SMI-09 | Cover Story

Sustainability, cost optimization, risk management

can there be a BALANCE?

It’s vital for companies to align their approaches to risk management, value creation and sustainability . Executive Management plays a crucial role in getting this right.

One wrong move and Philippe Petit would have fallen 417 meters. It’s August 1974 and the slight Frenchman is balancing on a tightrope stretched illegally between the twin towers of the World Trade Center, then still unfinished, surrounded by the New York skyline.

Onlookers crane their necks while the man carries on walking, no safety net in sight: it is probably the most spectacular balancing act in recent human history and Petit became world famous as the “man on the wire”.

Philippe Petit is a fitting analogy for modern procurement:

companies have to balance cost optimization, value creation and risk management, under increasingly difficult conditions. Our latest risk management study shows that 90% of companies have been affected by supply chain disruptions in the last 12 months, or have had to procure expensive replacement products at short notice.

As if that were not enough, the issue of sustainability adds another dimension that procurement has to address, both in terms of the company’s ecological balance sheet and from a social point of view. Transparency plays a crucial role in supply chain sustainability.

The increasing importance of this balancing act is also reflected in a CPO survey. The results show that although cost optimization and risk management were still identified as the most important issues with 54% each, sustainability follows closely behind with 51%. To be able to balance these sometimes contradictory goals, procurement must undergo an extremely significant transformation.

But how can this be achieved?

The Status Quo can be built upon

To date, cost awareness has been very strongly embedded in most companies and procurement departments have invested a lot of energy in optimization. However, they are currently affected by rising material costs (including raw materials), as well as supply bottlenecks. Focusing on short-term savings can often be at the expense of supply chain stability, and can get in the way of partnership-based, long-term collaboration with suppliers.

Supply chain resilience has increasingly come to the fore as a result of the pandemic, and some companies have already selected alternative suppliers in domestic markets as second sources. However, this isn’t feasible in every sector. In some cases, such as with steel, oil and other raw materials, considerable additional costs have to be accepted or, in some areas, production even has to be suspended. An obvious example of this is the semiconductor crisis. In the automotive sector at the moment, OEMs have to pay significantly more for semiconductors, currently in such short supply, if they are to be able to produce vehicles at all. In the medical technology sector, decision-makers sometimes have to make choices about which instruments and machines are more critically needed for treatment, and pause other production lines.

A knowledge of entrepreneurial risks is essential for resilience. Yet to date, only 55% of companies systematically identify their risks, as our latest risk management study shows. It is high time to prioritize this issue and use data analysis tools to create transparency about possible risks in your supply chain, and consider alternative supply options.

/ What is your priority in the procurement organization?

Reducing costs

36%

56%

Reducing risks

68%

62%

Complying with existing regulations

68%

66%

Delivering on corporate sustainability goals

63%

25%

Supply chain resilience

48%

Sustainability in the Supply Chain

Despite sustainability’s increasing importance, a company’s management team is rarely responsible for it; it is often left to the lower ranks. However, a lack of clear commitment to the environment and society is not sustainable in the long term. Increased transparency in the supply chain and measures such as using green electricity increase costs in the short and medium term, but they add a competitive advantage in the long run: on the one hand, because corporations and companies are thus already prepared today for future legal requirements. In addition, these can increase the attractiveness for investors as well as the opportunities on the sales side and the applicant markets.

Sustainability as an investment standard

Blackrock, the world’s largest asset manager, called on companies to take action in the face of climate change and to tie investments to sustainability factors from now on. The company believes sustainable and climate-conscious portfolios can offer investors better risk-adjusted returns.

(Source: Blackrock)

Particularly in procurement and the supply chain, there is great potential for more sustainability that companies have hardly begun to exploit up to now: from saving CO2 in logistics to modifying product design to replace raw materials. If, for example, a product needs less material, or alternative materials are more environmentally friendly, procurement can develop innovative solutions by working with the product development team as well as suppliers, delivering a major value contribution to the company.

