In the current economic climate, procurement teams face a challenging balancing act. On one hand, the goal of achieving net-zero emissions and carbon neutrality is pushing businesses to adopt more sustainable procurement practices. This often involves organisations sourcing from suppliers that prioritise environmentally-friendly operations, which can sometimes come with higher costs. On the other hand, the recent surge in inflation has put increased pressure on businesses to reduce costs wherever possible, including rapidly within their supply chains.
These two forces – the push for sustainability and the need for cost reduction – can seem to be at odds. The traditional view is that sustainable procurement practices inevitably lead to higher costs and are coupled. This is particularly concerning in a high-inflation environment, where businesses are already grappling with rising expenses. Meanwhile, the urgency of achieving net-zero emissions makes it clear that businesses can’t afford to ignore sustainability in their procurement practices.
A study by the Economic Intelligence Unit (EIU) discovered that increased cost is the main barrier to firms adopting a strategy around supply chain sustainability (38%), followed by difficulty in monitoring complex supply chains (29%) and organisational structures (24%). This is reinforced by the findings in 4C’s Transformative Procurement 2023 Report which highlighted that over three-quarters (76.8%) of procurement organisations have a limited approach, at best, to sustainability with increased cost as a key barrier.
This raises a critical question: are cost reduction and sustainability mutually exclusive in procurement, or can they be reconciled? This article will explore this question, challenging traditional beliefs and offering insights into how procurement teams can navigate the current macro environment.
Understanding cost reduction and sustainability in procurement
Simply put, cost reduction in procurement involves strategies to decrease expenses associated with acquiring goods and services from third-party suppliers. This can be through the application of various supply and demand side levers to improve the cost of the product or service.
Sustainability, on the other hand, involves practices that meet present needs without compromising the ability of future generations to meet theirs. In procurement, this frequently means sourcing from suppliers that minimise environmental impact and promote social responsibility through the products/services provided as well as their own operations and supply chains.
The intersection of cost reduction and sustainability in procurement
Contrary to traditional views, cost reduction and sustainability can intersect in procurement. This intersection becomes more apparent when we consider the main cost-reduction strategies in procurement and how they can be aligned with sustainability goals.
- Total Cost of Ownership (TCO) analysis and Lifecycle Analysis (LCA): Both TCO analysis and LCA involve considering the full range of costs associated with a product or service from ‘cradle to grave’. By incorporating metrics within LCA that capture environmental costs into these analyses, companies can make more informed procurement decisions that align with both cost reduction and sustainability goals. For instance, a product with a lower upfront cost but higher environmental costs may be less desirable than a slightly more expensive product that has a lower environmental impact. Doing so rigorously can uncover the Tr-CO (True Cost of Ownership) which often organisations do not have visibility of and thus can’t optimise.
- Volume consolidation and sustainable sourcing: Volume consolidation can be paired with sustainable supplier sourcing to achieve both cost reduction and more sustainable practices. By consolidating purchases with suppliers that prioritise sustainable practices, companies can achieve volume discounts while also reducing their environmental impact. This strategy requires careful supplier education and selection and may involve working with suppliers to improve their practices over a longer-term horizon.
- Supplier negotiation and collaboration: Companies can use their negotiating power to encourage suppliers to adopt more sustainable operations. This might involve negotiating for more sustainable packaging, delivery methods or production processes. Collaboration on product design with suppliers can also lead to innovative solutions for products that are easier to manufacture, use fewer materials or are more durable, all of which can lead to cost savings and sustainability benefits.
The business case for integrating cost reduction and sustainability in procurement
Integrating cost reduction and sustainability in procurement can offer significant business benefits. Companies that prioritise sustainable procurement can also benefit by enhancing their brand reputation and customer loyalty, as consumers increasingly value businesses that demonstrate environmental and social responsibility.
However, this integration is not without challenges. It may require a shift in procurement strategies and potentially higher upfront costs. But with careful planning and a long-term perspective, these challenges can be mitigated.
This is true across categories; whether it’s moving from on-premise environments to cloud environments in IT, traditional print to targeted digital marketing channels, to packaging re-modelling.
Steps to integrating cost reduction and sustainability in procurement
So, how can procurement teams integrate cost reduction and sustainability? Here are a few steps:
- Leadership commitment: Business and procurement leaders must be committed to sustainable procurement and willing to invest in it. This involves setting clear sustainability goals, allocating resources for sustainable procurement initiatives and defining the success criteria.
- Planning: Procurement teams should develop a clear approach that outlines their sustainability goals and how they align with cost reduction. This might involve conducting a spend and carbon analysis to identify opportunities for cost savings and sustainability improvements, developing sustainable procurement initiatives and establishing a Tru-CO to measure against.
- Supplier engagement: Engaging with suppliers is crucial for integrating cost reduction and sustainability. This might involve conducting supplier assessments to evaluate their sustainability performance, negotiating contracts that include sustainability clauses and collaborating with suppliers on sustainability initiatives. Regular communication with suppliers can help co-identify opportunities for cost savings and sustainability improvements.
- Continuous improvement: Sustainable cost reduction is a journey, not a destination. Procurement teams should continually evaluate their practices and look for new ways to improve. This might involve conducting regular supplier reviews, tracking performance against KPIs and seeking feedback from stakeholders. Regular reviews and adjustments can help ensure that the procurement strategy remains aligned with the company’s cost reduction and sustainability goals.
Cost reduction and sustainability do not mean mutual exclusivity in procurement. They can be significantly complementary when considered holistically, which contributes to a company’s financial success and environmental responsibility. By rethinking traditional views and embracing the intersection of cost reduction and sustainability, procurement teams can not only increase their value but also make a tangible positive impact on business and societal goals.
Interested in finding sustainable solutions to your procurement and supply chain problems? If you’re interested in exploring how we can assist your organisation, please don’t hesitate to reach out to myself, Jon Williams, Senior Manager or Allison Ford-Langstaff, Managing Partner at 4C Associates.