A practical guide
Recent research suggests sustainable procurement initiatives are back on the agenda after something of a hiatus during the pandemic period. Jonathan Dutton FCIPS offers Supply Clusters members some pragmatic tips on how to get back on track with EIGHT core planks of sustainable procurement and your supply side environmental, social & governance (ESG) agenda post-Covid:
Sustainable Procurement momentum 2019-20
By the time Covid hit commerce hard, back in March 2020 or thereabouts, procurement as a profession had positively embraced many forms of sustainable procurement and had built momentum in finding ways to implement sustainable policies through the supply side, often as a valued and relevant outcome from good strategic procurement strategy.
This drive was energised, if not kick-started, by the publication of the new global ISO 20:400 standard for Sustainable Procurement (May 2017) which framed ‘sustainable procurement’ in a much wider context.
This built a momentum that was powered in large part by a growing culture of engagement on broader policy outcomes from procurement effort driven by no little enthusiasm from procurement practitioners. Many of these initiatives had tangible outcomes to offer in compelling case studies – and not just in areas of mandatory new standards, but, often, in the non-mandatory ones as well.
Sustainable procurement definitions
That 2017 ISO standard widened the definition of ‘sustainable procurement’ to include a much broader range of contributions beyond the simply inferred ‘environmentally’ driven procurement.
Sustainable procurement today includes key segments such as environmental, indigenous, ethical, and social procurement as well as economic development. The relevance of each to your organisation’s purpose, goals of their brand should dictate your priorities in each element of a more sustainable approach.
In such a broad standard, only the largest organisations can even attempt initiatives in all these areas. Most have to prioritise efforts. Often, in practice, your broad policy or CEO’s strategy dictates the priority of each element within your business. These priorities often reflect your wider stakeholders concerns and values – principally your customers (or voters/citizens in the public sector).
In other words, your sustainable procurement efforts should be relevant and align with your organisation’s needs.
The Covid effect
Yet, Covid changed priorities. The arrival of Covid in its commerce-shattering mode, around March 2020 in Australia & New Zealand, stopped the growing momentum of sustainable procurement almost dead in its tracks, it seemed. As one Chief Procurement Officer (CPO) remarked privately during a PASA CONNECT CPO Roundtable at the time, “… and who cares about that now? We have a business to save.” Latterly, another CPO added, “It is a shame we are now just in box-ticking mode on sustainable procurement; but we have other priorities all of a sudden.”
This breath of reality stalled much progress on sustainable procurement initiatives early into the pandemic.
Post-Covid procurement priorities
However, detailed research in the procurement industry suggests a comeback. That the passion behind sustainable procurement initiative is more resilient than our laconic CPOs observed.
The Grosvenor Performance Group, a consultancy, surveyed 200 Australian procurement teams several times during the last 18 months, from April 2020 through to April 2021, to gauge their changing priorities throughout the crisis.
Predictably, the classic universal number one procurement priority of COST had been usurped by RISK MANAGEMENT early in the crisis – certainly for those first three months as vital supply lines were secured, new stuff (PPE) sourced immediately to enable business to continue and indirect contracts had to be quickly paused.
Yet, true to type, RISK as a number one priority had been quickly replaced by COST again quite quickly as organisations reacted to survive and began fiscal repair strategies just a few short months later as the pandemic dragged on.
But, by Christmas 2020, both public and more anecdotally private sector procurement teams had re-engaged with the sustainable procurement agenda according to the research.
This message is consistent with the procurement culture in the ANZ region and its perceived enthusiasm for sustainable procurement causes – common also amongst millennial staff.
It is also borne out in recent global research by The Hackett Group, a US based consultancy, who surveyed hundreds of international CPOs in Q1 2021 to determine that, unusually, sustainable procurement issues had been newly rated an improved 9th place on their Top 10 Procurement KEY ISSUES Report listing.
Neatly, this trend fits well with another corporate trend – the rise and rise of environmental, social & governance (ESG) purity as a measure of organisational worth in an increasingly sensitive and concerned ‘woke’ society; including voters, consumers, shareholders, boards and bosses.
