Sustainable Sourcing Definition

What is Sustainable Sourcing?

Sustainable sourcing integrates environment, social, and governance (ESG) criteria and performance factors into a company's sourcing process and sourcing decisions arounds purchased goods, services, and materials

Sustainable sourcing focuses on identifying and selecting suppliers who are committed to sustainability and who can demonstrate they meet certain standards related to environmental performance, labor practices, and social responsibility. Sustainable sourcing aims to minimize negative impacts on the environment and communities, while also contributing to the long-term viability of the businesses and organizations involved.

Rising pressure from customers, ESG investors, regulators, and other stakeholders is leading more companies to implement sustainable sourcing practices and programs to improve the safety and sustainability of their supply chain. According to both McKinsey and our own internal data, a corporate supply chain’s enviromental impacts are, on average, 5 to 25 times higher than the company's direct operations, making sustainable sourcing a priority for organizations taking action to decarbonize, reduce sourcing costs, de-risk their brand, and improve ESG performance.

While environmental sustainability is one of the foundational attributes of "sustainable sourcing," the practice is also defined by economic, ethical, and social criteria and considerations. Sustainable sourcing promotes value chain circularity, well-being, and long-term resilience - both in nature and among organizations.

What is Sustainable Sourcing - A Definition

The 7 Pillars of Sustainable Sourcing

Sustainable sourcing integrates processes, systems, requirements, and criteria designed to provide double-bottom-line benefits for the organization and its stakeholders. A comprehensive sustainable sourcing strategy or program-set is based on:

  1. Long-term, strategic sourcing lens - Sustainable sourcing needs to think long-term about enterprise value, resource availability, sustainability, and risk, including areas like biodiversity and climate risk
  2. Comprehensive, thoughtful sourcing criteria - Sustainable sourcing should consider both financial sourcing requirements like cost, quality, and risk alongside ESG factors like ethics, human rights, equity, and environmental impacts
  3. Systematic, transparent supplier evaluation, onboarding, and management - Establish consistent and well-documented guidelines, processes, policies, and systems for monitoring and approving purchasing requests, managing vendors, sourcing negotiations, invoicing and payment, data and record-keeping, inventory management, and other strategic purchasing considerations
  4. Efficient spend - Sustainable sourcing should aim to be a source of cost savings and positive ROI by reducing input costs, usage, and/or promoting circular re-use
  5. Optimized inventory and logistics - Better-optimized logistics and inventory isn't just better for business, it's often more sustainable. Less transportation mileage, less raw material consumption, lower energy use, and reduced waste are all hallmarks of sustainable sourcing and operations
  6. Supplier engagement - Building strong relationships with high-quality suppliers is essential to your organization’s success, particularly when you need to collaborate with those suppliers on sustainable sourcing performance, transparency, and traceability
  7. Unified data - From assessing supplier risks to understanding product-level environmental and social impacts, accurate data is a critical component for better supply chain sustainability. You need to collect, organize, manage, and take the steps to understand the data your organization gathers throughout its value chain to optimize your sustainable sourcing decisions

There are a number of different specific approaches to sustainable sourcing, including sourcing locally, supporting small and medium-sized enterprises, and working with suppliers to improve their sustainability performance. Many organizations develop specific sustainable sourcing policies and programs to guide their procurement practices and to ensure they're aligned with their sustainability goals.

The Benefits of Sustainable Sourcing

Strategic, sustainable sourcing delivers consistent financial, social, and stakeholder benefits. Here are just a few examples highlighting the ROI of sustainable sourcing:

€1.2 billion

Sustainable sourcing efficiency improvements helped Unilever realize over €1.2 billion in operational cost savings since 2008

Source: Unilever, 2020

$227 million

Operating cost savings from manufacturing efficiency improvements that reduced product defects and waste

Source: McKesson, 2020

$60 million

Reduction in operating costs from sustainable sourcing programs and practices focused on product ingredients

Source: PepsiCo, 2017

$50 million

Company-wide improvement in profit margins for Nike by replacing certain shoe components with more sutainable materials and improving its supply chain sustainability practices

Source: Nike, 2021

Beyond cost reductions and savings from reduced energy use, lower materials consumption, and more efficient transportation, sustainable sourcing unlocks other value levers too. Authentically sustainable products improve brand reputation, provide opportunities for premium pricing, and reduce legal, compliance, and publicity risks. Research by the World Economic Forum finds effective sustainable sourcing can raise revenue by 5-20% and reduce sourcing costs 9-16%, while improving brand perception and reducing risk.

Moreover, strategic sustainable sourcing helps derisk and future-proof organizations when it comes to supply chain pressures, resource scarcity, and consumer purchasing trends.

