8.tactical-operational-sustainable-sourcing.pdf

MODULE 3: Tactical & Operational Sustainable Sourcing Relevance of sustainability for Procurement Achieving Environmental Impact Improving Huma...

MODULE 3: Tactical & Operational Sustainable Sourcing Relevance of sustainability for Procurement Achieving Environmental Impact Improving Human Rights Standards Sustainability as Integral Part of the Sourcing Process ©2023 B2G Copyright MODULE 3 : TACTICAL & OPERATIONAL - SUSTAINABLE SOURCING Relevance of sustainability for Procurement ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > RELEVANCE OF SUSTAINABILITY FOR PROCUREMENT The highest the emission intensity, the lowest the valuation is Difference in valuation (Price: Sales) from median, all else equal Chemicals -11% 12% Mining -10% 12% Energy -10% 12% Oils and gas -12% 13% Cement -10% 11% Steel -12% 14% High Emission Intensity Low 5th Quintile Median (0%) 1st Quintile ©2023 B2G Copyright  From a changing attitude among investor… "To prosper over time, every company must not only deliver financial performance, but Relevance of sustainability for Procurement also show how it makes a positive Procurement has important role contribution to society." (Larry Fink, CEO of BlackRock, 2017) to play: Sustainability is of major importance from financial & investor point of view …To a real shift "We are going to see evidence over the long term that sustainable investing is going to be at least equivalent to core investments. I believe personally it will be higher" (Larry Fink, CEO of BlackRock, 2018) ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > RELEVANCE OF SUSTAINABILITY FOR PROCUREMENT Socially Responsible Investment (SRI) refers to the application of sustainable development principles to financial investments. +34% Environmental +25% SRI : 30.7 SRI : 22.9 Social Strong High ESG Investment Sustainability SRI : 18.3 Potential Scores Governance 2014 2016 2018 Growth of global SRI assets ©2023 B2G Copyright Relevance of sustainability for Procurement What does sustainable procurement (SP) means ? SP is the integration of sustainable development and social responsibility into the acquisition processes of private and public organizations. ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > RELEVANCE OF SUSTAINABILITY FOR PROCUREMENT Sustainable Procurement consists of integrating environmental, social and economic criteria into the procurement processes of goods and services Buy local Social Support the social economy Ensure material circularity Ensure human, labour and community rights are respected ○ Reduce the use of raw materials ○ Reduce waste at the source Bearable Equitable Eliminate hazardous substances Sustainable Ensure the use of more environmental Calculate total cost of ownership friendly means of transportation and Environment Viable Economy Foster equity across supply chain (fair packaging options prices, interest in SMEs) Reduce the impacts generated during use (consumption of energy and other consumables) ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > RELEVANCE OF SUSTAINABILITY FOR PROCUREMENT Considering sustainability in procurement creates a new competitive environment across industries and companies Regulators Competitors use Customer demand Rising NGO influence sustainability increasingly focus on increasingly linked increases benefits of reporting as a corporate to sustainability partnerships differentiator sustainability ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > RELEVANCE OF SUSTAINABILITY FOR PROCUREMENT Procurement has to consider some elements when dealing with suppliers : carbon footprint, resource footprint, basics rights, social standards, compliance, responsible business Carbon footprint Resources footprint Environment : 01 Circular Economy Water Carbon footprint Resources footprint Energy, emissions Biodiversity & & climate change land Basic rights Social standards Access & Society : Human rights & 02 Basic rights Social Standards inclusiveness in products & service inclusiveness Socio-economic Safety & well-being development Compliance Responsible Business Governance : 03 Anti corruption Reporting & KPIs Compliance Responsible Business Corporate governance Advocacy strategy & ethics & policy shaping ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > RELEVANCE OF SUSTAINABILITY FOR PROCUREMENT Implementing Sustainable procurement requires that senior managers of the company are educated on the sustainable procurement guidelines of the organisation. CPO’s key targets Identify and prioritize sustainability concerns based in the supply chain Integrate Sustainability in Procurement target operating model and measure the relevant impact Effectively implement tailored measures along the supply chain and empower the organization ©2023 B2G Copyright MODULE 3 : TACTICAL & OPERATIONAL - SUSTAINABLE SOURCING Achieving Environmental Impact ©2023 B2G Copyright Achieving environmental impact About the three Scopes of emission Greenhouse gas emissions are categorised into three groups or 'Scopes' by the most widely-used international accounting tool, the Greenhouse Gas (GHG) Protocol. Scope 1 covers direct emissions from owned or controlled sources. Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company’s value chain. ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > ACHIEVING ENVIRONMENTAL IMPACT Procurement has an important influence on SCOPE 3 Scope 1 Scope 2 Scope 3 Direct Indirect Indirect Definition GHG emitted directly from owned or Indirect GHG emissions from the All indirect GHG emissions occurring controlled sources generation of purchased energy in the value chain, but not included in scope 1 or scope 2 Example Company facilities Electricity Purchased goods and services Company vehicles Steam Capital goods Heating Transportation & distribution Cooling Use of sold product Influence by company High Medium Low Transparency of origin Medium High Low Relative size of emission Small Medium Large ©2023 B2G Copyright  MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > ACHIEVING ENVIRONMENTAL IMPACT Scope three emissions separate into 15 categories upstream or downstream CO2 CH4 N2O HFC PFCs SF2 s Key focus for Procurement Scope 1 Scope 2 Scope 3 Scope 3 direct indirect Indirect Purchased Indirect Transportation (downstream) 1 9 goods (upstream) & distribution & services 2 Processing of 10 Capital sold products goods 8 3 11 7 Leased Company Purchased Use of old 15 Fuel & energy 4 facilities Electricity, products 12 6 assets 14 related activities 5 steam, 13 Investments Transportation Employee heating & End-of-life treatment of commuting Company cooling for & distribution Business sold products Franchises vehicles own use Waste generated in travel Leased operations assets Scope three upstream activities Reporting company Scope three downstream activities Note: Carbon dioxide C02, Methane CH4, Nitrous oxide N2O, Hydrofluorocarbons HFCs, Perfluorcarbons PFCs, Sulfur hexafluoride SF6 Source: GHG protocol ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > ACHIEVING ENVIRONMENTAL IMPACT Carbon pricing policies supports comprehensive decision making and there are many approaches Carbon Pricing Approaches Informative Decision criteria Direct taxation Internal market Shadow Price Implicit price Internal carbon fee Cap and trade Company's awareness Ensure decisions alignment Operational areas' direct Positive incentive to and education with strategy in CC responsibility area's engagement Fostering critical thinking and Guide company's future growth with Innovation is encouraged through Reducing emissions areas can benefit discussions on the theme to define greater resilience to regulatory emission targets, with a financial financially from this development future portfolio changes counterpoint Simulation of potential carbon Price based on spending on Establishment of internal Establishment of emission taxation scenarios to inform emission reductions to comply taxation on area's emissions, to quotas by business area, in the business planning and with government regulations, encourage reductions and fund cap-and-trade model, provides investment decisions used as benchmark before fee emission reduction efforts greater flexibility to is introduced diverse businesses ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > ACHIEVING ENVIRONMENTAL IMPACT Many companies add "internal carbon pricing" to their transfer pricing system Why should we use internal carbon pricing? How to adopt internal carbon pricing? Quantify costs of Co2 emissions Measure your Co2 emissions Create incentive to reduce Co2 emissions Understand company's relative competitive Determine scope 1+2 emissions by adding energy consumption plus raw energy material purchases Differentiate by region and segment due to regulatory regime More than 1,400 firms apply Set price for Co2 carbon pricing Use typical price that is between $10 and $30 per ton as basis Calibrate with current prices and adjust for predictions on regulatory development Integrate in relevant decisions Rethink investment proposal process Apply to strategic decisions where relevant, e.g., product decision, production footprint, and M&A ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > ACHIEVING ENVIRONMENTAL IMPACT Project example : Carbon footprint review First, the baseline is assessed … … then, improvement measures are created Quantify scope 3 emissions Set emissions Set emissions reductions Quantify scope 3 targets according to the using two approaches reductions emissions science-based targets targets initiative Classified Classify categories and Implement and Implement measures with categories and suppliers according to their track measures careful tracking of results suppliers carbon risk Revamp Improve governance processes sourcing including through revamped process sourcing criteria ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > ACHIEVING ENVIRONMENTAL IMPACT Project example : Supply chain/transport optimization Sustainable Procurement at a manufacturer of commercial aircraft OEM Starting point Approach Results & impact Realized ~20% savings vs. current contract Aerospace OEM aimed to reduce cost and Cross-functional initiative to improve supply situation and reduced logistics CO2 emissions optimize geographical footprint base and identify short- and long-term savings by 22% Difficult negotiation position Set-up of a cross-functional due to 40% decline of ~20% cost reductions team, incl. Procurement, purchasing volume (COVID-19) Increased supply chain Engineering, Planning and Commercially powerful performance due to strategic Legal suppliers indicated to drive