Sustainability is now part of the new agenda of global corporations, which have been investing in strategies for people, processes and technology. Besides generating a positive impact on the environment, the idea of business leaders is also to keep competitiveness in a market that actually considers sustainable factors as an assumption for success.
A survey by ISEAL Alliance (2017) showed that those companies with sustainability certificates improved their market access, increased their profits and reputation, and decreased costs and risk to 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 value from 2005 to 2015, against 25% of those listed at Ibovespa.
While the attention of business leaders is no longer limited to financial performance and operational excellence, new ethical, environmental, health, consumer safety and involvement, employee, investor and community concerns generated by this new process still raise questions in the corporate environment.
Being sustainable, however, doesn’t imply following a ‘green primer’ to the letter. Actually, it’s about promoting change throughout the value chain. This is what says Eduardo Sanches, executive partner at Diagma Consulting Brasil, expert in supply chain management, and professor of the Sustainability module in the Strategic Procurement Management course at FIA, in his interview to Mercadoe; he has an experience of more than 15 years in sustainability applied to procurement and supply.
Mercadoe: Is sustainability a trend?
Eduardo Sanches: Sustainability covers much more than simply the concept of resulting environmental and social impacts. In my opinion, it’s how businesses can actually respond during the transformations of society. As a leader, you must define a logic to adapt your business to a more complex environment, and that is having a real sustainable view.
Here is another example: Companies must have an innovative bias, regardless of the sector in which they operate, and this has to do with sustainability. How do you manage your innovation? Will you manage the internal environment only, with your teams? Or will you have a management that is a bit more extense?
Many companies develop their products and solutions by partnering with suppliers. Thus, the relationship with suppliers becomes a matter of sustainability – not only commercial relations, but the relationship of sharing strategy, challenging suppliers with regard to innovation, and making them participate in the product innovation process, because solutions aren’t actually inside the companies.
They are inside a network of a much more complex system – such as what is doing Dell by taking plastic out of the oceans and making computer parts with it. This is an excellent sustainable logic, because while reducing the cost of raw materials that are already available on the ocean floor, the company is helping to keep it clean. For me, this is a matter of survival in the market.
ME: How can companies have such holistic view with regard to sustainability and innovation?
ES: The first question is how the company leaders see sustainability. If they see it only as a kind of risk and compliance management (which is important too), and as a necessary evil, the issue isn’t affecting the business. I think that to incorporate it as a business strategy, company leaders must see it as a strategic issue for their company, making it work as an innovation driver. They should ask themselves: How can I get an environmental or social issue and turn it into a business opportunity?
Another example is a company that previously had to dig several miles to find pipe leaks. Now they have a small robot that drills a hole in the pipe and finds natural holes in pipes, to detect water leaks. Answering your question directly, the company shouldn’t see it as a risk, but as a business opportunity.
ME: What would be the first step to contribute with more inclusive markets?
ES: The first step is to effectively consider it as a responsibility of the company. Business leaders must understand that they have a social role that goes simply beyond the generation of profit and employment. But I think the first step is actually to acknowledge this broader responsibility, it’s about starting to discuss the externalities – that is, the impacts that the company causes on society and the environment, which aren’t managed. It’s starting at the very beginning.
In the case of a call center company, for instance, what is the social impact? If they have many employees on their premises, what are they doing to improve the daily work of these people? It’s a question to consider how a company can help in the industry it operates. There is a sustainability concept called ‘material subjects’. What are they? A given company has great impact and influence on a certain subject. If we are talking of an industrial company, for instance, which manufactures certain kind of products, its material subject will certainly be waste management.
Reverse logistics, of the so-called circular economy, is integral part of this aspect. But the first step for companies that want to adopt sustainability involves a strategic viewpoint – that is, they must recognize the impacts caused by them. Then they must evolve and redirect the development of their products, along with their processes, governance, decision-making and performance indicators.
That’s why supplier management life cycle is important, as a process from supplier certification to supplier’s performance evaluation, to decide whether buying from him or not, and must incorporate sustainability criteria. If the decision involves only what is cheaper, but business view indicates a supposed sustainable company, the daily processes aren’t matching the strategy at all; consequently, we have here a huge incoherence issue.
ME: To what extent can be considered ethical that a company with great negative impact invests in sustainability?
ES: There are already many people questioning the intention of companies to do greenwashing, something that is already absurd as a business goal. From my viewpoint, the transformation and some models that are surely unsustainable will inevitably need to find a new alternative to survive.
Oil companies, for instance, state that they are energy companies, as the opposite denotes that they extract oil only. In my belief, oil companies that invest in more sustainable alternatives are preferable to those that extract oil only. I don’t believe in the compensation principle; I think this is mere philanthropy. Rediscussing the business, understanding that it causes impacts and seeking new alternatives represent an entirely different thing.
ME: When will procurement professionals no longer be pressed for saving and cost avoidance and be pressed for sustainability instead?
ES: Transformations are systemic in nature, and I think everything is happening at the same time. When a business must face cycles of economic growth and recession, the sustainability agenda loses some strength. How can we analyze a company and say that something sustainable is lacking, if it can barely survive in the economic aspect?
I think that the complexity of decisions must consider that things can be done to be added together and not through an excluding logic. In other words, we can have more market value, innovate more, sell more and still be sustainable. How does this apply to procurement? I think that as companies expand their sustainability agendas, there is no doubt that procurement professionals will also be pressed for it. Now they are already pressed for supply risk management. In the textile industry, for instance, no one wants to be associated to the slave labor of a supplier.
The sustainability agenda is linked to risk and efficiency, to doing-more-with-less, and to the creation of value and innovation. For Natura, for instance, the use of biodiversity assets, observing a fair payment for producing communities and their cultural heritage, turns the social and environmental impacts into positive actions.
