Starting your sustainable procurement journey

Starting your sustainable procurement journey:Establishing KPIs

Having the right KPIs allows your organisation to deliver measurable, tangible sustainability results – where they matterThere is a classic adage about performance improvement that goes, “If you can’t measure it, you can’t improve it”. Although sustainability is more front-of-mind for businesses than ever, many businesses are struggling to define how to turn an ambition of ‘more sustainable procurement and supply chain’ into practical, tangible action plans and results.

Having the right KPIs for sustainable procurement not only allows organisations to identify baselines and priority improvement areas, but also to communicate impacts and trade-offs of critical sourcing decisions. We have found that many businesses view sustainability objectives in isolation of financial and other targets. A strong category or supplier management plan should include a balanced scorecard of cost, quality, and sustainability objectives that can be assessed together, and any trade-off requirements done through conscious decision making.

In this article, we will outline the different types of sustainability that organisations are looking to influence, principles of effective KPI design and deployment, and specific example KPIs for different categories that can be used to set targets and measure results to overall, help support or kick-start your sustainability journey.*

*Note: This is not intended to be exhaustive of all potential KPIs, and specific requirements will vary by industry.

What does sustainability mean for your business?The first step to establishing sustainability KPIs for your business is to clearly define what ‘sustainability’ means – as this can vary greatly in scope and focus across different industries and organisations. In our experience, even businesses with world-class procurement functions and a focus on sustainability tend to look almost exclusively to supplier labour practices and natural resources supply. While these are two very important areas, there are many other factors underpinning a sustainable supply chain.

With our clients, we typically focus around the three dimensions of the ‘triple bottom line’ to prioritise focus areas for their industry or specific categories.

Social sustainabilitySocial sustainability ensures that labour practices are ethical, safe, and fair.

This is a common primary focus for businesses to drive transparency in as they look to mitigate reputational risks associated with suppliers who utilise forced or child labour, unsafe production environments, or unethical business practices (such as anti-bribery requirements).

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What is the biggest challenge your organisation faces in delivering a sustainability programme?

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These are typically focussed at supplier level, for categories of procurement with outsourced labour, offshore production, and complex supplier tiering and distribution.

KPIs for social sustainability focus on driving transparency of fair treatment and equality for all labour throughout the supply chain. These can include diversity reporting on gender and racial parity, compliance with labour management or health and safety policies and may be limited to tier 1 suppliers or mandated through multiple tiers of a complex provision.

Most strongly aligns to the UN Sustainable Development Goals #1,2,3,5,8,10

Environmental sustainabilityEnvironmental sustainability focusses on supply, distribution, consumption, production, and disposal of physical goods to avoid or mitigate any detrimental impacts on the environment.

Common areas of focus today include building awareness and transparency of natural resources supply (for example, forestry products, no-conflict mining, sustainable food production), limiting plastic use, and an increasing awareness of CO2 footprint within internal and customer-facing logistics networks.

However, this dimension also covers a wide range of additional levers that businesses can pull to improve the sustainability of their procurement and supply chain, such as utilising renewable energy sources, limiting waste, and identifying circular economy opportunities through aftermarket sales.

KPIs for environmental sustainability must be designed to ensure responsible supply, distribution, consumption, production, and disposal of key materials and energy resources. They should be defined to drive transparency and action across each step of the value chain by helping a business understand, for example:

• Supply: Does a product come from a renewable, no-conflict, sustainable source? Are we comfortable with how the product was handled and manipulated between original resource acquisition and our supply chain?• Distribution: What is the carbon footprint of getting products to us, or from us to our customers?• Consumption: Can we use less or eliminate the need for products? Are we using virgin materials or recycled/aftermarket options? • Production: Are we using sustainable sources of energy and water? Are we limiting use and eliminating waste of energy and water? Are we responsibly managing, treating, or recovering waste streams? Are we producing environmentally-responsible products and packaging for our customers?• Disposal: How much are we sending to landfill? Recycle/reclaim? Aftermarket sales? Other recovery, such as compost and waste to energy?

