Suppliers and their role in sustainable procurement

Procurement is in the hot seat for embedding sustainability practises and it's time
for companies to see it as more than just a conduit to savings and efficiencies, but as an
important agent for change that is opening up an array of new opportunities for businesses.
Procurement functions are also starting to realise that they cannot improve their sustainability
performance without their supply chains. So, how can companies support their suppliers to
integrate sustainability practices at a time when procurement budgets are being cut?

Companies can support and reward the sustainable practices of their suppliers through:

1. Provide supply chain finance

The days when monitoring supply chain prompt payment represented the only efforts that
companies were making to support supplier cash flows are gone. More and more companies are
taking up various systems of support such as loan provision and credit access that is provided for
suppliers, such as Levi Strauss who established a Global Trade Supplier Finance programme
which provides lower costs for supply chain borrowers scoring strong on social and
environmental performance ratings.

2. Reward suppliers for their efforts

In the past it was believed that the threat of terminating a contact was enough to discourage
supplier underperformance, however, leading companies are now realising that actively
rewarding those suppliers who have implemented sustainable supply chain practices is a more
successful method. Companies are now establishing preferred supplier programmes,
recommending suppliers to other companies and awarding suppliers brand profile and even
payment bonuses for their efforts.

3. Create a supplier friendly procurement process

Historically a burdensome and resource intensive procurement process meant that smaller
suppliers were put at a clear disadvantage to their larger competitors. Now, companies are
actively looking at how to make their procurement systems accessible to SMEs and social
enterprises. One such effort being made is in standardising the information being requested at the
bidding stage. An array of platforms including CIPS, Ecovadis, Achilles and more have arisen
which make the procurement process less resource intensive for suppliers.

4. Create shared resources, training and networks to promote good practice

Many suppliers used to develop and improve their sustainability performance using their own
resources, resulting in more financial pressures on the suppliers. Now, procuring organisations
are offering free expertise and training on the sustainability agenda to their suppliers as well
as developing networks to promote good practice sharing and networking. A good example of
this can be seen in the Supply Chain school collaboration in the construction sector where
suppliers can network at events and training sessions. Many companies are also setting up
knowledge sharing platforms for their suppliers.

5. Co-fund and invest in supply chain to scale up innovations

Historically companies have left their suppliers to innovate and create new processes and
systems as they improve their sustainability performance. Now companies are seeing the
financial, and new market opportunities in collaboration, co-funding and co-creation of new
products and services. A number of leading companies including Costain, BMW and Veolia
have introduced Awards that recognise innovation efforts of its suppliers and give suppliers the
opportunity to pitch new solutions that can be scaled up and commercialised.

Supply chains: new sustainability hotspot

A combination of evolving policy and technology are pushing the envelope on supply chain
sustainability. Environmental and social impacts occurring within corporate supply chains — for
example, greenhouse gas emissions, human rights abuses, deforestation are difficult to identify
and manage, but organizations increasingly are obliged to do so. Meeting corporate and
legislative requirements has demanded an upsurge in creativity within procurement departments,
shaped by five key forces.

1. New and emerging legislation

Both climate change and human rights legislation has created a race to the top, as companies
seek to improve their performance on these issues before their peers. The Paris Agreement
commits the world to a net zero carbon future, and governments are creating the necessary policy
and legislative frameworks to deliver the ambitious mitigation targets. Similarly, international,
national and business-specific standards have been established to help eliminate human rights
violations, including modern slavery and child labor.

For example, the U.K. Modern Slavery Act, which came into force in 2015, aims to prevent
modern slavery in part by mandating companies to be transparent about how they are tackling
the problem within their business and their supply chains. Procurement teams are usually central
to corporate compliance efforts as the primary link between head office and distant, disparate
suppliers.

2. Limitations of the audit system

Supplier audits are the bedrock of many sustainable and ethical sourcing programs. However,
company supply chains are becoming more extensive and complex, while the number of issues
that need to be audited continues to expand fire safety and structural integrity have assumed
greater importance in garment sector audits following the calamities in Bangladesh, for example.

It is increasingly clear that companies will not be able to 'audit their way to sustainability.'
Despite the temptation to simply expand the number and scope of audits, it is increasingly clear
that companies will not be able to "audit their way to sustainability." Yes, supplier audits will
continue to play a role in greener and more ethical supply chains as baseline diagnostics tools.
But procurement professionals are finding new ways to address the root causes of intractable
sustainability issues. These range from data-driven risk assessments, collecting information
directly from workers using mobile phones, to intensive, multi-stakeholder work that focuses on
really thorny issues that won't go away within particular industries.

3. Collaboration

Just as companies recognize the limitations of the audit system, there is widespread
acknowledgement that no single organization can drive meaningful, lasting change.
Collaboration is a key driver of both supply chain sustainability and of innovation. Some
industries are reticent about collaborating on the supply side of their business, viewing it as a
competitive are more advanced.

These industries are establishing new models of working together, inclusive of suppliers, civil
society, governments and communities. For example, the Bonsucro initiative is notable not just
because it developed the first metric-based standard to measure the impact of the sustainable
production of sugar cane, but also because it brings together incredibly diverse actors from
across the entire supply chain.

4. Knowledge transfer

We all know that many professions work in silos and procurement is no different. However,
these barriers are eroding as procurement teams strive to meet the expectations of regulators and
customers on sustainability. An indirect benefit has been substantial levels of knowledge transfer
as diverse sectors and individuals from different career backgrounds start working together.

It is increasingly clear that companies will not be able to 'audit their way to sustainability.'

In extractive industries, for example, environmental and social impact assessments (ESIA) are
standard requirements for companies developing new mines or wells. Similar project-based
impact and risk assessment methods are starting to be used by retailers, fast food and consumer
goods companies to help them understand the environmental or socioeconomic impacts of their
supply chains.

Similarly, as extractive companies begin to engage with modern slavery challenges around their
supply chains, it is likely that they will draw on expertise from food and garment industries.
Financial services and insurance firms are also taking notice of the risks and opportunities that
companies are exposed to because of their supply chains.

Engagement with these sectors will create new opportunities for procurement teams to work with
highly developed and quantitative analytical approaches.

5. Technology and Big Data

Corporate marketing has been fundamentally altered by social media, and the impacts of
technological innovations on supply chain management could be equally profound.

Pressure on companies to tackle sustainability risks within supply chains is a key driver of digital
capabilities the "digitization" of supply chains. Broadly, this means moving all components of a
company supply chain online, everything from real-time invoicing to supplier risk data.

For example, companies are exploring various technologies to tackle deforestation in their
supply chains, ranging from DNA barcoding to drone and satellite monitoring. Blockchain
technologies being developed give products a "digital passport" showing what they are really
made of and where they originate, bringing full supply chain transparency closer to reality.

Finally, combining information held on suppliers and the movement of goods through the value
chain with Big Data on the external operating environment such as natural hazards or strikes
should improve supply chain optimization and corporate resilience. New laws and technological
changes are prompting more internal opportunities for innovation as new perspectives, skills and
approaches are brought together.