The big picture: Sustainable sourcing practices are converging with strategic sourcing to become a fundamental component of business strategy.
Between the lines: New and emerging regulatory requirements have intensified focus on a wider range of sourcing and supplier performance metrics.
- Reliability and resilience KPIs should be rounded out with metrics around diversity, social performance, human rights track records, greenhouse gas (GHG) emissions, and more.
- Customers and investors are putting their dollars into companies that focus on these metrics.
How it works: Ensuring a sufficiently comprehensive sourcing strategy involves a straightforward game plan that includes a gap analysis, roadmap, monitoring and reporting, and a new narrative that resonates with key stakeholders over time.
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Sustainable sourcing, an emerging trend only a decade ago, is converging with strategic sourcing to become a fundamental component of business strategy. This reflects a broader move toward more ethical and environmentally responsible supply chains – a shift driven by regulatory requirements, customer expectations, technology advances and the realization of long-term benefits of sustainable practices. Just as e-commerce, cybersecurity and mobile applications were once futuristic concepts that are now part of our everyday lives, sustainable sourcing practices are poised to become a standard, almost inseparable element of business operations, essential for resilient, forward-thinking supply chains.
Overall supply chain management (and supply chain risk management) approaches are already transforming. This transition is driven by recent waves of disruptions that exposed the vulnerability of long-standing supply chain management strategies that prioritize low-cost production over reliability and resilience and ultimately translate to very high costs and eroding profit due to revenue loss. Leading supply chain management capabilities embrace sourcing approaches designed to ensure that suppliers satisfy a broader collection of requirements in addition to pricing, including business continuity and resilience, quality, capacity, risk management and more.
The pressure to cultivate greater reliability and resilience is intense. Global rules-makers and regulators continue to increase and enhance requirements for greater visibility into internal practices related to cybersecurity; national security; environmental, social and governance (ESG) standards, (including specific measures and policies as well as human-trafficking concerns); and other business practices among all tiers of suppliers, according to the Protiviti white paper, Prospering in the New World of Supply Chain Risk Management. Institutional investors, shareholder activists, consumers, employees and regulators are driving companies to look upstream at their supply chain as well as downstream to their distribution channels to reduce the carbon footprint in their value chains and product lifecycles. Similar attention and pressure focus on human rights abuses in global supply chains, driving the need for more robust human rights due diligence.
New and emerging regulatory requirements such as the Corporate Sustainability Reporting Directive (CSRD), the General Data Protection Regulation (GDPR) and the U.S. Securities and Exchange Commission (SEC) cybersecurity disclosure rules have intensified the focus on a wider range of sourcing and supplier performance metrics, including those related to data privacy and greenhouse gas emissions. Yet this pressure is being eclipsed by evolving demands from boards, shareholders, employees and customers who expect organizational leaders to rethink and reframe supply chain management and sourcing activities to address a broader set of risks that threaten revenue assurance and profitability. And customers and investors alike are putting their dollars into companies that focus on these metrics.
Strategic sourcing involves data cleansing and spend analysis; category management, sourcing and supplier onboarding; and supplier management. It also includes development of sourcing KPIs that address all variables related to cost, risk and/or profitability. As strategic sourcing and sustainable sourcing converge, more companies are implementing sustainability metrics into their KPIs.
In addition to reliability and resilience measures and indices, including time to recover (TTR), time to survive (TTS), sense-and-respond maturity, and the ability to respond quickly and effectively to new customer requirements, these metrics should be rounded out with KPIs focused on the diversity performance of the supply base and other social-performance measures, human rights track records and risks, GHG emissions, and the supplier’s alignment with the prevailing sustainability frameworks. Suppliers that fail to perform up to these measures face growing revenue risks, including the loss of large government contracts and the defection of high-value customers to competitors.
The good news is that integrating these KPIs into sourcing selection and supplier management processes can be performed efficiently. This integration provides opportunities to streamline disparate tools and screening mechanisms. In some cases, an existing third-party risk management (TPRM) tool might have an ESG module that can be activated. In other cases, an optimal solution might simply mean expanding the existing supplier survey to include more social- and sustainability-focused questions.
More good news: For most organizations, ensuring that a sourcing strategy is sufficiently comprehensive (and places them in a good position for the coming changes) involves a straightforward game plan consisting of the following:
- A gap analysis: Conducting a supply chain risk assessment that evaluates core sustainability dimensions and the organization’s exposure to environmental, social and ethics risks. This analysis frequently identifies cost-savings opportunities as well.
- A roadmap: Creating a plan for managing relevant risks and improving performance against these dimensions over time.
- Monitoring and reporting: Developing a method for tracking, measuring and reporting progress against all sourcing risk dimensions.
- A new narrative: Communicating a more complete sourcing story that, over time, will resonate with customers, investors, regulators and other stakeholders.
These steps will enable organizations to stay competitive and relevant while preventing them from taking an outdated, narrow approach on sourcing – one that is not sustainable in today’s environment, let alone decades from now.
