Procurement is Missing in Supply Chain Sustainability
General Motors faced bad publicity in August 2014 after an explosion at a tier-two supplier, Zhongrong Metal Products.
Mattel experienced a campaign against its popular Barbie and Ken dolls, in which Greenpeace accused Asia Pulp & Paper, a Mattel tier-two supplier, of clear-cutting vast swaths of Indonesia’s rain forest.
In both these cases, scandal happened far down in the supply chain. Major companies like GM and Mattel tend to work directly with their tier-one or primary suppliers; those suppliers in turn have relationships with a host of lower-tier suppliers.
But customers will hold the brand accountable when even lower-tier suppliers violate environmental and labour standards.
So, how can companies address sustainability issues in their supply chains? It’s a tough challenge, with each tier often having hundreds of suppliers.
The solution: Sustainable supply chain efforts need to make the procurement function central, at every tier of a supply chain. My research shows that, ironically, sustainable supply chain efforts often engage almost every function but procurement.
Here’s what I found, and how firms can do better.
I studied three sustainability leaders and their supply networks
I studied three multi-national companies (MNCs) and their supply networks. The MNCs were in the electronics, automotive, and pharmaceutical industries. All were members of the Dow Jones Sustainability Index and had made other sustainability-related commitments; I wanted to understand current best practice.
From 2013-2016, I conducted 131 interviews at the MNCs and their tier-one and lower-tier suppliers. I visited supplier factories in China, Mexico, Taiwan, and the United States. I also attended several industry conferences and gathered relevant documents. (More details on my research are here.)
Supply chain sustainability efforts use “cascading,” industry standards, and 3 tools
Each of the MNCs had taken a popular approach to supply chain sustainability: having tier-one suppliers “cascade” sustainability requirements. In “cascading,” the MNC requires tier-one suppliers to comply with its environmental and social requirements and expects those suppliers to use the same requirements with lower-tier suppliers.
To advance supply chain sustainability, the MNCs used three tools: assessment, training, and incentives. They aimed to apply these within the MNC and to all tiers of suppliers. Each MNC had also worked with its industry organization to promote industry-wide supplier sustainability standards.
All three supply networks had some areas of strength. In particular, the MNCs and a few tier-one suppliers had mastered their supplier sustainability assessments. The MNCs also provided environmental, health and safety (EH&S) training to their suppliers and implemented incentive programs such as supplier sustainability awards, preferred supplier programs, and supplier learning groups.
However, these efforts largely missed the procurement function, and so impact fell short.
The procurement function has been overlooked in supply chain sustainability
In all three networks, sustainability efforts largely skipped over the procurement function.
Training and incentives: Procurement personnel in both the MNCs and in suppliers received little sustainability training and had no incentives to pursue sustainability.
Communicating sustainability mandates: In both tier-one and lower-tier suppliers, the procurement unit was not informed about MNCs’ sustainability requirements.
Here’s how supply chain sustainability efforts travelled from the MNC to suppliers:
- The MNCs procurement team met with the tier-one supplier’s sales and marketing personnel to demand that the supplier comply with the MNC’s sustainability requirements, such as CO2 emission reduction projects and overtime work limits.
- The tier-one supplier’s sales/ marketing personnel then shared those requirements with their counterparts in operations, R&D, and EH&S — but, surprisingly, not with procurement personnel.
- As a result, tier-one suppliers’ procurement staff didn’t learn about MNCs’ sustainability requirements and couldn’t communicate those requirements to their own suppliers, much less enforce them.
When procurement is overlooked, sustainability suffers
MNC sustainability teams recognize the power that procurement personnel have over suppliers. One sustainability manager told me: “We simply do not have the leverage over my firm’s suppliers. Procurement managers are in the front line – suppliers listen to them, not us! They are the ones who select suppliers and place a work order.”
But in these three networks, procurement managers in tier-one and lower-tier suppliers were almost all unfamiliar with the MNCs’ sustainability requirements. One told me, “We are not invited to the table when discussing our customer’s sustainability requirements.” Another said: “I don’t really know [the MNC’s] sustainability requirements. If my marketing counterpart receives such information, that doesn’t flow to me.”
Because incentives for procurement personnel are still based mainly on cost reduction and quality improvement, most procurement personnel still focus on these traditional targets. The 65 procurement personnel I interviewed told me that cost-saving is their top priority, followed by quality improvement and on-time delivery.
Ultimately, the MNC’s sustainability requirements can’t cascade throughout its supply network.
4 ways to make procurement central in supply chain sustainability
To make supply chains more sustainable, the procurement function needs to be central. My research suggests four ways to achieve that.
- MNC procurement should work with supplier procurement. The MNC procurement unit needs to actively engage the supplier’s procurement unit. For example, MNCs could invite suppliers’ procurement personnel (along with EH&S personnel) to their sustainability training sessions.
- MNC functions should send a consistent message to suppliers. MNC directors should promote collaboration among all functions that interact with first-tier and lower-tier suppliers. Connecting R&D, sustainability, and procurement is especially important. Suppliers must repeatedly hear that MNCs value economic, environmental and labour outcomes.
- MNCs should offer sustainability training and incentives to procurement personnel. Procurement personnel need more sustainability training and proper incentives for supplier sustainability. Otherwise, they will continue to focus on cost, quality, and delivery goals.
- Procurement personnel should proactively engage with industry associations. Procurement personnel should participate in the development and updating of industry-wide sustainability standards and training. Generally these efforts are led by industry associations. At these MNCs, sustainability teams lead involvement with industry associations. Procurement personnel can contribute expertise and come to see the industry-wide sustainability efforts as core to their work.
Companies can take a new approach to procurement
The three MNCs I studied made several changes based on this research’s results:
- The pharmaceutical MNC required sustainability training for its procurement personnel and set common KPIs for sustainability, R&D, and procurement. It also increased connection with suppliers’ procurement units, e.g. through a partnership linking procurement staff at tier-one and lower-tier suppliers with MNC procurement and risk management personnel.
- The automotive MNC made sustainability training mandatory for its procurement personnel. Its procurement staff have joined sustainability personnel in taking a prominent role in relevant industry associations oriented to improve supply chain sustainability.
- The electronics industry is known for constant cost-reduction pressures. But despite these pressures, the electronics MNC has worked with its network of suppliers to adopt some industry-wide sustainability initiatives (e.g., standardized audits and training). Its procurement personnel have yet to get directly involved with the industry association.
The three MNCs are spreading their sustainability requirements to suppliers more effectively, while recognizing that this is a long-term project. I believe that all firms can follow their example: improving supply chain sustainability by putting the procurement function at the center.
About the author
Veronica H. Villena is an assistant professor of supply chain and information systems in the Smeal Business School at Pennsylvania State University. Her research focuses on how companies engage their global supplier network to achieve economic, environmental, and social outcomes. She has won multiple awards and published work in a variety of prestigious journal. Dr Villena’s research papers can be accessed at https://www.researchgate.net/profile/Veronica_Villena. She serves as an Associate Editor for the Journal of Operations Management and as a Senior Editor for Production and Operations Management.
Before joining academia, Dr. Villena worked in several positions in manufacturing, purchasing, quality, and project management. Her experience as an auditor for SGS has enabled her to assess the process management of hundreds of multinational companies in various industries in Europe and Latin America.