No matter the type, location or size of a company, a huge percentage of its total expenses are going be spent on supply chain activities. Therefore, to create lasting value, it is imperative that businesses engage and collaborate with their suppliers. Simply maintaining transactional supplier-buyer relationships, dictating rules and mandating compliance are not enough. To create true competitive advantage, organizations must enact transformational change related to procurement policies and practices in conjunction with a comprehensive supply chain strategy.
Of course, before approaching and negotiating corporate social responsibility (CSR) expectations with external suppliers, a business must get its own house in order. After all, it won’t do much good to require suppliers to conform to a customer-imposed sustainability standard if the organization’s own internal sustainability practices are incomplete or not fully ingrained in the company culture. It’s essential for businesses to begin this process by embodying their own desired sustainability value chain agendas. Furthermore, once policies are enacted, actual practices must be carefully monitored.
The next step is to examine and potentially adjust the nature of existing supplier relationships. Companies then can begin to move from a tactical approach of top-down monitoring and leveraging of scale to a more impactful and strategic collaborative approach aimed at advancing mutual goals and generating more value.
The best practices for building such relationships are described in the following seven steps:
1. Align sustainable procurement and core business strategies. The greatest value emerges when a strong business case is articulated together with smart supply chain strategy. This can change the focus of supply chain management from simple resource procurement to a set of capabilities that have the potential to generate value for a company — whether business value is short term and direct, such as cost reduction, or long term and indirect, such as innovation and customer loyalty. Pursuing this strategic approach enables alignment to be built across all levels of the organization so that everyone demonstrates the CSR-focused culture.
2. Institute sustainable procurement policies. Once sustainable procurement strategy is aligned with the core business strategy, sustainable procurement procedures and policies help institutionalize these ideas and put them into practice. Such policies work best when they are endorsed by those at the top of the organization — ideally the board of directors. This also provides a stabilizing and lasting influence that will enable value to accumulate over time. The following tools can help establish the base for a sustainable procurement program:
- Supplier CSR codes of conduct reflect the basic tenets of responsible management, typically covering key elements including labor, health, safety, ethics and management systems. They must be reviewed and updated regularly so they continue to reflect best practices and account for emerging issues.
- Zero-tolerance lists include minimum standards and the threshold performance a company expects suppliers to attain. These lists typically reflect the values business leaders hold most near and dear. It is highly recommended to follow the United Nations Global Compact publication “Supply Chain Sustainability: A Practical Guide for Continuous Improvement” when writing and adopting a successful supplier code of conduct, especially for labor practices. Noncompliance with zero-tolerance standards often results in termination of the supply contract and business relationship.
- Supplier diversity policies help ensure diversity in business and portfolios in order to further mitigate risk. Such procedures are established to give a company competitive advantage and meet customer and government requirements. The guidelines can spell out in the broadest terms the philosophy that diversity is good for the business. They also articulate the need for regional, cultural and social diversity to access global skills and markets, offer varied viewpoints and styles, and benefit different communities and local economies, respectively. Building diversity into a company’s procurement policy also gives procurement managers more flexibility, empowering them to work with new and more sustainable suppliers.
3. Create a sustainable supplier roadmap. Many supply chain professionals lack a comprehensive understanding of their supply chains’ influence with regard to sustainability. In this step, companies categorize suppliers in relation to their levels of influence — from both risks and opportunities perspectives and inside and outside the company. Some of the suppliers will be large and sophisticated, while others may be better characterized as mom-and-pop shops. Upon investigation, some suppliers may even be further ahead of the curve in their sustainability journeys than the client itself, creating new opportunities for learning. Conversely, other suppliers may be behind and can be pulled forward for added value. Procter & Gamble, for example, engaged 30 key suppliers in the first year of its sustainable procurement program before expanding it to include 400 suppliers.
4. Engage supplier management in goal setting. It’s essential to engage supplier management, as high up the organizational ladder as possible, when developing clear CSR goals. Becoming more sustainable is typically good for both parties. Suppliers may have publicly stated or internal objectives that can be best advanced by leveraging the client company’s initiatives, activities or networks. Businesses that do this well often hold a top-level summit with key suppliers and even consider drafting and signing a joint commitment letter that outlines how all parties will work together to promote sustainable practices. In this way, organizations can begin to build a community or ecosystem that contributes sustainable value.
5. Document baseline performance. As with any company goal-setting process, it is important to determine a starting point or baseline before establishing a meaningful trajectory of where a company wants to end up. For example, if a business seeks to reduce its suppliers’ collective carbon footprint, it first is essential to know what its suppliers’ current emissions are. Only then will it be possible to develop solid goals and strategies for driving and delivering improvement. The choice of what companies ask suppliers to report on also is a strategic one. Care should be taken not to compromise the proprietary aspects of the relationship or cause great expense to the supplier that might end up being passed on to the organization. A business may be well advised to use existing data collection and reporting systems when possible to help gather and track sustainability data and progress.
6. Enable training and capacity building. Training and capacity-building initiatives will take buyer-supplier relationships to the next level, influencing both stakeholders in a positive manner. For CSR areas in which company capacity is strong, it may be possible to build supplier capacity by leveraging expert resources for supplier training and support. While suppliers can improve and become more sustainable companies on their own, they likely will do this a lot faster with the support of their buyers. Supplier capacity-building aims to train providers on both general and company-specific sustainable management practices. Capacity building also can support the implementation of specific, desired CSR practices and standards.
For example, when IKEA determines that a supplier has not been complying fully with its supplier sustainability standards, the furniture giant often employs an extensive intervention program that, in some cases, helps the supplier develop whole new capacities that are more sustainable for both businesses. Likewise, companies can learn from their suppliers’ CSR competencies. This reciprocal arrangement can be the crux of supplier meetings and engagement strategy, catapulting the relationship far beyond the typical transactional level. It often develops into a partnership that adds value for all parties and creates a mutual loyalty that serves as a competitive advantage.
7. Monitor and measure supplier performance. After establishing a baseline, companies can establish ongoing measurement processes through a cadence of regular, face-to-face check-ins with their suppliers. This level of accountability helps ensure efforts undertaken in good faith produce desired and expected results. Similarly, many companies have designed scorecards that clearly spell out expectations, track sustainability results, and maintain a collaborative process for continued improvement and dialog.
To promote the most collaborative, trusting relationships, many companies choose to assemble all of their suppliers in the same room and have open discussions about mutual goals and measured progress. They can talk candidly about what’s working well and what isn’t. This gives all participants a chance to network and help each other achieve joint and individual business goals
Successful, embedded CSR activities demand a very strategic approach. Companies that communicate their requirements, monitor supplier compliance and track performance will be the ones to derive greater value from their supply chain. This starts with organizations working to ensure that their suppliers have management systems in place to help mitigate potential risks, safeguard the continuity of supply and improve overall value chain sustainability. Only in this way can transformational procurement effect a positive impact throughout the network and marketplace.
Suhas Apte, coauthor of “The Sustainability Edge,” is president of Apte Consultants and a partner in the Blue Earth Network. He formerly served as global sustainability officer and president of the European Family Care business at Kimberly-Clark. Apte may be contacted at email@example.com.
Jagdish N. Sheth, coauthor of “The Sustainability Edge,” is the Charles H. Kellstadt Professor of Marketing in the Goizueta Business School at Emory University. He has published more than 300 papers and 30 books. Sheth may be contacted at firstname.lastname@example.org.
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