Magoosh GRE

Developing a Sustainable Procurement Policy

| October 31, 2016

Introduction

The rising demand for greener, more environmentally friendly products and services has paved the way for sustainable procurement. In the field of operations management, ‘sustainable procurement has emerged as a way green the purchasing and supply process’ (Walker et al 2009, p.348). Sustainable procurement means taking consideration sustainability issues in all procurement actions and processes. In its broadest sense, it encompasses the following aspects: (a) it means thinking carefully about what the organisation purchases; (b) purchasing only what the organisation needs; (c) purchasing products and services that have high environmental performance; and (d) taking into account the social and economic impacts of purchasing decisions (Sustainable Procurement Resource Centre 2012).

According to Kennard (2006, p.1), ‘sustainable procurement is the process whereby economic development, social development and environmental protection are balanced against business needs.’ In simpler terms, sustainable procurement means carefully considering the impact of every purchasing decision on the environment and on society.

The United Nations’ definition of sustainable procurement is similar to that of Kennard (2006). The UN (2010) defines procurement as sustainable if it is able to integrate requirements, specifications and criteria, which are compatible with and favourable towards the protection of the environment, promotes social progress, and supports economic development. Environmental aspect refers to the impacts of the product or service on the environment over the whole life-cycle (i.e. from cradle to grave). Social aspect deals with the effects of purchasing decisions on issues such as labour conditions, international equity in the distribution of resources, etc. Last but not least, economic considerations involve purchasing based on principles of best value for money, price, quality, availability and functionality. These can be achieved through resource efficiency, improving the quality of products and services, and by optimizing costs.

For private business organisations engaging in sustainable procurement, it cannot be denied that that they are maximising net benefits both for themselves and the world at large (i.e. society and external environment). As such, businesses integrate cost considerations and the basic procurement criteria of price and quality, with sustainability impacts (usually evaluated in terms of quality consideration). The environmental, economic, and social factors that are part of sustainable procurement are known as the ‘triple bottom line’ or TBL (Meehan & Bryde 2011).

Despite the seemingly complicated requirements and processes involved for sustainable procurement, this is not meant to burden the market with additional obligations (UN 2010). Sustainable procurement is a well-defined strategy that can be phased gradually throughout the supply chain and the organisation’s business processes. When implemented effectively, sustainable procurement promotes dialogue and open communication between the suppliers, procurers, and management operations.

Business Drivers for Sustainable Procurement

There are several incentives for businesses to engage in sustainable procurement. One of the main drivers for sustainable procurement is due to its financial benefits. Sustainable procurement helps organisations to eliminate waste, be more energy efficient, reduce the company’s carbon foot print, and save money. Moreover, it can help to enhance the company’s image since this will have a positive impact on customers, especially as there is a rising demand for products and services that are produced in a more socially responsible and environmentally friendly way (CIPS 2012).

Engaging in sustainable procurement also helps an organisation to establish a competitive advantage by improving competitiveness. Additionally, sustainable procurement will allow the company to comply with environmental legislation. Some organisations also aim to promote resource efficiency or increase their standing in sustainability rankings such as the Dow Jones Sustainability Index (Copeland 2012). This may be motivated by the company’s corporate social responsibility (CSR) initiatives.

Practicing sustainable procurement helps companies to achieve their CSR objectives. For instance, some sustainability programmes provide jobs by sourcing supplies locally, which in turn helps to develop the local economy. The company can also improve their ethical, health and safety standards by requiring suppliers to source raw materials in an ethical and responsible way (OPITO 2012).

Kennard (2006) lists down the different benefits of sustainable procurement. These are also some of the main drivers that motivate businesses to practice sustainable procurement in their supply chain management and operations.

  • Manage costs by implementing a more comprehensive approach to whole-life costing
  • Improve internal and external standards via conducting performance assessments
  • Compliance with environmental and social regulations or legislation
  • Manage business risks
  • Improve the company’s image and/or brands
  • Develop a sustainable supply chain for the future
  • Involve the local community

A study conducted by Price Waterhouse Coopers and EcoVadis (2010), in collaboration with the INSEAD Social Innovation Centre quantified the value drivers associated with sustainable procurement policies. Through examining several case studies, the quantitative model was developed by analysing the three main drivers for sustainable procurement (i.e. cost reduction, risk reduction, and revenue growth) and their impacts on the company’s annual procurement expenditures, market capitalization, and revenue. These were then compared to the implementation cost of a sustainable procurement programme. The findings of the study show that the cost reduction impact of sustainable procurement outweighs the implementation costs, especially on categories where cost savings and sustainability benefits are aligned. This indicates that businesses engage in sustainable procurement because the value drivers that compel them to engage in sustainability are evaluated to be beneficial to their organisations.

