Planet, people, profit: sustainability in action
Use Case: sustainability risk integration in the procurement of a car manufacturer
By Andrea Montermini, VP and Co-Leader of the Global Sustainability practice @EFESO Consulting
“Let’s build the first real sustainable car – with recycled raw materials, zero emissions, cleanest energy and with AAA labor practices through the whole supply chain!” Well, dreams can come true. If any car manufacturer is already pursuing this mission, he is probably producing very small quantities. And of course, it is not impossible that such a vehicle will roll off a mass production line at some point, setting a new milestone in automotive history.
But today we are fare away from that. Facing sustainability means to struggle on many places with different rules: relying on the right drive technology, predicting customers’ needs at time and getting transparency in the supply chains … all important fields of action, without a doubt. But in general, the confrontation with sustainability brings up questions and dilemmas that a company never thought about before. Which trade-offs between sustainability and profitability are acceptable? How to uncover areas where sustainability increases profitability? And what are the most important key performance indicators (KPIs) for managing the value chain?
A new, KPI-driven concept
From our experience, setting the right focus on the most realistic actions is the key. So, we did in a project for an OEM who initiated a sustainability program via his procurement organization. At the beginning, we shaped a commodity strategy. The target was to innovate and structure the existing sourcing strategy for the different commodities, from gearbox to seats or whatever was not manufactured in-house. But by doing that, we discovered a great opportunity to enlarge some aspects to sustainability. As a result, we developed a new concept of integrating sustainability within as a part of risk management together with the company’s management. This concept relies on three main elements: a commodity strategy, a triple-p approach for risk identification and a set of standards for automotive sourcing KPI’s and metrics.
Which trade-offs between sustainability and profitability are acceptable?
Commodity Strategy
In this part, we started to rebuild the existing procurement strategy by four steps: first, setting category and context for the strategy, e.g. in terms of product and perimeter, market evolution and internal / external benchmarks. Second, we collected and analysed further inputs, especially regarding to the commodity business model and supplier risk management. This resulted, thirdly, in a new category strategy with an updated supplier panel, a business vision and a positioning matrix. As the fourth element, concrete action plans for the procurement made this strategy package complete.
Triple-p approach
This was not aligned to sustainability criteria at all. But already in this project phase it became apparent, that we could not start deploying an ESG (Environmental Social Governance) strategy and report certain commitments at very high level. It was necessary to point out a bigger scope and so we decided to propose not to have a standalone project but to combine new fields: on one side the commodity strategy which is really providing the guidance on each category and supplier segment. On the other side, we improved the way they plan and report the procurement activities, e.g. with business plans and sourcing ways.
The combination of the risk management and sustainability perspective made the difference
And thirdly, we combined the risk management and sustainability perspective. That means to incorporate the ESG KPI and following initiatives that will be executed as a part of the risk management activity. The pragmatic reason to do so was, this was the quickest way to immediately raise the relevance of sustainability for the supplier management and the quality strategy and link it to the way they run the business on a daily basis. The framework for this is a triple-p approach which is referring to the dimensions environment (planet), social (people) and economic (profit). Proceeding from this, several aspects are evaluated – regarding to profit typical supply risks like material availability but also new one like cyber risks, for example. But the essential value for a ‘sustainable movement’ of the organization is taking place in the social and environmental dimension. Here is a more detailed framework for concrete risk management actions necessary.
The essential value for a ‘sustainable movement’ of the organization is taking place in the social and environmental dimension.
Automotive sourcing KPI’s and metrics
For sustainability, we addressed some main pain points. For instance, the company did not have any action for tangible results on one dimension of the sustainability report like the conflict minerals. So, we expanded the traditional risk management framework by using the triple-p approach. To get a quick and pragmatic about what is possible, were testing this approach in one of the company’s plants as a pilot project. To link sustainability topics to a risk matrix, we were deploying several KPIs to be incorporated into risk management. Those KPI cover a very brought spectrum of topics and numbers, e.g. the total energy consumption in Gigajoules, the percentage of recycled waste or the supplier CSR rating.
Future-oriented supply chain management
Finally, we made clear that this Triple-p dimension was entering into the evaluation of the risks across the suppliers and the bill of material. Of course, suppliers are segmented also with the perspective of the bill of material that is the sum of all the parts that composed a vehicle. And so, there was a process installed to stop monitoring, assessing, and monitoring all the suppliers for all this in large panel of risk.
The Triple-p dimension was entering into the evaluation of the risks across the suppliers and the bill of material.
Furthermore, we started rating the different categories and commodities in terms of risk, also including risk connected to ESG topics. To visualize that information, we also have been upgrading the basic risk management dashboard in terms of criticality for sustainability. So, the dimension of the goal is to what extent we have a sustainability criticality into that segment. For example, a commodity can be placed in a strategic quadrant, because it is high profiting, not locally available and so a high supply risk for the company – with a high impact to sustainability KPI, if it has to be sourced from other supplier in case of emergency. On the opposite, a local sourced component could have a low risk factor, of course.
This matrix is only the starting point. Currently, we are addressing the process: how to make a platform, how to set up a platform to have a routinary evaluation of all these elements without a lot of effort for the people. So, we will start providing new requirements to supplier to improve, by priority, their ESG profile. This will be in order for the company in the scope 3 perspective, to improve the overall sustainability ESG rating of the company itself.
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