12.2: Sustainable Procurement

The Circular Economy

The European Union and the national governments of many countries and businesses worldwide have promoted the concept of the so-called circular economy (CE) (Korhonen et al., 2018). According to the European Commission, 600 billion euros can be saved within the manufacturing sector alone in the EU after transitioning to this type of economy. As an example, Finland’s national economy can earn 2.5 billion euros through a circular economy, and the global economy is estimated to benefit by 1,000 billion US dollars annually (Korhonen et al., 2018). China was the first country to adopt the circular economy in 2008.

The circular economy encourages practices to minimize the negative impact on the environment and simultaneously stimulate businesses to find new opportunities (Korhonen et al., 2018). A circular economy suggests the following solutions to reduce adverse environmental effects: remanufacturing, repair, reuse, refurbishment, disposal, cascading, upgrading, and recycling. Authors of the academic article “Circular Economy: The Concept and its Limitations” (2018) have proposed the current concept of the circular economy with its inner circles.

The circular economy has two cycles — the technical cycle and the biological cycle. The inner or concentric circles of the technical cycle of the circular economy focus on maximizing the value of products through processes like reuse, repair, refurbishing, and remanufacturing. These processes retain more value compared to recycling, which is less preferred as it often reduces products to basic materials. By prioritizing these inner loops, we extend product lifespans and reduce waste, fostering a more sustainable economy.  In the biological cycle of the circular economy system, the nutrients from biodegradable materials are returned to Earth to regenerate nature.

The circular economy is a win-win-win option for sustainable development because it contributes to economic, social, and environmental dimensions of sustainable development (Korhonen et al., 2018).

Role of Governments in Sustainable Supply Chains

As primary regulators and policymakers, governments have a profound influence on the direction and practices of supply chains. Their interventions, ranging from stringent regulations to incentivizing sustainable practices, can either facilitate or hinder the adoption of sustainable measures by businesses. By leveraging their legislative and economic powers, governments can set the tone for responsible business conduct, ensuring that supply chains not only contribute to economic growth but also uphold environmental and social standards. A government’s role toward ensuring sustainable supply chains could include the following:

Regulation and Policies

Governments play a pivotal role in shaping the landscape of sustainable supply chains through the formulation and enforcement of regulations and policies. This is the primary role of governments in driving sustainable supply chains. These regulations can range from environmental standards to labour practices, ensuring that businesses operate within a framework that prioritizes sustainability.

The Uyghur Forced Labor Prevention Act (UFLPA) is a testament to the power of governmental regulations in influencing supply chain practices. This act, aimed at preventing forced labour in the Xinjiang region of China, has posed significant compliance challenges for businesses. Companies have had to revise their procurement plans and ensure transparency in their supply chains to comply with this act, thereby emphasizing the role of government policies in driving sustainable practices.

Incentives and Tariffs

Governments can also influence sustainable supply chains through incentives and tariffs. Incentives serve three primary roles:

1. Increase the supply of a product.
2. Drive the adoption of new technologies.
3. Support the industrialization of specific zones. (On the other hand, tariffs can redirect procurement away from certain countries and support local manufacturing. However, the overall impact of incentives and tariffs on sustainability is debatable.)

Examples of the Use of Tariffs

• The Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act in the US has spurred massive investments in the semiconductor industry, showcasing how incentives can boost the supply of critical products.
• The European Union’s approval of a €2.8 billion renewable energy scheme in Germany exemplifies how incentives can drive the adoption of sustainable technologies.
• China’s “Go West” policy is an initiative aimed at developing its western regions, demonstrating the role of incentives in zonal development.
• The tariffs imposed by the USA on China have forced companies to alter their supply chains to avoid tariff-laden countries, emphasizing the role of tariffs in shaping global supply chains

Public Procurement

Public procurement, the process by which governments and state-owned enterprises purchase goods and services, represents a significant portion of a country’s GDP. In the United States, for instance, government procurement amounts to nearly $2 trillion annually. This massive scale gives governments substantial leverage in influencing supply chain practices. By setting criteria for their suppliers, governments can enforce sustainable practices, dictate who they will procure from, and even shape the broader market dynamics.

• The Buy American Act mandates the U.S. government to prefer U.S.-made products in its purchases, thereby influencing domestic production and supply chains.
• The Federal Supplier Climate Risks and Resilience Rule requires suppliers to the U.S. government to report greenhouse gas emissions and climate-related risks, ensuring that the government’s vast procurement power supports environmentally responsible businesses.

Transparency Requirements

Transparency in supply chains is crucial for sustainability. Governments can mandate businesses to disclose information about their suppliers, their locations, and their practices. This not only ensures ethical practices but also builds trust with consumers.

The UK’s Modern Slavery Act is a prime example of the transparency requirements that are in action. In 2016, 51 new prosecutions were initiated under this act, which mandates companies with a U.K. footprint and earnings over £36 million to annually publish a statement detailing their efforts to address modern slavery within their supply chain. This act has not only increased transparency but has also held companies accountable for their supply chain practices.

Collaboration

Governments often collaborate with businesses, NGOs, and other stakeholders to promote sustainable supply chains. Through partnerships, governments can pool resources, share knowledge, and drive collective action toward sustainability.

A classic example of collaboration is the various global climate accords, where nations come together to set collective targets for reducing carbon emissions. These accords often require businesses to adopt greener supply chain practices, showcasing the power of collaborative efforts in driving sustainability.