The key planks of sustainable procurement
Notwithstanding all the above, there are clear priorities for supply side effort on sustainable practices for many organisations now. These include both mandatory and non-mandatory aspects of sustainability in its broadest sense: The diagram above is not an exhaustive list of these sustainable procurement planks, but highlight common ones:
However, today, as FY21 draws to a close, there is some consensus on the ‘state of play’ for each of these EIGHT common key planks and isolating ‘where’ the profession is generally up to at the present time in terms of key issues, progress and next steps:
A quick summary might include the following snapshots, pointers and reminders – so that any procurement manager should be able to pick up the scent and realign their sustainable procurement efforts post-covid quite quickly using this simple checklist as a reminder or as a prompt:
The doyen of sustainable procurement efforts since the mandatory new Modern Slavery Act 2018 – most organisations over the size threshold of $100m revenues now have their mandatory board-approved modern slavery policy and public statement.
Some have started to map their inbound supply chain, others have held risk-workshops internally to isolate vulnerable industries or sourcing countries where heightened risk of modern slavery practices may lie. As yet, few have actively gone looking for modern slavery examples beyond asking suppliers (and increasingly their suppliers) to self-declare their sanctity and their efforts to unmask slavery.
The federal government extended reporting and compliance deadlines during Covid, but the first organisations liable for mandatory reporting are due 1st July 2021:
DO: Make sure your Board have approved your modern slavery policy and statement
DON’T: Miss the revised deadline for your organisation to REPORT on your efforts
Federal government buyers are mandated to follow indigenous procurement policy (IPP) that demand a 3% of federal government’s annual spend (around $35bn) to indigenous owned suppliers. The states have mostly joined in enthusiastically, as have many larger corporate firms. Spend commitments towards indigenous owned suppliers ranging from 1 to 3% are typical for many large organisations. Often, these spend commitments are rolled into organisations’ indigenous Reconciliation Action Plans (RAPs).
One difficulty of fulfilling pledges on spend commitments is the ready availability of indigenous owned suppliers. When the IPP was introduced in June 2015 only around 160 indigenous owned suppliers were readily identifiable. The work of the leading not-for-profit in the space, Supply Nation, who worked with direct endorsement of the Office of Prime Minister & Cabinet in Canberra, has increased ‘registered’ indigenous suppliers to over 3,000 by May 2021. https://supplynation.org.au/
Given the exponential rate of growth, some buyers might suspect that some newly ‘indigenous owned’ firms might be more cynical than they appear – reiterating the importance of primarily using Supply Nation registered or Certified supplies. Regardless, basic economics reminds us that large spend commitments chasing few suppliers can have obvious consequences on price.
DO: Use indigenous owned suppliers Registered or Certified by Supply Nation
DON’T: Let your RAP/IPP commitments slip, if you focus on other mandatory initiatives
The federal government is agonising over a commitment for Australia to target net zero-emissions by 2050 as some other leading countries have and are pressuring the country to achieve. Yet many organisations are now declaring their own net-zero targets within timescales of 2025 through to 2050 – many seem to be agreeing on 2030.
Central to net-zero strategies is the energy category – and many organisations are working on renewable energy plans such as solar or renewable production & sale-back to the grid. This approach can also lead to net-zero cost targets as well as for emissions.
Other environmental targets can be specific to each organisation as they align to purpose, goals or their consumer needs and often include things like recycling, carbon offset, palm oil policy, plastics usage, etc ….
DO: Review your energy policy – especially if it is a DIRECT requirement or brand relevant
DON’T: Fail to capture the wide range of emissions initiatives around your business
This strata of cause-related buying can take many forms. The essence is often centred around creating jobs by quota for disadvantaged segments, for example; seniors, the disabled, long-term unemployed or young people. Positive discrimination in effect. This can be effectively used in localities and on major projects requiring large pools of unskilled labour. But it can also be a difficult thing to business case? Why attempt this difficult and time-consuming challenge – just altruism? Or is there another reason? In any case, social procurement often centres your brand values well.