Managers on Demand

To get the balancing act right, management must create the necessary conditions and kickstart a fundamental transformation process. One of the most important prerequisites is defining the goals that will need to be included later in each area’s planning. This includes highlighting and actively promoting the new priorities within the company.

One of the most important prerequisites is to define the goals, which are later to be transferred into the concrete planning of all areas.

It will then also be management’s responsibility to embed prioritization in the relevant departments operationally and to avoid conflicting goals. If sustainability targets are defined for procurement and costs increase as a result, for example, a budget to meet these increases must be available. A CPO needs a clear framework for planning towards the future and setting up new processes.

A comprehensive program with a clear timeline is also essential; for sustainability, for example, this might be a 60% reduction of CO2 by 2025. This also needs to be proactively implemented within the company if you want to keep your employees on side on this journey. This could mean very simple measures with managers acting as role models. Using public transportation or switching to bicycles where possible, for example, can create awareness of CO2 reductions within the company and subsequently enable broader action. Another example would be the gradual transformation towards more virtual meetings to create a new meeting culture.

Tracking Goal Attainment with Company-Wide KPIs

Once the goals are set, cross-functional monitoring is essential. Above all, this should include defining KPIs throughout the company and tracking them regularly. Management must also set the right incentives, including by incentivizing staff purely on the basis of the defined goals and their prioritization.

You should also regularly review whether your sustainability agenda’s goals are being achieved. This includes giving every product not only a “price tag” but also a “CO2 tag”. Non-product-related areas such as the company’s fleet or business travel can also be evaluated along these lines.

Initiatives such as the Carbon Pricing Leadership Coalition are working to find practical solutions to this issue. The CSO or whoever is responsible within management must also promote effective communication with customers and set clear rules for working with suppliers. Where there have been general terms and conditions up to now, in future these should be supplemented by general sustainability conditions. As the interface to the suppliers, procurement has the task of communicating this to them and jointly defining clear rules for cooperation and processes.

Carbon Pricing Leadership Coalition

The Carbon Pricing Leadership Coalition brings together leaders from governments, the private sector, academia and civil society to expand the use of carbon pricing measures.

How managers can support

“Only when cross-company KPIs are defined and the framework and a clear mandate for procurement are created can it operate successfully and master the transformation.“

1. Achieving transparency & recognizing conflicting goals
2. Reformulating and prioritizing goals
3. Sharing the goal system between departments
4. Setting up a control tower & defining KPIs
5. Change management & incentivization

Meeting the requirements

All these points clearly demonstrate the key role that management plays in resolving conflicting goals. Procurement can only work effectively and achieve a successful transformation if management defines cross-company KPIs,creates the conditions and provides a clear mandate for procurement.

If you look now at the status quo in companies, there is still some catching up to do. Many companies have understood that risk monitoring and risk management is an important and central task within procurement, but they need to focus more on transforming procurement into a value and innovation driver.

In the future, classic product group management will become increasingly digitized. This increasing automation means procurement can spend less time on day-to-day operations and work more strategically, for example in cross-functional development projects. Procurement can contribute its knowledge of supplier markets to projects like this, and point out possible extra costs and potential for risk at an early stage.

Not only does digitization help to accelerate transformation, modern tools can also bring about increased transparency and measurability across the supply chain. The use of analysis tools begins with raw materials. To be able to create transparency in this, it is essential to have information at hand about which raw materials are contained in the end product and in what proportions. It’s only by knowing the proportion of raw materials that procurement can get ahead in price negotiations with suppliers and agree advantageous index clauses.

The fact that, on average, not even 50% of the supply chain has been digitized up to now means that resources urgently needed by companies are being wasted. So it makes sense to establish a control tower that provides a quick, automated overview of important suppliers, raw materials, index price changes and insolvency risks. If all this information is gathered in one place, the procurement department can define strategic options about what to do if a supplier lets them down: what mitigation plans are in place? What dual sourcing strategy needs more development?

In the best possible scenario, this transparency offensive should be extended so that companies and suppliers share data with each other too, from current stock levels to carbon emissions. For example, if a company is aware that the magnesium stocks in a supplier’s warehouse are running low, it can secure the supply at an early stage, or even support the supplier in the search for new sources.

