Wednesday 23rd Aug 2017 - Logistics & Supply Chain

The united colours of sourcing

Sourcing, says Evan Pusey global vice president, product management at Kewill, is becoming more global and more difficult to manage as supply networks move further afield. ‘A lot of our customers are having to establish buying offices overseas, and that means we are dealing with partner companies and putting people into countries to help manage services wrapped around software’

‘Companies have differing abilities to manage sourcing effectively whilst also working on “green” issues, and that is generating a lot more requests back to providers like Kewill to find ways of providing the right information. We are seeing in some firms a tiered sourcing strategy – source locally, if they can’t supply, source regionally, if they can’t then look globally. And all the time businesses will be looking to put their hands on information to support their buyers’ decisions. Many companies have moved on from production cost to regard landed cost as the Holy Grail – I can envisage companies trying to come up with an “environmental landed cost” that would balance the costs of, for example, air freight to the environment against traditional landed costs, and this would probably include the costs of public perceptions as well’.

In the public sector, (and by implication in that large part of the private sector that has involvement in public sector contracts), says Gary Robinson, client services director at TradingPartners, ‘there is a lot of visibility of Corporate Social Responsibility, environmental and sustainability issues built in to the tendering processes, and e-tools are helping make this a more objective process.

‘We can build these issues into the tendering and tender evaluation process so that with for example the carbon footprint of a supply, we can consider the method of supply, who will have the courier contract, what sort of vehicles they will use and so on, or we can run weighted auctions that take these issues into account. You can be as complex or as simple as you want: for example for print cartridges you might want to factor in what they are made of, and whether they are new or recycled. Clients can build in physical measures, which might be weighted, or they might be a “gauge”, with a yes/no response. If we can use quantifiable measures, we can make sustainability and CSR factors as transparent to the buyer as the traditional issues of price and quality.

‘In the public sector almost everyone has some measures in place to ensure “best value for money” but they can go further: some even have a “sustainable procurement officer” to build sustainability into the process and to help develop suppliers and improve their offering’.

Robinson says the public sector is probably in advance of much of the private sector in these areas, but some very large private sector organisations are beginning to look at the issues in detail, although this may be less obvious – the public sector tends to be constrained by legislation and so creates more visible, formal processes; private companies may be achieving similar goals through less formal means.

In general, he says, for service contracts such non-price factors remain important throughout the contracting process; for supply of goods they tend to be a part of the pre-qualification exercise, after which it all comes down to price (and CSR / sustainability factors will of course tend to influence price).

Legislative constraints
And although the public sector is under direct political pressure to demonstrate best practice in these areas, they also work under legislative constraints, such as the European Union rules on public procurement. Broadly says Robinson, ‘if you can quantify the effects of a particular sustainability requirement or policy, then it’s probably okay to include it [the procurement regulations are based on the premise that every potential supplier should be treated equally, so subjective measures are naturally viewed with suspicion] but there is a fine line to tread. “Local sourcing” may appear to offer measurable transport benefits, for example; but a national or international firm may have a local offering, while a “local” firm may be importing from across the world. Requirements need to be open and fair, practical and measurable so as not to be regarded as discriminatory’. Robinson says his firm is working closely with the likes of the Centre for Sustainable Engineering, to help create an independent view of what the key measures ought to be, especially in terms of carbon emissions which seems to be the current key focus, although it is only one of many sustainability issues.

There is then a key difference between the public and private sectors in that the former has to focus on quantifiable measures of environmental and other costs and benefits; the private sector can, indeed has to, take a more marketing-led approach which responds to customers’ perceptions of good and bad supply chain practices – perceptions which may be lead more by newspaper headlines than hard facts.

CSR, environment and sustainability issues are important sourcing questions around most of the world, but in very different ways. In the US, Pusey points out, public sector focus on sustainability is very largely around ‘social cohesion’ issues of sourcing from local and minority-owned suppliers – an approach which to a large extent wouldn’t be legal under European Union public procurement rules. Communications professionals being supposedly at the forefront of the zeitgeist, the views of Martin Jones, director of advertising at media consultants AAR, are interesting. A recent survey among communications agencies found that around 50 per cent of their customers’ procurement departments were actively interested in ‘sustainability’ as part of the criteria for selecting an agency, perhaps a surprisingly large proportion given that media services are not the most obvious destroyer of the planet. However, Jones reports that to a large extent this interest seems to be a case of ‘ticking the box because it’s the right thing to do’ rather than any fundamental commitment to sustainability (and no-one goes out deliberately to hire an agency that claims not to be ethical or ‘green’). AAR also reports that ‘The UK is very much at the forefront of this being an issue – our sister offices in Europe and the US report clients still seeing these as peripheral subjects.’

