Blog series: Procurement as a value driver

The complexity of supply networks has traditionally been seen as a key source of challenges. With environmental, social and corporate governance (ESG) criteria entering the equation, the level of complexity increases, and so the importance of correctly setting priorities increases.

Procurement is an area that hides many ESG risks. In this blog post, we share the drivers behind them, how and why transitioning from traditional to sustainable procurement brings value to your company and, finally, how we can help you to make the transition happen.

Why does sustainability gain so much attention within procurement?

According to Deloitte’s recent 2023 Global Chief Procurement Officer Survey, published in 2023, 43% of chief procurement officers (CPOs) admit that there is an increase in overall procurement risk; in 2021 the corresponding figure was 20%. Along with this, there has been the shift of ESG becoming the second most crucial priority (after operational efficiency) on the CPO agenda.

The increasing complexity of supply networks makes the pursuit of sustainability an increasingly complex task wherein the growing number of tiers in the supply chains blurs the visibility of what the tier furthest from you is doing. Combined with the multiplicity of suppliers on each tier, the issue calls for attention as it exposes your organisation to a plethora of potential ESG risks across the supply chain that are best identified and monitored at the procurement stage.

Sustainable procurement as a procurement value driver

The key pillars that sustainable procurement builds on are the principles reuse, recycle and reduce. For example, organisations can aim at reducing their consumption in certain categories or aim for purchasing resources with longer durability. Sustainable procurement goes beyond purchasing raw, or direct, materials and involves IT purchases, transportation, energy and utilities, facilities, real estate, travel and the company fleet.

When deciding which categories to pursue for sustainable procurement, it is important to evaluate them by value and volume, and rank them by their potential impact. In the end, if 20% of the purchases are responsible for 80% of your organisation’s ESG footprint, it is worth channelling your effort into these categories that make up the 20%. One of the ways to ensure sustainable procurement is through the supply base – another is via product and category life cycle assessments. 

Managing ESG in the supplier base

If your headquarters are based in a developed country, it is part of your organisation’s corporate social responsibility to promote ESG in the less developed areas from where your raw materials are most likely coming. The promotion of ESG to your suppliers in areas with a weaker legislative system (many countries outside Europe are such areas) can be fostered, for example, by developing closer collaboration with suppliers, improving supplier engagement and developing the use of back-to-back contracts. 

It is critical to know what regulations affect your business and bear in mind that legislation differs across countries in its strength and priorities. 

According to Deloitte’s CPO report, only 46% of CPOs require suppliers to meet specific ESG criteria, and, on top of that, the ESG focus primarily remains on environmental criteria, such as emissions and waste: 62% of CPOs reported targeting climate mitigation and 72% of CPOs are focused on waste reduction and material circularity. Yet the importance of the social facet of ESG is on the rise, covering diversity, equality and inclusion that go beyond the organisation’s internal focus. oreover, this area (the social area) shows the biggest gap between the countries from the legislative perspective.

Digitisation supporting sustainable procurement

But how should your organisation ensure sustainable procurement through the multiple tiers of the supply chain? How do you establish the level of transparency? Where can you effectively monitor and manage your suppliers in order to ensure that they are acting sustainably, instead of just hoping that they are? Hoping is a poor strategy that might backfire when it comes to sustainability. The best strategy is to establish strong digital capabilities for your organisation. 

Modern algorithms allow fraud and misconduct detection, and risk sensing among suppliers. Yet, inadequate technologies remain one of the key barriers to improving procurement. AI, data analytics and the continuously evolving technologies are there to serve the pursuit of sustainable procurement (explore our digital supply chain capabilities framework here.

At the end of this very brief overview of the aspects of sustainable procurement to explore, we invite you to come and talk to us about facilitating your journey to truly sustainable sourcing and procurement, as required by the current and upcoming legislation.

Yours sustainably,

Deloitte