Innovating to meet the challenges of sustainable procurement

I've just been reading an interesting article headlined "Why sustainability is now the key driver of innovation" in the September issue of Harvard Business Review (subscription required). In it, leading management thinker C.K. Prahalad and his two co-authors argue that the notion that introducing green practices and products means putting social concerns ahead of financial ones is nonsense. In fact, their research among 30 large companies suggests that costs can actually be reduced and revenues increased as a result of better products and new businesses. 

"We find that smart companies now treat sustainability as innovation's new frontier," they write. "Indeed, the quest for sustainability is already starting to transform the competitive landscape." Pioneers in this space include HP, Cisco, GE and FedEx.

Companies typically go through five stages on the path to becoming sustainable, they suggest. First, viewing compliance as an opportunity; second, making value chains sustainable; third, designing sustainable products and services; fourth, developing new business models; and fifth, creating next-practice platforms (ie, pushing the boundaries of innovation). 

At stage one, conforming to the most stringent standards in the world can reduce sourcing costs through economies of scale and optimise supply chain operations. The authors cite the example of HP developing an alternative to the anti-corrosion – and potentially cancer-inducing – coating hexavalent chromium and then transferring the technology to a number of vendors to ensure competition.

At stage two, meanwhile, firms need to work with suppliers to develop more eco-friendly raw materials and components and reduce waste by either offering them incentives or, as in the case of Wal-Mart, using its purchasing power to insist that suppliers (eg, in China) improve their performance.

Prahalad and his colleagues acknowledge that recession has slowed movement towards more sustainable practices, but insist that those companies that have seized the initiative will emerge stronger from it. "The key to progress, particularly in times of economic crisis, is innovation," they write.

This message will resonate with a growing number of procurement leaders. At the hotel group NH Hotels, for example, CPO Pedro Martinez has started an initiative called the NH Sustainable Club. Launched in June, it brings together key suppliers such as TV manufacturer Philips and non-food consumables distributor Bunzl, to discuss ways to help NH meet its targets of 20% less consumption of water, less energy spend, less waste and lower carbon emissions by 2012. The programme has the full backing and involvement of the hotel group's CEO, Gabriele Burgio, as this YouTube video illustrates. 

Pedro tells me that "the Club is a way to 'distill' innovation into NH Hotels, and among suppliers, in order to conduct business in a more sustainable way". He adds: "I didn't expect such a good results. I think we, buyers, need to move on this direction."

I couldn't agree more. And a recently published report by the HEC, a Paris-based business school, suggests that after a slow start procurement organisations are beginning to play their part. Its survey of 75 large European companies found that sustainable development was ranked third in the list of priorities behind direct and indirect cost cutting, with 90% of respondents rating it "critical" or "important" – up from 60% in 2005. More than a third said the resources allocated for sustainable procurement would be greater in 2009 (although I would be a little sceptical about whether this has proved to be the case as the research was actually conducted at the end of last year). Avoiding risk to brand image and complying with regulations topped the list of drivers – in other words, most CPOs are operating at stage one of Prahalad & Co's model. However, a third cited developing "innovative green products", which suggests that some companies are further down the track and are looking to procurement to deliver value at stages three or even four.

Significant challenges must be faced at each stage, note the authors of the HBR piece. For procurement, these include balancing short-term and longer-term cost-cutting initiatives, baking sustainability goals into buyers' objectives and finding appropriate supplier metrics. Overcoming these challenges will require both hard work and some innovative thinking on the part of CPOs. But I have to say I'm more optimistic about their chances of pulling it off than I was just a couple of years ago.  

Comments

[Jan-Patrick Willmes]

www.betterwork.org

Sustainability is NOT only Carbon Footprint, Innovation or alike. Isn't it also Workplace Conditions and/ or respecting different moral, civilatory & regulatory environments without jeopardizing developement needs & demands & supply. In Todays world we should thrive for intergrity in our internal & external actions & related essential communication. If Sustainability is just another brand-aspect and NOT a living combined logic of sometimes disruptive innovations & growth pathes of (y)our organizations then it's nor worth mentioning it. What do you think?

[Geraint John]

I absolutely agree. But even with products such as SUVs we are seeing manufacturers responding to a changing public mood - hence the Lexus hybrid model that launched earlier this year. Although many consumers currently don't think about sustainability when they make their purchases, I believe that during the next decade we are going to see the momentum build significantly.

[Sherry Gordon]

What you write about is encouraging news. However, what do you do about products that customers want but that inherently detract from sustainability? Large vehicles such as SUVs are an example. Or bottled water. You can come up with innovative green products, but consumers will have to want to buy them. I'm not arguing for wasteful products. But in a consumer-driven market, there has to be increased awareness and a change in consumer thinking and behavior.