Sustainable procurement demands a new operating model—and more collaborative supplier partnerships

Procurement is uniquely positioned within today’s organizations to achieve meaningful sustainability goals by building partner consensus, supplier collaboration, and a reimagined operating model.

Supply chains have become more complex over the past couple of decades, with cross-border transactions and continuous time-sensitive flows of materials, information, and capital among new centers of production and consumption. This added complexity has inevitably expanded carbon footprints and raised ethical concerns about materials waste, supply chain provenance, and more.

Consumers, meanwhile, are seeking more sustainable purchase options; investors are assessing environmental, social, and governance (ESG) portfolio opportunities and risk; and governments are enacting laws and policies that reflect such growing public sentiments. At the intersection of these trends is a once-in-a-generation opportunity for procurement to shape the long-term business impacts of sustainability.

When it comes to ESG, we emphasize sustainability to highlight the potential connections among business and non-business objectives. Our focus is on areas where there is “double materiality” for businesses in adopting processes and practices that in furthering environmental or social goals, also improve resiliency, performance, and customer experience while managing costs.

In a previous article, we highlighted the role procurement can play in monitoring and reducing companies’ scope 3 emissions, a vital step in addressing climate change since an estimated 80 percent of supply chain emissions are now attributed to external suppliers and vendors. The same steps taken to reduce external emissions—route and load planning for fewer, shorter vehicle trips; energy-efficient vehicles and equipment; automation and optimization of warehouse packaging and travel time—also cut fuel and order fulfillment costs, transit and order cycle times, and materials waste. We also argued that procurement—with its deep supplier and customer relationships, cross-functional reach, and access to granular supply and demand market data—is the logical function to lead the implementation of sustainability strategies and serve as an internal sustainability advocate.

Boards have a compelling case to mandate organizational and cultural changes that elevate procurement’s role in addressing sustainability. In this article, we outline the imperatives for chief procurement officers (CPOs) as they initiate the process within their organizations.

The CPO as change agent

Making the shift from traditional procurement, which is focused on resiliency and cost control, to sustainable procurement that balances internal financial and external environmental and social goals will require expanded skills and capabilities for monitoring and transparency along with collaborative relationships with supply chain partners.

CPOs will need to build new networks that are organized differently, challenge traditional procurement methodologies, and engage suppliers to effectively address sustainability while continuing to deliver on their commercial objectives. In Kearney’s 2022 Procurement Roundtable, 68 percent of chief procurement officers (CPOs) reported that sustainability principles are already being internalized—an indication that procurement is building the necessary strategic partnerships.

A board mandate to reallocate talent and resources to non-financial objectives is an essential starting point, but some initial, concurrent groundwork is required in three areas:

Build internal consensus

Forward-thinking CPOs start early, building an internal network of allies to support the sustainability agenda. At a minimum, this network should include marketing, sales, operations, and finance to ensure cross-functional support for the initiative. It is also essential for securing agreement on and developing suitable key performance indicators (KPIs) for sustainability based on a broad understanding of related trade-offs.

Different business segments, of course, will have exposure to different levels and types of risks in markets where they operate, and there may be different priorities and a need to tailor KPIs to the market conditions. The CPO should serve as a focal point and an advocate for sustainability, orchestrating the activities of the various functions involved (see figure 1).

Checklist for CPOs: proven steps to build consensus

• Identify a pivotal agenda that requires cross-functional collaboration. Define the central, thematic starting point—for example, a project, initiative, or problem to be solved—with organization-wide impacts that demands the attention and involvement of all key internal stakeholders.
• Assemble a coalition of core functions. Clearly define why each group’s involvement is essential and what skills and expertise each brings to the agenda to gain buy-in. It is also important to clearly delineate each member’s role and value in ensuring success.
• Adopt an agile mindset, and work in rapid sprints. Set up pragmatic governance and reporting to balance the need for quick adoption with diligence of processes in a cross-functional, collaborative effort. Break the project down into small, manageable tasks with clear timelines and goals and with regular, informal check-ins and progress updates to keep participants on track.

Partner with key suppliers

Supplier relationships assume a new dimension as sustainability goals are integrated into procurement decision-making. Shared goals and collaboration with suppliers are crucial for monitoring, reporting, and measuring performance.