Most strongly aligns to the UN Sustainable Development Goals #6,7,12,13,14,15

Financial sustainability Finally, financial sustainability (commonly interchanged with supply chain sustainability or supply chain resilience, though these have slightly narrower scope), ensures that a business’ profitability (top and bottom line) is well-protected even in the event of disruption or market changes.

Priorities around supply security and price stability are at the forefront of decision making in the wake of major global events, such as the COVID-19 epidemic or natural disasters.

Additional to this are more holistic category-management reviews around the business’s competitive differentiators and ability to serve ever-changing customer requirements, as end consumers are increasingly aware of and requiring sustainable options for purchases.

KPIs for financial sustainability commonly focus on supply and distribution risks – often aimed at increasing transparency through the supply chain and lower tier suppliers by identifying unstable or high-risk suppliers and regions.

There is also a growing trend of utilising customer-centric KPIs to indicate whether growth and profits are sustainable, for example, customer satisfaction, percentage of revenue driven from sustainable product offerings, and percentage of suppliers with whom we have signed a supplier code of conduct.

The “Triple Bottom Line” People: Social Sustainability • Diversity and equality • Fair Treatment • Ethical labor and governance • Health, safety and security • Relieving poverty • Privacy

Planet: Environmental Sustainability • Replenishing natural resources, ensuring chain of custody • Renewable energy • Sustainable water and land use • Limiting or eliminating emissions and pollution • Limiting or eliminating landfill waste; utilising circular economy

Profit: Financial Sustainability • Supply security • Price stability • Healthy profit margin and competitive advantage • Efficient processes • Perception as positive employer

Defining sustainability KPIs: PrinciplesBy making conscious decisions about which aspects of sustainability are a priority for your business – either to build transparency or to drive tangible improvements over time – it is important to remember the key principles of effective KPI design and deployment. They should be:

Specific and measurable KPI values should be clearly measured and are specific to a supplier or category. Where there is a performance ambition but data is not currently collected, new processes and data flags must be put in place to establish a baseline and monitor progress.

Outcome-based Measuring a change in results, not just activities being completed from a task list.

Aligned to top-down business objectives KPIs should be easily translated between category-specific performance and overall business targets.

With these principles in mind and a clearly prioritised focus on the sustainability areas that matter to your business, a suite of KPIs can be developed to effectively drive sustainability improvements.

Examples of effective procurement sustainability KPIsThere is no right or wrong set of sustainability KPIs for procurement and supply chain, as needs and priorities will vary across industries and businesses. So long as the principles of effective KPI design are adhered to, and they are developed with an aim to drive transparency and action across each step of the value chain, a variety of performance metrics can be suitable to drive improvements.

Taking the three dimensions of the ‘triple bottom line’ referenced earlier into consideration, here are some examples of performance metrics your business can adopt to improve the sustainability of your procurement:

Social SustainabilityEvaluation of social sustainability is frequently conducted through independent third-party audit firms, supporting either supplier self-evaluations or full facility onsite audits.

While KPIs can be put in place for ongoing monitoring and management, practices are most frequently evaluated through assessment of supplier codes of conduct and adherence to those policies, and wider government or professional body regulations.

Less effective More effectiveNumber of suppliers who have been audited

% of suppliers with spend > €100k p.a. with successful environmental sustainability audit results


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Less effective More effective“Plastic-free by 2030” “No single-use

plastics used inbound or outbound packaging materials by 2030”

Category ABC

% of inbound products with SUP in packaging

% of outbound products with SUP in packaging

72%

16%

Less effective More effective

Business Objective Carbon neutral by 2030

Category KPI % of suppliers with Environmental ISO accreditation tCO2e of logistics footprint


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• Disposal: o Tonnes or percentage of material sent to landfill; o Tonnes or percentage of material recycled or composted; o Tonnes or percentage of waste streams sold on;

Financial SustainabilitySupply risk must be evaluated at supplier level and focussed on the segmentation of suppliers that represent high commercial value and high potential risk.

