Sustainable sourcing? Don’t make me laugh.
The world is full of buzz words: big data, cloud computing, phablets, wantrepreneur. Some have substance sitting behind them and go on to become mainstream (phablets are coming – mark my words!). Others are created not to describe an innovation, but to describe a new concept that is hard to articulate (just try asking someone to articulate what cloud computing is. It’s fun listening to them attempt it).
And then there are the buzz words that people freely use, yet seem to not really understand what it means. Big data is a good example of this. As is sustainable sourcing.
What is sustainable sourcing?
A text book definition of sustainable sourcing describes a sourcing exercise which goes beyond economic considerations and takes into account environmental, social and ethical factors as well. Yet the reality is that few truly achieve this. And for those that claim they do – why are audits of the supply chain from a sustainable perspective such a rare bread (as the recent horse-meat-in-burgers scandal has nicely demonstrated). I challenge any organization to claim that their supply chain is 100% sustainably sourced (never mind demonstrate it).
For most companies that have a ‘sustainable sourcing policy’, this means drafting a policy, and publishing it on the website. Box ticked. But, that’s typically as far as it goes.
An alternative view would be to look in a dictionary the true meaning of ‘sustainable’. This describes a solution that will ‘endure’. Sustainable sourcing in this context should therefore be about ensuring the most appropriate solution is put in place that solves the business problem, is fit for purpose, can be scaled up or down, can be adapted to new conditions or changed with minimal risk or cost as business demand changes over time, and creates levers of control – as well as not negatively impacting the environment, society, etc.
Sustainable sourcing therefore is about meeting the needs of the present without compromising the future – both within the organization and in the world outside it. And once the sourcing event is complete, the area needs to be managed over time.
True sustainable sourcing therefore should see any costs that are taken out of the cost base, stay out - with value being delivered back to the business in the form of innovation, new IP, lower risk and a truly future proofed supply chain.
But hang on – that’s ‘category management’ isn’t it? Oh no. Another buzz word. Another buzz word that is frequently used, but commonly misunderstood.
A new definition
I propose therefore that sustainable sourcing needs to be defined as:
‘Sustainable sourcing results in a value for money solution that will endure over time, which won’t negatively impact the environment, society or compromise your ethical stance, that solves the business problem, is fit for purpose, can be scaled up or down, creates levers of control, and can be adapted to new conditions or changed with minimal risk or cost as business demand changes over time.’
Simple – and who wouldn’t want that? Now to achieve this, you need category management. The two are intertwined and dependent on the other – they are chicken and egg. You can’t have a mature category management approach in an area without sustainable sourcing – and vice versa.
The sad reality however, is that three years after running a sourcing project, the situation has usually deteriorated – and the a new sourcing exercise can be run again and large benefits will result - again. And so the circle starts once more.
So why does this happen? Well, it’s due to a widespread problem - a lack category management going on in businesses. This means what could have been an enduring solution (and may well have been sourced as such) isn’t - due to the ever changing business demands, innovation, changing external factors (such as commodity pricing), suppliers’ expert tactics to claw back margin, etc.
New business practice is needed
So where am I going with all this? Well, I’m proposing that what’s needed is a different model for how organizations mobilize their supply base. It’s not new theory, just new practice. But it means investing in an area that delivers a return on investment not based just on actual savings achieved, but also on savings avoided. It’s based on achieving value for money, and maintaining that over time.
And that demands something which is lacking in most organizations - a high level of trust and transparency between the finance function and Sourcing. It amazes me on an almost daily basis, that the function that is responsible for managing the cost base is not absolutely aligned 100% with the finance function. Until that happens, organizations are always going to miss out on maximizing value for money.
Our latest research reveals that businesses spend, on average, two-thirds of their revenue on non-labor costs – 68.3% in 2011. This far outstrips their collective labor costs, which averaged just 12.9% of their revenue. Yet headcount reduction is traditionally seen as the best way to tackle cost. This raises a number of questions:
- Are businesses ensuring that their non-labor cost base is being effectively managed?
- If not, why not?
- And what are the potential benefits of making that investment?