Spend Analytics as key enabler to achieve sustainable procurement value through Closed-Loop Spend Management (CLSM)

In this four-part series we have looked at the question of sustainability and what it really means to an organization in terms of process and outcomes; we’ve specifically focused on what that means for Procurement, and consequently the business. We have explored where sustainability fits into the Procurement agenda, and how Procurement can embed sustainability into its processes, which has led to an exploration of how spend analytics can be applied to help an organization fulfil its sustainability goals.

• In part 1 we talked to Heta Ruikka, VP of Product at Sievo, experts in spend analytics, about how combining analytics with process, by use of intelligent technology, can give organizations not only the insight to ‘see’ supply chain challenges but the agility to overcome them. How the use of spend analytics can create sustainable procurement strategies.
• In part 2 we went deeper and looked at how the two terms ‘carbon-neutral’ and ‘net-zero’ mean different things as organizations look to reduce CO2 emissions. Speaking with Heta Pirttijärvi, Product Manager also at Sievo, an expert in spend and particularly CO2 analytics, we discover how intelligent use of spend data can translate into actionable information about emissions policy, and emissions reduction.
• In part 3, we took a step further and learnt how all of this applies to Procurement in real terms. Talking to Torsten Naue and Shruti Goel, Sustainable Value Chain experts from professional consultancy, Accenture, we discovered how Procurement is well placed to leverage this spend data to help it not only support the organization’s sustainability and inclusion agenda, but actively drive it.

To conclude the series, we look at a novel approach to spend management that can “close the loop” between procurement and supply chain management and other key business functions to help organizations be more proactive in their quest for a more sustainable and responsible business.

To understand the principle of closed-loop spend management (CLSM) and how sustainability factors into the approach, we talked to Vivek Luthra, Shruti Goel and Torsten Naue, Sustainable Value Chain experts from professional consultancy, Accenture.

We began by asking for a better understanding of what CLSM means and how it can help drive sustainability.

What is ‘closed-loop spend management’ and how does it relate to sustainability?

“Closed Loop Spend Management is an approach that is geared toward injecting agility and resilience into business operations by optimizing overhead costs and transforming the supply chain and procurement processes.” (The subject of how resilience ties to sustainability is explored in Part 1: Creating sustainable procurement strategies for a resilient business by expanding on spend data.) “It aims to generate 4x more value than an average industry player through better cost management, digital accelerators and responsible sourcing capabilities.

“CLSM enables enterprises to unlock value and fuel transformation and growth in the business operations through:

• Spend transformation – extracting maximum value through differentiated and new value levers including digital.
• New ways of working becoming agile and resilient enterprises through automation, digital accelerators, living architecture, variable cost structures and talent of the future.
• Responsible sourcing — enabling trust and transparency in the value chain, reducing greenhouse gas emissions and eliminating wasted capacities by leveraging circular sourcing opportunities.

“The approach is anchored to 6 key steps: 1) Visibility 2) Value Targeting 3) Category Ownership 4) Lock Value in Budgets 5) Execute Initatives and 6) Control & Monitoring. Across each of these steps sustainability has been entrenched in the following manner to ensure that CLSM has Sustainabilty embedded by design and not as a bolt-on approach:

1. Create visibility of environmental and social impact of the spend baseline, consider e.g., carbon emissions, water, biodiversity impact, job impact, amongst others
2. Articulate value levers that not only address cost reduction and demand management, but also outline the environmental and societal impact (and potential trade-off). Identify innovative, sustainable value-levers that also can drive for cost-efficiency.
3. Define category ownership that turns Sustainability-enhanced category plans into reality in the day-to-day business.
4. Lock in defined budgets that reflect potential environmental impacts and levers.
5. Execute sourcing initiatives to optimize cost and reduce environmental impact.
6. Control and monitor cost savings and sustainability impact for each initiative.

A CLSM approach can boost a company’s operational resilience, cost elasticity and value maximization, while addressing and optimizing the sustainability impact of the spend. The first step in taking this journey forward is to conduct a spend analytics with a sustainability lens.”

So, how does spend analytics as part of the CLSM cycle work and contribute to the sustainability agenda?

“Spend analytics works through leveraging the innate relationship between every dollar spent and its associated environmental and societal impact, i.e., for every good or service you procure, there is a corresponding impact embodied in that purchase, such as the carbon or water involved in its creation. The process in turn relies on two fundamental inputs, spend data, and ESG impact factors. In short, ESG impact factors show the average impact (e.g., carbon emissions) per monetary value of a good or service. These are estimated via environmentally extended input-output tables (EEIOs), which use economic data on the flow of goods and services, across industries and economies, overlayered with environmental data, to provide the average environmental inputs into said good or service (e.g., 0.5 kg of CO2e emissions are embodied in every dollar spent on aluminum).

