March’s Procurement News Digest

  • Author: Carmen Molina
Posted on 12-04-2011

Procurement NewsLong awaited UK anti-bribery law guidance

The UK Ministry Of Justice has finally issued guidance for applying the new anti-bribery act, which comes into force on July 1st. Firms have welcomed the Ministry of Justice’s guidance, according to The Guardian, with many saying it has lifted the threat of corporate hospitality falling foul of the new regulations. Ken Clarke, the justice secretary, said the legislation would “reinforce Britain’s reputation as a leader in the global fight against corruption”. Clarke added: “Addressing bribery is good for business because it creates the conditions for free markets to flourish.”

In the guidance, there is no exemption for “facilitation payments”, deemed to amount to a bribe. Gifts or tickets to sporting events and dinners are permitted as reflecting “good relations” with clients. Anti-corruption groups and lawyers said the UK government appears to have softened its stance on some elements including the geographical scope of the law.

Car makers struggle after Japan disaster

Toyota is struggling to source 500 types of car parts following the earthquake and tsunami that hit the north-east of Japan earlier this month. General Motors has also announced suspension of production at one its plants in the US, blaming parts shortages. Nissan too has reported supply chain ‘bottlenecks that its procurement teams are trying to control.

It comes as businesses across various industries report procurement challenges in the wake of the disaster as processing plants and energy facilities remain closed. Japan is a big supplier of key parts used in industries ranging from car manufacturing to consumer electronics and data processing. The problem will come in the middle of April when companies run out of inventories and supplies” Rajiv Biswas IHS Global Insight.

BT seeks to cut supply chain CO2 emissions

In a bid to reduce the carbon footprint of its operations BT has introduced a climate change procurement standard that will apply to all its suppliers. The scheme has been implemented to encourage suppliers to reduce carbon during the production, delivery, use and disposal of products and services supplied to BT.

The initiative includes three “minimum expectations” to be undertaken by all contracted suppliers. Firstly the supplier must demonstrate it has a policy in place to address the challenge of climate change. Secondly the supplier should be actively measuring and reporting carbon, as well as other relevant green house gas emissions. Finally, the supplier must have in place “challenging targets” to reduce emissions and is reporting on progress.

Liz Cross, BT CSR strategy and policy for procurement, said: “This is not something that we’re legally obliged to do, but we see this as key to delivering on our commitments on carbon reduction.”

Jaguar Land Rover looks to local sourcing

Jaguar Land Rover has awarded £2bn worth of supply contracts to UK companies in a move that will create up to 5,000 jobs. The news came as a welcome boost to western suppliers struggling against mounting competition from far-eastern, low-cost country suppliers.

A further boost to UK automotive suppliers came from a report compiled by the UK’s Automotive Council which claimed that a third of supply contracts lost by UK companies had gone to Western Europe, rather than the Far East and, as a result, could be won back.

Porsche drive procurement function to meet corporate goals

Porsche’s procurement function previously sat within the finance and business department. From April 2011, Uwe-Karsten Städter will be the company’s new board member in charge of purchasing. Since 2007, Städter has been head of electrics/electronics group procurement at Volkswagen.

Matthias Müller, chairman of the board of management, said: “Our purchasing volume is growing not only because of the current development of the economy but above all because of ambitious corporate goals which Porsche has defined for the forthcoming years. “Procurement will clearly have a greater weight in future.”

McDonalds sets out vision to eventually source sustainably

McDonalds wants its suppliers, “over time”, to only provide agricultural raw materials for its food and packaging from land that has been certified as sustainable by an external third-party evaluation process. Their Sustainable Land Management Commitment (SLMC) will first focus on the five areas it believes will make most impact: beef, poultry, coffee, palm oil and packaging.

Part of the initiative includes sponsorship of a three-year beef study to investigate carbon emissions on 350 beef farms across the UK and Ireland. McDonald’s is also joining the Roundtable on Sustainable Palm Oil (RSPO) and has committed to source only RSPO-certified Palm Oil by 2015.

