerships With Your Suppliers
Effectively tracking Scope 3 emissions is an opportunity for businesses with supply chains to think differently, and for procurement to redefine the supplier relationship as a true partnership, where buyers and suppliers work hand-in-hand to improve and rethink the way business is done.
To learn more benefits of sourcing sustainably watch our on-demand webinar Gearing Up for Scope 3 Emissions here
How To Build Sustainability into the Sourcing Process?
Analyzing and taking proactive action on choices made in the formation of the supply chain is a critical step for any business that wishes to become more sustainable and ready for a low-carbon economy. A critical step in the journey to meet these goals is to enhance the sourcing process — but this can’t exist without a change in mindset.
Basic spreadsheets can support simple analysis of expected emissions, but sustainable sourcing can be costly. There is potential in some cases to reduce costs by sourcing more sustainably, but often you are looking at more expensive alternatives and it is a case of balancing costs and non-cost objectives. Businesses must optimize where they invest in sustainable sourcing so they can carefully balance trade-offs between cost, speed, incumbency switching, and environmental goals.
Capturing data is another complex issue, but the reasoning required to apply this data in negotiations so that efficiencies are discovered quickly throws up further challenges.
Sourcing Optimization Can Help You Source Sustainability
Fortunately, sourcing optimization is the ideal sourcing technology to address such challenges and can make reaching sustainability targets a much more manageable business process change. Keelvar’s Sourcing Optimizer platform can help buyers capture supplier innovation in an RFI or even within the bid that might have otherwise gone unnoticed.
For example, scenario analysis can let sourcing teams quickly assess the balance between CO2 reduction and cost, then bias in favor of suppliers with more sustainable approaches that suit their budget allocations. Then with the advent of Sourcing Automation, sourcing best practices can be consistently applied from end-to-end so there is a clear path to scalable operationalizing of sustainability with human oversight at key points of the process.
Take the transport category for example, where a supplier bidding on an ocean lane can provide varying pricing for fuel switching or slower speeds. Aiding your journey towards more sustainable sourcing, Keelvar’s optimization platform bidding capabilities allow carriers to bundle round-trip lanes and convey efficiencies that reduce emissions, time, and money.
Of course, collecting data about suppliers and the products they sell in an RFQ is one thing, but figuring out the right ratio of cost and sustainability mandates becomes a much bigger challenge when dealing with hundreds of suppliers and thousands of line items.
That’s why through Keelvar’s sourcing software, we can provide insight on how best to award business based upon your constraints and preferences, and you also have the option of giving systematic feedback on bid items to help guide suppliers into compliance on things like transit time or the percentage of recycled material.
Example scenarios for analyzing sustainable awarding in Keelvar Sourcing Optimizer include:
- Award at least 50% of business to Smartway Certified carriers
- Award 100% of these select lanes to slow steaming bids
- Optimize on lowest CO2 possible and compare to the lowest cost possible
- Award 100% of items to sustainable-certified suppliers unless it costs more than $500,000
- Optimize on the highest sustainability score and compare to the lowest cost possible
- Award as many round-trip lanes as possible to 1 carrier per round trip combination
- Favor recycled material bids by 5%
- Penalize suppliers with lower SmartWay ratings
By working in partnership with your suppliers to leverage key data, and with the help of intelligent sourcing tools, companies are able to make informed decisions about their environmental impact that helps them to meet regulations and satisfy customer preferences, without excessively burdening their purchasing team.
Through intelligent sourcing optimization, we can build processes that simplify and standardize this process in a way that results in digestible decision support analytics. Ultimately, it will be the agile and accountable companies who act to incorporate sustainability into their procurement processes today who will thrive the most in the business environments of tomorrow.