Sustainable Sourcing: An Optimization Guide for 2024

Sustainable sourcing refers to the procurement of goods and services that are produced in an environmentally and socially responsible manner. This article explores the key principles and benefits of sustainable sourcing and highlights strategies that businesses can adopt to implement it effectively.

In order to thrive, businesses today must adapt to meet new regulations, emerging challenges and satisfy changing consumer preferences. Due to the devastating impacts of Greenhouse Gas (GHG) emissions – a by-product of how we’ve been making, shipping, and/or providing energy-intensive products and services – sustainability is higher on the agenda of procurement leaders than ever before.

Corporate Social Responsibility (CSR), an area that includes environmental and sustainability initiatives, saw the largest increase in CPO-level priorities in the past two years, up 22% according to Deloitte’s 2021 Chief Procurement Officer Survey. The report also found that 63% of high-performing procurement organizations formally track themselves against sustainability measures.

Keelvar’s own Voices of Sourcing Survey found that the supplier attribute that was going to increase the most in terms of importance over the next 5 years was likely to be related to sustainability factors:

Sustainable sourcing helps reduce harmful effects on the environment and local communities. At the same time, it ensures the long-term success of businesses by promoting responsible and efficient practices.

Savvy companies are increasingly looking to define a sourcing strategy to lower emissions as a means of meeting climate pledges and widening their margins as customer preference for more sustainably produced products rises.

For the supply chain and procurement community, there is little time to lose in the battle to reduce GHG emissions, which are almost certainly to blame for rising global temperatures and degradation in air quality levels.

Sustainable sourcing is built on several core principles that guide businesses in minimizing environmental and social impacts while maintaining ethical practices throughout their supply chain. Below are the key principles that define sustainable sourcing:

1. Environmental Impact

‍Sustainable sourcing aims to reduce environmental degradation by promoting eco-friendly practices. This includes using renewable and recyclable materials, minimizing greenhouse gas emissions, conserving energy and water, and reducing waste at every stage of the supply chain. These practices not only protect natural ecosystems but also contribute to the long-term sustainability of the business.

2. Social Responsibility

‍Beyond environmental considerations, sustainable sourcing also prioritizes the well-being of people involved in the supply chain. Companies should ensure fair labor practices, safe working conditions, and respect for human rights across all suppliers and partners. This means providing fair wages, ensuring reasonable working hours, and upholding workers' rights to foster a positive social impact.

3. Ethical and Transparent Supply Chains

‍Ethics and transparency are at the heart of sustainable sourcing. Businesses must ensure that their supply chains adhere to high ethical standards, such as combating corruption, promoting equality, and respecting the rights of local and indigenous communities. Transparency allows companies to trace the origin of their products and ensure that they are sourced and produced responsibly.

4. Collaboration and Partnerships

‍Collaboration is key to achieving sustainable sourcing goals. Companies need to actively engage with suppliers, industry peers, and stakeholders to foster shared sustainability practices. This could involve working closely with suppliers to improve their environmental and social performance, collaborating with competitors to set industry standards, or partnering with NGOs and other organizations to drive collective progress in sustainability.

1. Sourcing Sustainably Puts You Ahead of the Competition

You might already have a good handle on the sustainability of your own operations, like reducing emissions within your company. But if you’re not tracking the emissions produced by your suppliers or those created when distributing your products, you could be missing out on big opportunities to improve your sustainability efforts.

While some businesses are focusing on reducing emissions within their own operations, very few are looking at the emissions created across their entire supply chain (known as Scope 3). However, smart companies are starting to invest in tools that help them source more sustainably, recognizing that sustainability is no longer optional – it’s key to staying competitive in today’s market.

2. Appeal to Customers Who Prioritize Sustainability

There’s growing consumer demand for businesses to be more sustainable, especially among younger generations who are actively choosing brands that align with their values. Companies that embrace sustainability are not only cutting costs but also attracting more customers who prioritize eco-friendly products and services.

3. Forge Stronger Partnerships With Your Suppliers

Tracking your supply chain’s emissions is also a chance to strengthen relationships with your suppliers. By working together to reduce emissions, you can turn traditional buyer-supplier relationships into true partnerships. This means collaborating to find better ways to operate, making sustainability a shared goal for everyone involved.

While sustainable sourcing offers many benefits, it also presents some challenges that businesses must address to ensure successful implementation. Here are some of the key challenges:

1. Cost and Investment

‍Transitioning to sustainable sourcing often requires upfront investment. Whether it's adopting new technologies, sourcing eco-friendly materials, or conducting supplier audits, these efforts can lead to higher costs in the short term. For businesses with tight budgets, this can be a significant challenge. However, long-term cost savings and improved efficiencies often make these investments worthwhile.

2. Complex Supply Chains

‍Many businesses have extensive and complex supply chains, making it difficult to trace every step of the production process. Ensuring that all suppliers meet sustainability standards can be time-consuming and resource-intensive, particularly when dealing with suppliers in different regions or industries. Building transparency and traceability in such a complex system takes significant effort and collaboration.

