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The business of sustainability
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Sustainability Integration in Supply Chain Management Sustainability Integration in Supply Chain Management
Presented by: Shubha Shanbhag
Date: 24th January 2019
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Content
Supplier selection based on ESG criteria
Supplier Evaluation
Supplier performance monitoring
Supplier engagement (overarching theme)
2
Is there a business case for sustainability?
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Why supply chains need to be “sustainable”
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Success Factors Have Evolved
Manage Business Risks
assessing supply chain risks is the right thing to do
Minimise business
disruption from
environmental, social &
economic impacts
Protect company
reputation & brand value
Meet evolving regulations
Realize efficiencies
supply chain optimization leads to cost savings and
other indirect benefits
Reduce cost of material
inputs, energy,
transportation
Increase labour
productivity & engagement, Retain
talent
Create efficiency and
partnerships across supply
chains
Create Sustainable Solutions
sustainable supply chains create business opportunities
and build resilience
Meet evolving investor &
customer expectations, increase resilience
Differentiation and
enhance brand value
Enhanced supplier relationships,
collaborate to innovate, quick response to changing markets
Reporting & disclosure (UNGC, GRI, DJSI, CDP)
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Select sustainability issues
Resource UtilizationEffective
DeliveryCost and Quality
Visibility and
Innovation
Economic Goals in Supply Chain
Environment
Social
Health & Safety
Cross cutting themes
■ Waste disposal practices
■ Use of energy, water and other
natural resources
■ Emissions to air
■ Effluents and discharge
management
■ Stakeholder engagement
■ Fair employment practices
■ Labour & working conditions
■ Diversity of suppliers
■ Community benefits
■ Data privacy
■ Sustainability of facility
management contractors
■ Security of personnel,
equipment and property
■ Travel risk
Economic Issues
■ Job creation and skill
development
■ Supporting local procurement
and SMEs
■ Ensuring supplier agreements
are at viable margins and are
fair
■ Whole life costing and
reduction in entry barriers
■ Emergency preparedness, fire
and structural safety
■ Ergonomics, indoor workplace
safety and industrial hygiene
■ Transportation of goods
■ Accidents and incidents
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7
Success definition -Company Vs Suppliers
Co
mp
an
yContinuous improvement
Creation of sustainable products, being a market differentiator
Sustainable and profitable production
Stable relationship with suppliers
Enhanced brand image and reputation
Reduced risk of malpractice & complaints
Reduced supply chain disruptions
Moving beyond compliance and aiming for value creation
Improve and innovate together
Supplier ownership
Working with mission/strategy aligned suppliers creates huge business opportunities
Su
pp
lie
r
Preferred supplier status
Increase of long-term contracts, assured profitability due to long-term contracts
Financial stability which allows accurate planning of the work strategy
Priority of contracts against bids from other suppliers, if included in a program of continuous improvement
Increased productivity, reduced operational expenses
Motivated workforce, improved working conditions
Improved compliance & reduced legal liabilities
Access to training programs at reduced cost
Incentives for Research & Development, Innovation
Improved competitiveness in the market
Reduced disruptive monitoring and enforcement from customers
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8
Phase Customer Sustainable Supply Chain Approach Benefits to Suppliers
Planning Screening Identify sustainability risks & opportunities
Supplier Codes/other commitments (inclusive of
sustainability criteria)
Aim for higher sustainability standards
Process challenger
Supplier
Monitoring
Audits/Monitoring Enhanced supplier relationships
Supports continuous improvements in sustainability performance
Maintain document & data accuracy
Identify efficiency improvements
Root cause analysis
On-time delivery
Optimized operational costs
Avoids breaches/violations, penalties
Review,
Decision
making
Training, capacity building initiatives Learning of best practices (environmentally and socially responsible and
ethical practices)
Stay ahead of competition
Update of evolving legislations and sector trends
Supplier programs Collaboration, support in R&D, creating shared value, innovating together
Rewards and business incentives
Disclosure Reporting requirements Allows review of information/data collection systems
Measure and disclose performance improvements
How can sustainability help a supplier achieve success?
