What is Responsible Sourcing?Sourcing
Responsible sourcing is the incorporation of ethical, sustainable and socially conscious principles into sourcing, procurement and overall supply chain management practices. This approach ensures that business between a buyer and its suppliers is conducted in a manner that does not negatively impact society or the environment.
Responsible sourcing requires a shift in thinking and priorities. It requires companies to place a higher priority on their impact to the environment and society as compared to business and economic needs. Think more in terms of Purpose Over Profit.
Why is it Important?
Today, the world faces tremendous challenges – environmentally and socially. Businesses have a responsibility to understand the impact they have and to limit negative impacts. This includes understanding who their suppliers are, how they do business and what standards they operate by. By doing business with a supplier, you are choosing to invest in that supplier, as a result, their business practices – good or bad – will be propagated by your decision.
According to a Gartner report called The Journey to Responsible Sourcing, “Increasingly complex globalized supply chains mean that responsible sourcing risks, such as labor exploitation, environmental pollution and unsafe working conditions, can go undetected. Procurement leaders have a crucial role to play to leverage responsible sourcing activities to identify and correct these poor practices but also to go a step further encouraging suppliers to limit environmental impacts, such as greenhouse gas emissions.”
Historically, sourcing prioritized cost and the ramifications of that are felt throughout the supply chain, where suppliers need to cut corners and employ substandard practices. However, the impact on a company’s brand should such practices come to light is detrimental.
So today, many leading Procurement organizations look beyond cost factors to make decisions based on quality, reliability, innovation and social and environmental practices. There is a growing trend among consumers for responsible sourcing or ethical sourcing.
Large corporations are focusing more on sustainable sourcing and sustainable finance and ethical sourcing and the integration of ESG into every day business practice. This is actually proving to be a profitable strategy for many. [provide source]. Responsible sourcing is also increasingly vital due to expansion of supply chains into developing countries largely seeking to lower costs.
Key Elements of a Responsible Sourcing Strategy
The first thing that Procurement organizations should do is to determine the purpose of establishing a responsible sourcing strategy. Is it to protect the company’s brand? Is it to build a unique competitive advantage? Is it part of a broader ESG mandate?
Once that is determined, there are basic elements that will help organize and structure the initiative, as shown below. Many organizations already have responsible sourcing policies and programs in place but they vary widely in effectiveness.
Some stop at simply communicating the policy documents to their suppliers, others have a more focused approach with specific objectives such as reducing carbon emissions, reducing water or energy usage, etc. The most successful programs however have strong collaboration with suppliers.
Does Responsible Sourcing Pay?
A study by Harvard Business School Professor George Serafiem found that a $1 investment yielded $28 in return over 20 years — for companies that focused on ESG. Those that did not yielded just half that: $14. Similarly, Mckinsey named “cost reductions” as one of the five main values of ESG, explaining that“executing ESG effectively can help combat rising operating expenses,” affecting operating profits by as much as 60%. The same Forbes article gives the example of 3M who have been measuring ESG since 1975 and claim to have saved billions of dollars.
In a report produced recently by Procurious, Procurements leaders reported benefits in supplier collaboration, sales, brand perception and product/service quality. The most important takeaway from the research is that companies with advanced responsible sourcing programs realize a greater ROI across the board compared to their peers.
It is clear that Procurement plays a big role in executing ESG strategies. Procurement strategies orchestrate where and how a company spends. In doing so, Procurement can ensure that business with suppliers is conducted in a manner that aligns to certain environmental, social and ethical standards.
Sustainable business practices between buyers and suppliers, including responsible sourcing can help incorporate ESG into day to day operations e.g., what is purchased, from whom, how it is delivered, what is known about that supplier, finding a new supplier, understanding positive and negative impact, etc.