Integrating sustainability into procurement decision making

1. Integrating sustainability into procurement decision making Sustainable 60 Marketplace May 4th 2011 www.pwc.com/nz Gary Collier

2. Sustainable procurement – how does it create value? Reduce costs Manage business risks Business Drivers Innovation and creating brand value Meeting external requirements May 2011 Slide 2

3. Integrating sustainability into procurement decision making Strategy 2. Product Aligned with strategy Delivering what the customer wants • Process • Stakeholders in equilibrium • Rolled out and embedded? • Consistent with strategy • Compliance 3. People Training Rewards and incentives 4. Raw materials Security of supply May 2011 Slide 3

4. Sustainability - relevant and ever more important • Businesses are beginning to come to terms with the very real risks to their business • Climate change • Awareness and acceptance of the science • Impacts being felt globally • Raw Material – security of supply • rising costs – food, fuel, energy • battle for scarce resource “Some may wonder, even inside Wal-Mart, with all that is going on in the global economy, should being a socially and environmentally responsible company still be a priority? You’re darn right sustainability should be a priority.” Lee Scott Oct 08 May 2011 Slide 4

5. Supply chains have an important roll to play in supporting innovation and removing cost • Walmart • Walmart has managed to cut some food prices, temporarily, by up to 30% through strategic management of environmental issues • Walmart are working with suppliers to reduce packaging; • Efforts with one supplier resulted in the creation of 20% smaller packaging box – eliminating 500 trucks from the road and saving 890,000lbs of paper fibre • Allowed supplier to absorb rising pasta costs instead of passing them on to Walmart • Attempting to remove the middle-man; and • Buying directly from a co-operative of coffee farmers cutting 3 or 4 steps out of the supply chain • Source locally. • Selling Wisconsin-grown yellow corn in 56 stores in or near Wisconsin. May 2011 Slide 5

6. What are you trying to achieve with your sustainable procurement programme? Opportunity Revenue growth & brand enhancement Cost reduction, operating efficiencies & culture Ambition Compliance & Risk Management Risk May 2011 Slide 6

7. Gaining increased control of the ‘upstream’ supply chain, can secure supply and differentiate a business May 2011 Slide 7

8. What do our customers and consumers want from us? Can the supply chain help us deliver? Customer A Retail and consumer goods case studyIdentification of likely trends in the sustainability driven agenda between retailers and their suppliers; and potential platforms for differentiation and strategic partnerships Drivers What are the key drivers of the environmental strategy? ILLUSTRATIVE Strategy Strategic Leadership What is the environmental strategy? Customer D Customer A Strategy Focus Customer E Social Sustainability What are their focus areas and key initiatives? Customer F Supplier Requirements Supplier Collaboration Risk and reputation management Customer C Customer B Does the retailer look to collaborate with suppliers on key issues? What does the retailer require of its suppliers? Must Haves Opportunity Areas Risk and reputation Management Strategic Leadership Environmental Sustainability Yes Yes Likely future direction May 2011 Slide 8

9. Process Understand and prioritise social, ethical and environmental risks and opportunities for key purchasing categories Ensure that these are communicated around the business ANALYSIS Take into consideration the overall corporate strategy and brand values Develop an integrated supply chain strategy considering relevant priority areas in an integrated manner STRATEGY Align buying practices to strategic and brand values priorities by reviewing • roles and responsibilities of all involved in the purchasing process • current buying practices and potential impacts – positive and negative • supplier selection and assessment procedures • buyer performance evaluation processes • management information to report performance to board IMPLEMENT INTEGRATE May 2011 Slide 9

10. Challenges to integration Board • Access to relevant and reliable information to give confidence that risks and opportunities are being managed appropriately • Obtaining real buy-in and ownership from the supply chain director. • Often lack resources and internal clout, operating in silos without the appropriate corporate infrastructure to help realise their objectives CSR/Ethical Trading Buyers • Numerous, complex and potentially conflicting demands and decisions without formalised corporate guidance. • Misalignment of rewards and incentives with other stakeholder objectives • Conflicting messages from corporate customers from within the same organisation and different organisations. • Lack of integrated supplier assessment programme, considering all relevant supply chain issues, • Lack of real incentives to achieve stated requirements Suppliers May 2011 Slide 10