Oil price rises hit metal prices

Fears of an oil supply shortage sparked by civil unrest in North Africa made the price of crude oil jump in the last week of February to over $100 a barrel (£62.40). A report published by OPEC said that if sustained for a long period, the recent surge in oil prices could slow global growth resulting in higher prices for industrial goods and technical services.

The changing oil price and subsequent supply disruptions impacted the cost of a variety of metals including aluminium, copper and gold – which all went up. The cost of precious metals increased as a result of their role as safe haven for investment in the middle of political uncertainty.

Despite all this, OPEC concluded the world economy was still enjoying a solid recovery with JP Morgan’s global Purchasing Managers’ Index reflecting this. The PMI moved above 57 index points in February, indicating expansion in the current quarter. In addition, manufacturing across many economies posted stronger growth in February, especially in the US, Europe and Japan.

Adidas kicks off five-year sustainability programme

Adidas has outlined its new environmental strategy, a five-year plan to reengineer its approach to environmental management; a strategy based on extending existing programmes to deliver process efficiencies from areas including product design, development and sourcing to logistics, own sites and IT systems.

“Implementing environmental performance across our value chain is an important step to deliver sustainable operations over the long term,” said Herbert Hainer, Adidas Group CEO.

As part of the strategy, which was published together with the Group’s 2010 Sustainability Report, the Adidas Group is committed to using 100% better cotton by 2018. “Our goal is to use 100% Better Cotton in our products by 2018 and we are excited to work closely with the Better Cotton Initiative towards achieving this ambitious goal.” Another initiative is called “Green Company”, which looks at the own sites of the Adidas Group.

Global IT procurement budgets set to increase

Worldwide commercial IT spend is forecast to total $3.6tn in 2011, a 5.6% increase from $3.4tn in 2010, according to market watchers. Gartner’s latest outlook has been raised slightly for 2011 from its previous forecast of 5.1% growth.

Gartner analysts said this stable forecast comes despite political unrest in the Middle East, while the impact on IT markets of the recent natural disasters in Japan is yet to be fully understood.

Gartner has added media tablets, such as the iPad, to its computing hardware spending estimates beginning this quarter. “The addition of media tablets, reinforced by an expected additional decline in the value of the dollar, accounts for the increase in top-line growth,” said Gordon.

Sources of information: procurementleaders.com, purcon.com, bbc.co.uk, spendmatters.com, Google News

How do you transform sustainable procurement strategy into standard business processes?

  • Author: Heinz-Gerd Peters
Posted on 28-01-2011

Sustainability at Deutsche TelekomA large number of companies have good ideas and have developed strategies on sustainable procurement; this is clear from benchmarking and workshops held within our own industry and across other industries. The problem for companies is quite often that these well formulated strategies are not, in fact, implemented in the real processes of procurement.

Much of the time procurement is still reduced to contracting based on price; this is the specific driver for success and procurement is monitored and also paid on this basis. Even quality aspects and the consequences of quality for the product life cycle are not usually considered by procurement but by the requesting department within the organisation. Often the requesting department is much more powerful than the procurement department; in some cases only the requesting department is the decisive factor in the purchasing process. Indeed, procurement is sometimes only involved in writing the purchase order, although this is sometimes in practice against existing company policies.

Under those circumstances a CSR department must cooperate with both procurement and the different requesting departments to implement sustainability needs in concrete purchasing processes and in the criteria for bid evaluation. This creates some challenges to be mastered.

First, the definition of the bid evaluation criteria. The same criteria will not apply to all the commodities considered. For example, there is a big difference between IT hardware and marketing; for IT hardware energy efficiency should be considered, and this is not really relevant for marketing.

Second, the weighting of sustainability within the bid process. In some cases it may make sense to weight sustainability more than in other cases; because some products or services may be more risky or important than others from a sustainability perspective.

Third, keeping in mind that procurement is normally monitored on the basis of costs, we can ask: what is the financial impact of weighting sustainability? Take the case of one supplier that offers a better price than a second supplier, but has a poor performance on sustainability; you may choose the second supplier because of the overall evaluation result. This will result in higher costs for the purchasing company. However, how do you measure the reduced risks by considering sustainability criteria; for example, the costs of researching alternative suppliers as a result of a crisis, and the communication and reputational risks of such a crisis?

