Developing a sustainability-based supply chain can drive value and success – both for business and society. That’s why companies have expanded their commitment to practices of corporate responsibility and co-responsibility in their value chains.
The world is changing. Consumers, employees, investors and communities expect now more from businesses, not only profit. They want to connect with companies that make a difference and contribute to the well-being of employees, community, suppliers and the environment.
An ISEAL Alliance survey, conducted in 2017, showed that companies with sustainability certificates have improved their market access, increased profits and reputation, and reduced costs and risk for both manufacturers and retailers. At BM&F Bovespa, the stocks of businesses that integrate the Corporate Sustainability Index (ISE) – created to analyze the performance of companies under sustainable aspects, based on economic efficiency, environmental balance, social justice and governance – increased 100% in their value between 2005 and 2015, in contrast to 25% of those listed on Ibovespa.
In other words, people seek what comes down, in practice, to the concept of triple bottom line: people, planet and profit. This sustainability tripod means that profit is just one of the results of companies’ focus. Although common sense indicates that the term sustainability refers only to the sustainable use of natural resources, being sustainable includes also the social and economic aspects of the business world.
That’s why, in addition to addressing their own manufacturing, transport, distribution and acquisition activities, companies are increasingly emphasizing social impact actions – which encompass diversity and inclusion when hiring employees or contracting suppliers. And procurement is integral part of the process by which businesses can create value, by influencing and developing the supply chain for a more responsible business logic.
However, while some companies are based on the new economy (conscious capitalism) and have already anticipated the new culture, others still maintain price, service level and quality as the only parameters to choose suppliers. “Professional buyers are still heavily pressed for saving and cost avoidance. A balanced approach must be considered here. More than just the economic issue, it’s necessary to think in a comprehensive way about social and environmental impacts induced by a purchase”, said Eduardo Sanches, Executive Partner at Diagma Consulting Brasil and expert in supply chain management, with experience in sustainability applied to procurement and supply.
According to Mr. Sanches, this doesn’t mean having to make the best decisions according to the triple bottom line – the tripod of a sustainable environment. “It’s worth discussing the trade-off to see what can be done, taking company needs into account, as cost may be more important at a particular time or in a specific project. What really matters is to be consistent with suppliers, and also transparent to what you actually expect from them, giving them the opportunity to communicate the required trade-offs to meet your expectations”, Mr. Sanches recommended.
He further emphasizes that the “win-lose” model can’t be sustained any longer. “It’s one thing seeking cost efficiency in the supply chain; and pushing supplier margins is another thing. There are studies that show that net current value is much higher in a balanced relationship with suppliers than in the scenario of ongoing pressure on chain margins”, said Mr. Sanches – referring to the intangible values of a balanced relationship with suppliers, such as shorter time-to-market of new products, offer of first-hand innovation and problem solving agility.
If the challenge for businesses is now meeting their needs for goods and services, thus maximizing benefits for their network and the rest of the world, it remains to be seen how this will work in practice. “By adopting procurement strategies, process preparation and complex decision-making based on sustainability criteria”, said Mr. Sanches.
“When contracting a supplier with poorer social practices, when compared to the competitors’, you can think if you will manage to improve such practices within two years, without changing cost competitiveness”, he exemplified. However, these aren’t the only criteria that can make a business sustainable.
Governance + collaboration = sustainable environment
In addition to the social and environmental risks that are inherent to business, governance is another challenge for supply chains. “Risk analysis involves sustainability, being the start of a systemic assessment for business decision-making”, said Mr. Sanches. “The big dilemma here, as it involves a complex thinking, is knowing what to favor according to each project, taking into account innovation, a social-environmental agenda and logistics, among other factors”.
The main hindrance in the implementation of a robust governance project, according to Marcelo Pereira, Supplier Management Director at Mercadoe, is that procurement areas aren’t sure what to do when comes to risks. “When talking about e-procurement, everyone understands what is a request, quotation or order. But when talking about registration, evaluation, certification and management of suppliers and third parties, there is still little reference on the subject”.
The “Third Party Risk” study, conducted by Thomson Reuters, surveyed companies in nine countries and found that only 55% of Brazilian respondents conduct risk analysis in their subcontractors. These data stress the lack of knowledge regarding the reputation of suppliers (corrupt practices, use of irregular labor workforce, etc.) – which can even result in legal penalties for contracting companies.
According to Mr. Pereira, risk management is one of the layers of sustainability. Therefore, strategic management focused on sustainability must be linked to efficient risk management processes, from the revision of partners’ data to the assessment of the reputation of suppliers and their executives.
Factors such as legal qualification, check of fiscal and labor regularities, technical-operational qualification, financial analysis and sustainability practices should be considered in supplier management. “These factors must be monitored constantly, not only at the time of closing an agreement”, highlighted Mr. Pereira.
Mr. Pereira points out also that there is little trust between buyers and suppliers, which reflects in the capacity for joint innovation. “In most supply chains, 90% of relationships are still transactional. It’s a common practice for large-sized manufacturers or retailers to press their suppliers for cost reduction, but this is now changing”, said Mr. Pereira.
That is where collaboration, a corporate asset according to Mr. Pereira. must be considered. “There is no doubt that is harder to have a close relationship. But it pays off too”, he said. For him, an alliance between buyers and suppliers can guarantee the survival of companies in times of recession, thanks to risk and uncertainty reduction policies. “It seems that soon people will see, in a given company, all other companies that are in the same path”.
Due to the need of a higher degree of collaboration and engagement across all parts of a supply chain, many companies have adopted their own interpretation of sustainable procurement, developing tools and techniques to support that engagement and collaboration. “Automation helps to remove barriers by optimizing processes, decreasing operational costs, monitoring risk and compliance effectively, and promoting higher collaboration with suppliers”, concluded Mr. Pereira.