Regional, Local, and Sustainable Sourcing

Stephen DeAngelis

November 07, 2011

Steve Hall, Deputy Editor of Procurement Leaders Magazine, provocatively writes, “Collaboration is, for some, mostly pointless – we’ve all got our own goals and collaboration is just a moment when those goals overlap and little more. For others, it’s a romantic notion in a pragmatic world.” [“Sustainable Sourcing: Asking more of supplier relationships,” Procurement Blog, 15 September 2011] I suspect that a lot of supply chain analysts would challenge Hall on those assertions. Most analysts would agree that supply chain stakeholders each have their own individual goals; but, they would argue, those goals overlap more than for “just a moment.” Supply chains involve 24/7/365 activities. To function at peak performance, collaboration at the intersections of stakeholder interests must also be 24/7/365. That is a pragmatic, not a romantic, truth. Hall quickly reveals that he doesn’t really believe those assertions himself; especially in the area of sustainable sourcing. He believes that when it comes to sustainable sourcing stakeholders must collaborate (continuously and pragmatically). He writes:

“Think of the relationship between a business and its suppliers. Procurement has got quite good at supplier relationship management – top functions are adept at segmenting suppliers and then opening the channels to improve either side of the deal, whether it be improving cash flow, fixing prices, sharing innovation. But when it comes to the sustainable standards that companies, particularly consumer facing ones, are looking to impose, the agenda naturally becomes one-sided. You want to work with us? Well, we have committed to reducing our footprint, which means you have to too. A hard-line makes sense, but the application of some of the collaborative methods that reap rewards in other aspects of purchasing is surely a more sophisticated way of going about achieving green targets.”

I have noted in a number of previous posts that when it comes to supply chain sustainability, the only efforts that will last are those for which a business case can be made. For more on that topic, read my post entitled Supply Chain Sustainability. This is just as true in the area of sustainable sourcing as in any other area of of the supply chain. Hall writes about an interview he had with a Chief Procurement Officer (CPO) from a South American company. The CPO told Hall, “The supplier that brings good ideas for us and reduces costs and adds value to our sustainability measures, we give them credit.” The CPO then asserted that, all else being equal, his company would choose the supplier with the best sustainability credentials. Based on this conversation, Hall concludes, “In that way, it’s not only a supplier’s emissions that need consideration, but their ability to collaborate that needs to inform sourcing decisions.” He continues:

“Complicated yes, but when you consider that, in particular some of the more strategic suppliers that a purchasing organisation is going to work with can be vital to delivering stakeholder benefits, the potential of a supplier to help a business move towards its sustainable sourcing ideals should be built into the sourcing process. … If a business is serious about sustainability, it needs to think seriously about what measures it needs to take to generate that kind of collaborative relationship with key suppliers. It’s taken a long time and a lot of external influence to get some companies to think that way about any kind of supplier relationship – and it may take a long time to get it right with sustainability – but those who are ahead are positioning themselves in the race for green credentials.”

In another article on sustainable sourcing, Hall continues to press home the point that a business case must be made for sustainable efforts. If one can’t be made, a company is likely engaging in what is commonly known as “greenwashing.” Hall points out that the general public is already “cynical towards greenwashing efforts.” [“Sustainable sourcing: investment trumps cheap cost-cutting,” Procurement Blog, 1 April 2011] He writes, “You might argue that many businesses, particularly consumer-facing ones, get it already. Witness the fierce competition between Coca-Cola and Pepsi to produce the first renewable bottle (Pepsi claim to have won that).” Other businesses, he says, have been slower to understand the benefits of sustainable sourcing. That will probably change, he believes, once those companies understand the link between sustainability and cost savings. He explains:

“With commodity prices rising, and fuel costs in particular a threat that we’ve potentially not seen the worst of yet, does that perhaps mean that sustainability goes to the wayside? Well, I think the answer is that for some yes, for some absolutely not. We’re already seeing prices being passed on to consumers and, of course, cost-cutting strategies coming to the fore, some of which you could argue have taken a rather short-term approach. … Sustainable alternatives are the inverse of that. They require investment, research, collaboration – but they have long-term potential. Reducing packaging is an obvious way of doing this for food retailers, for example.”

I’ve argued before that companies need to take the long view when it comes to strategy. At the same time, they need a few short-term wins along the way. When it comes to supply chain sustainability, the best place to look for short-term wins is waste reduction. Interestingly, waste reduction almost always leads to energy reduction as well. Hall reports that a study on the food industry concluded that it “is on track to reduce packaging weight by 19%, or 2.5 billion pounds, by 2020. That’s the energy-saving equivalent of removing 363,000 homes or 815,000 gas-guzzlers.” Hall admits that “going green isn’t the answer to many of the problems that businesses face right now,” but he believes that “the pressure on cost, particularly in areas such as fuel could be a catalyst for greater innovation.”

Some manufacturers are reducing costs associated with transportation by moving manufacturing closer to demand centers. A related way to reduce such costs is to adopt regional or local sourcing strategies. John Shook, CEO of The Lean Institute, writes, “There is nothing inherently wrong with sourcing globally. But a single-minded focus on lowest piece-price with no regard to broader regional strategies leads to unneeded complexities.” [“Time for Regional Sourcing Models?Supply Chain Digest, 21 June 2011] He claims that, as global sourcing increased, “sensible considerations such as total cost, quality, logistics, and partnering for mutual prosperity … disappeared.” It sounds like there is a business case to be made for regional sourcing. Shook continues:

“‘Outsourcing’ grew along with ‘offshoring,’ under the edict, ‘Match the price I can get in China or your contract goes up for bid.’ And up for bid they did go, and out of business they went. First, smaller suppliers closed their doors, at huge cost to OEMs to replace the lost supply of parts and materials. They were followed by larger ones. … As a result, supply chain logistics became increasingly complex. Other trends contributed: more sophisticated software and transportation systems, for example, led to the rise of ‘3PL’ or third-party logistics specialists. Logistics and even supply chain strategy became outsourced. Outsourcing begat outsourcing. Not unlike the specter of machines designing machines (as in the Terminator), a monster was created. In the end, yet another key competence of manufacturers was lost to specialists whose interests were their own, not the OEM’s. Certainly not the customer’s. There is nothing inherently wrong with sourcing globally. But a single-minded focus on lowest piece-price with no regard to broader regional strategies leads to unneeded complexities.”

To learn more about what other analysts are saying about simplifying supply chains, read my post entitled Reducing Supply Chain Complexity. Shook claims that “a new sourcing model is needed,” one that is “regional and rational.” He concludes:

“Anyone anywhere who wants to make his or her country a competitive manufacturing location needs to practice lean math. That’s total cost — including the potential cost of disruption on long-distance supply chains — rather than the piece price plus slow freight cost calculation done by most manufacturing firms today. The USA, specifically, is already a much more ‘competitive’ manufacturing location than most senior managers seem to think, based on the continuing decisions to send manufacturing to locations far and wide.”

Multinational corporations have started to adopt the regional/local sourcing strategy. Louise Lucas reports that “many companies [are] taking more direct control of supply chains across the globe. The aim is to ensure supply and quality, but also to remove some of the volatility from pricing; hence PepsiCo’s decision to grow potatoes in China for its crisp brands and SABMiller’s farming of barley in Africa for its beer.” [“A market for local sourcing,” Financial Times, 6 April 2011] In the end, the marketplace will determine which strategies win and which sustainable efforts endure. The good news is that “green” initiatives are no longer being pursued primarily for their public relations benefits.