As I have said many times, my 20 years in procurement has afforded me the opportunity to witness, firsthand, how more diverse and inclusive supply chains are more sustainable, innovative and deliver higher value. This value comes in many forms including cost savings, access to new markets, process improvements and innovative insights that lead to product enhancements.
During a recent panel discussion, I was speaking with a former colleague about how the role of procurement has evolved and continues to broaden. While cost savings and efficiency will continue to be important, greater transparency across and down the supply chain with increased emphasis on diversity and sustainability will be at the center. Historically, diversity and sustainability efforts have been managed separately in many organizations. However, leading companies are bringing these two together under the roof of responsible sourcing. As I began to think about the continuing evolution of sourcing & procurement, I asked myself the question: If you were building a responsible sourcing-ready procurement organization today, what would it look like? To illustrate I drew a sketch and called it “The House of Responsible Sourcing.”
The House of Responsible Sourcing
The diagram above illustrates the necessary building blocks and resulting benefits and outcomes of a corporate “responsible sourcing”-focused procurement organization. For a major corporation, the house is built on a foundation of billions of dollars in purchases representing hundreds of categories. That spend attracts a network of suppliers that form the supply chain. An organizations culture and policy will determine the level of diversity, inclusiveness and sustainability within a corporate supply chain. This will, in turn, drive the social and economic benefits at the top of the house.
Global Corporate Spend
It all begins with spend. The goods and services that a company purchases to run the business and deliver products to customers form the foundation. This drives the types of suppliers and supplier capability needed in the supply chain. The procurement organization should aim to competitively purchase specified items at the least possible cost without compromising quality. The best procurement organizations aim to attract a diverse set of suppliers to its supply chain and increase the level of diversity and inclusion year over year. Those same companies also demand supplier diversity commitments from their Tier One Suppliers.
Tier One Suppliers
These are the suppliers that sell materials, goods and services directly to the corporate buying organization. Items are typically provided across numerous spend categories (direct and indirect). Depending on the industry these items range from specialty chemicals, packaging and construction to MRO, information technology and legal services.
Tier Two Suppliers
These suppliers serve the needs of the Tier One suppliers. In the case of project-based purchases such as construction or consulting, these suppliers may be subcontractors to a Tier One on a specific project or engagement. The best procurement organizations require their Tier One suppliers to actively report detailed activity with Tier Two diverse suppliers. This enables the company to capture a key element used to calculate the total impact that their procurement dollars have in local markets where they operate. It also enables the identification of Tier One suppliers of the future.
Diversity, Inclusion & Sustainability Policy
The combination of procurement dollars with the appropriate supplier diversity, inclusion and sustainability policy yields measurable results in innovation, quality and value. As a former CPO, I have vivid recollection of countless experiences where inclusive procurement policies paid large dividends for the organization. In most cases, the benefits were a result of uncovering sourcing improvement opportunities aligned with broader corporate initiatives and then expanding our supplier portfolio of potential bidders to include a number of new qualified diverse suppliers. The underlying procurement policy required at least two diverse bidders for every three bidders.
Innovation, Quality & Value
Those new suppliers not only offered more competitive pricing, but often exposed the organization to new revenue growth opportunities including access to new markets. Many of these new suppliers offered very impressive solutions aligned with our corporate sustainability efforts (energy conservation, reduction in paper use, recycling, reverse logistics, carbon footprint reduction, etc.). Uncovering these new, innovative suppliers drove increased use of RFP’s across the company. It created a lot more work, but generated significant value for the organization.
Supplier Management Software & Tools Enabling Digitization, Supply Chain Transparency and Economic Impact Reporting
Leading corporations committed to building responsible sourcing cultures centered around diversity, inclusion and sustainability are rapidly adopting software, that provides increased supply chain visibility, tracking and measurement of their holistic impact. They are tracking and measuring the activity of their suppliers, their supplier’s suppliers and the resulting ecosystems developing as a result. These organizations are clearly drawing the link between their global corporate spend and its socioeconomic impact in the form of job creation, local community development and consumer spending. This provides procurement organizations and buyers with a “big picture view” of how their purchasing decisions are changing lives.
Now that you’ve seen my house of responsible sourcing, what would yours look like?