Taking the long view on environmental sustainability can seem somewhat remote from the day job of most people working on the front lines of procurement and supply chain.
However, embedding this thinking into business strategy and management has never been more important to improving resilience and competitive advantage.
Labour productivity and cost has improved over the past decades thanks to ICT, mechanisation and moving production to low-cost countries. At the same time material and resource input costs have been trending in the opposite direction. Average global commodity prices have more than trebled since the year 2000 at their recent peak.
The supply and demand dynamics behind this volatility are likely to continue exerting pressure, with 2.5 billion extra people becoming middle class consumers by 2030. The impact of climate change, and the inter-relationship between energy, water, and food, will exacerbate risks. Without appropriate action, this means shrinking profit margins and higher supply chain costs.
Improving supply chain resource efficiency and resilience should be a natural fit in the role of procurement and supply chain management. Butit can be challenging to reconcile longer-term issues with the commercial realities and short-term priorities of sourcing.
Developing a framework for collaboration outside the cut-and-thrust of sourcing and procurement processes can be a powerful mechanism for uncovering knowledge and innovation within the supply chain. Significant opportunities have been revealed through the Carbon Trust’s experience of working with companies such as M&S, Tesco and a number of manufacturing multinationals. This includes collaborative buying, process innovation, and supply chain optimisation.
Supply chain resource and risk mapping can provide the intelligence for product design and production strategies that hedge commodity price volatility. Using this intelligence in product design can enable companies to optimise the use of raw materials, or substitute them entirely, while creating even better customer propositions. For example in BT, teams use a ‘design checklist’ tool to build resource efficiency into products from the start of their development cycle.
Procurement and supply chain can help shape innovative customer value propositions and ensure the business model as a whole becomes more resource efficient. Companies that have taken a long view on sustainabilty, and integrating this into their business model, are already demonstrating the benefits.
Caterpillar, Philips and Desso have all become great case studies showing how creating more ‘circular’ value chains improves margins, revenues and security of supply. They are doing so by taking back parts and products at end-of-life, remanufacturing or reprocessing them, and reselling them to the same or different customer segments. This is usually embedded within an end-to-end service proposition.
Fully closed-loop recycling, where materials are reclaimed and recycled back into new products, is now close to becoming a reality at a meaningful scale. New materials, technologies, processes and supply chain partners are enabling these types of models to emerge and gain traction. This is expanding and redefining the remit of supply chain and procurement. Some of the most exciting opportunities in the UK are in remanufacturing, where a market potential of up to £5.6 billion has been identified.
The first step towards making a change is to understand the business case. Quantified risk and opportunity scenarios can be developed by drawing on supply chain and market insights. Generating ideas for alternative business models in cross-functional teams also reveals opportunities for prototyping and testing.
Strategic decisions can then be taken regarding how to engage with suppliers in the implementation phase. Where common sector-wide challenges are found, pre-competitive collaboration with industry peers is a valuable approach. Setting ambitious targets also serves as a useful reference point in framing a strategy, and provides the impetus needed to potentially re-think a business model and deliver transformative change.
Workstreams addressing specific areas of risk and opportunity can then be developed. These should ideally be phased to establish a strong basis for change: engaging internal and external stakeholders; piloting new processes and models; learning from successes and failures; and rolling out what works.
☛ Aleyn Smith-Gillespie is associate director at Carbon Trust Advisory