The global industrial landscape is witnessing a dual transformation characterized by the convergence of automation and sustainability. Companies strive to remain competitive by acquiring complete automation and sustainability standards which have become prevalent objectives in their supply chain strategy. There is a growing momentum for global suppliers to focus on environmental, social, and governance (ESG) implementation, as companies have set ambitious targets to achieve net-zero emissions by 2050.
Author: Rohith Botu, researcher at NITISARA, August 2023
Introduction
This decade is witnessing a restructuring of global value chains due to various externalities including geo-political trends, trade wars, economic decoupling of Atlantic-Asian regions and the global health pandemic. To restructure the supply chain processes, it is crucial to start from the roots of sourcing and procurement. This provides an opportunity for the market of procurement as a service to introduce new practices in the supply chain and restructure responsible procurement. According to a study by the Aberdeen Group in 2018, procurement costs are a significant expense for companies, with 78% of Chief Procurement Officers (CPOs) prioritizing cost reduction. The market for procurement-as-a-service is projected to grow from $3.06 billion (£2,771 billion) in 2020 to $4.74 billion (£4.2 billion) by 2027.
Emerging Frameworks in Procurement Processes
The emerging procurement and sourcing market is divided into different technology segments based on the services they provide in that echelon of the supply chain Industry. Kearney’s top 100 procurement companies list divides the services into various market segments below:
- Process Automation
- Contract Management
- Risk Management
- Spend Management
- ESG and Sustainability
The integration of automation and sustainability has become imperative as organizations strive to boost operational efficiency while aligning their practices with worldwide environmental goals. This integration ensures streamlined operations that also contribute to broader ecological objectives.
Accounting Climate Change and Sustainability Standardsnbsp;
In accounting for a company’s environmental impact, GHG emissions are classified into three scopes as defined by Greenhouse Gas Protocol. Scope 1 emissions are the direct emissions from sources owned or controlled by the company, like those originating from company-owned vehicles and production facilities. Scope 2 emissions, on the other hand, include indirect emissions resulting from purchased electricity, heat, or steam consumed by the company. Lastly, scope 3 emissions constitute all other indirect emissions in the company’s value chain, which are not directly controlled by the company such as logistics and product use by customers. According to Deloitte, Scope 3 emissions are defined by 15 distinct upstream and downstream categories outside the reporting organization, making them by far the most complex and difficult to assess.
Scope 1 and 2 emissions are relatively straightforward to measure, and companies can create action plans to reduce them effectively. However, scope 3 emissions are much more complex to calculate and account for, which often leads companies to neglect including them in their ESG reports. According to McKinsey, for many companies, scope 3 emissions account for as much as 80 percent of their total climate impact (as compared with scope 1 and scope 2 emissions). Scope 3 emissions could be abated through relatively straightforward measures, such as product and logistics optimization, as well as the procurement of low-carbon energy by suppliers. At NITISARA we aim to achieve sustainability in procurement and cross-border logistics, thereby helping companies to connect with responsible suppliers, reducing scope 3 emissions.
The United Nations Global Compact (UNGC) CEO study done in collaboration with Accenture says the supply chain is the key to winning the battle against climate change. That’s because supply chains are the biggest contributor to the problem— they generate up to 60 per cent of global emissions. Supply chain visibility across all the suppliers is required to reduce scope 3 emissions. Many suppliers in the supply chain do not properly understand their emissions, and a significant portion of emissions originates from suppliers beyond Tier 1. Accounting for these emissions is necessary to achieve the company’s decarbonization goals.
To be ESG compliant, suppliers must understand their customers’ sustainability goals and restructure supply chains accordingly. Companies should actively assist in this process. Suppliers must measure, monitor, and disclose emissions to quantify scope 3 impacts. Companies, being responsible customers, should support suppliers in setting climate-related targets and ongoing decarbonization efforts. Digitization techniques, like simulating carbon footprints with a digital twin, should be incorporated by suppliers to estimate emissions. Apple educates and supports suppliers through its Clean Energy Program for net zero progress. This collaboration is vital to achieve ESG compliance in supply chains.
Optimising the supply chain for net zero increases efficiency, reduces costs, and improves customer service for suppliers. Many companies have set their target to become net zero by 2050, which leads them to prefer suppliers who are ESG compliant, thereby increasing their chances of expanding their customer base worldwide. Consumers and investors are also focusing on ESG, considering the market trend and responsibility to the world. According to a survey by EY in 2020, 73% of global institutional investors prioritized evaluating the physical risk implications of climate change in asset decisions. In March 2021, the EY Future Consumer Index revealed that 49% of consumers prioritized the environment and climate in their lifestyles and purchases. This has led companies and suppliers to adopt a responsible procurement process.
Crafting a Sustainable Procurement Pathway
Enterprises should adopt some key strategies to establish a sustainable path. Firstly, closely monitoring direct and indirect carbon emissions, including Scope 3 measurements, is crucial to understand the ecological effects completely. Building partnerships with sustainable suppliers subsequently strengthens the foundation of environmentally conscious endeavours. Utilizing eco-friendly initiatives across all operational aspects sets companies apart and attracts sustainability-minded customers.
Innovating operational processes provides a competitive advantage and drives the achievement of sustainability goals. Balancing emission reduction with financial prudence demonstrates a committed effort to enhance environmental efficiency. Companies can prioritize bids involving reclaimed materials from new suppliers to promote a circular economy. The ultimate goal is to reduce environmental impact, paving the way for a more ecologically friendly future. By collectively embracing these measures, companies can steer themselves toward a comprehensive and enduring approach to sustainability.
Emerging startups focused on sustainable procurement have a valuable opportunity to accelerate ESG compliance for global corporates by leveraging automation tools. According to a 2022 Gartner, Inc. survey, 87% of business leaders plan to increase their investment in ESG and sustainability goals within the next two years, creating a favourable environment for startups to work in this area. The World Economic Forum reported that currently, only 9% of companies worldwide utilize technology for data collection, analysis, and ESG reporting. ESG reporting and analysis require extensive data, and technologies such as IoT (Internet of Things), RPA (Robotic Process Automation), and IA (Intelligent Automation) can reduce human intervention in supply chain practices, improve efficiency, and enable real-time data collection for ESG metric analysis.
These tools aid in measuring, managing, and reporting ESG performance metrics, and the process can be carried out in three steps.
· First, identify the current pain points in the supply chain and gather data on ESG-backed practices from all business units.
· Second, manage tasks according to ESG guidelines and track performance using relevant metrics.
· Third, report on all measured practices within the company and utilize external sustainability reports to visualize the data and compare it against global SDG goals to become net zero.
Conclusion
In conclusion, the procurement process in the supply chain industry is undergoing a profound transformation towards sustainability and automation. ESG implementation is now a key part of supply chain strategies, aiming to reach zero emissions by 2050. Automation is reshaping procurement processes, enhancing efficiency, and profitability. Accounting for climate change and reducing scope 3 emissions is crucial for ESG compliance. Companies focusing on sustainable procurement have a promising future as investors invest in ESG goals. Embracing responsible procurement is essential for a greener future and provides a strategic advantage in the competitive global market.