But those companies that don’t have sustainability as a business model (and are less mature in this regard) are probably managing supply risk, and their internal practices come down to the use of recycled paper only, and to the ban of plastic cups. This isn’t the right way to manage a business. It’s possible to go from a supply analysis to the incorporation of sustainability to a business model.
ME: Many people confuse sustainability with recycling issues and small everyday actions of a company – such as saving plastic cups and using recycled paper. Do you think that the mindset of Brazilian business leaders must change?
ES: Absolutely. I think there is the need of higher level of awareness – which has been increasing a lot already. The important factor is increasing this awareness of business impacts. You must just think about the interference caused by a given business in people’s daily lives and in the environment – something that goes well beyond daily attitudes.
ME: What is the role of leaders when facing sustainability challenges?
ES: I think we can draw a parallel with the quality theme, which has now strategic steering, and the incorporation of such theme in the strategy of all businesses. Suddenly, this became obvious in business. The strategic importance given to the theme comes from leadership.
Someone told me once the case of a new packaging solution that would to be submitted to the president of the company. It was much cheaper when compared to the solution that had been used before, but it impaired employee’s ergonomics and had a negative impact on the environment. And the president replied that he didn’t want to cut costs at any price. He wanted a solution with the same price of the previous packaging mode, but that wouldn’t hurt the employees or throw more plastic in the environment. The logic is simple: leadership must set examples on a daily basis.
ME: How can you prepare the supplier to meet expectations with innovative products?
ES: Sustainability is very much related to how innovative you are in the market. Porter used to say that “either you are cheaper or you are different” to survive in business. But now everyone has to be competitive and innovative; there are no other choices. The principle of supplier relationship governance must have a mid- and long-term view of the impact that the supplier can bring to the business model.
How is this related to innovation? You can innovate in your products, for instance, in several ways. Yoy can make a briefing with your suppliers and they will help you to develop products. In a broad way, you can then challenge the market with something people are looking for, and you can have a very close relationship with your suppliers – not just a transactional relationship, but one that enables sharing strategies, an awareness of the capabilities that your suppliers have from a technological viewpoint.
Here is a practical example: Suppose that you are deciding which package you will use for a new product. You have two suppliers and must understand, with regard to both of them, what is the adopted research and development structure, and what the chosen production equipment is.
There isn’t much sense in understanding relationship in the mid- and long-terms if you choose a cheaper supplier or one who has a more competitive cost – instead of another who can be actually more expensive, but has a research laboratory in Brazil, brings you a lot of interesting innovations, and is willing to participate in collaborative processes. Therefore, the look of cost has to be much more focused on net current value than cost. And that’s where innovation comes in, because you must be quick and bring in future revenue before it can even exist. This is a completely logical matter, as you are thinking in a higher revenue while making a purchase decision.
ME: Is that true for all company sizes?
ES: In my view, this is absolutely true. Everyone has a supplier, as nobody can work in an isolated way. You must know who you will need to operate; then you qualify several suppliers, certify them, and classify who is more strategic for your business. If the chosen one is strategic, he will be critical to your business model; and if he is critical, why can’t he participate in that process with you?
ME: How sustainability factors can be incorporated to the supplier relationship cycle?
ES: The first question is: who do you want to be part of your network? This is where your values come in as a company; the way you operate must be very similar to the way your suppliers operate. That’s why the purchase allocation process is crucial: because one single company affects the entire supply chain.
This starts at certification time – that is, what are the criteria under which you are evaluating your suppliers? In a qualification audit, for instance, you can ask if the supplier has a social / environmental policy, and then go on with such questions, seeking information on the social externalities that he is monitoring.
You can increase the level of maturity in supplier management gradually. Let’s assume that the supplier meets your requirements; he has been certified and qualified, and then you will make a procurement decision in a bidding process. At that time, you can also ask suppliers to answer to aspects of the innovation structure, how they manage their waste and water, and how they invest in the education of their employees. Then you use all such data as decision elements or criteria – which are the so-called multicriteria decisions.
Imagine the impact if you tell the supplier that he is competitive, but that there is a supplier with very similar price and excellent investments in employee education; that he invested in a research and development laboratory in Brazil; and that he has a production technology that enables making the same product using 50% less water. In this way, you are promoting competitiveness in a broad sense – where businesses need to look at aspects other than the financial one; for me, this is being competitive in our new context.
I think there is a challenge for companies, and not only from a strategic and business standpoint, because procurement professionals must adopt a decision-making process that involves a lot of supplier information, and carry out decision-making actions that are consistent with the company’s policy and propositions. The idea here is to influence the chain to work in a sustainable way.
ME: What is the role of technology in this process? How are companies doing in terms of technology? Is there a market for it?
ES: I think technology is a vital factor. As companies realize the complexity of supplier information level that must be managed, they won’t be able to avoid technology. There are also companies and some startups that, using blockchain technology, implemented a traceability process. You can check the QR code of a product in the supermarket, and then find out when it was planted, when it was harvested, what inputs were used to manufacture it, if pesticides were used, etc. And if you analyze this a little deeper, it’s nothing more than an audit process, fully integrated to the supplier management process. And all of this is possible only with technology.
ME: Do you believe that, in the long term, sustainability applied by companies can undermine the action of governments, or even exercise some control over civil society?
ES: Governments exist to organize interactions, in order to preserve a certain balance. Businesses are places where society members can meet and act. So I believe there is no such issue of power between governments and businesses, but an increase of non-economic power from businesses in people’s lives instead. I think that this movement must actually exist, even to enable governments to dedicate themselves to more basic things and infrastructure.