integrating sustainability into procurement decision making sustainable 60 marketplace may 4th 2011 ...
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Integrating sustainability into procurement decision making
Sustainable 60 MarketplaceMay 4th 2011
www.pwc.com/nz
Gary Collier
pwc Slide 2May 2011
Sustainable procurement – how does it create value?
Manage business
risks
Bu
siness D
rivers
Meeting external
requirements
Innovation and
creating brand value
Reduce costs
• Developing low carbon supply chains: Analysing alternative methods of packaging, transport and distribution to reduce direct and indirect energy use in the supply chain
• Increased resource efficiency: Savings through greater water efficiencies and increased recycling, reuse and reduction of materials
• Integrate in Whole of life/Total cost of ownership initiatives: Including sustainability criteria such as carbon emissions
• Security of supply: Understanding the pressures on water and energy use, and political instability in order to develop proactive management systems to mitigate these risks.
• Reputation and legal risks: Assessing suppliers compliance with company or industry labour standards.
• Competitive advantage: Brand differentiation through ethical sourcing e.g. Fairtrade – food and drink, Forest Stewardship Council - Timber, Kimberley Process – Diamonds. Increasingly within non consumer facing industries also e.g. construction products
• Capture and share opportunities: Develop, or adapt existing, supply and distribution chains so as to increase the participation of low-income producers, informal traders and employees
• Tax incentives –support for negotiation of tax positions or incentives
Meeting evolving customer expectations for business: Increasingly customers request information on responsible procurement approach and request certification that certain issues are not present in the supply chain
Investors ‘name and shame: Investor organizations publicly rate performance on various sustainability issues in the supply chain (for example water and carbon).
Accelerating regulation: E.g. Dodd-Frank Act requires SEC listed companies to report and remove any conflict minerals coming from the DRC and neighbours
pwc Slide 3May 2011
Integrating sustainability into procurement decision making
1. ProcessStakeholders in equilibriumRolled out and embedded?Consistent with strategyCompliance
2. Product
Aligned with strategy
Delivering what the customer wants
4. Raw materialsSecurity of supply
3. People
Training
Rewards and incentives
Strategy
pwc Slide 4May 2011
Sustainability - relevant and ever more important
Businesses are beginning to come to terms with the very real risks to their business
Climate change• Awareness and acceptance of the science• Impacts being felt globally
Raw Material – security of supply• rising costs – food, fuel, energy• battle for scarce resource “Some may wonder, even inside Wal-
Mart, with all that is going on in the global economy, should being a socially and environmentally responsible company still be a priority? You’re darn right sustainability should be a priority.” Lee Scott Oct 08
pwc Slide 5May 2011
Supply chains have an important roll to play in supporting innovation and removing cost
WalmartWalmart has managed to cut some food prices, temporarily, by up to 30% through strategic management of environmental issues
Walmart are working with suppliers to reduce packaging;• Efforts with one supplier resulted in the creation of 20% smaller
packaging box – eliminating 500 trucks from the road and saving 890,000lbs of paper fibre
• Allowed supplier to absorb rising pasta costs instead of passing them on to Walmart
Attempting to remove the middle-man; and• Buying directly from a co-operative of coffee farmers cutting 3 or 4
steps out of the supply chain
Source locally.• Selling Wisconsin-grown yellow corn in 56 stores in or near Wisconsin.
pwc Slide 6May 2011
Compliance & Risk Management
Opportunity
Risk
Revenue growth & brand
enhancement
Cost reduction, operating
efficiencies & culture
Ambition
What are you trying to achieve with your sustainable procurement programme?
pwc Slide 7May 2011
Gaining increased control of the ‘upstream’ supply chain, can secure supply and differentiate a business
pwc Slide 8May 2011
What do our customers and consumers want from us? Can the supply chain help us deliver?
Soci
al
Su
stain
ab
ilit
y
Strategic Leadership
Risk and reputation
management
Risk and reputation
Management
Strategic Leadership
Environmental SustainabilityLikely future
direction
ILLUSTRATIVE
Customer A
Customer B
Customer C
Customer D
Customer E
Customer F
Customer A
Drivers
Strategy
Strategy Focus
Supplier CollaborationSupplier Requirements
What are the key drivers of the environmental strategy?
What is the environmental strategy?
What are their focus areas and key
initiatives?
Does the retailer look to collaborate with suppliers on key issues?
What does the retailer require of its suppliers?
