Article
Procurement in a circular economy
Benefits beyond sustainability
Procurement’s contribution to an organisation’s success is about more than managing spend. As the world transitions towards a circular economy, the Procurement department has many vital roles to play. Successfully closing, slowing and narrowing resource loops entails coordination that surpass organisational boundaries. Procurement’s role as an interface to and ‘guardian’ of actors in the upstream supply network therefore needs to become more strategic.
From savings to circularity
As regulators increasingly demand that companies establish transparent value chains and conduct due diligence regarding the social and environmental conduct of their suppliers, Procurement departments must ensure a company’s compliance with rules and demonstrate transparency.
Events such as the COVID-19 pandemic or the blockage of the Suez canal have made the vulnerability of many supply chains painfully obvious. Risks such as extreme climate events, political instability or trade wars need to be monitored and mitigated by Procurement to ensure that the supply chain is resilient and does not suffer shortages or extended delivery times.
Increasing consumer demand for sustainable products creates market opportunities and reputational benefits that can be realised. Most of a product’s circularity is determined at the design stage, which includes used materials. Procurement can do more than significantly influence the environmental and social footprint of the final product. Considerations regarding the circularity of materials often go hand in hand with positive quality implications: products designed to last longer and be maintained and repaired more easily.
All the above implies that the Procurement department’s profile within an organisation needs to rise from a purely operational to a more strategic and proactive level. Consequently, Procurement’s performance needs to be measured with key performance indicators (KPIs) that go beyond savings, able to capture the strategic contribution to an organisation’s success.
The circular economy as a means to achieve sustainable development
Sustainable development means living within the limited resources of our planet and also considering a just distribution of resources at an intra- and intergenerational level. In a sense, it constitutes a desired target state for society (the WHAT). The circular economy is one such approach, proposing a way (the HOW) to achieve sustainable development. It describes an economic system that – in contrast to linear ‘end-of-life’ concepts – keeps resources in the economic cycle at their highest value for as long as possible. In a circular economy, economic growth is decoupled from natural resource use, no longer implying that faster growth means more rapid use of natural resources.
The changing role of sourcing and procurement
Compared to ‘traditional’ procurement, procuring for circularity takes on a different, more collaborative mindset towards suppliers: Cooperation with strategic suppliers can be a powerful source of innovation and sustained competitive advantage. Increasing specialisation and vertical dis-integration lead to networks and alliances of firms whose connections are no longer purely transactional, and thus more specific and harder to imitate. Supplier-buyer relationships can be sources of a ‘collaborative surplus’ that is jointly generated through contributions of the alliance partners that cannot be generated by either firm on its own.
Improving the social and environmental impact of a product over the entirety of its value chain requires a joint effort by actors in the value chain. A collaborative environment allows buyers and suppliers to open up about their respective sustainability challenges, exchange ideas and combine complementary expertise. Each value chain actor can focus on addressing environmental and social challenges at their stage of the value chain, trusting that respective upstream and downstream actors do the same. Ultimately, a value chain of this kind can outperform competitors as it can satisfy market needs better – more transparently, more reliably, more sustainably, and potentially faster.
Unlock your potential in inter-firm collaboration
Supplier management is an important factor in realising a ‘collaborative surplus’. Supplier collaboration aims at building long-lasting and fruitful supplier relationships, contributing to a competitive supply chain. There is no one-size-fits-all collaboration approach in circular procurement. As companies frequently have a larger supplier base than they can efficiently manage with available resources, setting the right priorities becomes key. Doing so based on spend or performance alone can lead to a neglect of suppliers that might have a considerable impact on a company’s circular economy ambitions. Segmenting suppliers based on current and future business strategy goals, including regular reviews to accommodate evolving business needs, is an important prerequisite to supplier collaboration.
Fostering collaborative supplier relationships entails defining and communicating clear expectations towards suppliers, encourage open and honest communication and allowing time for regular interactions to encourage compliant behavior, exchange feedback and ideas, and potentially support ongoing activities.
How Deloitte can support your journey in fostering collaborative supplier relationships
We set out five key steps that can help your organisation begin to forge collaborative supplier relationships:
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Marcus Kutzner
Partner, Consulting
Marcus leads the Deloitte Sourcing & Procurement Practice in Switzerland and
EMEA and brings over 15 years’ experience in management consulting where
he successfully led large-scale procurement transformation. He combines
process and technology expertise as well as intercultural working experience.
He supported many leading international clients in the development and
delivery of innovation, transformational and technology strategies as well as
organisational operating model designs and cost reduction programmes.
Marcus is targeting areas of digitalisation by using state of the art technology
(e.g. cognitive, machine learning, RPA, analytics and blockchain) for empowering
people and organisations to reach their full potential and getting prepared for
the future.
