Integrating sustainability into procurement decision making

Sustainable 60 MarketplaceMay 4th 2011

www.pwc.com/nz

Gary Collier

pwc Slide 2May 2011

Sustainable procurement – how does it create value?

Manage business

risks

Bu

siness D

rivers

Meeting external

requirements

Innovation and

creating brand value

Reduce costs

• Developing low carbon supply chains: Analysing alternative methods of packaging, transport and distribution to reduce direct and indirect energy use in the supply chain

• Increased resource efficiency: Savings through greater water efficiencies and increased recycling, reuse and reduction of materials

• Integrate in Whole of life/Total cost of ownership initiatives: Including sustainability criteria such as carbon emissions

• Security of supply: Understanding the pressures on water and energy use, and political instability in order to develop proactive management systems to mitigate these risks.

• Reputation and legal risks: Assessing suppliers compliance with company or industry labour standards.

• Competitive advantage: Brand differentiation through ethical sourcing e.g. Fairtrade – food and drink, Forest Stewardship Council - Timber, Kimberley Process – Diamonds. Increasingly within non consumer facing industries also e.g. construction products

• Capture and share opportunities: Develop, or adapt existing, supply and distribution chains so as to increase the participation of low-income producers, informal traders and employees

• Tax incentives –support for negotiation of tax positions or incentives

Meeting evolving customer expectations for business: Increasingly customers request information on responsible procurement approach and request certification that certain issues are not present in the supply chain

Investors ‘name and shame: Investor organizations publicly rate performance on various sustainability issues in the supply chain (for example water and carbon).

Accelerating regulation: E.g. Dodd-Frank Act requires SEC listed companies to report and remove any conflict minerals coming from the DRC and neighbours

pwc Slide 3May 2011

Integrating sustainability into procurement decision making

1. ProcessStakeholders in equilibriumRolled out and embedded?Consistent with strategyCompliance

2. Product

Aligned with strategy

Delivering what the customer wants

4. Raw materialsSecurity of supply

3. People

Training

Rewards and incentives

Strategy

pwc Slide 4May 2011

Sustainability - relevant and ever more important

Businesses are beginning to come to terms with the very real risks to their business

Climate change• Awareness and acceptance of the science• Impacts being felt globally

Raw Material – security of supply• rising costs – food, fuel, energy• battle for scarce resource “Some may wonder, even inside Wal-

Mart, with all that is going on in the global economy, should being a socially and environmentally responsible company still be a priority? You’re darn right sustainability should be a priority.” Lee Scott Oct 08

pwc Slide 5May 2011

Supply chains have an important roll to play in supporting innovation and removing cost

WalmartWalmart has managed to cut some food prices, temporarily, by up to 30% through strategic management of environmental issues

Walmart are working with suppliers to reduce packaging;• Efforts with one supplier resulted in the creation of 20% smaller

packaging box – eliminating 500 trucks from the road and saving 890,000lbs of paper fibre

• Allowed supplier to absorb rising pasta costs instead of passing them on to Walmart

Attempting to remove the middle-man; and• Buying directly from a co-operative of coffee farmers cutting 3 or 4

steps out of the supply chain

Source locally.• Selling Wisconsin-grown yellow corn in 56 stores in or near Wisconsin.

pwc Slide 6May 2011

Compliance & Risk Management

Opportunity

Risk

Revenue growth & brand

enhancement

Cost reduction, operating

efficiencies & culture

Ambition

What are you trying to achieve with your sustainable procurement programme?

pwc Slide 7May 2011

Gaining increased control of the ‘upstream’ supply chain, can secure supply and differentiate a business

pwc Slide 8May 2011

What do our customers and consumers want from us? Can the supply chain help us deliver?

Soci

al

Su

stain

ab

ilit

y

Strategic Leadership

Risk and reputation

management

Risk and reputation

Management

Strategic Leadership

Environmental SustainabilityLikely future

direction

ILLUSTRATIVE

Customer A

Customer B

Customer C

Customer D

Customer E

Customer F

Customer A

Drivers

Strategy

Strategy Focus

Supplier CollaborationSupplier Requirements

What are the key drivers of the environmental strategy?

What is the environmental strategy?

What are their focus areas and key

initiatives?

Does the retailer look to collaborate with suppliers on key issues?

What does the retailer require of its suppliers?

Opportunity Areas Must Haves YesYes

Retail and consumer goods case studyIdentification of likely trends in the sustainability driven agenda between retailers and their suppliers; and potential platforms for differentiation and strategic partnerships

pwc Slide 9

May 2011

Understand and prioritise social, ethical and environmental risks and opportunities for key purchasing categories

Ensure that these are communicated around the business

Take into consideration the overall corporate strategy and brand values

Develop an integrated supply chain strategy considering relevant priority areas in an integrated manner

ANALYSIS

STRATEGY

IMPLEMENTINTEGRATE

Align buying practices to strategic and brand values priorities by reviewing• roles and responsibilities of all involved in the purchasing process• current buying practices and potential impacts – positive and negative• supplier selection and assessment procedures• buyer performance evaluation processes • management information to report performance to board