Opportunity Areas Must Haves YesYes
Retail and consumer goods case studyIdentification of likely trends in the sustainability driven agenda between retailers and their suppliers; and potential platforms for differentiation and strategic partnerships
pwc Slide 9
May 2011
Understand and prioritise social, ethical and environmental risks and opportunities for key purchasing categories
Ensure that these are communicated around the business
Take into consideration the overall corporate strategy and brand values
Develop an integrated supply chain strategy considering relevant priority areas in an integrated manner
ANALYSIS
STRATEGY
IMPLEMENTINTEGRATE
Align buying practices to strategic and brand values priorities by reviewing• roles and responsibilities of all involved in the purchasing process• current buying practices and potential impacts – positive and negative• supplier selection and assessment procedures• buyer performance evaluation processes • management information to report performance to board
Process
pwc Slide 10May 2011
Challenges to integration
Board
Suppliers
Buyers
CSR/Ethical Trading
Access to relevant and reliable information to give confidence that risks and opportunities are being managed appropriately
Obtaining real buy-in and ownership from the supply chain director.Often lack resources and internal clout, operating in silos without the appropriate corporate infrastructure to help realise their objectives
Numerous, complex and potentially conflicting demands and decisions without formalised corporate guidance.Misalignment of rewards and incentives with other stakeholder objectives Conflicting messages from corporate customers from within the same organisation and different organisations.Lack of integrated supplier assessment programme, considering all relevant supply chain issues,Lack of real incentives to achieve stated requirements
pwc
Innovation may be found within the supply chain
Use of forward commitment procurement
Worked with NGOs and specialists to define product specifications
Product uses 70% less energy, lasting up to 10,000 hours
Consumer saves; on cost price and usage phase
100 million were sold in 2007
pwc Slide 12
Engaging consumer with sourcing programmes
“Caring Dairy” program embodies the slogan of “milking happy cows not the planet”
The “Dairy Stewardship Alliance”/”Caring Dairy” is an agreement whereby Ben & Jerry sources milk from farms that produce milk without using growth hormones.
Farmers are paid a price premium
Provided with expertise towards adopting sustainable farming practices.
pwc Slide 13May 2011
Are our people properly equipped? implementation and integration can be challenging• Do we have the right tools to deliver the strategy?
• Do we have the competencies throughout the organisation?
• How do we build our capacity?
Implementation requires employees across the business undergoing targeted, function specific engagement and training
OwnershipI will proactively and visibly lead through my attitude and behaviour.
CommitmentWe’re in this together. I will go the extra mile to ensure we succeed.
SupportThe business is taking this seriously. The company is making sure I have the information, tools and latitude I need to contribute.
EngagementI want to play a role in helping achieve this vision. I want to be part of something which could really make a difference to my family, my company and the world.
UnderstandingI understand these issues and their implications. I understand the interrelationship between the business and these issues. I understand the business’ motives, vision and strategy for responding to these challenges.
AwarenessSustainability and climate change are important issues.
Ownership
Commitment
Support
Engagement
Understanding
Awareness
En
ga
ge
me
nt d
estin
atio
n sta
tes
pwc Slide 14May 2011
Rewards and incentivesIf it is not measured…
If it is not valued…
If performance is not recognised…
Buying
decisions
Challenging the mindset
Training•Buyers are “asking the right questions”
•Sustainability training: life cycle analysis, prioritisation of sustainability issues, understanding of current and future challenges
•Divisional VPs direct and challenge buyers to come up with two quick wins with commercial benefits and one major innovation project on sustainability each year
•Part of the buyers annual appraisal
•Giving a broader mandate increases the opportunity to find more innovative solutions than a prescriptive approach (e.g. with a broad mandate for change the buyer for detergent was able to arrive at the ‘All Small & Mighty’ solution that a more rigid approach may have inhibited)
…will it get done?
pwc Slide 15May 2011
Sustainability issues are influencing drivers for raw material volatility.
Understanding these issues can lead to competitive advantage
Raw material price volatility
Supply Demand
Speculation
BiofuelsHuman
Consumption
FeedYieldTrade
BarriersLand
harvested
pwc Slide 16May 2011
Analysis of the value chain of a product may reveal environmental and/or commercial ‘hot spots’…
% of CO2 emission
12% 23% 3% 15% 3% 4% 5% 17%6% 5% 2% 5% 1% 100%
E.g. CO2 Emissions by Lifecycle Stage
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Raw material A
Packaging Natural Gas Electricity Others Logistics &Distribution
Consumption Waste Packagingend of life
Total
g C
O2
eq
per
SK
U
Raw Materials
Manufacturing
Consumption and disposal
Raw material C
Raw material D
Raw material E
Raw material B
E.g. economic analysis
0
1
2
3
4
5
6
Co
st/
ton
ne
Labour
Fuel
Mai
ntenan
ce
Other
cost
s
Mar
gin
Auctio
n
Landed
Cost
s
Freig
ht & F
inan
cing to
Chin
a
Landed
Chin
a Pric
es
Yield
Proce
ssin
g cost
s
Chines
e pro
cess
or mar
gin
Cost E
x-Fac
tory
Chin
a
Secondar
y Fre
ight
Insu
rance
/Fin
anci
ngDuty
NZ input p
rice
pwc Slide 17May 2011
Sustainable & commercial analysis
ILLUSTRATIVELow
High
Size of bubble represents commercial impact of sustainability issue
Key
Low Medium High
MediumIssue C
Issue H
E.g. Direct carbon emissions
Security of energy supply
Issue J
Issue E
Issue K
Issue F
Illustrative Overview of Top Tier Sustainability Issues
Environmental Impact
So
cial
Imp
act
Issue G
Issue A
Issue B
What are the current and future environmental risks & opportunities in relation to your value chain? Is your source of raws secure?Evaluation of commercial impacts of sustainability issues. Identify & quantify significant opportunity and risk areas for the business, region or brand across the value chain.