up shift to high performing Clear focus on sustainability prices by up to +90% suppliers (lower risk and impact in addition to pure cost Fragmented supply chain with shorter lead-times) improvement high CO2 footprint due to poor ~22% less CO2 emissions from Targeted insertion of capable alignment between suppliers shipments within supply chain new entrants and sub-contractors Improved geographical Supplier-specific negotiation Complex parts portfolio footprint through regional levers and training for buyers including attractive parts as well alignment (e.g. 45% Large-scale virtual sourcing as unpopular legacy parts less spend shipped between event with 20+ suppliers and continents) 100+ involved employees ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > ACHIEVING ENVIRONMENTAL IMPACT Supplier responsibility and liability regulations contribute in global carbon footprint optimization through supply chain restructuration Old supply chain New supply chain ~$1B spend shipped ~$500M spend shipped inter-continental (2021–2031) inter-continental (2021–2031) Impact equivalent to planting -22% CO2 ~120,000 trees emissions (~2k tons CO2 less) US Europe Asia Africa US Europe Asia Africa From/To From/To US US Europe Europe Asia Asia Thickness of line relative to amount of forging spend shipped between forger’s and machinist’s locations Low High Transport-related CO2 Emission ©2023 B2G Copyright MODULE 3 : TACTICAL & OPERATIONAL - SUSTAINABLE SOURCING Improving Human Rights Standards ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > IMPROVING HUMAN RIGHTS STANDARDS Complying with human rights standards along the supply chain of utmost importance Why are human rights important? Put the human being and employee at center Protect vulnerable groups from abuse and allow people to stand up to social corruption Provide universal standard that holds governments accountable Ensure basic needs for people Encourage equal work opportunities and freedom of speech ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > IMPROVING HUMAN RIGHTS STANDARDS Project example : Human rights in supply chain 1 2 3 4 5 6 Screen human Set human rights Identify scope of First tool results Create list of human Design Implementation rights Dimensions goals action right levers roadmap Screen the 10 human Derive the concrete Identify own scope of Review initial results on Identify initial list of Create initial right dimensions on human right goals from action/prioritization supplier/site clusters human right lever to implementation roadmap suitability for own dimensions for further within for concrete next address clusters for human rights levers sustainability agenda scope prioritization activities ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > IMPROVING HUMAN RIGHTS STANDARDS Project example : Human rights in supply chain Implementation Low Medium High Value/ Speed Immediate to Immediately terminate business Introduce (Supplier) Human Communicate Human Rights importance relationship Rights Handbook 1-2 Years Send dedicated Human Rights fact-books Put business relationship on hold (e.g., on COVID) Send personalized letter including Add liability terms into supplier contracts urgent need for improvement Establish (Supplier) Code of conduct Establish reporting process for suppliers' progress Request to local management to monitor supplier closely 1-2 Years to Request to local management to Conduct supplier audit and review More than 3 years monitor supplier closely sustainability performance Set-up collaborative action plan On-site support and Training ©2023 B2G Copyright MODULE 3 : TACTICAL & OPERATIONAL - SUSTAINABLE SOURCING Sustainability as an Integral Part of the Sourcing Process ©2023 B2G Copyright MODULE 3: TACTICAL & OPERATIONAL > SUSTAINABLE SOURCING > SUSTAINABILITY AS AN INTEGRAL PART OF THE SOURCING PROCESS To make a relevant impact, the conventional sourcing process needs to be enhanced with sustainability-relevant activities Preparation/capturing of Tender management Negotiations and contract Implementation current situation awarding Establish baseline Prepare tender Establish baseline Communicate Conventional sourcing (demand, cost, documents (demand, cost, supplier selection specs, etc.) Prepare e-Sourcing specs, etc.) Document Assess purchasing tool Assess purchasing services/products activities strategy Distribute invitations strategy and prices Define or reference for RfQ Define or reference Update ERP products for RfX Support suppliers products for RfX systems Research market with RfQ Research market Launch and supply base Analyze and validate and supply base operational Qualify suppliers quotations Qualify suppliers implementation (RfI) Select suppliers for (RfI) negotiations Create transparency of Include sustainability Include sustainability targets in Document sustainable sustainability sustainability in the supply chain questionnaires and assessment in supplier negotiations commitments Actions for (Tier 1, 2,.. N) tender documents Consider sustainability Review sustainability performance Assess suppliers' sustainability Analyze and validate suppliers' performance in supplier selection in regular audits Define sustainability targets by sustainability maturity Anchor sustainability KPIs in in category contract Qualify sustainable suppliers ©2023 B2G Copyright