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Typical Procurement Process
Ascertain procurement requirements from internal
teams
Ascertain procurement requirements from internal
teams
Identify vendors
(registered or new)
Identify vendors
(registered or new)
Develop evaluation criteria and
terms
Develop evaluation criteria and
terms
Pre-qualification of suppliers
Pre-qualification of suppliers
Shortlisting and
tendering
Shortlisting and
tendering
Evaluation of Tenders
Evaluation of Tenders
Negotiation and
Contracting
Negotiation and
Contracting
Sign-off on commitments
on cost, quality, delivery
Sign-off on commitments
on cost, quality, delivery
Monitoring and Decision-making on continuing
procurement
Monitoring and Decision-making on continuing
procurement
Supplier audits
Supplier audits
Review list of suppliers
Review list of suppliers
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Key Stages for Sustainability Integration in Supply Chain
Ongoing monitoring, engaging, rewarding, reporting and participating responsibly in industry toward sector wide change
Integrate results of evaluation into sourcing decisions using balanced scorecard and alignment of internal buying incentives
Evaluate Suppliers and engage to influence improvements
Establish sustainability criteria (Policies) for selection, evaluation and monitoring (apply relevant industry standards)
Map supply chain and identify highest risk areas
Review internal process/ support in place and assign responsibilities to lead
Establish sustainability criteria (Policies) for selection, evaluation and monitoring (apply relevant industry standards)
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Determining Criteria: The Balancing Act
Parameters that can be legally enforced
Values that matter to the organization
Sector-specific risks and opportunities
Material issues with direct business
implications
Typical Sustainability
Themes
Environment, Health & Safety
Social and Human Rights
Ethics and Governance
Resource Conservation
Engagement Mechanisms
Disclosure and Data
Quantifying opportunities
Scale and Capacities
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Important considerations for establishing Sustainability criteria
13
Reflect the priorities
defined in the policy, most important
sustainability impact areas
Objective and verifiable;
Clearly defined without any risk
of bias;
Allow fair competition
Clear distinction between the minimum &
optional requirements
Ensure that particular attention
is paid to local, small and
medium organizations, and
their capacity to respond to
such criteria;
Mandatory criteria -which a supplier must meet in order to be on the bid
list.
Optional/preferred – Does not stop supplier from bidding, however, will
inform the basis of the supplier selection criteria.
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Setting the criteria – important considerations
Management Systems: These criteria should provide high level understanding of the company’s management information,
commitment to quality, EHS&S systems
Sustainability: These criteria should provide evidence that the supplier has in place policies, procedures and systems to manage
the sustainability performance.
Product/Goods/Services: These criteria will help to understand the conformance of product/Goods/services to required standards
of performance or functional requirements
Process & Coverage depth: These criteria will help to understand the processes the company has in place for handling
nonconformities and managing sub-vendors.
Improvement: This is to ascertain that there’s a continuous improvement process in place.
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Sample E&S criteria
Aspect Sub-criteria
Management
system
ISO14001 Certification
Environmental Performance Evaluation
Eco-Labelling
Environment-Friendly Raw Materials
Product Green/Environmental certification
Re-use, recycling percentage, easy of disassembly,
reduction of hazardous material in the product
design
Green/Environmental friendly packaging
Air emissions
Waste water Hazardous wastes
Technology Ability to alter process and product for reducing the
impact on natural resources
raw materials used in the supplied components
(environmental friendly/ renewable materials)
Transportation Using a modern eco-efficient transportation fleet
Aspect Sub-criteria
Worker’s
right
Worker’s contracts
Employment insurance
Employment compensation
Standard working hours
overtime payments
Health and
safety at
workplace
Health and safety incidents
Training for safety at work
PPE
Supportive
activities for
worker
Discrimination
Growth at work
Attention to religious and cultural issues
Wage
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Weightage for sustainability
Correlation between the
goods/services being procured
to company’s sustainability
goals and objectives
Risk Level Suggested total
sustainability
weighting
Significant correlation HIGH- (Significant risk/Impact) 25 to 50%
Limited correlation MEDIUM- (Moderate risk/impact) 10% to 20%
Minimal or no practical
correlation
LOW- Contract is unlikely to have any
detrimental credibility, reputation or
operational impacts.
