Procurement with Purpose: Easy to Say, Hard to Do

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One of the big themes at last week's SAP Ariba Live was “procurement with purpose” — the idea that procurement organizations, with their collective spending power, can use their clout to do good. When you consider that the annual transaction volume through the Ariba Network exceeds the combined annual commerce of Alibaba, Amazon and eBay — and dwarfs that of many nations— it seems quite feasible that procurement can drive change, especially since money talks.

But just as only the squeaky wheel gets the grease, only the loudest money is heard above the din. Unless you represent a substantial portion of business to a supplier that needs, or wants, your business (to grow), and unless you truly can walk away at any time without any real consequence, chances are they are not going to change their way of doing business just because you said to.

And since the reality is that, in most (custom) manufactured product categories, you can't bring up a new product line overnight, you don't have that many qualified suppliers desperate for your business, and you require raw materials (such as rare earth metals or steel or low-yield crops thanks to a recent natural disaster) in limited supply where the raw material providers have all the market power, a single organization, even a multi-billion dollar one, is still often in the position where it can't drive the change it wants (because the dollar value by supplier is still relatively low).

Moreover, when you consider the number of child laborers in the world, the number of people that depend on substandard wages and jobs in substandard working conditions just to eat, and the fact that these people are clustered in regions that provide the majority of certain food commodities or mined raw materials, it's unfathomable that you can eliminate all traces of labour that violate your ethics overnight and still stay in business. At the end of the day, there's always a competitor less ethical than you, and always another customer to take your place.

Moreover, you have the CFO making your life miserable every step of the way with his or her “savings first” mandate. If neither the organization nor the supplier are in direct violation of any laws, then unless you can find a similarly priced supplier, making an argument to move away will be difficult. If the next source of supply is 10% more and all the supplier is doing is using sub-tier suppliers known to pay poor wages to adult workers in poor (but not hazardous) working conditions in a country where they are not violating any laws, your argument that you should change sources of supply because it's the right thing to do is not going to fly. The average CFO is not going to sacrifice a million just to be good, especially if there are competitors with ethically similar, or worse, supply chains.

Does this mean nothing can be done? Of course not. If you can get board approval to eliminate any known sources of child or slave labor, hazardous working conditions or and any other conditions that can violate a known law in a country you are, or plan to be, doing business with, then you can make any necessary changes regardless of cost increase.

Furthermore, if you can get commitment from the board to ensure that a certain amount of spend must go to suppliers with sustainability initiatives, diversity initiatives or innovation initiates, then you will be able to justify some cost increases in some categories to take steps in the right directions.

And if you can form buying consortiums on a network where all parties pledge not to source from suppliers known to use sub-tier suppliers in their supply chains that use child or slave labor or use particularly damaging environmental processes, things will change. Either the supplier will work with the sub-tier supplier to improve their operations or, knowing that there is a lot of business to be had, a new sub-tier supplier that is more ethically sound will suddenly materialize, especially if the buying consortium agrees to pay a little more to ensure all workers are fairly paid and fairly treated. Money talks, and if enough money says "do good," someone will do good, even if he is only doing it to get rich and filthy.

In a follow-on article tomorrow, we’ll look at SAP Ariba’s role in all this. In the meantime, you can download a new briefing paper here from our colleague at Spend Matters in Europe, Peter Smith, titled “Procurement with a Purpose — Making a Positive Impact on Organisations, Human Rights and Communities.”

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