“Having mapped spend categories to equivalent (or close to) ESG impact factors, multiplying the two values together can provide an estimated footprint (e.g., upstream carbon footprint) of said purchased good or service. The insights this generates should be treated in a similar way to that provided through basic spend management, i.e., 1) how much do I spend and with whom? 2) how can I drive value from what I spend? and 3) how can I monitor and enable this at scale overtime?

“With sustainable spend analytics we now have an answer to all three, through 1) visibility of our impact across categories, suppliers, markets or however else the data is cut, 2) assigning corresponding accountability to those category managers and suppliers identified as the core drivers of impact, and 3) proactive supplier engagement, category-level targets and integration into enterprise resource planning software. The category managers and sustainability leads both can benefit from this analysis to understand how the category they are responsible for is contributing to the emissions footprint, which supplier should they focus on, and what percentage of Scope 3 emissions is attributed to purchased goods and services.

“The key mutually beneficial aspect of sustainable spend analytics is that it demonstrates how efficient procurement practices can provide both direct environmental and financial value to businesses, whilst simultaneously reducing the risk exposure to those suppliers who fail to do likewise.”

What are the key challenges or limitations of this approach and how can they be solved?

“The sustainability spend analytics approach (also referred as spend-based approach as per GHG protocol) is based on environmentally extended input output (EEIO) factors, which are used to estimate cradle-to-gate ESG impact (i.e., upstream emissions, water use, etc.) for a given industry or product category.

“There are several constraints that may impact the accuracy of the estimations performed using a spend-based approach. EEIO databases usually comprise ESG factors at broader sector levels (e.g., production of aluminum in China), which makes finding an accurate impact factor for a corresponding spend category (e.g., aluminum racks for stores) the core challenge in the process. A variety of EEIO providers exist to address this challenge, who differ across broadly three aspects: procurement cost, breadth of data (i.e., number of activities covered) and depth of granularity (i.e., detail of activity).

“Frequent price fluctuations of the purchased products or services can also impact the estimation even though the ESG impact remains the same. Similarly, exchange rate fluctuations may also complicate the spend-based method.

“The spend based methodology or the EEIO model assumes a linear correlation between spend and environmental flows. It is not a highly accurate model because of these assumptions. However, it is simple to apply, quicker and cost-effective when compared to other approaches (e.g., process-based LCA), which are time- and cost-intensive.

“It’s also difficult to measure the impact of decarbonization actions taken up by companies and their suppliers using a spend-based approach. An alternative method for such specific measurements is the supplier-specific method. It is recommended by GHG protocol for calculating upstream GHG emissions for Scope 3 category 1 (Purchased Goods & Services) and is based on collecting product-level cradle-to-gate carbon data directly from suppliers. The supplier-specific method is more relevant for a company if its suppliers and partners are ahead on the data maturity curve. Many organizations are asking their suppliers to report emissions through the CDP supply chain program. That allows them to get supplier-specific data which they can incorporate to calculate more accurate emissions for their top suppliers.

“Ultimately the choice of the calculation approach is a complex decision, mainly based on considerations such as data availability, data quality, suppliers’ data maturity, time and resources at hand. The spend-based approach can be used as the first steppingstone to calculate ESG impact and identify ESG hotspots in the organization.”

What advice would you offer to category managers pursuing sustainable practices?

“For the most part, sustainable spend analytics is focused on calculating Scope 3 emissions, while other ESG impacts are not prioritized by category managers. More mature organizations are also using ESG factor databases to understand the impact of spend on water consumed, forest area impacted, and so on, to have a more holistic impact of the spend in control and hence look at initiatives that have broader ESG impact. Organizations that are starting on their responsible sourcing journey are using sustainable spend analytics as a steppingstone with the ultimate objective to have transaction-based spend and emissions linkage through tools that enable a system of record along with ESG impact analysis of the spend. The tools that can provide an ESG risk view of the spend are key for category managers to decide upon their future actions based on data.”

Spend Matters thanks the Accenture team for their valuable insights:

Authors: Vivek Luthra, Shruti Goel, Torsten Naue

Key Contributors: Charles Holmes, Manvi Arora

This Spend Matters Brand Studio interview series has been written with the spend analytics experts at Sievo and Accenture.