This form of social procurement is not the same thing as BUY LOCAL, although that can be an example of one strategy to support social procurement aims. However, the approach of developing a social enterprise to achieve different aims through a viable business is a laudable approach.
A social enterprise is an organization that applies commercial strategies to maximize improvements in financial, social and environmental (Wikipedia) – the old triple-bottom-line, if you like, or just a new maximizing social impact alongside profit for co-owners of a social enterprise business.
Social procurement today is also relevant to Procurement following the end of JOBKEEPER in March 2021 as an important financial support to many SME businesses around Australia.
A key procurement question is likely to be which SME suppliers are important to your business? And the more important supplementary question – what exactly can you do to ensure they survive the post-pandemic period? There is much an imaginative buyer can do to help – longer contracts, more volume, better payment terms, bank guarantees, loans, free-issue materials, purchase of other categories, client references, business advice, additional labour, etc …
DO: Determine which of your valued SME suppliers need help, and what you can do?
DON’T: Commit to targets without having a firm plan & supplier support to achieve them
Buyers unilaterally extending payment terms to 60 or 90 days is increasingly being perceived as unfair – especially on smaller suppliers. And sometimes even considered supplier bullying in some cases.
Yet, after significant campaigning by the Australian Small Business & Family Enterprise Ombudsman (ASBFEO), and as part of the economic response to the pandemic, the new Payment Times Reporting Act 2020 became law in Australia on 1st January 2021 after a super-fast legislative pathway of only 7 months.
This Act mandates tiered reporting of payment times by large organisations (over $100m) to small suppliers (under $10m income) – and includes large parts of the public sector too. Small firms employ around 50% of the workforce are a critical part of the economy and cash-flow is their lifeblood. Improving liquidity drives up working capital which stimulates economic growth.
The aim of this Act is ultimately, it seems, to standardise towards obligatory 30 day payment terms. Significant penalties apply from 1st July 2021 for non-compliance to the Act including ‘naming & shaming’ on a government website or, ultimately, fines up to 0.6% turnover – maybe $200m for a Top Ten ASX company. Few organisation’s P2P systems can comply automatically with the detailed reporting requirements of the new Act without some configuration or programming work.
To some extent, at least, this issue can perhaps be seen as an extension to the empathies in the Unfair Contract Terms Act 1977 which was extended to cover standard form small business contracts from 12 November 2016 and insurance contracts for consumers and small businesses from 5 April 2021. That is, giving SMEs rights akin to consumers when signing standard form contracts with much larger client companies.
Finally, the options available today are increasing quickly for Supply Chain Finance (SCF) and reverse-factoring arrangements that can give both the buyer a small financial return from using third party lenders to enable smaller suppliers to chose exactly which date they prefer to be paid against a sliding scale of small commission fees for this choice of liquidity.
DO: Understand the new legislation quickly and ensure speedy compliance – this year!
DON’T: Universally impose new extended payment terms on suppliers > 30 days
Several Australian public sector jurisdictions have BUY LOCAL policies or variants on this theme for differing reasons. The Defence department purchase equipment for the ADF from local sources or strategic allies – for obvious reasons. And some Defence contracts are directed to specified jurisdictions in order to create jobs and drive economic development benefits (eg: submarines being built under French supervision in Adelaide).
The Queensland (QLD) government offers favourable terms (sometimes up to a 30% price advantage) to local supplies to encourage buy-local driven economic development. Moreover, the QLD government is not alone in also having targets of the percentage of spend committed to SME suppliers -v- larger suppliers. This target was 25% of their spend with SMEs by 30 June 2021, and is 30% by June 2022.
The South Australian (SA) government has firm economic development policies to favour suppliers in-state rather than interstate – their Economic Contribution Test (ECT).