Table 1. Analysis of the main drivers for sustainable procurement vs. impacts on company’s performance

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Source: Waterhouse Coopers and EcoVadis (2010)

Evaluation of Case Studies on Sustainable Procurement

In this section, two global multi-national companies are evaluated in terms of their sustainable procurement policies. These are AkzoNobel and IKEA.

Case Study: AkzoNobel

AkzoNobel is a one of the leading companies in the manufacture and supply of paints, coatings, and specialty chemicals. As of 2012, the company has revenue of €15.7 billion and 57,200 employees in its global operations (AkzoNobel 2012). In 2008, AkzoNobel is the first company to combine its annual report and sustainability report into a single publication. This demonstrated that sustainability is a business case, instead of a novelty, which was an idea held by most companies. For its 2009 agenda, the company included as one of its priorities the achieving world class sustainability and safety. AkzoNobel won the ProcureCon award in 2008 for its leadership in sustainable procurement. AkzoNobel is also one of the top-ranked companies in the Dow Jones Sustainability Index and in 2012; it was evaluated as one of the global super-sector leaders in chemicals (Van Hoeven 2012; AkzoNobel 2012; Achilles 2008).

Table 2. Assessment 2012 – Global Supersector Leaders (1)

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Source: Dow Jones Sustainability Index, Annual Review 2012

It is evident that AkzoNobel has embedded sustainability in its overall corporate strategy. The company manages sustainability by integrating it across the business and it is reviewed based on a balanced score card. In order to map out their sustainability achievements, AkzoNobel has developed a framework to assess the environmental, economical and social aspects of their operations. This framework has three levels: (Van Hoeven 2012; AkzoNobel 2012)

  • Invent – to identify and manage areas that will provide long-term and sustainable opportunities for the company; work with customers and suppliers in delivering eco-premium solutions; and develop their people to lead and deliver innovative solutions
  • Manage – to incorporate a strong sustainability component throughout the entire value chain; work in partnership with suppliers to ensure business integrity and help deliver sustainable value to the customers; optimise processes, improve yields and improve energy efficiency
  • Improve – to improve in meeting compliance especially in the following areas: Integrity management; heath, safety, environment and security management; Product stewardship; and Employment practices.

Figure 1. AkzoNobel’s Sustainability Framework

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Case Study: IKEA

IKEA is a global retail powerhouse in the home furnishings sector with over 338 stores worldwide. As of 2012, the company has a sales turnover of €27.5 billion and 154,000 workers in its global operations. IKEA’s business idea is supported by its vision of offering well-designed, functional, and low-priced home furnishing products. The company makes its products affordable so as to enable many people to afford them (IKEA 2012).

IKEA’s business units have integrated sustainability in their business plans and managers are responsible for achieving the company’s sustainability targets. To support its sustainability objectives, the company has employed social and environmental specialists with expertise in a wide range of areas. IKEA stores and distribution centres also have social and environmental coordinators to provide training and monitor working conditions, safety, waste management, and water and energy conservation (Van Hoeven 2012).

IKEA utilizes a Sustainability Product Score card to help classify its home furnishing range and help the company move towards more sustainable product development. It serves as a guide in improving products based on 11 criteria that have an impact on a product’s sustainability profile during its life-cycle. The results of the scorecard are displayed in individual product labels (IKEA 2011a).