0% to 10%
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Linkage with the contracts
Include clauses that enable the organization to increase its
control over what happens in the supply chains.
Examples of clauses might include:
Provision to audit all parties involved in the supply chains;
Obligations on the supplier to inform of any significant
impacts in the supply chains;
Minimum standards to be met (suppliers & sub-suppliers)
Rights to terminate the contract for breaches of sustainability
obligations
Financial penalties on sustainability violations
Financial incentives
Supplier Evaluation
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Ten Cs of supplier evaluation
Source: The Journal of Purchasing and Supply Management
Traditional aspects
• Competency
• Capacity
• Commitment
• Control
• Cash
• Cost
• Consistency
Evolving aspects
• Culture
• Clean
• Communication
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Important considerations in supplier evaluation
Supplier past performance- on similar projects, overall compliance history
Supplier governance structure- commitment from senior management, investment in EHS&S
Outlining specific requirements beyond compliance (e.g. certifications)
Focusing on material and high priority issues and risks
Focus on systems (consistent implementation & effectiveness)
Performance on EHS&S aspects, any major non-compliances
Overall capability towards innovation, continual improvement initiatives
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Supplier Evaluation Methods Questionnaire/
Interview based
Supplier evaluation
questionnaire is used.
The purchaser scores
these aspects and
presents the results to
the supplier.
Site Visits &
Audits
A site visit is a formal
way to deploy a
survey at the supplier.
Performs a detailed
review of the operation
of the supplier
Historical
Overview
Uses historical data
from database,
combines the results
from subjective
method and the
weighing point system.
Weighing Point
System
Supplier rating is a
weighing point system
and uses mostly
quantitative data from
the supplier.
Benefit- Simple to
use, not labour
intensive, often leads
to the improvement
of the relationship
with the supplier.
Drawback-
subjective.
Benefit- Results can
be compared to a
norm or to other
suppliers.
Drawback - does
not provide details of
low scores and it
highly relies on the
accuracy of the data
that is used.
Benefit- Gives more
information about the
supplier by using
quantitative as well
as qualitative
aspects.
Drawback- May not
capture recent
sustainability
information/incidents
Benefit- Proactive
method, Suited for
critical/strategic
products/services
Drawback- Very
labour intensive
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Linkage of Sustainability Risks & Supplier Evaluation
I- risk cannot be managed and is therefore not addressed (these need to be closely monitored)
II-The risk is managed by the choice of supplier- For risks that can only be managed by choosing
the most sustainable supplier a supplier selection process will need to be used. The categories
used in supplier selection should relate directly back to the risk assessment undertaken at the
start of the contract.
III-The risk can be addressed through the specification
IV-The supplier needs to provide proposals on their approach, the procurer will then evaluate this
in bid evaluation
V-The risk is managed either by targets to be delivered once the contract has been awarded or
generally as part of contract management activity
Example risks :
High CO2 emissions due to poor energy efficiency/ travel management
Supplier sub-contracts the work to an organisation with poor sustainability credentials
Suppliers staff are not properly trained in the sustainability issues associated with the contract
Employees exploited by supplier, Risks of unethical practices- bribery, corruption,
Reputation damage to the agency through poor sustainability practices by supplier etc
The risks identified then need to be managed. Select options can be:
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Example of result integration
Wins the order this season
A Key Tool: The Balanced Scorecard (still rare)
Rank (1-5). Track record on:
Factory/Supplier 1
Factory/Supplier 2
Factory/Supplier 3
Price competitiveness 4 3 4
Quality reliability 3 4 2
On-time shipping 3 4 5
Labor / Environmental standards
3 4 2
Innovation/ Product development
3 4 4
Total Score: 16 19 17
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Evaluation outcome
Capture the evaluation results
Assess the compliance levels in line with defined
expectations
Identify the differentiating top suppliers
& ordinary suppliers
Top Suppliers
• Incentivize by giving more business
opportunities
• Reduction in audit/monitoring frequency to
allow more time for process improvement
• Collaborate to create innovative solutions
Medium and low performers
• Identify non-compliance and trigger corrective action,
including contractual penalties
• Escalate internally and raise concerns with
respective suppliers
• Agree for a fixed timeline based action plan to close
out the gaps
• Reassess
• Gradual phase out of poor performing suppliers
Ongoing Monitoring
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Monitoring- Zooming out beyond the cost/quality metric
Why monitor?