Deutsche Telekom is embarking on a project to consider sustainability criteria within bid processes based on ten pilots across different commodities, in order to establish more detailed knowledge about the impacts of these criteria. This will be a complex and challenging project. However, there is no alternative if you really want to be a sustainable company, with more than just good ideas and standards such as supplier codes of conduct and social audits.

The next challenge for the near future will be the measurement of sustainability criteria. In addition we will have to think about different incentive systems for procurement people; and this may be an even harder challenge.

Dr Heinz-Gerd Peters is Head of Sustainable Development and Environment, Deutsche Telekom AG

What are the implications for public procurement of the Spending Review and sustainability requirements?

  • Author: Laurence Cranmer
Posted on 22-12-2010

SustainabilityProcurement across the UK Government and public sector is a significant part of the economy as a whole. Last year the Office of Government Commerce reported that, ‘The Public Sector spends around £220bn each year on procurement in over 44,000 organisations right across the UK in every sector that government operates. Public sector spend often constitutes a large percentage of a given supply market – often between 10% and 15% ’.

This scale of public procurement suggests that it can play a major role in at least two areas of government policy: to help find the £81 billion savings required by 2014-15; and, to support becoming what David Cameron described as ‘the greenest government ever’.

The recent Spending Review mentions procurement several times. It discusses, ‘a tough new efficiency regime, monitored and supported by the new Efficiency and Reform Group’. This will include as part of its work addressing the key findings of the recent Efficiency Review by Sir Philip Green to ensure that, ‘the Government is using its scale as effectively as possible in common areas of spending such as procurement, property and major contracts’.

The Spending Review also includes as one of its ‘Spending Challenges’, ‘a programme to centralise the procurement of commonly used goods and services, bringing efficiency gains of over £400 million a year’.

One example of the Government approach to sustainable procurement is the publication of the self-assessment ‘Flexible Framework’ that, ‘allows organisations to measure and monitor their progress on sustainable procurement over time’. The Framework is voluntary, although it includes some mandatory requirements.

The website for the Department for Environment, Farming and Rural Affairs (Defra) says that, ‘During these tough financial times, now more than ever, we need to be thinking about balancing environmental, social and economic needs’. In general it seems that Government considers spending reductions and sustainable procurement as complementary areas of policy.

There is much more to say on each of these issues. I will make a few comments.

Public procurement will be aiming to provide value for money as always, but will be looking to make substantial savings to contribute to Departmental spending reductions.

Departments will be seeking to establish collaborative procurement arrangements across Government in order to increase market leverage.

The move to greater centralisation of public procurement for some goods and services may need to be balanced against ‘big society’ ideas of greater local provision, including perhaps contracts with SMEs.

Suppliers will find they will need to meet both current and possibly increasing sustainability requirements, both directly and across their supply chains.

Departments, possibly acting collaboratively, may seek greater engagement and negotiation with suppliers, across all areas of procurement but in particular on costs and sustainability.

I am very interested to know what readers think about this brief sketch of these complex issues.

What are the implications of far reaching company wide sustainability plans?

  • Author: Laurence Cranmer
Posted on 06-12-2010

SustainabilityUnilever has just announced its ‘Sustainable Living Plan’. Their website states that, ‘Unilever unveils plan to decouple business growth from environmental impact’, which I think involves a very interesting and bold claim. The website also makes the more familiar but still significant claim that, ‘Our plan isn’t just the right thing to do for people and the environment. It’s also right for Unilever: the business case for integrating sustainability into our brands is clear’.