Process

pwc Slide 10May 2011

Challenges to integration

Board

Suppliers

Buyers

CSR/Ethical Trading

Access to relevant and reliable information to give confidence that risks and opportunities are being managed appropriately

Obtaining real buy-in and ownership from the supply chain director.Often lack resources and internal clout, operating in silos without the appropriate corporate infrastructure to help realise their objectives

Numerous, complex and potentially conflicting demands and decisions without formalised corporate guidance.Misalignment of rewards and incentives with other stakeholder objectives Conflicting messages from corporate customers from within the same organisation and different organisations.Lack of integrated supplier assessment programme, considering all relevant supply chain issues,Lack of real incentives to achieve stated requirements

pwc

Innovation may be found within the supply chain

Use of forward commitment procurement

Worked with NGOs and specialists to define product specifications

Product uses 70% less energy, lasting up to 10,000 hours

Consumer saves; on cost price and usage phase

100 million were sold in 2007

pwc Slide 12

Engaging consumer with sourcing programmes

“Caring Dairy” program embodies the slogan of “milking happy cows not the planet”

The “Dairy Stewardship Alliance”/”Caring Dairy” is an agreement whereby Ben & Jerry sources milk from farms that produce milk without using growth hormones.

Farmers are paid a price premium

Provided with expertise towards adopting sustainable farming practices.

pwc Slide 13May 2011

Are our people properly equipped? implementation and integration can be challenging• Do we have the right tools to deliver the strategy?

• Do we have the competencies throughout the organisation?

• How do we build our capacity?

Implementation requires employees across the business undergoing targeted, function specific engagement and training

OwnershipI will proactively and visibly lead through my attitude and behaviour.

CommitmentWe’re in this together. I will go the extra mile to ensure we succeed.

SupportThe business is taking this seriously. The company is making sure I have the information, tools and latitude I need to contribute.

EngagementI want to play a role in helping achieve this vision. I want to be part of something which could really make a difference to my family, my company and the world.

UnderstandingI understand these issues and their implications. I understand the interrelationship between the business and these issues. I understand the business’ motives, vision and strategy for responding to these challenges.

AwarenessSustainability and climate change are important issues.

Ownership

Commitment

Support

Engagement

Understanding

Awareness

En

ga

ge

me

nt d

estin

atio

n sta

tes

pwc Slide 14May 2011

Rewards and incentivesIf it is not measured…

If it is not valued…

If performance is not recognised…

Buying

decisions

Challenging the mindset

Training•Buyers are “asking the right questions”

•Sustainability training: life cycle analysis, prioritisation of sustainability issues, understanding of current and future challenges

•Divisional VPs direct and challenge buyers to come up with two quick wins with commercial benefits and one major innovation project on sustainability each year

•Part of the buyers annual appraisal

•Giving a broader mandate increases the opportunity to find more innovative solutions than a prescriptive approach (e.g. with a broad mandate for change the buyer for detergent was able to arrive at the ‘All Small & Mighty’ solution that a more rigid approach may have inhibited)

…will it get done?

pwc Slide 15May 2011

Sustainability issues are influencing drivers for raw material volatility.

Understanding these issues can lead to competitive advantage

Raw material price volatility

Supply Demand

Speculation

BiofuelsHuman

Consumption

FeedYieldTrade

BarriersLand

harvested

pwc Slide 16May 2011

Analysis of the value chain of a product may reveal environmental and/or commercial ‘hot spots’…

% of CO2 emission

12% 23% 3% 15% 3% 4% 5% 17%6% 5% 2% 5% 1% 100%

E.g. CO2 Emissions by Lifecycle Stage

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Raw material A

Packaging Natural Gas Electricity Others Logistics &Distribution

Consumption Waste Packagingend of life

Total

g C

O2

eq

per

SK

U

Raw Materials

Manufacturing

Consumption and disposal

Raw material C

Raw material D

Raw material E

Raw material B

E.g. economic analysis

0

1

2

3

4

5

6

Co

st/

ton

ne

Labour

Fuel

Mai

ntenan

ce

Other

cost

s

Mar

gin

Auctio

n

Landed

Cost

s

Freig

ht & F

inan

cing to

Chin

a

Landed

Chin

a Pric

es

Yield

Proce

ssin

g cost

s

Chines

e pro

cess

or mar

gin

Cost E

x-Fac

tory

Chin

a

Secondar

y Fre

ight

Insu

rance

/Fin

anci

ngDuty

NZ input p

rice

pwc Slide 17May 2011

Sustainable & commercial analysis

ILLUSTRATIVELow

High

Size of bubble represents commercial impact of sustainability issue

Key

Low Medium High

MediumIssue C

Issue H

E.g. Direct carbon emissions

Security of energy supply

Issue J

Issue E

Issue K

Issue F

Illustrative Overview of Top Tier Sustainability Issues

Environmental Impact

So

cial

Imp

act

Issue G

Issue A

Issue B

What are the current and future environmental risks & opportunities in relation to your value chain? Is your source of raws secure?Evaluation of commercial impacts of sustainability issues. Identify & quantify significant opportunity and risk areas for the business, region or brand across the value chain.