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Your Path to More Sustainable Sourcing

Sustainable supply chain management is complex. It requires a holistic view of all the partners, processes, logistics, and raw materials involved in manufacturing and delivering your products to customers, plus the ability to track, collect, and connect data at each step. It also involves use of sourcing influence to shift suppliers in sustainable directions. By reducing partners’ Scope 1, 2 & 3 emissions, you reduce your company’s Scope 3 emissions.

But sustainable sourcing isn’t just about risks and challenges. It also presents historic opportunities to make and distribute more appealing, durable, valuable, and differentiated products, invent (or reinvent) new products, reduce costs, protect the environment, and elevate your company’s brand. Products and packaging can become biodegradable, compostable, or even upcycled from other products’ waste. The entire world benefits - both now and in the future.

Sustainable sourcing opportunities include:

  • Purchasing renewable energy (PPAs, etc.)
  • Procuring energy efficiency technology and services, and encouraging, advocating, or even financing them at leased and third-party sites
  • Purchasing and sourcing other organizations' waste and byproducts as raw material inputs
  • Sourcing raw materials closer to the plant or site that manufactures or cultivates it
  • Sourcing a greater percentage of recycled and upcycled raw materials for products and packaging
  • Improving and reducing the emissions intensity of your raw material transportation
  • Partnering - and even financing - to implement sustainability improvements in strategic parts of your value chain
  • Purchasing carbon credits, renewable energy credits (RECs), and other sustainable assets

As well as setting better, more sustainable sourcing standards - and helping suppliers meet them.

Your sustainable sourcing strategy should fit the needs and realities of your business, but at a minimum consider material ESG factors and key supplier relationships.

Sustainable Sourcing Themes

Sustainable Sourcing and Supplier Engagement

Supplier relations is an ongoing dialogue, and your organization will have varying degrees of influence in a specific value chain. When working with suppliers on sustainability initiatives, it's important to be clear, consistent, and understanding with your sustainable sourcing approach and policies:

  1. Engage your CEO, CFO, or Chief Sourcing Officer (CPO) in this communication process. Make it clear to your suppliers sustainable sourcing is a company-wide initiative and top priority.
  2. Ask your suppliers what they're doing currently around sustainability and human rights, and what policies and controls are already in place now. In many cases, your larger and more strategic suppliers will already have been approached by their other value chain relationships around similar initiatives. Your partners may already have innovative approaches, products, and solutions they can bring to the table
  3. Educate each supplier on why sustainable sourcing matters for your business and stakeholders, as well as why investing in sustainability is beneficial to their business as well. Cite other brands and examples. Highlight the opportunities and risks of inaction.
  4. Also work to engage your Tier 1 and priority suppliers around their supply chains. Who are their suppliers? What are their sourcing policies? Where are the biggest lower-tier risks, issues, and opportunities for improvement?

Once you've established one or more sustainable supply chain programs, work with your suppliers to implement best practices:

  1. Introduce your Sustainable Supply Chain Code of Conduct and policies up front. Make it publicly available on your website. Include it in contracts and RFPs. Track which suppliers have reviewed and signed on.
  2. Help suppliers establish long-term sustainability goals and science-based targets.
  3. Include your suppliers' suppliers within these sustainability programs.
  4. Request each supplier designate a sustainability lead and primary point of contact on their staff to work with you to extend the sustainability program(s) to lower-tier suppliers.
  5. Offer training to suppliers and provide them with incentives for implement sustainable sourcing practices and building capacity
  6. Offer co-investment or supportive financing to help your strategic suppliers implementing sustainability practices like renewable energy, energy efficiency, and closed-loop processes (if your organization has the means).
  7. Conduct annual reviews and solicit feedback from your suppliers on how to improve.
  8. Use independent audits, verification steps, and data checks.

For example, in 2021 Hewlett-Packard (HP) launched a new Sustainable Bond Framework, which the company will use to issue bonds to help finance HP sustainability projects. The company plans to issue up to $2 billion in sustainable bonds, and one use of proceeds will be projects that help decarbonize its supply chain. Similarly, Unilever and Campbell Soup Company offer their farmers technologies, guidelines, and products to help them optimize their fertilizer and water use and improve soil conservation.

Your Next Steps With Sustainable Sourcing

Aligning your organization's sourcing policies, programs, and decision-making with its ESG and sustainability targets can be challenging - but also incredibly powerful for innovation, differentiation, and value creation. If your company makes or sells physical products, your supply chain is the foundation for your organization's overall sustainability performance - putting sustainable sourcing at the forefront of ESG implementation.

Achieving sustainable sourcing exellence does require internal capacity, resources, and investment. But, done correctly, it can boost everything from your firm's brand and reputation to employee morale and retention, operating financials, and risk management efforts.