Remove hidden waste in the supply chain
Understand supplier vulnerability, flexibility (ability to respond to changing needs)
Facilitate supplier performance improvement
Reduce risk, reduce cost and raise performance
Helps identify poor performance and associated risks at an early stage
Ensures that the supplier is “on track” with respect to the contract conditions
Ensures that the product/service delivery schedules are met and deviations (if any) are avoided
Allows engagement opportunities to understand any challenges in implementation process
Allows to find gaps and improvement opportunities
Allows to investigate problems and root causes
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Access to supplier data and information on sustainability metrics
Time, resource and cost intensive if the supplier base is large/complex
If not rightly managed can lead to inaccurate results/ missing on high risk areas or hotspots
Poor visibility of supply chain (tier 2 and below)
Resistance from suppliers
Typical challenges
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Monitoring Techniques
Interviews - Conduct interviews against a defined set of questions/checklist.
Surveys - Using surveys that can be distributed and collated electronically.
Verification of self-assessment questionnaires/reports - Auditing the supplier’s management and control systems.
Onsite assessment –check the “on-ground situation” vis-à-vis “information reported in self assessment questionnaires”.
Supplier Engagement
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What are they already doing?
What options are available within existing contract?
What technologies and innovations might meet your needs?
Recognize risk from lack of engagement
Engaging suppliers
31
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Points to consider prior defining
engagement initiatives
“A longer term initiative”
Covers “ A broader scope of activity”
Clear purpose and expectations
Inclusive process
Supplier relationship management initiatives
shall be aimed to achieve greater levels of
benefits and innovation, coverage of high risk
suppliers;
Capacity building programs – to improve
alignment between the organization and
suppliers;
Supplier diversity initiatives - to increase
business opportunities for under-utilized
groups of suppliers by including them in
procurement decisions
32
Supplier engagement –Key considerations
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Identify the engagement points throughout the procurement cycle
• Tender opportunity adverts
• Tender specification
• Contract interviews
• Award of contract
• Contract management
Engage suppliers
Collaborate – Training, capacity building
Identify the resources needed
Define the frequency of supplier engagement based on supplier clusters (high, medium and low risk, High, medium and low spend)
Define engagement media (Meetings/webinars, interviews and discussions, surveys)
Assess current supplier alignment and their overall impact
Understand supplier concerns and challenges
Define a engagement strategy to suit the different levels/clusters of suppliers
33
Engage suppliersEstablish supplier engagement
program Define approach and
strategy to engage suppliers
Supplier engagement process (contd.)
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34
Engaging with supplier teams
Have a discussion on
Contract conditions
Expectations from the
contract
Broader sustainability &
other requirements
Selection rationale
Performance monitoring
Threshold levels,
termination clauses
Rewards and incentives for
exceeding contract
conditions and meeting
sustainability criteria
Have a discussion on
Disclosure of any foreseen risks
and concerns (EHS, social,
business)
Any emergencies, non-
compliances
Audit findings & corrective
action plans
Grievances
Maturity of management
systems (environment, health
and safety, social) and continual
improvement
Performance levels and explore
opportunities for long term
contracts, possibilities of
collaboration
Support from supplier’s senior
management
Governance structures and
resources
Have a discussion on
What went well
Things to improve
Gradual phasing out of poor
performers
Enrollment for long term
programmes/initiatives
Engagement Methods
Face to face meetings
Site visits
Supplier portals
Web guides
Webinars
Telephonic discussions
Contract Stage Execution Stage Contract Review/Closure
Stage
The business of sustainability
Thank you Shubha Shanbhag
Senior Consultant
ERM India
+91 9004195343
Mumbai, India
