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Sustainable approach benefits business

(chinadaily.com.cn)
Updated: 2008-07-09 09:36

Spotlight on the CEO raises pressure for the CPO

Purchased products and services account for more than 60 percent of the average company's costs. When your supply chain's environmental and social footprint equals or exceeds your company's, the business' resulting exposure to supplier activities becomes enormous – as does its vulnerability to adverse environmental and social impacts caused by any suppliers.

The Chief Procurement Officer controls procurement, however, accountability for a company's ability to demonstrate sustainable procurement rests with the CEO, for at least three reasons.

One is that the CEO is accountable for the overall performance of the business. Therefore, the CEO needs to be aware of and managing any risks of damage to the business, its income and its reputation – including those risks caused by short-sighted efforts to cut costs in procurement.

As an example of how major such risks can be, the world's largest toy company was obliged to recall about million toys manufactured by a supplier in China. The recalls resulted in a charge of about $40 million to the company, and disrupted its supply chain significantly.

Following a 2006 investigation into suspicious payments for consultancy services, a leading technology company's name was severely tarnished. Two top executives lost their jobs. Potential fines ran into billions of euros, and the company also faced the possible indictment of still-serving executives. To recover lost ground, it adopted a proactive stance, hiring its own legal and financial investigators who identified 1.3 billion euros in suspicious payments.

Second, the CEO is accountable for the business' overall response to stakeholder expectations. As the procurement budgets of the world’s biggest companies exceed the gross national product of many nations, this makes procurement a major concern, not just at company level but among external stakeholders and society in general as well. Hence a more engaged approach is required of the CEO to deal with the risks and opportunities created by growing awareness and expectations among consumers, customers and governments that businesses will procure responsibly.

Evidence of rising consumer interest in green products/services comes from a report by the UK's Co-Op Bank, Rise of Ethical Consumerism in the UK 1999-2006.This report highlights the tripling of the UK's ethical consumerism market over the period surveyed. Conversely, nearly 60 percent of respondents said they had decided not to buy at least one company's products or services in the previous months because of the company's behavior.

The third reason for CEOs' accountability for sustainable procurement is their duty to build the value of the company. There are several routes to this: value can be added through reduced costs, reduced risk, revenue protection and/or revenue growth.

As the many examples in a new series of Arthur D. Little publications show, success on any or all of these routes is enhanced by companies led by CEOs focused on achieving sustainable performance through integrity and innovation.

The CEO cannot delegate his or her accountability for sustainable procurement. But he or she typically delegates responsibility for making it happen to the CPO. And the pressure on the CPO to deliver the required results – from a CEO whose risk exposure in relation to supplier activities is as great as any the company itself presents, but whose control over those activities is much less – is likely to be intense.

Part of a bigger picture

The CPO's role in procurement is essentially a balancing act – addressing and aligning the conflicting interests of keeping supply chain costs down, keeping operating costs and risks down, reducing lead times, maintaining or increasing quality, and optimising the balance sheet.

After all, the concerns of procurement are not only the cost, quality, technical specification and availability of products and services bought. Procurement externalities such as disposal costs, CO2 implications, and other costs and impacts of operation must also be taken into account, as consumer expectations and government regulations relentlessly drive up their significance in day to day business terms.

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