Reflecting on this announcement, it seems to suggest an approach to sustainability that seeks to cover the entire range of company activities in a single plan. Other similar plans include Proctor and Gamble’s ‘Sustainability Vision’ and Marks & Spencer’s ‘Plan A’. These whole company plans link multiple strands of sustainability together, and directly tackle all operational and supply chain activities. These plans also seem to aim, implicitly or explicitly, to ‘decouple business growth’ from ‘environmental impact’, as Unilever states. Developing and implementing plans on this scale suggests a number of features of the companies involved. I think some of these features are as follows:

  • The company is a significant agent in global society, including and beyond its commercial activities
  • This agency generates both substantial positive benefits for customers and for economic prosperity more widely, but also substantial negative environmental and social externalities
  • The company is able to act as a single agent, albeit in collaboration with stakeholders, to reduce these negative externalities very substantially, and in some cases to zero
  • To achieve this, the company is able to reduce impacts across it operations but also throughout the entire supply chain from raw materials, through to consumer use of products, and finally to disposal
  • There remains a sound business case for the plan that combines for example revenue opportunities, cost reduction, risk mitigation and brand reputation
  • At the same time, companies may have a global responsibility to act on these issues of sustainability beyond legal requirements and financial return

When considered together, these features of global companies raise both conceptual and practical questions. From a practical point of view we can ask, for example, whether new or improved processes and measures are required to manage supply chains to minimise or remove negative impacts on this scale. We can also ask how companies will translate whole company sustainability plans into positive brand reputation.

From a conceptual point of view we can ask some far reaching questions. For example, do companies in fact have a global responsibility to achieve minimal or zero negative externalities, even if this responsibility exceeds legal requirements and/or reduces financial return. Perhaps this becomes a responsibility for companies beyond a certain size or scale of negative impacts. Alternatively, is this responsibility fully discharged within a more traditional view of the company through responding to customer, investor or citizen preferences; this seems to be consistent with Unilever’s statement that, ‘the business case for integrating sustainability into our brands is clear’.

As company wide sustainability plans are implemented over time, it will be very interesting to see how these and other questions work out.

CSR Risk: Asking the Right Questions

  • Author: Fiona Donaldson
Posted on 29-10-2010

Corporate Social ResponsibilityMany individuals in the field of procurement and corporate responsibility will no doubt be aware that the last five years have seen a marked increase in the pressure on companies to take responsibility for the activities and actions of their suppliers. Most corporate sustainability reports will include brief sections on suppliers, however most companies are barely scratching the surface when it comes to the supply chain.

It is easy enough for a first-tier supplier to sign up to a “code of conduct” (an activity of debatable worth), complete self assessments and even audits to assure their customers of their dedication to managing corporate responsibility risk, but what about their suppliers and the suppliers of their suppliers, and so on to the nth degree.

The challenges for an organisation within this area of sub-tier management need to be addressed in a formal and methodical way to ensure understanding of product tracing and the overall supply-chain. What companies need to ask themselves is “where is the risk imported from?” and “How will these risks affect my brand identity and business continuity?”

Many organisations are unable to answer the fundamental question as to why they are trying to manage corporate responsibility risk in the supply chain. Ultimately the decision should be made based on the company’s understanding of (and commitment to) the required actions to ensure a responsible and sustainable method of conducting business inclusive of their suppliers’ actions rather than treating this as a tick-in-the-box activity.

Are corporate objectives on sustainability and cost improvement complementary or mutually exclusive?

  • Author: Laurence Cranmer
Posted on 28-09-2010

SustainabilityCompanies engaged in implementing sustainability requirements of every kind are confronted by an interesting convergence of ‘practical’ and ‘ethical’ issues. Implementing sustainability necessitates overcoming practical issues, but at the same time, the idea of sustainability raises questions about the principles that establish the boundaries of what the business is responsible for, clearly an ‘ethical’ issue.

I think that ‘practical’ issues raise ‘ethical’ issues – the two are inextricably linked, and the distinction between the two is not as sharp as it first appears. However, for companies, I think this suggests an important distinction: practical issues can be addressed within the broadly accepted current responsibilities of the business; whereas ethical issues may raise questions about these responsibilities, potentially for the business itself and as part of the wider public policy debate.

The idea that applying sustainability requirements may produce cost savings suggests an interesting overlap between practical and ethical issues as they confront the business. If companies both reduce costs and become more sustainable, they can combine an improvement that falls within current responsibilities for improving efficiency to increase overall financial return, and meet a requirement that may fall outside of these responsibilities as defined by current legal and regulatory requirements.