3. Limited Supplier Options

‍Not all suppliers have adopted sustainable practices, and businesses may struggle to find suppliers that align with their sustainability goals. In some industries, there may be limited options for eco-friendly or ethically produced materials, forcing companies to either compromise on certain standards or invest in developing new supplier relationships.

4. Measuring Sustainability Impact

‍Tracking and measuring the impact of sustainable sourcing can be difficult. Companies need to rely on accurate data to assess their environmental and social performance, which is not always easy to obtain. Additionally, measuring long-term benefits like reduced environmental impact or improved social responsibility can be complex and require consistent monitoring.

5. Regulatory and Compliance Issues

‍Businesses operating in multiple countries may face differing regulations regarding environmental and social standards. Navigating these regulations and ensuring compliance with local laws can add to the complexity of sustainable sourcing efforts. Non-compliance can lead to legal and financial risks, making it crucial to stay updated on global standards and ensure that suppliers do the same.

Analyzing and taking proactive action on choices made in the formation of the supply chain is a critical step for any business that wishes to become more sustainable and ready for a low-carbon economy. A critical step in the journey to meet these goals is to enhance the sourcing process — but this can’t exist without a change in mindset.

Basic spreadsheets can support simple analysis of expected emissions, but sustainable sourcing can be costly.  There is potential in some cases to reduce costs by sourcing more sustainably, but often you are looking at more expensive alternatives and it is a case of balancing costs and non-cost objectives. Businesses must optimize where they invest in sustainable sourcing so they can carefully balance trade-offs between cost, speed, incumbency switching, and environmental goals.

Basic spreadsheets can support simple analysis of expected emissions, but sustainable sourcing can be costly

Capturing data is another complex issue, but the reasoning required to apply this data in negotiations so that efficiencies are discovered quickly throws up further challenges. For businesses aiming to embrace sustainability and prepare for a low-carbon economy, rethinking the sourcing process is crucial. Becoming more sustainable starts with changing how decisions are made in the supply chain. While simple spreadsheets can help analyze expected emissions, truly sustainable sourcing often requires more sophisticated tools and a shift in mindset.

One of the challenges is that sustainable sourcing can sometimes be more costly. Although there are opportunities to save by sourcing sustainably, companies often find themselves choosing between more expensive options and balancing costs with non-financial objectives like environmental impact. It’s essential for businesses to optimize their investments in sustainable sourcing by weighing the trade-offs between cost, speed, switching suppliers, and achieving sustainability goals.

Data collection is another hurdle. While it’s important to gather data on emissions and sourcing practices, the real challenge is using that data effectively in negotiations. Applying these insights to discover efficiencies can be complex, but it’s a critical step toward a more sustainable sourcing process.

While it’s important to gather data on emissions and sourcing practices, the real challenge is using that data effectively in negotiations.

Sourcing optimization technology is key to overcoming sustainability challenges, making it easier for businesses to hit their environmental targets without sacrificing efficiency. Keelvar’s Sourcing Optimizer  platform is designed to help buyers identify and leverage supplier innovations that might otherwise go unnoticed in traditional sourcing processes.

For example, Keelvar’s scenario analysis feature allows sourcing teams to quickly assess trade-offs between CO2 reduction and cost. You can prioritize suppliers with more sustainable approaches that still fit within your budget. As businesses look to scale their sustainability efforts, Keelvar’s sourcing automation ensures that best practices are applied consistently throughout the entire sourcing process, with human oversight at critical points to maintain control and flexibility.

Take the transportation category as an example. A supplier bidding on an ocean freight lane can offer different pricing options for fuel switching or slower shipping speeds, both of which reduce environmental impact. Keelvar’s platform enables carriers to bundle round-trip lanes, providing more efficient, cost-effective solutions that cut emissions while saving time and money.

Keelvar’s platform enables carriers to bundle round-trip lanes, providing more efficient, cost-effective solutions that cut emissions while saving time and money

Gathering supplier data is important, but managing the balance between cost and sustainability across hundreds of suppliers and thousands of line items is where it becomes more complex. Keelvar’s software simplifies this by offering insights on how to award business based on your sustainability goals and cost constraints. You can even give systematic feedback to guide suppliers on key factors like transit times or recycled material use, pushing them towards more sustainable practices.

Here are a few example scenarios of sustainable awarding using Sourcing Optimizer:

• Award at least 50% of business to SmartWay Certified carriers.
• Award 100% of specific lanes to suppliers offering slow steaming bids.
• Optimize for the lowest possible CO2 emissions and compare with the lowest cost options.
• Award 100% of items to sustainable-certified suppliers unless it exceeds a set cost threshold, such as $500,000.
• Optimize for the highest sustainability score while comparing with the lowest cost bids.
• Maximize round-trip lane awards to one carrier per round-trip combination.
• Favor bids using recycled materials by applying a 5% preference.
• Penalize suppliers with lower SmartWay ratings.

Keelvar’s optimization and bidding capabilities provide businesses with the flexibility and insights needed to navigate the complexities of sustainable sourcing, making it easier to balance environmental and financial goals.