Transparency is by far the most significant factor for transformation: it means goals can be reprioritized at procurement level. Specific goals relating to value creation can, for example, improve supplier performance or cost savings through better product design. It can make sense to develop nearshoring options, to make the supply chain more stable and sustainable.

But as these goals are often diametrically opposed, procurement has to find a balance depending on its priorities and keep recalibrating them as they can keep shifting, depending on the political and economic situation worldwide. For example, in the automotive industry, at the moment it’s crucial for companies to obtain semiconductors, and now the supply chain has been affected again as a result of the Ukraine crisis. In this current situation, resilience takes priority over cost optimization or value creation.

Companies must ask themselves how they can balance trade-offs, especially for long-term, strategic decisions. The search for alternative raw materials plays just as important a role as strategic collaboration with suppliers.

Procurement also has to manage trade-offs when it comes to sustainability. For instance, many companies are currently working on initiatives to relocate supply chains and to regionalize; even though production in Europe is often associated with higher costs, it can help to significantly minimize delivery problems. With shorter distances, different means of transport and higher environmental and social standards in domestic markets, this can also make sense from a sustainability point of view.

But as these goals are often diametrically opposed, procurement has to find a balance, depending on its priorities, and keep recalibrating them, as they can keep shifting depending on the political and economic situation worldwide. For example, in the automotive industry, at the moment it’s crucial for companies to obtain semiconductors, and now the supply chain has been affected again as a result of the Ukraine crisis. In this current situation, resilience takes priority over cost optimization or value creation.

Since goals are often diametrically opposed, purchasing must find the balance depending on its priorities and calibrate them again and again.

CONCLUSION: Making Transformation Work

To sum up, finding the balance is a company-wide task that can only be successful if management recognizes its importance and defines the most suitable framework for it. Cross-departmental lighthouse projects are ideal for embedding this in the organization and providing an initial sense of achievement.

Procurement can make a significant contribution to a company’s resilience , as a driver in cross-functional teams. But to be on top of these complex issues and to find answers to significant questions in the supply chain, it must evolve decisively. With the right tools and skills, and by working closely with suppliers, a supply chain can be completely redesigned for the better, providing vital agility in the balancing act between resilience, sustainability and continuous value creation.

Authors

Paul Zahn

is a Managing Director at our office in Chicago. With his vast experience in strategic procurement, he predominantly assists customers from the automotive, industrial goods and mechanical engineering sectors. He also leads the Competence Center for Procurement Management.

contact@inverto.com

David Ring

is a Managing Director in INVERTO’s Cologne office and mainly supports customers from the health sector. He has extensive experience of transformation projects and is responsible for this issue in the Competence Center for Procurement Management.

David.Ring@inverto.com

Eva Hormel

is a Senior Consultant at INVERTO in Munich and supports procurement optimization projects in many industry sectors. As well as optimizing tendering and logistics, she is currently helping one of our customers with risk management in semiconductor procurement.

contact@inverto.com

Experts Interviews

Procurement Transformation

ESG-Initiatives

Get to know more about the project

Mr. Kraus, Syntegon, still trading as Bosch Packaging, was facing a carve-out when it was launched at the end of 2018. Investors expected the company to significantly improve its performance straight after that. How was this time for you as CPO?

We basically had to work on two independent, very dynamic projects. For the carve-out, the goal was to be able to survive as an independent company and to build up solutions, which were previously centralized from Bosch, within the framework of a smaller company. Indirect procurement and an SRM (Supplier Relationship Management) solution are good examples of this. In parallel, we had to develop and implement a concept to increase performance for liquidity and procurement results in the short term. This was quite difficult within the company’s previously decentralized structure, with varying maturity levels and priorities. That’s why we also ended up working on a very extensive transformation. Personally, I found the time challenging as we also had to completely change the way we communicated with each other straight after the launch, because of the pandemic.

What was your approach after the carve-out?

