In early January, the fifth annual AlixPartners Disruption Index (ADI) survey1 revealed that global business leaders are getting better at managing disruption after more than three years of pandemic, supply chain instability, worker shortages, and inflation. However, the business world in 2024 is facing a new age of disruption that will continue to challenge leaders in new ways. The ADI shows that newly emerging factors outside of executives’ control are now setting CEOs’ business agenda, with climate-induced volatility claiming a spot in the top four disruptive forces executives expect to face this year. Similarly, the World Economic Forum's recent Global Risks Report 2024 places a spotlight on the critical nature of environmental concerns. Out of the top ten risks projected over the next decade, five are directly related to environmental factors.
Procurement organizations hold an essential role in redefining sourcing strategies to address these imminent risks while ensuring the economic viability of their organizations. Traditionally, strategic sourcing has focused on three dimensions: quality, service, and price, but adding in a fourth dimension—sustainability—gives firms the ability to improve resiliency and their environmental footprint in tandem with superior commercial outcomes.
In conducting hundreds of sourcing events for clients, we have found that those who position sourcing as a fork-in-the-road choice between profit and sustainability have it wrong. Good strategic sourcing strategies will align naturally with environmental, social, and governance (ESG) goals when the process incorporates the right criteria.
For example, we have found that suppliers that prioritize meeting quality process accreditations like ISO tend to also have more advanced sustainability programs. These suppliers are typically in compliance with new ESG reporting requirements and present lower greenhouse gas emissions within their own operations and throughout their value chain. Likewise, efforts to reduce material usage or offer more eco-friendly packaging not only help to meet sustainability goals but also reduce costs and enhance value propositions.
A well-structured strategic sourcing process improves margins, boosts resilience, and enhances ESG performance for both the company and its suppliers. In other words, incorporating sustainability as a core dimension in sourcing can act as a proxy to better vendor selection and more robust supply chain outcomes.
Here are five ways to better incorporate sustainability into your strategic sourcing process.
1. Prioritize sustainable suppliers
Procurement organizations can make a substantial impact by using a weighting rubric that values suppliers that meet the four strategic sourcing dimensions, including sustainability. Several companies now provide reliable ESG ratings for a fact-based evaluation to compare different suppliers. These ratings should be weighed against cost, service, and quality as part of the supplier selection criteria. By selecting vendors that implement forward-thinking ESG strategies—utilizing renewable resources, minimizing waste, and reducing carbon footprints—procurement organizations can promote responsible and environmentally conscious practices throughout the supply chain.
2. Encourage suppliers to provide eco-friendly, waste-reducing packaging
Recent findings show 57% of consumers are “less likely” to buy products in nonsustainable packaging and 86% of consumers among younger generations are willing to pay more for sustainable packaging. By encouraging potential suppliers to provide innovative and waste-reducing packaging in requests for proposals (RFP), organizations can significantly decrease the environmental footprint of the products and services they procure—and often increase margin.
As part of strategic sourcing, companies can use a Design & Source to Value (DSV) approach, which can support the valuation of key cost and attribute drivers of their products, thereby allowing for the removal or reduction of low-value materials or processes, and often leading to new brand-enhancing concepts. This approach differs from the traditional optimization as it considers the full product value through consumers’ lens to create better and more affordable design. A successful DSV effort requires close collaboration across marketing, research and development, operations, and procurement.
3. Favor energy-efficient products and services
Procurement organizations can play a crucial role in promoting energy-efficient products and services, especially for capital investments for property, plants, and equipment. By proactively selecting items that consume less energy, such as energy-efficient building materials and technologies or smart thermostats and controllers, they not only reduce their own environmental footprint but also create a strong market demand for energy-efficient solutions. This demand encourages suppliers to invest in innovative technologies, further driving progress in sustainability. Embracing energy-efficient procurement delivers substantial economic benefits, resulting in cost savings, improved operational efficiency, and enhanced competitiveness.
4. Drive overall decarbonization
Together with sustainable packaging and use of energy-efficient technologies, electrification and clean sources of energy can significantly support decarbonization and combat climate change. Procurement organizations wield significant influence through their vast supply chain networks and can help encourage the use of clean energy. For example, procurement organizations can incentivize suppliers to electrify their vehicle fleets and use solar power to obtain savings in energy costs and a reduction in their carbon footprint. To identify where suppliers can reduce their carbon emissions, companies can utilize an approach like Should-Carbon modeling, which uses quantifiable data to estimate carbon through the different stages of the value chain (for example from farm to table for a dairy product).
5. Collaborate with external partners and report on progress
Collaboration is a powerful tool for driving environmental change. Procurement organizations can partner with suppliers, industry associations, and other stakeholders to collectively address environmental challenges. This can include identifying areas for improvement, develop corrective action plans, and implement measurable metrics for tracking progress and setting targets.
More mature companies can drive capability development within their supply base by sharing best practices and recognizing top performers. By transparently reporting on their progress and achievements in environmental sustainability, these organizations can inspire others to follow suit and contribute to a growing movement of responsible procurement. Organizations that track and report sustainability metrics tend to manage cost and operational key performance indicators (KPIs) better, maintaining overall control of their business.
A vital role to play
The role of procurement teams has never been more vital. Their decisions directly influence bottom lines and set the environmental course for entire industries. By enhancing proven strategic sourcing and related toolkits with pragmatic sustainability principles, procurement can steer businesses toward both more robust profitability and improved stakeholder outcomes.
By embracing ESG-forward approaches—not as a “fork-in the-road” decision but rather as a way to turbo-charge their supply chains—procurement to foster innovation, reshape supply chains to be more resilient to shocks, and, most importantly, champion a sustainable future.
Notes:
1.The AlixPartners Disruption Index surveys 3,100 senior executives across 10 industries and 11 countries to uncover the latest global business concerns. The survey questions executives on the degree to which their business is being disrupted, the various disruptive forces impacting them, the pace at which these disruptive forces are accelerating, and the strategies they are employing to confront them.