Role of Non-Governmental Organizations (NGOs) in Sustainable Development

In the realm of sustainability, NGOs have demonstrated their ability to significantly influence business practices. A notable example is Greenpeace’s campaign against Nestlé in 2010. Greenpeace released a video highlighting the link between Nestlé’s use of palm oil in its products and deforestation in Indonesia, which threatened the habitat of orangutans. The video went viral, leading to a massive public outcry. As a result, Nestlé committed to sourcing only sustainably produced palm oil by 2015, showcasing the power of NGO-led campaigns in driving corporate change.

NGOs, through their advocacy, research, and public campaigns, can spotlight unsustainable business practices and push companies toward more responsible actions. Their role is not just limited to “naming and shaming;” many NGOs collaborate with businesses to develop sustainable solutions, provide expertise, and co-create sustainability standards.

There are hundreds of NGOs globally working towards implementing sustainable supply chains. Broadly, these can be categorized into three types: issue-driven, buyer-driven, and seller-driven organizations.

Issue-Centric NGOs: Greenpeace

Issue-centric NGOs, such as Greenpeace, are laser-focused on specific environmental or social issues. Their primary mission is to raise awareness about these issues and compel businesses to enact policy changes that address them. By spotlighting unsustainable practices and their consequences, they exert pressure on corporations to adopt more sustainable strategies. For instance, Greenpeace’s campaigns against Nestlé’s palm oil sourcing and Shell’s Arctic drilling plans have not only brought about immediate corporate change but have also raised broader awareness about environmental issues. Through their targeted campaigns, issue-centric NGOs ensure that pressing environmental and social concerns are addressed at the corporate level.

Demand-Centric NGOs: The Sustainability Consortium (TSC)

Demand-centric NGOs, like The Sustainability Consortium (TSC), are primarily formed by large manufacturers and retailers who are closer to consumer demand. Their main objective is to integrate sustainability into the core of business operations, reflecting the demands and expectations of the modern consumer. TSC, for instance, provides a platform for businesses like Amazon, BASF, and Walmart to collaborate and understand the environmental, social, and economic impacts of their products. By creating standardized metrics and methodologies, TSC enables these businesses to benchmark their performance, identify areas for improvement, and implement more sustainable practices. Their work ensures that sustainability becomes an integral part of business strategy and operations, directly responding to consumer demand for more sustainable products.

Supplier-Centric NGOs

Supplier-centric NGOs such as Fair Trade organizations, represent the interests of suppliers, especially those in specific parts of the world producing agricultural and other products. Their focus is on ensuring that these suppliers adopt sustainable practices and receive fair compensation for their products. They set rigorous social, economic, and environmental standards and ensure compliance through regular audits and certifications. The Fair Trade label informs consumers about the ethical and sustainable origins of products, ensuring better conditions for producers. Their work strikes a balance between environmental sustainability, social justice, and economic viability, ensuring that suppliers in developing regions are not left behind in the global push for sustainability.

As business students, irrespective of your chosen major, understanding the roles and impacts of these NGOs is paramount. In today’s interconnected global economy, businesses are not isolated entities but are part of a complex web of stakeholders, including NGOs. These organizations play a pivotal role in shaping public opinion, influencing consumer behaviour, and even driving regulatory changes. Their activities can directly impact a company’s reputation, operational strategies, and bottom line. Moreover, as future business leaders, managers, or entrepreneurs, you may find yourselves collaborating with, responding to, or even challenging the initiatives of these NGOs. A comprehensive understanding of their objectives, methods, and influence equips you with the knowledge to navigate these interactions effectively, ensuring that your business decisions are profitable, socially responsible, and environmentally sustainable.

Governments and Supply Chain Sustainability

Governments play a crucial role in enforcing sustainability within supply chains. They can compel businesses to align their practices with environmental protection, social responsibility, and economic equity through legislation and regulation. Tables 12.1 and 12.2 summarize some of the most important laws in the USA and EU that drive sustainability and describe how these laws impact supply chain management.

Europe

USA

Examples of Implementations

European Green Deal: Companies like Unilever have committed to reducing their carbon footprint, affecting their entire supply chain from sourcing to distribution.

Clean Air Act (USA): Automobile manufacturers such as General Motors have adapted their production processes to comply with emission standards.

Water Framework Directive (EU): Beverage companies must ensure compliance with this directive in water management.

Toxic Substances Control Act (USA): Chemical companies like Dow must comply with regulations on chemical usage.

While governments play a pivotal role in compelling businesses to modify their policies, non-governmental organizations (NGOs) are equally influential. Through various means, these NGOs can shape policies and drive businesses towards sustainable practices, often filling gaps where governmental oversight might be limited or absent.

Attribution

“12.2 Sustainable Procurement” is remixed and adapted from the following:

“Chapter 8: Sustainable Value Chain” from Global Value Chain, copyright © 2022 by Dr. Kiranjot Kaur and Iuliia Kau, licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

“Chapter 4: Introduction to Sustainable Supply Chains” from Supply Chain Management—An Integrated Approach, copyright © by Piyush Shah, licensed under a Creative Commons Attribution-NonCommercial 4.0 International License, except where otherwise noted.

The multiple choice questions in the Checkpoint boxes were created using the output from the Arizona State University Question Generator tool and are shared under the Creative Commons – CC0 1.0 Universal License.