11. Innovation may be found within the supply chain Use of forward commitment procurement Worked with NGOs and specialists to define product specifications Product uses 70% less energy, lasting up to 10,000 hours Consumer saves; on cost price and usage phase 100 million were sold in 2007

12. Engaging consumer with sourcing programmes “Caring Dairy” program embodies the slogan of “milking happy cows not the planet” The “Dairy Stewardship Alliance”/”Caring Dairy” is an agreement whereby Ben & Jerry sources milk from farms that produce milk without using growth hormones. Farmers are paid a price premium Provided with expertise towards adopting sustainable farming practices. Slide 12

13. Are our people properly equipped? implementation and integration can be challenging • Do we have the right tools to deliver the strategy? • Do we have the competencies throughout the organisation? • How do we build our capacity? • Implementation requires employees across the business undergoing targeted, function specific engagement and training Ownership Ownership I will proactively and visibly lead through my attitude and behaviour. Commitment Commitment We’re in this together. I will go the extra mile to ensure we succeed. Support Support The business is taking this seriously. The company is making sure I have the information, tools and latitude I need to contribute. Engagement destination states Engagement Engagement I want to play a role in helping achieve this vision. I want to be part of something which could really make a difference to my family, my company and the world. Understanding Understanding I understand these issues and their implications. I understand the interrelationship between the business and these issues. I understand the business’ motives, vision and strategy for responding to these challenges. Awareness Awareness Sustainability and climate change are important issues. May 2011 Slide 13

14. Rewards and incentives • If it is not measured… • If it is not valued… • If performance is not recognised… • …will it get done? • Buyers are “asking the right questions” • Sustainability training: life cycle analysis, prioritisation of sustainability issues, understanding of current and future challenges Training Challenging the mindset • Divisional VPs direct and challenge buyers to come up with two quick wins with commercial benefits and one major innovation project on sustainability each year • Part of the buyers annual appraisal Buying decisions • Giving a broader mandate increases the opportunity to find more innovative solutions than a prescriptive approach (e.g. with a broad mandate for change the buyer for detergent was able to arrive at the ‘All Small & Mighty’ solution that a more rigid approach may have inhibited) May 2011 Slide 14

15. Sustainability issues are influencing drivers for raw material volatility. Understanding these issues can lead to competitive advantage Raw material price volatility Supply Demand Yield Land harvested Trade Barriers Speculation Biofuels Human Consumption Feed May 2011 Slide 15

16. Analysis of the value chain of a product may reveal environmental and/or commercial ‘hot spots’… 6 E.g. economic analysis 5 4 Cost/tonne 3 2 1 0 Labour Fuel Duty Margin Auction Other costs Maintenance Yield Landed Costs Secondary Freight NZ input price Processing costs Landed China Prices Insurance/Financing Cost Ex-Factory China Chinese processor margin Freight & Financing to China E.g. CO2 Emissions by Lifecycle Stage Consumption and disposal 4500 4000 Manufacturing 3500 Raw Materials 3000 g CO2 eq per SKU 2500 2000 1500 1000 500 0 Raw material C Raw material A Packaging Natural Gas Electricity Others Logistics & Consumption Waste Packaging Total Raw material B Raw material D Raw material E Distribution end of life % of CO2 emission 12% 23% 3% 15% 3% 4% 5% 6% 5% 2% 5% 17% 1% 100% May 2011 Slide 16

17. Sustainable & commercial analysis Security of energy supply Illustrative Overview of Top Tier Sustainability Issues E.g. Direct carbon emissions Issue J Issue B Issue E Issue K Medium Issue C Issue A Issue F Social Impact Issue H Issue G Environmental Impact Low Medium High Key Size of bubble represents commercial impact of sustainability issue What are the current and future environmental risks & opportunities in relation to your value chain? Is your source of raws secure?Evaluation of commercial impacts of sustainability issues. Identify & quantify significant opportunity and risk areas for the business, region or brand across the value chain. High Low ILLUSTRATIVE May 2011 Slide 17