The first step was to use a new data analysis tool to create cost transparency and analyze the potential in each material area. Cross-location bundling and material field strategy, procurement professionalization and involving procurement in the award process from the early stages were all significant levers. This meant we could clearly show our Board and investors the goals that should lead to significant change in procurement.

As the results were quite different from previous levels, and there were some doubts within the company, we used external support to set up the new organization and achieved results from the outset, confirming that our concept was right.

Your investors wanted the procurement department to contribute significantly (in double figures, in percentage rates) towards value creation. What did that mean in practice for you?

At first, of course, it was a really big challenge and an honor to lead a top priority project. Especially as our procurement was very diverse, with a focus on supply. So when we were measuring results, we kept the spotlight very firmly on a positive EBITDA effect so we could establish targets for each location in relation to P&L in procurement. In hindsight, that was really effective. We also set up a very tight timeline for our project management, kept the procurement teams focused on cash and savings and made sure we communicated the results. Involving the site managers as a sounding board and the site procurement managers in the project steering committee ensured that everyone worked together really closely. We more than succeeded with this task: procurement is now a crucial driver in Syntegon’s value creation program.

How, in concrete terms, did you get it done?

Clear goals and responsibilities for the procurement teams, as well as external support, were important. In concrete terms, we contributed by increasing value in each individual product group by bundling and standardizing products, and by adapting specifications. We also developed a structured approach to supplier management. In the end, positive competition between the procurement teams also helped to deliver top performance. Ignoring any discussions about organization until there were really robust results from most of our locations also helped to focus more on the outcome and not just on varying opinions about organigrams.

What role did management support play?

The Board was fully behind us from the moment we were able to convincingly show them what great leverage we have in procurement, in terms of EBITDA improvement. Measuring hard results was certainly an important element here too. We could also always count on their support with important strategic decisions, as well as when it came to project resources. When we developed the new organizational model, we worked very closely with our management team. And if we couldn’t reach a decision ourselves with each location, management took over at very short notice to lead the discussions.

And were you recognized for the work you did?

Absolutely, both internally and externally. We received the 2021 Innovation Award from the German Association of Materials Management, Purchasing and Logistics (BME) for our transformation. It was great recognition of the whole team’s work, including our colleagues from INVERTO. We were also presented with an award for the procurement team’s performance by our CEO, Michael Grosse, at Syntegon’s Fall 21 management meeting. I feel that in procurement, we’re now fulfilling an important management function within Syntegon, and helping all our locations.

Isn’t there a risk in leaving out the organization issue until later?

Of course, the employees want clarity very early on about where the company is going in terms of an organizational model. But you have to keep firm under the pressure and clearly communicate when the issue will be discussed. That being said, key employees should be approached early on about potential jobs, to prevent them from leaving.

First the carve-out, then improving performance: how did you manage to keep your team on side through all this?

It was only possible with very close coordination and transparency about what we wanted to achieve together. Week after week, we kept going through how far we’d got with achieving our goals, we shared in our successes and, despite the pandemic, we also celebrated results virtually and in person when possible. I also tried to keep talking to all the team members and to help them if needed, by explaining decisions or lifting their morale. I was probably also able to pass on my enthusiasm to my team that in procurement we can have a real influence on Syntegon’s future.

How do you see Syntegon’s procurement department structure now?

We still haven’t finished our transformation. I’d say we’ve fulfilled 85% of our goals. We’re now in a much better position when it comes to bundling our requirements, and in relation to competition. Syntegon has implemented powerful IT tools to increase efficiency and guarantee data transparency. We can basically mark our indirect procurement as done. When it comes to project procurement, on the other hand, we’re only at maybe 70% of what I have in mind.

And strategically we still have some more work to do to ensure our procurement is futureproof. Up to now, we’ve mainly been concerned with increasing value, but now we have to focus more on issues such as risk management and sustainability factors.

Although the crises of the last 24 months have certainly been very challenging, I can proudly say that our team has proven itself and is making a very significant contribution to Syntegon’s success in terms of parts availability, as well as price stability and transparency with the different locations.

