Why circular procurement is the most important step in an organisation’s resilience journey. How to step into the unknown
Procurement functions are heading for a function shake-up over the next few months to years. CPOs will be at a cross-road. The trajectory they take will be the difference between an outcome of “extinction”, due to a combination of technology automation and outsourcing, or “promotion” upgrading as a strategic & competitive force for organisational resilience. This article describes What does this mean, Why is circular procurement the way forward and How to go about it.
What is happening?
The business progression from performance & efficiency to resilience started a few years ago, technology disruptions have kept the conversation going but it was still targeted at specific business sectors and functions. As a result, the overall sense of change urgency in Australia was only move slightly. You couldn’t really “feel it”.
This year, the COVID-19 pandemic, the subsequent economic impact, bushfires & droughts in regional areas and the growing international boarders friction and trade tensions (specially with China) have finally move the dial in the right direction towards real change and an opportunity to #buildbackbetter. Businesses now are investing in business resilience.
This refreshed managerial skill and business paradigm requires an updated mindset and model underpinned by the following practical changes (adapted from HBR article):
Speaking at a recent public event, Malcolm Harrison, group CEO at CIPS, described the top procurement challenges for the next decade:
Procurement and supply management needs to remain agile and fleet of foot to adapt to change, and increasingly professionals will need to prioritise sustainability, innovation in supplier base, and developing that base, especially SMEs that are the life-blood of every economy. Above all, what’s become apparent is that the supply chain is a priority and that it is about agility not just cost, and ensuring the supply chain is taking part in those business critical decisions in a way that wasn’t always the case before.
Amongst the opportunities, he recognised the functions expectation to be a social driver for change. Systemically balancing cost cutting with other values such as sustainable & circular. Becoming a source of strategic value through initiatives that build organisational resilience is key. They recognised the need to step-up and live up to their role in economic recovery & regeneration.
But, to take-on these challenges and turn them into opportunities, procurement functions will need to overcome other functional weaknesses like:
- Value generation through traditional levers (no innovative change).
- Limited scope of influence at board strategic decision making.
- Delivering on cost reduction targets through ‘squeezing’ down suppliers (limiting real collaboration).
- Linear and conservative thinking on how to generate cash & drive efficiencies.
- Driving supplier collaboration as contract-base transactional efficiency.
- Reduction in talent development investment.
- Technology investment focused on transactional efficiency & process automation (not transformative).
Why is circular procurement the way forward?
The trajectory procurement functions were following has “worked” until now because organisation’s strategies were predominantly operating as part of efficiency-driven economies. As result, they were a good “fit”.
Today, as previously established, the strategies, business capabilities, objectives and operating models are in the need to embark a mindset shift towards resilience.
This shift creates an opportunity for procurement leaders to respond, transform and adapt. Doing so will lift the function’s strategic value in their organisation. Furthermore, procurement will become an enabler of sustainable competitive advantage.
According to an article in the Harvard Business Review on procurement and resilience strategies:
Deployed strategically, procurement can help firms build whole constellations of value — rather than simple chains of value — in which stakeholders of all sorts are connected to one another holistically and dynamically.., value constellations are highly resilient systems that simply cannot be created by focusing on financial efficiency.
This is where a transition to circular procurement could help implement and deliver this mission. Not only because it is the right thing to do, but because it is a proven source of:
- A pathway to build resilience. Addressing resource depletion challenges, delivering on regional/local sourcing strategies, unlocking government funds and new revenue streams.
- Sourced material and service innovation. Re-evaluating the business need, providing alternative sourcing models and closed loops (use & end-of-life).
- Market & jobs generation. Stimulating and creating demand for goods and services that contribute to a circular economy.
- Talent Development. Accessing and developing talent with a common purpose-driven corporate identity.
- Supplier collaboration. Increasing supply chain resilience through system level supplier collaborations, transparency across lifecycles and joint development of competitive advantages.
- Green Funds. Access to green innovation funds, extended shareholder investment and government tax incentives.
Finally, how to go about it?
Organisations will need a clear pathway to transform and unlock the benefits of circular procurement. In practical sense, it is important to start by getting the basics right:
- Q1: What is the difference between circular procurement and sustainable or responsible procurement?
- Q2: How can I use circular procurement as a framework for building resilience in our organisation?
- Q3: How can we systemically re-think the procurement organisation first and avoid technology-driven investments?
Q1: Circular Procurement vs Sustainable Procurement
The Nordic Council of Ministers, defines circular procurement as:
The procurement of competitively priced products, services or systems that lead to extended lifespan, value retention and/or remarkably improved and non-risky cycling of biological or technical materials, compared to other solutions for a similar purpose on the market.
The Australian Department of the Environment and Energy defines sustainable procurement as:
Sustainable procurement looks beyond the up-front cost to make purchasing decisions based on the entire life cycle of the goods and services, taking into account associated costs, environmental and social risks and benefits, and broader social and environmental implications.
