A Sustainable Supply Chain: Show me the Money – NOW!

Cost Reduction

Reduced Internal Cost: In 2008, water conservation, energy efficiency, green building projects and other eco-friendly initiatives yielded Baxter International Inc. a total of US $11.9 million in environmental income, savings and cost avoidance.

Reduced Specifications – In 2007, Wal-Mart launched “CO2Scorecard” aimed at saving 0.6 million tons of CO2 and US $3.4 billion in costs through reduced packaging content.

Reduced Compliance Costs – The Waste Electrical and Electronic Equipment(WEEE) and Packaging taxes in the European Union paid by producers are essentially calculated based on weight and product category. However eco-design criteria are being taken into account in the calculation of these taxes (e.g., use of recycled raw materials in packaging). Cost reduction can be achieved through lighter and eco-designed products.

The study found that cost reductions per project represent on average 0.05% of the company’s total revenue, ranging from 0.005% to 0.36%- a small price to pay for conformity and enhance product revenue gains. However, these cost reductions yielded a six times over payback for sustainable procurement initiatives.

Risk Reduction

Bad Barbie – In 2007, Mattel experienced a major crisis when a supplier used lead-contaminated paint on Mattel’s toys in addition to creating safety hazards with lead based magnets. This fiasco caused the company to recall about 20 million products at a cost of over US $100 million. Stock price dropped 18 percent. A big lesson learned was that Mattel’s brand reputation was significantly affected by events involving safety, environmental or social issues with poor supplier oversight and risk management. These events have also led to significant direct costs (recall of products, financial penalties) and/or indirect costs (decrease in market share, sales and market cap, product boycotts) for these companies.

Dirty Palms – As another example, the report showed that in 2006, Palm’s stock value dropped 14% in June 2006 due to suppliers not meeting the Restriction of Hazardous Substances (RoHS) directive. This poor planning and oversight led Palm to withdraw the Treo 650 smart phone from the European market. Overall, the study found an average 12% decrease in market capitalization after a supply chain disruption due to a sustainability issue. Ouch.

Revenue Growth

The study found that enhanced opportunities for experiencing direct revenue growth area bit harder to quantify (due in part to so many external variables and market variations). However, the companies did report that increases of to 0.01% to 2% of the company’s revenue could be realized, mainly due to linkages between enhanced brand’s reputation and implementation of sustainable practices in design, production, distribution and end-of-life management.

Green Procurement Strategies

The study noted the many challenges that procurement officers may have in effectively managing sustainable procurement challenges. Particularly, upstream manufacturing of intermediate products can pose a challenge, but not necessarily close the door to change. So when evaluating a best approach to green procurement, the report suggests that organizations consider first those “product categories that represent a high potential for cost reduction but that are not necessarily controlled by the procurement department such as energy, raw materials, chemicals used for production process, etc.”. Other categories that can drive growth and reduce risk and that are controlled more closely by procurement might include purchasing of green energy, raw materials with a higher recycled content, etc/.

I have spoken before about how procurement staff can be the gatekeepers that can drive continuous improvement in environmental and corporate social responsibility up and down the product value chain. Here a few tips again on how to green the procurement value chain:

  1. Conduct a spend analysis and ID which product categories may have greatest environmental impact
  2. Engage designers, production and transportation department staff and explore the entire spectrum of the supply network costs and value chain of a products life cycle. Explore if the product, process or supplier is creating unnecessary wastes, risks or avoidable costs
  3. Identify alternative products to replace materials creating negative life cycle impacts
  4. Engage your suppliers and evaluate what steps they are taking to lower the environmental footprint of their products
  5. Purchase products that disclose their environmental attributes (eco-labeling)
  6. Audit and engage suppliers to understand and more accurately evaluate their environmental performance. Collaboration and transparency with suppliers creates “reciprocal value creation” in the supply chain, where both suppliers and customers are better equipped and enabled to recognize and quantify each other’s value contributions to a successful, green supply chain
  7. Work with suppliers to help them reduce environmental impacts through changes in product design and materials use
  8. Engage in Product stewardship: Active management of all aspects of the product from raw materials to final disposal

So what’s the ‘bottom line’ on sustainable procurement? The answer can be lower costs, increased sales and revenue growth opportunities, enhanced reputation and risk management, leading to increased market share. These are all achievable targets that great, smart businesses should aspire to in 2011 and beyond.

Start making the business case- it’s payback time!
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Dave R. Meyer is VP of Sustainable Economic and Environmental Development Solutions (SEEDS) Global Alliance. You can view his blog related to sustainability best practices, green supply chain, public policy, the environment and business competitiveness at www.valuestream2009.wordpress.com