Table 3. IKEA KPI – Customers

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IKEA integrates sustainability in every stage of the value chain. The company is creating and securing sustainable processes for: (a) Product development and sourcing of raw materials of home furnishings and food products; (b) Production and distribution; (c) Stores and shopping centres; and (d) Product end-of-life (IKEA 2011b). In terms of its procurement policy, IKEA has two important focus points: (Van Hoeven 2012)

  • Increasing the sustainability its of supplier base
    • The IKEA IWAY code of conduct is required to be followed by all suppliers.
    • IKEA auditors regularly visit suppliers to ensure that they comply with IWAY criteria. These visits are either announced or unannounced and each supplier is visited at least twice a year.
    • The Compliance and Monitoring Group is responsible for ensuring that the audit criteria are implemented worldwide.
  • Increasing the use of sustainable raw materials.
    • IKEA is taking up leadership in the stewardship of sustainable wood and cotton and the company is adapting their procurement and sourcing functions as necessary.

Issues and challenges for organisations in developing a Sustainable Procurement Policy

Sustainable procurement in the business setting requires a high degree of cooperation and commitment among all members of the supply chain. Additionally, the ‘lack of understanding of sustainability within business, coupled with poor training and accountability are significant barriers to building supplier capacity’ (Kennard 2006, p.1).

Many businesses have developed tools and techniques to support this cooperation and commitment, as well as to instil sustainability accountability in the organisation. Training is very important in fostering a culture of sustainability within an organisation. All parties in the supply chain should be given adequate training regarding the importance and benefits of practicing sustainability. Moreover, the shifting of organisational and supply chain processes into a more sustainable way requires a lot of preparation and education (CIPS 2012).

Ethical core values should also be incorporated in the sustainable procurement policies and procedures for contractors and suppliers. Transparency is essential in order to support the organisation’s ability in implementing and ensuring that the policies have been followed. Sustainable procurement policies should include environmental protection, safeguarding the organisation against corruption, respect and consideration for people, and zero-accident tolerance in safety and health issues (Kennard 2006).

The transition to sustainable procurement is not an easy task. There are various product certifications, data, labels, and other documentations that make compliance to sustainability initiatives a big challenge. As such, it can be very difficult to synthesize the loads of data regarding a product’s sustainability attributes and evaluate it as sustainably compliant. Additionally, procurement professionals have another challenge – how to integrate these sustainability criteria into purchasing decisions, while also taking into account traditional considerations such as cost, quality, and delivery. More importantly, the biggest challenge is how to roll out the company’s sustainable procurement policy to the thousands of products that it purchases (Suarez 2012).

The road to sustainable procurement can be daunting but organisations can start on the right path by aligning their sustainable procurement policy/approach with the company’s overall CSR initiatives and business priorities. Suarez (2012) recommends the following strategy for companies, which are in the beginning phase of their sustainable procurement policy:

‘By understanding how they define a product’s sustainability, companies can prioritize their efforts to reduce the impacts of the products they purchase and align their process with broader corporate sustainability goals. Looking at the full life-cycle of a product, they can focus on the highest impact areas, or hotspots, that overlap with their own commitments to sustainability’ (sec.2).

It is also important for companies to consider and involve in the creation of a sustainable procurement policy other internal stakeholders who may not be directly part of the procurement process. For instance, departments such as marketing, product design, and operations/facilities may have significant influence on product specifications and these in turn can influence procurement decisions. The company should involve these individuals in considering sustainability impacts. It is recommended that a company engage in integrated sustainability procurement efforts in order to ensure that relevant people are involved in the process and sustainability is achieved (Suarez 2012).

According to Copeland (2012), companies that want to be sustainable due to a passion for being green can only take it to a certain extent. Unless the board and shareholders support their sustainability objectives, they won’t be successful. However, getting the board and shareholders to support a sustainable procurement policy may not be that easy. To address this, the company needs to understand why it makes business sense to be sustainable.

In order for the board to support the sustainable procurement policy, it is important to understand the whole life costing of the products being procured. This includes thinking about not just the purchase and usage cost, but also the cost of disposal. Sustainable procurement should also add to the value of the company’s existing products. The product should be improved in some way by the use of sustainable materials, rather than just being sustainable for the sake of being green (Copeland 2012). Procurement professionals should be championing sustainability objectives at the board level to help their organisation to thrive (Van Hoeven 2012).

Implementation and Monitoring issues for Sustainable Procurement

Implementation and monitoring a sustainable procurement policy is faced with many challenges. This is mainly due to the fact that implementing sustainable procurement means changing policies and procedures and fostering a new mindset and culture to the organisation’s management and employees. Undoubtedly, there will be resistance to such changes.

