Responsible procurement: issues of interest, risks and benefits.

Note: This article was first published in spanish and can be found here.

The issue of responsible purchasing is increasingly in vogue and generates interest both from consumers who purchase products and services as well as by companies that buy supplies for their processes and then sell their products to the public.

We have previously addressed this issue from the perspective of the responsible consumer, and we concluded that there is a long way to go before consumers really make a responsible purchase for different reasons.

But until now we had not addressed the issue from the perspective of the companies supply chain and that is what we will do in this article and in another yet to be published soon.

For a long time, corporate responsibility in the supply chain has generated controversy about the actions (or lack thereof) in many large companies. Unfortunate events still recent in our memories such as the one that occurred in 2013 at the Rana Plaza building in Bangladesh in which more than 1,100 people died, brought to public light terrible business practices and set again the need to closely monitor how different goods and articles for western companies are produced, sometimes directly and sometimes in subcontracting chains.

Which are the areas to be addressed to have a responsible supply chain?

Obviously, issues of interest to address doesn’t have to be the same in different industries, geographical locations, sectors, etc. As highlighted by Lena Strandberg in the interesting Notebook №6 of the collection of “la Caixa” Social Responsibility and Corporate Governance Cathedra, entitled “Corporate Social Responsibility in the value chain” and published in April 2010 , “corporate social responsibility work in the chain involves treating a variety of new issues and in different contexts to the usual”.

General topics can be organized into 3 main categories and are broken down into different subcategories as we can see below, all from the mentioned Notebook.

The declaration of the International Labour Organisation (ILO) on Fundamental Principles and Rights and its follow-up is the main standard regarding labor issues.

Social topics.

Among the social topics we can find these sub-themes:

• Child labor.
• Forced labor.
• Freedom of association and association and the effective recognition of the right to collective bargaining.
• Discrimination in employment and occupation.
• Wages.
• Respect for local democratic institutions and the relationship with the community where the companies operate.
• Product liability.

Environmental topics.

Given the entire value chain, from beginning to end, from raw materials to consumption, each step has an impact on the environment.

• Related environmental topics are the following points of care:
• Raw materials, scarcity and biodiversity.
• Manufacturing.
• Distribution.
• Consumption and recycling.
• Carbon emissions and other greenhouse gases.
• Use of energy, water and other resources.
• Waste and pollution.

Economic topics.

The value chain business model has changed, and with it also the relations between the actors. There must be a balance between giving not only legal but decent working conditions and the need to generate profits for the company and also the resulting of beneficial outsourcing processes.

Points to closely monitor in the economic sphere:

• The economic situation of providers and the relationship between supplier and buyer.
• Longer delivery deadlines and more complex logistics.
• Lack of communication and trust.
• Prices and commercial terms.
• Local sourcing and supplier diversity.
• Corruption and bribery.

What are the risks of not having a responsible supply chain?

When addressing this point, we must assume the premise that the quantification of risks in the supply chain is a pending issue in a large number of companies.

According to the report “Managing risk in the overall supply chain,” published in 2014 by the Faculty of Supply Chain Management at the University of Tennessee, 90% of companies do not make an analysis and formal quantification of the risks in their supply chain.

Also, they do not use their risk management structures to take charge of their supply chain, they often put it aside and focus only on product liability or in global financial problems that could affect shareholder value in a very notorious and public way.

Among the possible problems that concern the most to the respondents who were considered for the writing of this report are, in order of importance:

• Potential quality problems.
• Need of more inventory due to longer global supply chains.
• Natural disasters.

As we can see, they don’t seem to worry about the risks that have to do with the fact that if their supply chain is responsible or not, and neither if it takes into account or not the social, environmental and economic issues previously mentioned.

In contrast to this, Lena Strandberg states that “the reasons to include social and environmental responsibility in the supply chain are numerous. They may be purely economic reasons, for performance of the company, or personal reasons from a moral point of view”.

The risks of not including responsibility in the value chain, quoting Strandberg, are the following:

• Risk of reputation loss.
• Legal and operational risks.
• Corruption.
• Lack of operating license towards the community, stakeholders and governments.

And the benefits of having it?

In case that the risks incurred by not having a responsible value chain were not enough to implement it, those companies that still doubt about that implementation perhaps will “see the light” and take the plunge if they also know the benefits that being responsible also in this area of their activities can bring to their organizations.

We can count the following main benefits:

• Increases the capacity of providers and fidelity among actors.
• Helps to get new business and public procurement.
• Motivation for innovation of new products.
• Access to investors.
• Reduces costs and increases efficiency.
• Increases productivity.

We’ll continue…

In a future article we will analyze through a study of an european university what the state of responsible procurement to distant markets is, we will see some future trends in the supply chain from the point of view of CSR, and also we will set how we can implement a responsible purchasing system in a company.