• Supply Risk: o Number of approved suppliers (by location / region of supply source) o Level and locations of dedicated inventory o Lead times per product o Supplier financial history• Price stability: o Commodity index tracking o Currency tracking• Profitability: o Percentage of revenue from sustainable products sold

Support on your sustainable procurement journeySustainability, in all its forms, is a growing priority for all of our clients, seeking to build simple awareness for full scale deployment of improvement programmes and performance targets. Efficio has supported various industries from early movers (such as supporting retailers transitioning from plastic to paper packaging and the associated category management changes) to businesses just starting down their sustainability journey (such as oil and gas refineries seeking to better understand whether the metals traditionally used in their catalysts are conflict-free).

We believe that no matter where a business is on its journey to a more sustainable procurement and supply chain function, there are substantial benefits – both financial and non-financial –to be had from making conscious, deliberate choices for requirements and suppliers.

• Fair and ethical labour o Trade unions recognised by supplier o Number of industrial disputes within last 12 months• Diversity and equality o Supplier Diversity reporting on gender and racial parity o Category Diverse Spend: How much money your company is spending with diverse suppliers. o Category Diverse Supplier Count: The number of diverse suppliers that your company contracts with.• Health, Safety, and Security o % of suppliers with HSE management system accredited to ISO 18001 or any other equivalent standard o Number of lost time safety incidents

Environmental SustainabilityEnvironmental sustainability KPIs must be tailored to specific categories, suppliers, and products to be effective. While frequently focussed on direct materials, these can equally apply to indirect categories such as Fleet, Waste Management, Travel, IT, and Office Supplies.

• Supply: o Percentage of natural resources (paper products, food products, metals and minerals, etc.) procured from sustainable sources o Percentage of suppliers with registered Environmental Management System (e.g. ISO14001)• Distribution: o CO2 footprint of internal logistics (e.g. Fleet) o CO2 footprint of supplier delivery logistics o CO2 footprint of customer delivery logistics o Number of electric vehicles deployed for distribution• Consumption: o Percentage or tonnes of products purchased with virgin plastic content o Percentage of products purchased from recycled content o Percentage of products purchased from aftermarket sales o CO2 footprint of electricity requirements (facilities, HVAC, IT Hardware, etc.) o CO2 footprint of business travel• Production: o Percentage of electricity procured from renewable energy sources o Percentage of facilities LEED certified o Operational water use efficiency (typically % improvement) o Percentage of water replenished used in manufacturing operations in high water-risk areas o Percentage of products sold with recyclable / compostable / biodegradable packaging

If your business requires support in sustainable procurement and category management, from roadmap development, target setting, and putting in place actionable improvement plans, please visit our Sustainability Improvement Service page or contact [email protected].

Across industries, the most common categories we target for sustainability-focussed improvement initiatives include:

• Commodity natural resources (e.g. metals, cotton, pulp / fibres, food products, construction materials)• Other raw materials (e.g. chemicals, plastics, paint, textiles)• Packaging• Technical equipment and MRO• Water• Energy (production, operations, facilities)• Logistics• Fleet• Waste management• Travel• Hard FM• Soft FM• IT hardware• Office supplies

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Efficio’s offices

Efficio has experts ready to support your business rebalance its supply chain and accelerate next steps towards stability. Please let us know how we can help.

About Efficio Efficio is the world’s largest procurement consultancy, operating across the globe from its 11 offices in EMEA and North America.

We help organisations reduce costs, develop and implement their digital procurement strategies and upskill their procurement teams so that they can realise higher savings, faster and more sustainably – delivering greater value to the business over the longer term.

Our key differentiator is eFlow, a proprietary procurement technology and knowledge platform built and deployed by practitioners.

eFlow automates data insight generation, supports savings delivery, facilitates strong supplier partnerships and manages supply chain risk by enabling our clients to leverage a wealth of procurement intelligence and best practice on demand. This data and knowledge has been accumulated by our consultants over 20 years and through billions of dollars of addressed spend.

We aim to make procurement functions twice as effective, enabling them to deliver more with their own teams and become high-value generating functions for their businesses.

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Starting your sustainable procurement journey