21 Apr Counting the cost – driving sustainability through cost optimisation
Too many businesses associate sustainability with increased costs. One of the greatest challenges for procurement is to demonstrate how boosting your green credentials can build resilience and have a positive impact on your bottom line. During turbulent times, it is easy to get caught up in cost cutting, searching for quick fixes rather than driving long-term value. By taking a more holistic approach to cost optimisation, businesses can see the bigger picture and make procurement decisions based on lifetime rather than unit costs. Once spend analysis starts to factor in elements like product longevity, energy use, waste and logistics, it soon becomes clear how cost optimisation can also go hand in hand with cutting your carbon footprint.
When done effectively, driving efficiencies through procurement minimises spend as well as environmental impact. The problem is that businesses fail to make the link and associate sustainability with additional cost. They are firefighting and putting all their efforts into cost reduction. Their procurement decisions are based on demands for immediate cost savings. The result is that suppliers are selected according to unit cost without factoring in the overall spend associated with their purchases.
Cost saving v cost utilisation
We are confronted with this mindset time and again and spend much of our time highlighting false economies. Consider the example of a tool maker. They need to buy cutting disks for their machines and automatically place an order with the supplier offering the lowest unit cost. Their disks are cheap and the cost reduction box is ticked.
But let’s take a step back and consider the alternatives. That supplier’s competitor was offering disks at three times the price which last five times longer. Selecting that product would have been far more cost effective. The initial cost would have been higher, but that would have been far outweighed by lifetime cost savings. By replacing products less often, there are associated savings on a host of factors, including energy, waste, downtime and logistics.
Those in charge of procurement were only looking at the top of the iceberg:
Particularly when purse strings are tight, there is a temptation to only focus on the unit price. But what else lies beneath the surface? What is the lifetime cost of that product? Once you factor in the likes of transport, packaging, energy and set up costs, the evaluation can look very different. Perhaps that cheap cutting disk requires a longer set up time, consumes more energy and manpower and needs to be replaced far more often. A procurement process focused on overall spend and due diligence rather than initial cost would probably have led to a very different decision.
Links to sustainability
Addressing these hidden costs will not only result in cost optimisation but will also help build a more sustainable business. Once procurement decisions are made on the basis of factors such as energy, packaging and disposal costs you automatically start building sustainability into your supply chain. Suddenly, the low-cost option ends up being the green option.
Becoming more conscious about the cost of transport, emissions and energy consumption will invariably create a more sustainable supply chain. It also leads businesses to challenge traditional economic models. For instance, the more people wake up to the financial benefits of extending lifespans, reducing waste and conserving resources, the more likely they are to embrace the circular economy.
The circular economy offers an alternative to our linear model of take, make and dispose. It aims to eliminate waste and the limitless use of resources. By reusing, recycling and re-purposing, businesses save money at the same time as helping save the planet. That could mean working with suppliers to creating a return or closed loop for packaging or transforming one business’ waste into another’s raw material.
Clearly, that has major implication for how you go about selecting suppliers – link to supplier selection blog. You need to form long-term relationships with partners who share your vision and values.
Once businesses start to embrace sustainable procurement the possibilities are endless. Taking a holistic view of spend changes the goal posts and makes it far easier to operate in a more sustainable way. You then have a virtuous circle and can not only benefit from a boost to your bottom line but transform your brand and gain a competitive edge.
Yet to make this work, some function within the business needs to take ownership of the agenda. Only procurement has that over arching view and ability to pull the different strands of the operation together. The question you must ask is whether you have the capacity and resources to make that happen? Do you have what it takes to marry cost optimisation and sustainability, to look beneath the surface and take control of your spend?
Good for Business
And did we mentioned that being a responsible and sustainable organisation is good for business? Companies, large or small, can no longer ignore the pressures expected by stakeholders that they do better and act in ways that are ethical and values-led. Research is already showing that this is good for business and more profitable as companies with a good reputation attract customers, consumers, suppliers and talented staff. But that’s for another blog…