Sustainable Sourcing: Greener Procurement Grows with Optimization

Posted: 05/24/2021 - 00:00
Sustainable Sourcing: Greener Procurement Grows with Optimization

Sustainable Sourcing: Greener Procurement Grows with Optimization

The demand for sustainability is skyrocketing. With 61% of brands claiming an increase in customer demand for sustainability, it’s crucial to drive change where it matters most: the supply chain.

McKinsey reports that 90% of a company’s sustainability impact occurs in the supply chain. Yet one-third of supply chain leaders admit to no or low-maturity sustainability initiatives, according to Gartner. Companies continue to source suppliers with large ecological footprints and no reliable sustainability reporting. This not only hurts the environment – it could seriously hinder brand reputation, customer relationships and the bottom line. It’s time for sourcing leaders to take a new approach.

Shift from a Low-Cost Model to a Low-Carbon Mindset

To achieve sustainability goals, sourcing teams must shift from a traditional, low-cost-only focus to a strategic decisioning model that favors environmentally conscious suppliers and weighs critical sustainability criteria. Success requires technology and automation, and specifically, sourcing optimization software to provide the analytical ease.

Why? Let’s take a look at the logistics category. Throughout the pandemic, sourcing teams frequently faced rapid spot bidding events for ocean and air freight to keep goods moving. In these cases, annual negotiated rates were tossed out the window, and shippers had to weigh a combination of factors and trade-offs in a short period of time. Put yourself in their shoes: When capacity is tight and prices are high – and you need to secure freight quickly to ensure operational continuity and demand fulfillment – making time to weigh the impact of CO2 emissions is easier said than done, especially if you are analyzing bids manually.

Finding the right balance is always a challenge, regardless of whether procurement is operating in a crisis. Supplier availability, capacity, cost, delivery time, risk, quality and sustainability are all crucial factors to sourcing decisions. Without sourcing optimization, it is impossible to accurately project which combination will deliver the best outcome. With an analytical solution, procurement can collaboratively see and consider trade-offs, and compare scenarios to make the smartest choice and determine the best award decision for the business.

The best place for a business to start is equipping sourcing teams with the tools and processes they need to maintain agility, analyze differentiating bids against each other, and make quick award decisions that weigh a multitude of factors at once.

Optimization is the New Differentiator

Sustainability and cost efficiency aren’t mutually exclusive. With today’s sourcing optimization software, buyers and their stakeholders can collect a wide range of price and non-price bid information from suppliers, and easily analyze various award scenarios based on those criteria and other constraints.

The right optimization tool gives suppliers the flexibility to propose, for example, alternate pricing for a similar item that uses recycled packaging material or produces less waste. In logistics procurement, optimization offers bidding capabilities that allow carriers to bundle round-trip lanes and convey efficiencies that reduce emissions, time and costs.

Collecting carrier capacity commitments at varying geographic combinations also helps mitigate reactive spot bidding when loads are not accepted. This can ensure that your Smartway Certified carriers are utilized more often, rather than resorting to a non-compliant backup carrier.

Scale, automation, analysis and scenario building are key to strong optimization models. The advanced platforms make it easy to award based on complex criteria. For example, a buyer can set the optimization strategy to:

  • Award at least 50% of the business to Smartway Certified carriers.
  • Award 100% of these select lanes to slow steaming bids.
  • Optimize on lowest CO2 possible and compare to the lowest cost possible.
  • Award 100% of the items to sustainable-certified suppliers unless it costs more than $500,000.
  • Favor recycled material bids by 5%.

This type of outcome is either incredibly challenging and time-consuming or simply impossible to determine through basic e-sourcing tools and manual sourcing processes.

The ROI on Green Procurement

Optimization positions businesses to experience all the benefits sustainability has to offer, including cost savings, risk mitigation, increased operational efficiency, stronger sourcing process quality, and of course, supplier innovation.

Expect sourcing optimization technology to become business critical in 2021 as more of the world’s top brands make ambitious sustainability commitments. For example, leading processed food company Grupo Nutresa has committed to make 100% of its packaging material recyclable, reusable or compostable by 2030. It’s working with its suppliers to achieve this goal, as well as including sustainability criteria in its new bidding events to award likeminded suppliers. Sourcing optimization makes this all possible.

Leading the charge for other corporations, Apple has vowed to be 100% carbon neutral for its supply chain and products by 2030. Through process and sourcing innovation, low-carbon product design and supplier partnerships, the technology giant has reduced their fluorinated gas emissions by more than 242,000 metric tons since 2019 – setting the standard for other industries to follow suit.

Consumers – particularly younger generations – are placing increasing value on companies with a commitment to environmental consciousness. The most successful companies see sustainability innovation as a key strategic and tactical advantage, according to a recent Global 100 Most Sustainable Corporations in the World index. I completely agree. The benefits of sustainable procurement go beyond contributing to a better world – they are core to your business strategy and growth.


About The Author

Alan Holland's picture

Previously a lecturer in Artificial Intelligence at the University College Cork (Ireland) Computer Science Department, Alan Holland founded e-sourcing software company Keelvar in September 2012 when he left the University to commercialize advances in AI for procurement teams. ‍He specializes in optimization, game theory, and mechanism design. He is a frequent speaker and contributor to supply chain and procurement conferences and publications.