6

SUSTAINABLE
PURCHASING
AND SUPPLY
MANAGEMENT
 LEARNING OBJECTIVES

• Briefly explain the role of purchasing and supply

management in corporate governance
• Identify and explain the social responsibilities of
purchasing and supply management
• Identify and explain possible areas of unethical conduct in
purchasing and supply management
• Explain the role of purchasing and supply management in
ethical conduct in the supply chain
• Identify areas in environmental sustainability where
purchasing and supply chain management can make a
contribution
 LEARNING OBJECTIVES (Continued)

• Discuss the classification of risks inherent in purchasing

and supply management
• Compile a complete list of purchasing and supply
management risks
• Identify risks that can arise during each phase of the
purchasing and supply process
• Explain the strategies to deal with or eliminate purchasing
and supply risks
 Introduction
• Sustainable purchasing and supply is a
process whereby organisations meet their
needs for goods, services, works and
utilities in a way that achieves value for
money on a whole-life basis in terms of
generating benefits not only to the
organisation, but also to society and the
economy, while minimising damage to the
environment (Walker 2009: 742).
 CORPORATE GOVERNANCE AND
PURCHASING & SUPPLY MANAGEMENT
What is Corporate Governance?
• The framework of rules and practices by which a
board of directors ensures accountability, fairness, and
transparency in a company's relationship with its all
stakeholders (financiers, customers, management,
employees, government, and the community).

King reports (I, II and III)

• The King Report on Corporate Governance is a ground-
breaking code of corporate governance in South Africa
issued by the King Committee on Corporate Governance.
Three reports were issued in 1994 (King I), 2002 (King II),
and 2009 (King III). Compliance with the King Reports is a
requirement for companies listed on the
Johannesburg Stock Exchange.
• The King Report on Corporate
Governance has been cited as "the most
effective summary of the best
international practices in corporate
governance".
• Compel business organisations to act
responsibly and take precautionary
measures to ensure the financial well-
being of the organisation and the
protection of the interest of all
stakeholders.
Role Purchasing in Corporate Governance
• Act ethically and lawfully
• Ensure that the most beneficial value package (in terms of
quality, price, capability, environment and community
responsibility) is obtained with every purchase.
• Purchasing and supply personnel must always act
professionally in the interest of the organisation and
stakeholders
• Be fair and honest in the awarding of contracts
• Have an intimate knowledge of product/service they purchase
• Know supply market and market conditions
• Keep up to date with newest developments
• For corporate governance and reporting, special attention must
be given to purchasing agreements, electronic communication
with suppliers, inventory control, write-offs and risk
management.
CORPORATE SOCIAL RESPONSIBILITIES
OF PURCHASING & SUPPLY
MANAGEMENT
• What is Corporate Social Responsibility?
• CSR can be viewed as the organisation’s consideration
of, and response to, issues beyond the narrow
economic, technical and legal requirements of the
organisation.
Therefore, purchasing and supply management has the
following responsibilities in CSR;
• Economic (financial) responsibility to sharehloders (e.g
continuous purchasing of the best value package)
• Comply with legal obligations (e,g thelaw of contract and
environmental laws)
• Ethical responsibilities; those are the activities that are
expected as part of societal norms but are not codified in
law (e.g. Not accepting gifts and fair treatment of all
suppliers)
• Actions that are guided by purchasing and supply
management’s discrection rather than any legal
requirements or ethical norms (e.g black economic
empowerment purchasing)
 CORPORATE SOCIAL RESPONSIBILITIES
OF PURCHASING & SUPPLY MANAGEMENT
Purchasing and supply social responsibilities (PSSR):
• Meeting the discretionary responsibilities expected by the
society.
• This encompass activities relating to:
– Community
– Diversity
– Environment
– Ethics
– Financial responsibility
– Human rights
– Safety
 ETHICAL ASPECTS IN PURCHASING &
SUPPLY MANAGEMENT

