Tackling risk in the supply chain

With crises in the news like the Bangladesh factory collapse and recently this headline about a major council buying "Chinese crap because it's cheap", we all know there are risks in our supply chain, but what do we do to address them? And more importantly, with thousands of suppliers in dozens of categories, where do we start?

We have recently helped a number of organisations tackle these questions through supply chain sustainability risk analysis. This process looks at the risks (environmental, social and governance) in various spend categories and compares these against the value of spend in those categories. Risk and impacts are amplified by the amount you spend in that category, so if you have a large car fleet you will have greater impacts than just a few cars.

The most important thing this points out again and again is the more you can reduce the amount you're buying, the better the outcome for both the environment and your budget.

When we compare risks and spend in categories, we plot them on a chart like the one shown. High spend and high risk in the upper right, low spend and high risk in the upper left, etc. There are a few key strategies we've identified for each of the quadrants.

High risk / high spend

The risks in this category are multiplied by high purchase volume, so they should be the highest priority to address. However, these are also frequently the most complex categories to tackle, central to your organisation's business, with long-term contracts in place with major suppliers. These categories thus require long-term focus to achieve improvement.

Using supplier relationship meetings to hold conversations around sustainability and what opportunities there are for improvement through the life cycle is the best place to start. Some categories may also require working more closely with your supplier, investing in them to build their capacity to implement sustainability and partnering with them and other organisations to solve the toughest sustainability challenges.

High risk / low spend

Spend isn't everything - even minor categories can have high risks such as human rights and toxic ingredients. Frequently, though, these are also one-off or out of contract spend, which can be addressed quickly by setting a few standards and expectations. Minimum category specifications are a good strategy here, like establishing food & catering guidelines or requirements to meet standards such as Fairtrade (coffee, tea, chocolate), Energy Star (electrical equipment), and Greenwheels (fleet).

Competition is often high in these categories, so if your existing supplier isn't able to meet the requirements you set, another will. Although we often find that your supplier will be overly willing to provide whatever you ask for! With relatively low spend in these categories, they are also a better place to allow price premium for sustainable products like catering and recycled paper.

Low risk / high spend

This quadrant tends to be the major service providers for many companies, such as legal, insurance, and HR. While these organisations don't have very high inherent risks and impacts, because of the volume of spend there is still opportunity here. How many reams of paper do you suppose law firms go through? Setting evaluation criteria in your tenders that you prefer to work with organisations that are reducing their impact and setting reporting requirements on energy and paper use can influence these huge firms to make a difference. We wrote an entire guide on this segment for the Australian Government last year - see it here.

Low risk / low spend

This quadrant is generally last priority. But again, there is some opportunity here. The best approach to address these categories is to set pre-qualification requirements to ensure you work with companies that meet your expectations around environmental management and human rights. Many organisations use a code of conduct to set these minimum standards, such as the EICC.

If this seems like oversimplifying, it is. I could have written an entire article on each of those quadrants. But the important part is to get started, to understand where your spend currently lies. Of course, if you need help, ECO-Buy and Net Balance can assist; contact us at ecobuy@ecobuy.org.au.

Article provided by Sara Redmond-Neal, ECO-Buy Business Program Manager.