A study by Meehan & Bryde (2010) found that although some companies have sustainability objectives included in their corporate mission statements and despite external and internal pressures to embed sustainability; these have not translated into widespread practice of sustainable procurement in their organisations. This indicates that some organisations suffer from inertia in terms of their sustainability initiatives. To neutralise inertia and spur the organisation into action, the authors recommends several strategies: (a) Take experiences from other areas that emphasise the importance of inter-organisational relationships; (b) Develop a small number of sustainable development indicators for procurement and use more advanced environmental practices as examples to demonstrate how these elements have socio-economic impacts; and (c) Instead of just focusing on the pressures and drivers of sustainability, emphasise the triggers to overcome inaction and lead changes in behaviour amongst procurement staff.

One of the issues in implementing a sustainable procurement policy is the lack of leadership and commitment (Kennard 2006). The organisation needs to elect sustainability champions who will lead in transitioning the company’s policies and processes. Without these leaders, there will be no one to drive the organisation’s sustainability efforts. These leaders should be held accountable for failure to meet the required standards. Alternatively, the organisation could set up a working group or steering committee, comprised of people from different departments, to help find the most effective ways to implement the sustainable procurement policy (Sustainable Procurement Resource Centre 2012).

In monitoring the compliance to and effectiveness of a sustainable procurement policy, one critical area that may pose challenges to the organisation is the setting of measurements or KPIs (key performance indicators). The organisation should set how it is going to measure its progress and the impact of the sustainable procurement policy on its supply chain (Copeland 2012). According to Wilkinson & Kirkup (2009), ‘Process KPIs can help to demonstrate an organisation’s intent to external organisations, whilst also helping the organisation track the implementation of policies’ (p.24).

To avoid confusion and make it easier for employees to adapt, the company should not use a different measuring system than the one it normally uses. New information should be built into existing supplier scorecards and relationship management systems. There should be a seamless integration into the old measurement system so that the business runs as usual despite the changes (Copeland 2012).

Another issue in monitoring is compliance. There is the possibility that suppliers will fail to comply with the sustainable procurement policy when the company does not follow up on compliance. As such, organisations should also conduct regular audits to ensure compliance. The performance of suppliers and other members of the supply chain must be regularly monitored to check for adherence to the organisation’s sustainable procurement policies (Wilkinson & Kirkup 2009).

Conclusions and Recommendations

Implementing a sustainable procurement policy has positive final results for a business organisation. It can help to cut costs; increase product sale price, due to the perceived added value from procuring sustainably; and attract more customers through an improved brand reputation or company image (Copeland 2012). Moreover, according to the ICLEI (2012, p.1), a procurement policy that effectively incorporates sustainability can: (a) Reduce environmental impacts; (b) Drive social improvements; and (c) Achieve financial efficiency. These benefits are the main drivers which compel business organisations to engage in sustainable procurement.

In evaluating the case studies of two multi-national companies, AkzoNobel and IKEA, it was found that in order for sustainable procurement to succeed, it must be integrated into all aspects of the business from management, operations, and supply chain. Both AkzoNobel and IKEA are leaders in sustainability in their fields because they have successfully embedded a sustainable culture into their businesses. They employ frameworks, principles, and KPIs to help them implement and monitor their sustainability achievements. They have very specific sustainability goals and they regularly audit the performance of different business units, especially in the supply chain, to ensure compliance with the company’s sustainable procurement policies.

There are several issues and challenges to developing a sustainable procurement policy. These include: (a) The need for a high degree of collaboration and engagement among members of the supply chain; (b) Lack of understanding about sustainability; (b) Lack of accountability; (c) Poor training; (d) Difficulties in synthesizing loads of sustainability information; (e) Problems with integrating sustainability criteria into purchasing decisions; and (f) Lack of support from the board.

There are also challenges in the implementation and monitoring of sustainable procurement policies. These include: (a) Failure to put into action the objectives set forth in the sustainability agenda; (b) Lack of leadership in commitment; (c) Difficulties in setting the measurement tool or KPIs; and (d) Problems in monitoring compliance.