This overlap may become apparent as organisations analyse the procurement environment that confronts them. For example, supply chain analysis involves the systematic mapping of the supply network and the identification of cost drivers, value adding activities and non-value adding activities. The same map can be used to identify the environmental and social impacts of activities across the supply chain and analyse the links between, for example, waste as a cost driver and as an environmental impact.

Empirical research on labour standards in two of Nike’s garment suppliers in Mexico may also suggest this overlap. Research conducted by Richard Locke and Monica Romis from the MIT Sloan School of Management provides a ‘structured comparison of two plants, both located in the same country, producing the same products, and subject to the same code of conduct and monitoring practices’. The authors argue that, ‘through reorganizing the production system and adopting a variety of employment practices, [one plant] could improve labour standards and business outcomes at the same time’.

These examples suggest that cost savings and sustainability requirements may be complementary rather than in conflict at a practical level for the business. Working through these practical issues may of course raise more complex ethical questions about where the responsibilities of companies lie across all operations, including procurement, either at a business level or at the level of public policy. These responsibilities may include sustainability requirements that increase costs at least in the short term.

Laurence Cranmer is a member of the Oxford-Achilles Working Group on Corporate Social Responsibility and Associate Fellow, Saïd Business School, University of Oxford

Why measuring Social Responsibility Performance counts

  • Author: Paul McNeillis
Posted on 11-05-2010

Just when does a Social Responsibility initiative become material? In my view, it’s when it can be measured. If real performance on social issues is to become the norm for all mainstream corporations, then we need to fill out our success stories with clear measures of success.

Companies have some great stories about advancing human rights. I was at a sustainability conference in Chicago recently and I heard impressive stories from two companies (making chocolate and home products respectively) who had each engaged strongly with their suppliers in Africa. In both cases their teams had gone to the territory and over a sustained period started a real dialogue with the communities around their supply chains to understand the challenges they faced. They heard from the next generation farmers with no incentive to follow their parents, they heard about unscrupulous middle-men cutting out their profits, and they saw uncontrolled mining activities encroaching on prime farming land. By tackling these issues together with their suppliers they strengthened the capacity of their suppliers to sustain their communities, to advance their rights, and to be more productive.

The companies gained a host of benefits including maintaining long term security of supply, developing their people, and building their corporate reputation. Success stories like these are compelling, at least to a conference audience, because people can relate strongly to a simple human story with challenges and victories. But is it enough to influence mainstream senior management teams in less progressive companies?

I was struck by the contrast between these narrative accounts and the many presentations from those focussing on the environmental side. These speakers had more numbers than a maths class flowing from their presentations. This many millions of tonnes of carbon were saved by moving from air-freight to shipping, that many percent more items were shipped by redesigning packaging and that many tonnes of waste were saved by reduction initiatives. The conference audience certainly appreciated the insights, the innovations and the achievements. Moreover you got the sense that within these companies the senior teams had quickly appreciated the financial benefits of these projects as carbon or waste savings translated straight into cash savings albeit often with some capital investment. These environmental initiatives were ‘no brainer’ best practices available and applicable to all, whereas the social initiatives, without the compelling numbers behind them, started to look like the more risky, ‘pioneering’ moves of the few.

Also the environmental performance improvements could quickly be reckoned as percentages of overall business activity and therefore the materiality of the improvements demonstrated to any sceptics. In contrast the unmeasured social initiatives, although in these particular cases large in scale, had no way of differentiating from token initiatives or occasional philanthropy. So, just when does a social initiative become material?

The triple bottom line says that the three pillars of economic, environmental and social performance are all vital to a sustainable business. Environmental managers are mastering the measurement tools to submit the business cases, mobilise resources and deliver measured benefits. But what about those who are trying to champion social benefits? Where they are part of a receptive culture they get support from the leaders of their companies who often act because ‘it’s the right thing to do’. But if progress on social issues is to be achieved within mainstream corporations, then success stories need to be made more tangible, and that can only happen by applying clear measures of success.

I would like to hear your views and experiences on the measurement of human rights and social responsibility performance. Please comment…