A delicate balance of company and supplier interests is needed as parties agree on and work toward sustainability goals. This may involve a shift to a different contractual model such as gainsharing based on the value delivered by the vendor’s expertise or contribution beyond its typical responsibilities or revenue sharing from collaborative innovation.

Traditional supplier relationship management (SRM) processes require a pivot toward supplier impact management (SIM) to create a more outcome-focused environment where catalog management, sourcing, or SRM teams can bring practical ideas for improving sustainability KPIs and monitoring to achieve shared business objectives.

Checklist for CPOs: proven steps to effectively engage suppliers

• Focus on outcomes, not just activities. Avoid legacy practices that measure supplier relationships based on activity and process alone. Instead, strive to define outcome-oriented goals for each meeting and project with joint ownership.
• Start with achievable milestones. Promote patterns of behavior linked to defined outcomes, with attainable milestones set in the short term, to help build momentum and establish trust.
• Introduce more ambitious goals over time. Once initial milestones have been achieved, introduce more substantive, ambitious goals with clear benefits for all stakeholders. Articulate the benefits for suppliers, customers, and consumers to ensure a shared vision and commitment to the SIM framework.

Define the procurement operating model

The materiality assessment is a starting point to inform the CPO of the key issues to focus on when thinking about the right operating model. A double materiality approach that balances internal financial and external sustainability impacts, based on a baseline maturity assessment of the current procurement function, ensures the right baseline and focus areas to drive the transformation.

Checklist for CPOs: proven steps to define the right operating model

• Review procurement’s structure and processes. Consider creating a separate sustainability team within procurement or assigning a dedicated sustainability officer to each procurement project. Introduce metrics and performance indicators that reflect sustainable outcomes.
• Provide training and development opportunities. Training might focus on sustainable sourcing, supplier engagement, and product life-cycle assessments. Encourage collaboration and knowledge-sharing among your teams by establishing a sustainability community of practice or by holding regular, sustainability-focused team meetings.
• Evaluate existing systems and technology to improve capabilities. Integrate sustainability criteria into the procurement system’s supplier database by automating sustainability reporting and tracking or by using e-procurement software to track sustainable attributes. Adopt blockchain technology to improve supply chain traceability and transparency.

The reimagined model

A reimagined operating model, as defined in Kearney’s S model, addresses skills, structure, and systems as they function internally and as they interact with the larger business structure (see figure 2):

Skills. The set of capabilities that procurement needs in order to orchestrate a sustainability transformation and the imperatives for attracting or retaining a competitive talent base

Structure. How procurement is organized, including targets and KPIs that are essential for integrating ESG and sustainability objectives into procurement processes and decision-making, whether through a dedicated ESG team or existing procurement roles

Systems. The tools and technologies that support procurement operations, including implementing tools to track and analyze ESG data and metrics (In an earlier article, we described the need for procurement to embrace today’s tectonic shifts in supply chain technology and to boost its capabilities for better efficiencies and value gains.)

Of course, the needs, ESG priorities, and KPIs will be different for each organization. Procurement can begin with a gap analysis that assesses current procurement operations against the S model’s skills, structure, and systems to identify areas for improvement. Based on the assessment, the team can then develop a road map for integrating sustainability into procurement strategy and practices.

CPOs can achieve substantial improvements in sustainability while still remaining true to traditional business objectives. As an enabling function, procurement has long been part of the glue that binds business functions together in pursuit of strategic goals. Now it’s time for CPOs to add similar value in pursuit of a more sustainable future.

In the next article in this series, we’ll do a deep dive into how CPOs can maximize the impact of procurement by adopting new commercial models and rolling out an effective supplier impact management framework

About the Authors

Developed and written Imran Dassu, Adithi Raju and Priya Kumari, this article was originally published on the Kearney website on 18 April 2023. Figure sources is Kearney analysis.

Richard Powell BA (Hons) FCIPS Chartered, Director of Powell Procurement Services, is a senior Procurement practitioner who has been building, running, consulting, and transforming Procurement functions across multiple market sectors for over 25 years.