• Ethics
Set of moral principles/rules of conduct/values that guide our
behaviour
• Business ethics
Use of recognised social principles involving justice and fairness
throughout business relationships
 ETHICAL ASPECTS IN PURCHASING &
SUPPLY MANAGEMENT (Continued)
• Purchasing and supply ethics
– Based on values of business and accepted principles within
the purchasing profession
– Importance of ethical conduct in purchasing:
• Purchasers have power over large sums of money
• Purchasers probably have the greatest say in terms of which
supplier will receive an order
• Could be exposed to unethical temptations
• Unethical actions by purchasers influences relationships with
suppliers
• Temptations influence a purchaser’s objectivity and rational
thinking
 ETHICAL ASPECTS IN PURCHASING &
SUPPLY MANAGEMENT (Continued)
AREAS OF UNETHICAL CONDUCT
AMONG PURCHASERS
• Having an interest in a supplier and putting own interests
before employer’s
• Not reporting unethical conduct by superiors or colleagues
duet to loyalty or fear of retaliation.
• Ordering for oneself, friends and colleagues in the
enterprise’s name to obtain products at a lower price
• Withholding important information from a supplier if the
supplier’s position is harmed. To request information if the
intention if not to use it for purchasing decisions.
 ETHICAL ASPECTS IN PURCHASING &
SUPPLY MANAGEMENT (Continued)
AREAS OF UNETHICAL CONDUCT
AMONG PURCHASERS (Continued)

• Making confidential information about suppliers known

Setting specifications to suit one specific supplier, thereby
cutting out competition
• Disclosing confidential information about the purchaser’s
own organisation that may damage it.
 ETHICAL ASPECTS IN PURCHASING &
SUPPLY MANAGEMENT (Continued)
ETHICAL CODE OF CONDUCT
• Policy on
– the acceptance of gifts, meals and pleasure trips
– dealing with sales representatives
– handling quotations and tenders
– dealing with confidential information
– disseminating information
– behaviour during negotiations
 ETHICAL ASPECTS IN PURCHASING &
SUPPLY MANAGEMENT (Continued)
ETHICAL CODE OF CONDUCT (Continued)
• Policy on (continued)
– a supplier in which the purchaser or members of
management have an interest
– using the enterprise’s buying power in purchasing products
for personal use
– using an organisation’s equipment and time for personal
work
– direct purchases by other sections and managers
 ETHICAL ASPECTS IN PURCHASING &
SUPPLY MANAGEMENT (Continued)
ETHICAL CODE OF CONDUCT (Continued)
• Ethical code of conduct should be made known to every
purchaser, manager and staff
• Policy should continually be revised and updated
• Top management should ensure that all staff and
management understand and support the policy
• Training and education on ethics for all staff and
management
• May ask staff to sign a statement declaring that they
understand and will honour standards
• All suppliers should be provided with a printed copy of the
policy
• Suppliers and staff should be informed on how a complaint
about unethical conduct will be handled
 ETHICAL ASPECTS IN PURCHASING &
SUPPLY MANAGEMENT (Continued)
FRAUD
• Fraud is defined as
– dishonestly obtaining an advantage
– avoiding an obligation
– causing loss to another party
• Includes:
– theft
– corruption
– conspiracy
– embezzlement
– deception
– bribery
– extortion
 GREEN SUPPLY CHAIN MANAGEMENT
FROM GREEN PURCHASING TO GREEN SCM
• Environmental or green purchasing
– Integration of environmental considerations into purchasing
policies, programmes and actions
– Objective: to facilitate recycling, re-use and resource
reduction
– Contributions to environmental performance:
• Buying re-usable/recyclable packaging material
• Participating in design stage and suggest alternative sources
• Asking upstream members of the supply chain to commit to
waste-reduction goals
• Using early supplier design involvement
• Selecting suppliers based on environmental criteria
• Evaluating supplier environmental performance
 GREEN SUPPLY
CHAIN MANAGEMENT (Continued)
FROM GREEN PURCHASING
TO GREEN SCM (Continued)
• Green SCM
– Integrating environmental thinking into SCM, including
• product design
• material sourcing and selection
• manufacturing processes
• delivery of the final product to the consumer
• end-of-life management of product
 GREEN SUPPLY CHAIN
MANAGEMENT (Continued)
OPPORTUNITIES FOR GREENING THE SUPPLY CHAIN
SUPPLY CHAIN AREA OPPORTUNITY
Supply chain network design Reduced energy and CO2 emission

Building design Sun lighting, solar panels, indoor plants, more efficient design of manufacturing
and distribution facilities
Customer requirements and Pressure from customers in terms of organic, recycling, etc.
preference
Packaging Re-usable, recyclable, recycled

Reverse logistics Removing, processing of waste, coordination, full loads

Transport management Vehicles fitting loads, less CO2, use of trailers to increase capacity, search for
closer suppliers and markets
Collaboration with other enterprises Combining freight, processing of waste

Sourcing Local, green-conscious suppliers, carbon footprint of purchased goods,

alternative materials or design, standardisation

Technology Equipment to reduce CO2 emission, better accounting systems, energy-saving

equipment
Organisation valuation (share-holder True change towards sustainability embedded in strategies, practices and
value) reporting
Organisational Identifying possibilities, changing procedures, changing attitudes and
behaviour through conscious efforts