Media agencies may not be planet-wreckers on a par with the oil majors (although with a major government-backed environmental advisor still issuing tender documents on 70 pages of paper, you could wonder!) but since agencies are a significant mediator of sustainability messages from companies to their publics, and of public concerns and priorities back to companies, a solid commitment would be a good starting point. As it is, Jones notes that ‘Ten years ago agencies spent a fortune on getting ISO 9001 certification, with uncertain benefits – they are understandably reluctant to leap onto this bandwagon’.

Neither companies nor the public can be sensibly informed if the data isn’t available. ‘It all revolves around having the information, but this is often most difficult to gather. Technologies like RFID can potentially deliver unmanageable amounts of information, accumulated as a product moves through the supply chain, but companies need to get their heads around what information they actually need to make the sourcing decision. And equally, does my vegetable grower in Africa have the ability to gather and send me data directly? Or do I have to source data through other parties such as shippers?’ Only a minority of suppliers may be in a position to input sustainability performance data direct to your computer and those are likely to be the top suppliers whose environmental and other performance is already in the public eye.

In the absence of detailed data at the level of the individual supplier or other supply chain protagonist, there could be devised an agreed system of weighted averages for supply chain elements, perhaps aggregated into a traffic light system akin to that being trialled for fat and salt content in foods: a product might have a red for airmiles, an amber for use or petrochemical inputs, a green for being traded ethically, and so on. But, says Pusey, ‘this may just tick the box for consumers that someone is paying attention to the problem, while if everyone is using the same weightings, where is the incentive for any individual player to make an improvement?’

The information flow
Pusey says ‘More and more businesses globally are talking about supply chain visibility, which is not after all a new concept, and with increased electronic trading, gathering data, including sustainability data, from all points on the supply chain, is becoming more of a reality. But it still needs people to supply the information and to do the analysis. Can business get all its supply chain partners to extend the information flow, and can business see a return on doing the analysis? There are parallels with global data synchronisation: that’s an approach that could be extended to include environmental and other factors. There’s no technical obstacle, but it’s taken a long, long time to get as far as we’ve got’.

There are of course problems with the quality of data – some of the factors to be taken into account are not particularly ‘hard’ – they have to be taken on trust. Others may depend on, for example statistics from governments that may be being economical with the truth. Validating data, particularly in areas like labour conditions, is a difficult and expensive job – and, unless an element of compulsion is introduced, businesses will, says Pusey, have to ask themselves whether they see value in providing this information, and whether it affects consumers.

And even if a firm has defined its sustainability policies, brought all its supply chain partners on board, prequalified its suppliers, sorted out the ongoing monitoring and data flows, things can still go horribly wrong. The mass product recall by Fisher-Price of toys supplied from China with lead-based paint, is only the latest example. Rex Parry is head of IT and outsourcing practice at the international legal firm Eversheds, and he says ‘Hopefully you have drafted your contracts sensibly, and included all the things like child labour or excessive working hours that are less obvious than a faulty product, but which could come back to haunt you. The contract has to include not just the product, but how things are going to be done’.

A practical strategy
But, he warns, ‘”It’s in the contract” is not the whole answer. You need both a contractual strategy and a practical strategy, and the practical strategy covers everything from making unannounced inspection visits to questions of how to manage the Press, and how to pull product out of the supply chain, if something does go wrong’.

Enforcing contracts in the developing world is harder than in the UK . Bank guarantees can help, but are not that straightforward. A confidence creator that Parry has noticed in the Indian outsourcing sector is for these companies to set up a UK company that is the contracting party, with the performance sub-contracted back to the Indian parent. At least writing the contract according to English commercial law tends to be almost universally acceptable, and if, as may be the case the supply is to go to perhaps 25 different countries, may be almost imperative.

There are other legal risks that deserve consideration, warns Parry. ‘Class actions’ common in the US, are a rarity in the UK, but with mooted changes in the law they may be more common – not only from consumers who believe that they have suffered loss or damage, but from investors claiming that, for example, an irresponsible sourcing policy that has backfired has caused them loss.

Above all, says Parry, ‘Get a good lawyer, and find people in the company that have been around the block a few times!’ It is possible to source from around the world in ways that are both ethical and sustainable, and to economic advantage, but success depends on well thought-out strategies, robust processes, reliable data flows and continued detailed attention right through the contract. And of course, since all this costs money, these things need to be factored against that low, low factory price.

Viewpoint

Evan Puzey, Kewill
‘Can business get all its supply chain partners to extend the information flow and can business see a return on doing the analysis?

Rex Parry, Eversheds
‘Hopefully you have drafted your contracts sensibly, and included things like child labour or excessive working hours – less obvious than a faulty product.’

Get Weekly Logistics & Supply Chain News
Get Weekly Logistics & Supply Chain News
Thank you for your subscription