Mr. Moran, what does sustainability in the supply chain mean specifically?

A sustainably managed supply chain doesn’t have a detrimental footprint. The precise meaning, of course, very much depends on the product. Basically though, a responsibly managed supply chain in our sector is always founded on three pillars: ethical procurement, environmentally responsible procurement, and animal welfare. But the definitions of ethics, ecology and animal welfare aren’t always clear-cut. Discussions about these issues vary greatly. We already have some very clear definitions for ethical procurement. Child labor, for example, is unequivocally prohibited.When it comes to the term “sustainability”, on the other hand, in many areas we are only just starting to look at what it does and doesn’t mean.

Why do so many companies still find it so difficult to put the right measures in place?

In a lot of companies, the problem is that management delegates the matter. There might be a sustainability officer, but they are rarely appointed at the highest level. Or it’s all delegated to the procurement department, which then has to find its own way to make the concept a reality. The outcome is the same in both cases – responsibility for the matter doesn’t lie with management, so there’s no one to take ownership and drive things forward.

In that case, do the legislators need to intervene?

That can help by establishing a clear framework and sets minimum requirements. It forces companies to meet the required standards, which is often the starting point for sustainability. This is important because smaller steps are needed initially before getting to the really incisive measures. The principle of “walk before you can run” applies here.

If the legislation only requires the minimum, why should a company do more?

Obviously, it’s harder to put voluntary measures in place. But the benefits are also far greater, as consumers are often much further ahead in their thinking than the legislators. If you just do the bare minimum, then your customers will only honor that in a very limited way. You have to go further to meet their expectations. This is particularly true for industries like ours where the end consumer is extremely important. That said, it would be naive to think that B2B-based companies can escape this trend.

So, how does procurement combine sustainability criteria and cost efficiency then?

In principle, procurement can apply any guidelines as long as there is a clear framework. However, it’s true that sustainability has its price – that’s why it’s important there is a clear reason behind the decision and for executive management to communicate clearly that the costs are secondary to begin with.

How should companies decide on what course of action to take?

There are two keys steps for implementation. Firstly, the “why” needs to be defined for each measure. For example, why do we have zero tolerance when it comes to child labor? Because it’s a legal requirement and non-compliance would break the law and constitute a violation of the obligation we have toward our shareholders. We then need the “why” for the second step.

Which step is that?

Every sustainability measure needs a sponsor. This should explicitly not be the procurement department, but rather whoever is behind the “why”. In our example concerning zero tolerance for child labor, it’s about dealing with shareholders in the right way, so the CFO would be the logical sponsor. They’ll have a clear understanding of the positive impact of the measures and also be the one that benefits from them the most. In the same way, they will also be able to defend them if any conflict arises. The operational implementation can then be handed over to procurement, because achieving the best result within clear guidelines is what buyers are good at.

How should procurement communicate the new approach to suppliers?

The suppliers must know clearly what the company stands for, so that they can act accordingly. This also applies to prioritization – if a company decides to put sustainability first and price second, this is important information for the suppliers. What helps enormously is to summarize all the specifications in one document. This is the first thing new suppliers receive, and it contains everything they need to know about both quality and ESG criteria. Especially for suppliers outside Western Europe, who are often not yet that far advanced, it then becomes clear how important the topic is to procurement and which specific rules they have to adhere to.

Should procurement also be prepared to relocate parts of the supply chain to Western Europe?

That may become an issue in the short term, but that has nothing to do with a lack of control of suppliers outside Europe. That loss of control is a myth. It’s more about consumers there lagging behind in terms of what they want. Those requirements will level out in the long term and then we’ll also start buying more from those regions again.

All of that will lead to higher prices, especially in the food industry. Are you worried about that?

Consumers’ willingness to pay is completely disconnected from their expectations in terms of sustainable production and procurement, especially when it comes to food. That
is the biggest challenge we will face as an industry in the years ahead. Customers need to understand that a responsible, ethical supply chain comes at a certain price.
Communicating this will be a key task for us.