Source: Adapted from http://www.scdigest.com/letter

 RISK AND RISK MANAGEMENT IN
PURCHASING & SUPPLY
RISK AND UNCERTAINTY
Risk is defined as the deviation or variability of actual results
from desired or expected results
 Types of Risks
• Speculative purchasing and supply
management risks
– Core business risks
– Incidental business risks
• Interest rate risk
• Liquidity risk
• Currency (or foreign exchange) risk
• Event risks
– Operational risks
– External downside risks
Speculative purchasing and supply
management risks
Risks that offer a chance of gain or loss

• Core business risk

• All activities, decisions and events which
impact directly on the operating profit of
an organisation.
• These risks are inherent to the main
business of the organisation.
• E.g fluctuations in raw material prices
• Incidental business risks
• Risks which arise naturally from the
activities of a business. These risks are
mainly financial.
– Interest rate risk
– Liquidity risk
– Currency risk
Event Risks
• The exposure of an organisation to
potential losses resulting from external
factors and/or from shortcomings and/or
failures in the execution of its operations.

• External downside risks

• Refer to those external factors that could
affect the enterprise negatively.
• E.g natural disasters, robberies, hijackings,
supplier risks
• Operational risks
• The exposure of an organisation to losses
resulting from internal failures or
shortcoming of people, processes and
systems.
 RISK AND RISK MANAGEMENT IN
PURCHASING & SUPPLY (Continued)
CLASSIFICATION OF RISKS
Risks

Speculative
Event risks
risks

Core business Incidental Operational External

risks business risks risks downside risks

Fluctuations Natural
Interest rate Shortcomings disasters
in operating of people
risk
profit

Robberies
Shortcomings of
Liquidity risk processes

Hijackings
Currency (or Shortcomings
foreign of systems Supply and
exchange) risk
supplier risks
 RISK AND RISK MANAGEMENT IN
PURCHASING & SUPPLY (Continued)
IDENTIFICATION
• Description of need by user
– Wrong, inadequate specifications
– Requisitions received late
• Selection of suppliers, negotiation, placement of orders
and expediting
– Internal or external fraud
– Lack of supplies
– Pricing
– Quality discrepancies
– Continued availability
– Quantity and lead times
– Technological changes
 RISK AND RISK MANAGEMENT IN
PURCHASING & SUPPLY (Continued)
IDENTIFICATION (Continued)
• Receipt, inspection and dealing with discrepancies
– Deviation from agreed procedures for inspection and returns
to suppliers
– Internal errors
• Inventory management and internal distribution
– Problem with information systems and processes
– Disasters
 RISK AND RISK MANAGEMENT IN
PURCHASING & SUPPLY (Continued)
OPTIONS IN MANAGING RISKS
• Risk avoidance
• The chance of loss has been eliminated.
• Changing suppliers, using alternative materials, ceasing
some operations that have been carried out in the past, or
selecting a business location where a certain peril is not
present.

• Risk assumption
• The consequences of the loss will be borne by the party
exposed to the chance of loss
• Risk elimination
• Introduces standards, procedures and
actions necessary to eliminate risk

• Risk reduction
• Aimed at reducing the likelihood of
occurrence of loss and the severity of the
loss should it occur.

• Risk transfer
• Risk is transferred to another party.
 RISK AND RISK MANAGEMENT IN
PURCHASING & SUPPLY (Continued)
PROACTIVELY MANAGING RISKS
• Behaviour-based management techniques
– Supplier certification
– Implementation of quality management programmes
– Target costing
– Supplier development
• Buffer-orientated techniques
– Internal buffer inventory
– Supplier inventory
– Multiple sourcing
 RISK AND RISK MANAGEMENT IN
PURCHASING & SUPPLY (Continued)
PROACTIVELY MANAGING RISKS (Continued)
• Contingency plans
– Step 1: Define critical materials and service
– Step 2: Identify critical materials and services and their
suppliers
– Step 3: Perform a risk assessment of the identified suppliers
 RISK AND RISK MANAGEMENT IN
PURCHASING & SUPPLY (Continued)
PROACTIVELY MANAGING RISKS (Continued)
– Step 4: Develop the contingency plans
» Action threshold
» Key personnel
» Contingency options
 Assist the supplier to overcome its barriers
 Switch to an alternative supplier
 Alert operational (production) personnel
– Step 5: Put the contingency plan in place
 CONCLUSION

• Correct ethical behaviour is essential

• Purchasing and supply management plays an important
role in corporate governance and has social
responsibilities
• Risk management forms important part of corporate
governance