Note: In the third and final part of a series on the lessons from their new book Profit from the Source: Transforming Your Business By Putting Suppliers At The Core, authors Christian Schuh, Wolfgang Schnellbächer, Alenka Triplat and Daniel Weise reveal how CEOs can use the procurement function to build resilient companies.
The post-pandemic supply chain crisis, the energy crisis sparked by the war in Ukraine, and the worst inflation crisis for 40 years make for a formidable list of challenges facing business leaders.
As they focus on getting through these crises, some CEOs might be thinking they could quietly relax their costly and time-consuming commitments to environmental, social and governance (ESG) issues. “Surely,” they might be saying to themselves, “shareholders and stakeholders will understand if I put survival before sustainability?”
If they are thinking this, they should think again. That’s because if they jettisoned commitments to ESG issues, they would be making a big mistake — for at least two reasons.
First, it is not clear if they could ditch, or even postpone, their ESG commitments without suffering a major reputational hit. Many companies have made their commitments very public — for example, signing up to ambitious net-zero targets approved by external organizations such as the Science-Based Targets initiative, a partnership of leading climate-change groups, including the United Nations Global Compact and the World Wide Fund for Nature. Also, they may find themselves in breach of government regulations.
Second, there is no simple choice between survival or sustainability. Indeed, that’s a false dichotomy. In practice, survival and sustainability are two sides of the same coin. After all, a company that is not sustainable is by definition unsustainable — and won’t survive. Kevin Brown, CPO of Dell Technologies, puts it well: “Sustainability is not only about doing the right thing — it’s a better way of doing business.”
And there is clear evidence to show this. By our calculation, if companies get their sustainability strategy right, they can expect to enjoy increased sales, increased profitability (we have recorded premiums in the 2 percent to 5 percentage range), decreased capital costs (rate reductions of 0.2 percent to 0.4 percent), and greater investor interest (one-third of all assets under management are now invested sustainably). Also, they can expect to spark greater interest from the next generation of employees — 40 percent of millennials, those people born between 1981 and 1996, take ESG factors into account when choosing a job.
So, how can CEOs weather the current storms and honor their ESG commitments? As we explain in our new book, Profit from the Source, they need to empower their CPO and the procurement team. This is because the CPO is the point person not only for tackling the supply chain crisis (as the owner of the corporate relationship with suppliers), the energy crisis (by procuring power at an affordable rate) and the inflation crisis (by reducing costs) but also for delivering on the ESG commitments.
For some CEOs — if not most — this recommendation strikes them as odd: particularly the point about sustainability. They say to us: Isn’t it the job of the chief sustainability officer (CSO) to tackle sustainability issues — not the CPO?
Yes, we say, the CSO should of course play a critical role in coordinating a company’s response to all the various sustainability challenges. But, in our experience, the success with which a company delivers on its ESG promise depends on its relationships with suppliers — and the responsibility for this success — falls squarely within the domain of the CPO.
As a way of explaining what we mean to skeptical CEOs, we point to Boston Consulting Group research conducted in partnership with the World Economic Forum that focused on the "E" in ESG — but an equally good case can also be made for the "S" and the "G."
The BCG-WEF research found that about 90 percent of the carbon emissions generated by all the companies in the FMCG-products supply chain up to the point of sale are created by suppliers — specifically, chemicals and plastics, freight, and manufacturing companies. For other sectors, the percentage of these supply-chain, or Scope 3, emissions is similarly high: fashion (85 percent), food (83 percent), automotive (82 percent), construction (81 percent), and electronics (77 percent). From this research, the message is clear: If CEOs want to achieve their goal of net zero, they should give their CPOs the mandate to tackle the carbon emissions of their suppliers.
If they are given this mandate, CPOs can turn to a number of best practices (which we detail in our book). As a first step, they should get clarity on the quantity of greenhouse gases (measured in metric tons of carbon dioxide equivalent) their company actually emits every year. This is difficult to do — and working out the scale of a company’s supply-chain emissions is especially difficult because many large global companies don’t always know exactly which suppliers contributed to which products. As Dell acknowledges: “We have one of the world’s largest supply chains (and) its size and complexity can make it hard to give a simple answer to the question, ‘Who makes your products?’”
In 2019, HP, the information technology (IT) company, found a way to work out that its carbon footprint amounted to 46,785,800 metric tons of CO2 equivalent — 50 percent of which came from its supply chain. It did this by developing a series of life-cycle assessments that estimate the total amount of greenhouse-gas emissions associated with a product over its lifetime and which include emissions from materials extraction, manufacturing, distribution, usage by customers, and end-of-life management.
The second step, related to the first and part of a broader effort to become fully transparent, is to set ambitious, science-based, carbon-reduction targets for suppliers. Often, this means setting different targets for different suppliers. For instance, Tesco, the United Kingdom supermarket chain, which has committed to reducing supply-chain emissions to net zero by 2050, has set more stretching targets for agriculture suppliers because they contribute 70 percent of Tesco’s supply-chain emissions.
The third step is to redesign the company’s products, packaging and product portfolio for low-carbon sustainability. For example, in the case of product redesigns, some companies are incorporating more recycled materials in a highly experimental way. Ford, whose typical automobiles are produced with the help of 1,200 companies supplying 40,000 parts, has repurposed a variety of composite materials in its manufacturing process: using soy-based foam in seats and armrests, wheat-straw-reinforced plastic in the Ford Flex SUV’s storage bins, kenaf in the door bolster of the Ford Escape, and rice hulls in the F-150 wire harness.
A fourth step is to redesign the sourcing strategy — in particular through near-shoring: finding suppliers that are either closer to the company or closer to the company’s consumer markets. Of course, it may not be possible simply to swap suppliers, especially if the suppliers play an integral part in the company’s product-development process. So, as a fifth step, companies must be prepared to help their suppliers rise to the sustainability challenge and reduce their own carbon emissions.
Unilever, which spends 35 billion euros (US$35.2 billion) every year on around 56,000 suppliers in 190 countries, takes this approach. As the company says: “We have a fundamental responsibility to know our supply chain and address the issues that exist. If…waterways are being poisoned or forests are being chopped down illegally, we can’t turn a blind eye because we are a few levels removed from where it is occurring.”
With these strategies, CPOs can ensure that their companies stay on track to achieve ambitious, publicly declared ESG goals. At the same time, they can, by virtue of their role with suppliers, give their companies the best chance of weathering the supply chain, energy and inflation crises. So, if it wasn’t clear to CEOs before, then it should be now: the CPO and the procurement function really are their most important allies in the company.