How can businesses keep procurement costs down and be sustainable?

Procurement is now seen as instrumental when it comes to driving a company’s sustainability agenda forward. However, ensuring the best price while meeting those sustainability requirements can be a tricky balance – and that’s before the myriad other challenges that present themselves when an organisation is trying to keep costs down and simultaneously reduce the environmental impact of its supply chains.

According to Klaudia Dudzinska, trade and international affairs policy executive with Ibec, when it comes to sustainability, supply chain managers are key decision makers.

“They are the ones with the foremost knowledge and expertise in their sector,” she says. “They are at the forefront and understand how to make change happen in real time. Over the last number of years, businesses have been navigating this new transition diligently but it has not always been easy.”

Mark McKeever, procurement and supply chain director with PwC Ireland, identifies an acceleration in initiatives to drive sustainability across supply chains due to consumer demand, regulatory pressures and a growing awareness of environmental issues.

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Yet the numbers are not particularly encouraging and recent research from PwC highlighted an “emerging gap” between those companies that are acting quickly to broadly implement environmental, social and governance (ESG) standards and those that are not.

Meanwhile, the 2024 Global PwC Supply Chain survey found that while more than 40 per cent of companies surveyed recognise the need to have more ESG-compliant supply chains, just 12 per cent said that their supply chains were fully adapted to this trend. Worryingly, 22 per cent of company leaders said their organisations had not yet started transforming to meet this challenge.

Having worked in the sustainability space for almost 30 years, Mark Pagell, professor of sustainable supply chain management at University College Dublin’s School of Business, agrees that companies are lagging behind when it comes to addressing sustainability in their supply chains.

“How the supply chain is managed determines the cost, quality and environmental impact of the good or service the customer receives,” he says. “You can’t manage sustainability separately from managing the supply chain. Yet in many firms sustainability is a staff function or part of a compliance team, completely separate from the supply chain.”

UCD has created a diploma in sustainable supply chain management to help firms address this fundamental problem, by educating them on how to integrate their sustainability efforts and their supply chains.

“We wanted to create something for managers that linked sustainability to supply chain management,” says Pagell. “Many firms find sustainability difficult – often because they treat it as a burden, something outside their core function, a regulatory requirement and so on. They manage it separately from the design and delivery of their goods or service. And when it’s approached in this way it is expensive – because it’s an add-on to a system that was not designed for it.”

But while sustainable practices may incur additional costs, not all sustainable supply chain changes are necessarily more expensive, McKeever notes.

“In many cases, businesses find that reducing energy usage, minimising waste or optimising logistics can lead to cost savings in the long run,” he says. “While ESG transformation can make companies less competitive in the short term as costs rise, the long-term benefits will be greater.”

Some sustainability initiatives do require significant investment, such as transitioning to renewable energy sources or implementing advanced waste management systems. But for those businesses significantly behind the curve when it comes to sustainability, Pagell says they could see some quick wins.

“Better environmental management in the supply chains should lead to a reduction in energy use, a reduction in the use of other resources and saving money,” he says. “And when you look at where inflation has been worst – energy and fossil-fuel-related areas like fertilisers and plastics – finding ways to reduce or eliminate the use of these inputs in the supply is then a win for the firm and the planet.”

The biggest pinch point for most organisations is their Greenhouse Gas Protocol Scope 3 emissions – the indirect emissions from sources outside of their direct control, Pagell adds. “Few are fully aware of how big a problem this is since it’s not their operations or data,” he says. “And equally most have limited transparency deep into the supply chain.”

“The most challenging areas to ‘green’ often involve complex supply chains with multiple stakeholders or areas with significant upfront costs,” says McKeever.

These include manufacturing processes that require high energy inputs and are thus difficult to decarbonise, and industries with high reliance on global suppliers, such as technology or fashion, that may find it harder to ensure sustainability throughout the entire supply chain.

“A notable example is the textile industry, where sourcing sustainable materials and ensuring ethical labour practices across international boundaries is complex,” he adds.

McKeever says companies are now deploying advanced technology and emerging solutions to track Scope 3 emissions across their supply chain and ultimately to reduce carbon emissions. This follows an enhanced focus on supplier risk management in recent times, due at least in part to emerging legislation in this area – for example, the new German Supply Chain Due Diligence Act.

New legislative requirements in this space will not be a problem for those rare firms that have successfully integrated sustainability into their procurement processes, says Pagell.

“Leading firms started on this path 15 or 20 years ago and many have been trying to collect data on sustainability from their suppliers to create more transparency for at least a decade,” he adds. “Similarly, many start-ups are entering markets without a legacy supply chain that was designed to profit at the expense of people and the planet; for them sustainability is not an add on.”

Dudzinska says a policy approach based on open, strategic autonomy, which prioritises diversification of supply, supply chain resilience, trade diversification and economic de-risking, is key.

“Overdependence on single suppliers of inputs, in particular critical raw materials important for the green and digital transition, are prime examples,” she explains.

Businesses need continued support and guidance from the Government as legislation begins to be enacted in this space, adds Dudzinska.

“Smart regulation, conducting of impact assessment and thorough consultation with businesses can help address this going forward and must be at the heart of empowering and strengthening supply chains,” she says.