Taking into consideration the above challenges and issues, this paper recommends that developing a sustainable procurement policy should include the following: (Kennard 2006; Wilkinson & Kirkup 2009)

  • Make the organisation’s members aware of the importance of having a sustainable procurement strategy
  • Train and guide internal and external members of the organisation and supply chain
  • Develop links with other organisations and peer groups to learn from their experiences
  • Develop a standard approach to measuring strategic outcomes
  • Develop operational systems and procedures that are integrated with sustainability measurements and put these into practice in day-to-day procurement and monitoring activities

References

Achilles UK. (2008). Achilles congratulate ProcureCon 2008 Sustainability Award Winners. Available: http://www.achilles.com/en/uk/news/Achilles-congratulate-ProcureCon-2008-Sustainability-Award-Winners/. Last accessed 12th Dec 2012.

AkzoNobel. (2012). AkzoNobel Corporate. Available: http://www.akzonobel.com/aboutus/akzonobel_at_a_glance/. Last accessed 12th Dec 2012.

Chartered Institute of Purchasing & Supply (CIPS). (2012). Sustainable Procurement Review. Available: http://www.cips.org/products-services/Sustainable-procurement-review/. Last accessed 12th Dec 2012.

Copeland, E. (2012). Sustainable procurement makes good business sense. Available: http://www.supplychaindigital.com/procurement/sustainable-procurement-makes-good-business-sense. Last accessed 12th Dec 2012.

Dow Jones. (2012). Dow Jones Sustainability Index 2012 Review Results. Available: http://www.sustainability-indexes.com/images/review-presentation-2012_tcm1071-343085.pdf. Last accessed 12th Dec 2012.

IKEA. (2011a). The IKEA Group approach to sustainability. Available: http://www.ikea.com/ms/en_US/about_ikea/pdf/group_approach_sustainability_fy11.pdf. Last accessed 12th Dec 2012.

IKEA. (2011b). Sustainability Report 2011. Available: http://www.ikea.com/ms/en_US/about_ikea/pdf/sustainability_report_fy11.pdf. Last accessed 12th Dec 2012.

IKEA. (2012). The IKEA Concept. Available: http://franchisor.ikea.com/concept.html. Last accessed 12th Dec 2012.

International Council for Local Environmental Initiatives (ICLEI). (2012). Sustainable Procurement. Available: http://www.iclei-europe.org/topics/sustainable-procurement. Last accessed 12th Dec 2012.

Kennard, M. (2006). Sustainable Procurement. Available: http://www.fig.net/pub/fig2006/papers/ts08/ts08_03_kennard_0843.pdf. Last accessed 12th Dec 2012.

Meehan, J & Bryde, D. (2011). Sustainable Procurement Practice. Business Strategy and the Environment. 20 (2), p94-106.

OPITO. (2012). The importance of sustainable purchasing and supply: An OPITO Case Study. Available: http://businesscasestudies.co.uk/opito/the-importance-of-sustainable-purchasing-and-supply/sustainable-procurement.html#axzz2EvE3MaUV. Last accessed 12th Dec 2012.

Price Waterhouse Coopers, EcoVadis & INSEAD. (2010). Value of Sustainable Procurement Practices. Available: http://www.pwc.com/en_GX/gx/operations-consulting-services/pdf/value-sustainable-procurement-practices.pdf. Last accessed 12th Dec 2012.

Suarez, C. (2012). Going from What to How in Procurement. Available: http://www.bsr.org/en/our-insights/bsr-insight-article/going-from-what-to-how-in-sustainable-procurement/. Last accessed 12th Dec 2012.

United Nations (UN). (2010). What is Sustainable Procurement. Available: https://www.ungm.org/sustainableprocurement/default.aspx. Last accessed 12th Dec 2012.

Sustainable Procurement Resource Centre. (2012). Sustainable Public Procurement. Available: http://www.sustainable-procurement.org/about-spp/. Last accessed 12th Dec 2012.

Walker, H, Gough, S, Bakker, E, Knight, L & McBain, D. (2009). Greening Operations Management An Online Sustainable Procurement Course for Practitioners. Journal of Management Education. 33 (3), p348-371.

Wilkinson, A & Kirkup, B. (2009). Measurement of Sustainable Procurement. Available: http://www.adamwilkinson.com/documents/measuring%20SP%20report%20release.pdf. Last accessed 12th Dec 2012.

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