The Purpose of Procurement: How ESG is Changing our Roles

The Purpose of Procurement

Author: Larry Berglund

Major global events have been impacting supply chains for years: the shift from a fossil fuel energy supply to renewables; the digitalization of information; the electrification of transportation; the need for decarbonization to reduce emissions; eliminating plastics and waste; the pandemic; the circular economy; global warming; and environmental, social, and governance (ESG) policies.

The pandemic exposed the lack of resilience in sourcing strategies. The circular economy is a decade old and is gaining traction to affect how we view resources and materials. ESG is showing us that we can prosper with dignity and respect. Building supply chains with responsible materials and labour practices is possible. Addressing environmental concerns in a sustainable business model requires challenging the status quo. These changes require national and international interventions by business and thought leaders and governments.

The ESG blueprints and road maps have been written. We now need more companies and governmental agencies to adopt the best and leading solutions to ensure a planet which is going to sustain our collective ecosystems. The solutions are not secrets. The United Nation’s Sustainable Development Goals are readily available; the International Labour Organization conventions are market-tested; the 2007 United Nations Declaration on the Rights of Indigenous Peoples reflects the acknowledgement in social obligations; leading brand managers and manufacturing companies are sharing their processes and technologies; industrial associations are advocates for better methodologies; investors and stakeholder voices are being heard; the principles of the circular economy are working; innovative logistics are driving down costs and improving services; disruptive technologies are shaking the status quo; and the expectations of consumers and customers demand affordability and availability.

Supply chain managers have been part of the transactional process in all sectors. As Artificial Intelligence and the Internet of Things expands exponentially, the role of supply chains needs to adapt to be relevant as well. There will always be a cost of goods to consider but it will be a much broader view with the total cost of ownership internalized as much as possible.

Business decisions have been influenced by the theory of the Invisible Hand. The Invisible Hand is an economic term coined by Scottish economist Adam Smith over two hundred years ago. The basic premise is that people will do business with each other in a free market that best decides the price of goods and services. An unfettered free market does not want any government intervention. This concept upheld the idea that when everyone works for their own self-interest, we will collectively be better off.

We can now see the shortcomings of the Invisible Hand, which originated in a time with slave labour, a privileged few controlling commerce, harsh working conditions, child labour practices, and an absence of environmental responsibility. Natural resources were seen as being infinite but also worth fighting wars over. The Invisible Hand directed the expansion of the Industrial Revolution.

Fast forward to the 21st Century. Many of the shortcomings of the Invisible Hand have been eradicated in the marketplace – but not all. We acknowledge that government intervention is necessary to enforce responsible business practices. We complement the Invisible Hand with a term this author refers to as the Indivisible Hand of government. The Indivisible Hand guides and, out of necessity, monitors the Invisible Hand to stimulate social and economic interests being realized in a sustainable manner.

Any model which is primarily profit-based from a Supply side needs to be effectively balanced by the Demand side. Supply chain practices, built on the Invisible Hand values, were aimed at attaining the lowest cost. This theory seemed to make sense until we looked deeper into the supply chain and found that the lowest cost came at the expense of social values, environmental degradation, and the erosion of long-term economic development.

Until more recently, business management training was primarily based on Smith’s theory that as long as a product was legally sold, the market would set the price and should not concern itself with the public welfare – that was the job of government. Public sector procurement also followed the Smith theory, where the lowest cost from a tendering process must deliver the best value. Procurement decisions were largely one-dimensional – with economic interests being the first choice.

ESG practices are driven in the supply sector by the largest player on the demand side, public procurement. The weighting on environmental and social values continues is tempering pricing. Whether they are a small municipality or the Department of National Defence, governments are demanding a higher commitment to achieving GHG reductions, waste free water supplies, and resource conservation.

Procurement, which is a transactional tool of the Demand side, needed to redefine the value proposition to go beyond the lowest cost and be based on values of a larger stakeholder base. Procurement in private and public sectors began realizing that the lowest cost was not a sustainable model. The Indivisible Hand, through legislation and by supporting international standards, has been transformative in affecting how we think of value. We need a three-dimensional model with economic and environmental interests meeting the expectations of stakeholders.

We could surmise that business created the problems we are trying to resolve today but that is too simple. We could also say that business will get us out of the problems we are in today. Again, not entirely true. There will be a constant push and pull by business as environmental, social and governance issues surface, receive attention, and morph into newer challenges. It’s how we as a people have progressed globally. Commerce created wealth and it can support sustainability and inclusivity. It will be an asynchronous movement between developed economies and emerging economies. Where the developed economies have benefited from a technical advantage, the emerging economies have the opportunities to access and accelerate these benefits.

It’s been a decade since Harvard’s Joseph Henrich coined the term, WEIRD. Western, Educated, Industrialized, Rich, and Democratic. This term captures the attributes of western business. If you are reading this article, you are likely WEIRD. Being WEIRD is not good or bad. It’s part of our evolutionary path. ESG is a stepping stone along the path.

Supporting the shift to more responsible business practices is the United Nation’s Sustainable Development Goals. These goals act as a touchstone for actions to address global issues which we are all directly or indirectly connected with.

We all should take responsibility to act within our sphere of influence.

We invite you to checkout our training and service offerings pertaining to public sector procurement.

Author: Larry Berglund

Disclaimer: The views and opinions expressed in this article are those of the Subject Matter Experts and do not necessarily reflect the official policy or position of The Procurement School.

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