Buy Local policies, especially, seek to leverage the multiplier effect – that is expenditure with suppliers inside the target jurisdiction is then re-spent largely inside the same jurisdiction by those that received that income – and so on. Each time spend is re-spent also usually attracts some form of tax revenue too (not least GST @ 10%). Estimates range from x4 to x7 times the original price in new economic value can be created through “the multiplier effect” by purchasing locally compared to outside your jurisdiction – depending on variable factors.
It is also quite possible for private sector companies to have ‘buy local’ policies for reasons of patriotism (which was not so rare back in the day), for security & defence categories, or to heighten assurance of supply for crucial supply lines, or even to bolster the local community for PR reasons.
DO: Be very clear on WHY you are buying local, and what preferential terms this is worth?
DON’T: Fail to mention BUY LOCAL policies within tenders or RFPs when soliciting suppliers
Most firms have some form of charitable cause they support – either officially or unofficially. In fact, most firms have too many causes they support. This can dissipate contributions reducing effectiveness and confuse staff, customers and other stakeholders. It can also invite yet more requests for support – which are increasingly difficult to reject when compared to existing causes.
Better to minimise official causes and ensure relevance to your purpose and/or brand. This way effort can be concentrated to greater effect as well as being more easily understood, perpetuated and synergised by cumulative effort from your stakeholder base.
For example, PASA has adopted The Heart Foundation as their official charity following the premature passing of their founder & first CEO from a sudden heart attack. Alignment, understanding, focus, contribution.
Other examples of charitable alignment are easy to notice, when looking:
. The glass bottle manufacturer’s procurement team beachcombing to collect plastic bottles
. The bank that educates YR 11 & 12 students on personal finance
. The motoring association that provides free electric-vehicle charging stations
. The publishing company that rosters senior managers to read stories at handicapped kids’ centres
. The supermarkets that donate unsold food to the homeless
Alignment works and empowers – and never confuses and attracts additional support from others.
DO: Select a small number of charities to support that align with your purpose or brand
Don’t: Attempt to try and support every cause you are politely requested to
Supplier Diversity is a relatively new term in Australia. Wikipedia long-windedly defines it as a proactive business program which encourages the use of minority-owned, women-owned, veteran-owned, LGBT-owned, historically underutilized SME sized businesses, rehabilitation centres, disabled centres and other similar organisations. In other words, a way to support chosen minority segments through procurement.
As yet such programmes are rarely formalised here in Australia, but are more common in some other countries. The USA has had such policies more formally for decades and the South African Black Economic Empowerment (BEE) laws are well established.
That said, the federal government in Canberra currently have defined Procurement Connected Policies (PCPs) which outline exactly which handful of policies can be driven through using federal procurement as an instrument of these approved PCPs by federal government buyers.
However, during the Rudd Government 2007-10 there were at one point some 25 different PCPs published covering a wide range of policies that aimed to be partly achieved through the instrument of federal procurement. Alas, 25 policies through a narrow range of procurement categories is ambitious – certainly when some of those PCPs were mutually exclusive (how do you buy local and buy the internationally most competitive option, simultaneously?) or demand attributes too rarely found in a single qualified supplier (indigenous owned SMEs with >40% women on the board with approved Australian standard disabled access facilities, for instance). Buying and selling for the wrong reasons can easily become a ‘slippery slope’ and can lead to policy muddles or procurement confusion.
Again, it is important to align your choice of supplier policy and, crucially, do not attempt to thread too many policies through any single procurement expenditure. You cannot do everything. What you can do is choose – which policies are achievable? And which naturally align to your values, purpose and brand? This is how to make the most valid and telling contribution.
DO: Align your supplier diversity aims with your organisational purpose, goals & brand
DON’T Try to accomplish everything and hit every goal of diversity; only what is reasonable
Jonathan Dutton FCIPS has a non-executive role at SUPPLY CLUSTERS and writes a monthly column for the website. Jonathan is the CEO of PASA who run a wide range of procurement events and training programmes each year www.procurementandsupply.com and cover all aspects of sustainable procurement thoroughly. He has also worked extensively in the past as a procurement consultant and is a former non-executive director for over four years of the Australian Centre for Corporate Social Responsibility (ACCSR).