Circular procurement builds on and adds to the principles of sustainable procurement (it goes beyond ethical sourcing).
Sustainable procurement considers impact of products and services sourced through a whole-life-costing approach. In contrary, circular procurement seeks to reduce end-of-life for materials leveraging two principles:
- Circular Loops. Keeping products, components and materials at their highest value at all times. Minimising the existence of waste from design.
- Regeneration. Going from doing ‘less impact’ to regenerating / restoring natural systems. Circular sourcing seeks alternatives to virgin material, reducing extraction and consumption rates. Influences suppliers to adopt regenerative practices as part of the sourcing selection criteria.
Loop models reduce and or eliminate material end-of-life costs and impact. Implementing these models will enhance collaboration with suppliers capturing materials prior to their end-of-life and re-introducing them through take-back schemes or as a new spend category (secondary, by-product & recycled markets).
Q2: Circular Procurement as a framework & strategic asset to organisations
The best starting point is to have a circular economy strategy led by purpose & mission. Having this may clarify the direction of a circular procurement strategy.
When this is not yet defined, circular procurement should aim at value creation through the following three key areas:
- Building resilient mindsets & capabilities.
- Re-evaluating needs (internal & external)
- Redefining collaboration & rules of the ‘game’.
All strategies listed above have cost-efficiency embedded as an indirect benefit. But it is important to note that their main benefit is sustainable value creation.
A great example of these principles comes through Rolls-Royce (see detailed case study here).
RR’s procurement team established strong supplier partnerships across the network of the propulsion-technology market. Allowing their organisation to change their business model from selling engines to selling a service, “power-by-the-hour”, contract where customers paid for the propulsion they consumed. This model meant they became leaders in their industry.
Although this case study is widely known, what is less known is that it all came down to their procurement team who:
- Developed a highly persistent network of trusted procurement partnerships with airlines, overhaul shops, producers of systems and parts, financial institutions, and even nations.
- All efforts were focused on maximising and reconciling the many different kinds of value in the total lifecycle of the engine asset, from design to disposal.
- The key currency exchanged was not money or hardware but data.
- The partnerships focused on the pooling of risk, the co-production of values, and the sharing of reward.
Q3: Rethinking the procurement organisation — transforming the current business model
To get started, it is important procurement functions change the dialogue and approach on how they could influence system action in three ways:
- Portfolio Evaluation (the need): Raw materials, components, equipment and services (spend categories)
- Supplier relationships: redefining collaboration, working in ecosystems.
- Closing the Loop: influencing change in current business models through introduction of close-loop cycles, reverse logistics, supplier take-back schemes.
The table below describes the areas of intervention across a procurement process lifecycle required for a circular implementation:
A great example of applying circular procurement is found in the UK, Sweett Group is a professional services provider for the construction, asset and infrastructure management sector. They took a circular strategy for their facilities management (FM) contracts that included usage and disposal as well as purchasing. For a FM contract of approx $3.7M (AUD) over ten years, they worked with their supplier to improve the performance of service delivery.
Tender and awarding specifications were changed to reflect circular principles, they engaged and collaborated with suppliers throughout the process and awarded on the basis of:
- Higher quality servicing to improve asset life and reduce carbon and environmental impacts such as waste replacement before end of functional life.
- Adopted mobile asset management to enable performance-based environmental impacts reduction targets to be set (reduced furniture sent to landfill by 70%, 33 tonnes CO2 emissions avoided over a ten year period, 600 tonnes per year of waste reduction from going to landfill and costs associated with).
- Financial benefits (in AUD at present day exchange rate) across capital cost reduced by $27.5K, service and repair costs reduced by 26% ($40K) and residual value at the end of contract increased by $40K creating greater opportunities for second and third life contracts, enabling environmental benefits.
Conclusion
Today, disruption has become a constant event. This new paradigm has exposed the brittleness of current supply chains (and procurement teams) built for efficiency. As organisations try return to some sort of post pandemic normality in Australia, most of the world is very much on stand-still & locked down. Leading organisations in Australia have announced their commitment to #buildbackbetter and refocus/invest in resilience.
But changing so many years of working under the ‘efficiency’ banner & thinking will not be easy. Organisations need a very strong reason to engage their employees and stakeholders if they wish to pursue this journey; subsequently, they need to invest in the capabilities required to underpin this journey and measure success.
The principles behind circularity are a great source of common purpose, inspirational vision and economic benefit organisations can adopt to build their own strategies for long term value creation. They come with proven frameworks to do so and there is a global array of examples on how businesses across sectors, disciplines and sizes have successfully applied them.
A great opportunity awaits for procurement leaders who are able to see the threat of their function’s extinction as an strategic value creator and, as a result, want to “ride this wave” as an opportunity to redefine their role in the organisation and systems they operate in.
At the centre of resilience is strategic & circular procurement and at the centre of procurement is systemic collaboration.
