6 January 2011 | Nick Martindale

As the prominence of sustainable development continues to rise, many procurement departments are developing strategies to tackle the issue, as Nick Martindale reports

Despite the economic pressures of the past few years, procurement departments in South African organisations are increasingly having to develop strategies in the area of sustainability. This includes focusing on both their own carbon footprint and those of their suppliers’ corporate social responsibility (CSR) and local sourcing initiatives.

“Sustainable development is now an imperative for organisations, and that includes their procurement and supply chain policies and practices,” says Ansie Ramalho, chief executive of the Institute of Directors in Southern Africa. “It’s not about naive philanthropy or compliance with form requirements; it is about having an ethical approach.”

South African-based brewer SABMiller is one company that is taking this issue more seriously, paying particular attention to working with suppliers to reduce its carbon footprint.

“The prime focus is around recycling,” says Ian Russell, head of commercial. “The vast majority of our bottles are used multiple times – not once or twice, but 30, 40 or 50 times – so there’s a huge focus on keeping things that have been made in circulation. It’s about leveraging our ability to get the bottles returned and ensuring our breweries work as efficiently as possible to generate 
less waste.”

Damien Watson, manager of climate change and sustainability services at KPMG, says various regulations have created a climate where companies and their procurement departments now feel they need to act. This includes the 2009 King III governance guidelines in South Africa, which encourage organisations to incorporate sustainability reporting into annual reports, the Carbon Disclosure Project and the Global Reporting Initiative.

Companies listed on the Johannesburg Stock Exchange (JSE) are also under pressure to report on their environmental and CSR activities, while one of the objectives of South Africa’s new Companies

Act is to “promote the company as a vehicle for economic and social advancement”.

The mining sector is leading the way in South Africa, says Watson – partly as a result of health and safety requirements surrounding issues such as air and water quality that are a condition of being able to operate.

“As a mining company we’re often the only gig in town,” says Sven Lunsche, corporate affairs manager at South African gold miner Gold Fields, which was recently ranked joint first in the JSE Top 100 Carbon Disclosure Leadership Index. “You’re often the main employer and the contractors rely on you. If you don’t employ best practice in the community, it makes life impossible.”

He estimates around 50 per cent of the company’s exploration budget is spent on building good relations with the local community, and this starts before a single hole is drilled.

Health and safety

On the procurement side, suppliers have to sign up to meet strict health and safety and environmental management standards, and are regularly audited by the procurement team, says Lunsche.

“Suppliers have to meet criteria in terms of quality and being financially sound, but increasingly this includes sustainability, human rights and environmental principles,” he says. “We can’t control sub-contractors, but we make sure all our key suppliers are sustainable businesses.” The company also works with smaller vendors to ensure they are aware of their responsibilities, he adds.

Yet many other sectors are only beginning to think about this issue. Retail bank Absa, for example, has made sustainability a core focus for 2011, and sent out a questionnaire to its top 50 suppliers to identify what they are doing in this area.

To date there is no element of compulsion to conform to certain standards. “If we have two suppliers and it’s down to cost or sustainability, then right now we would take the cost,” admits Ian Horn, acting head of products and services at Absa. “The weighting given to this now isn’t as serious as we would like, or one that we have the luxury of doing from a cost perspective.”

This is a view that resonates with James Denton, principal consultant at Rethink Management Consultancy, in Gauteng. “Many South African businesses are focused simply on staying in business,” he says. “Their focus is short term and related to cost management and retention of vital staff.”

This problem is magnified in poorer countries in southern Africa, he adds, where the concept of sustainability is not as well-established.

Where procurement is actively involved in sustainability, the focus is more on Black Economic Empowerment (BEE), skills development and human rights than environmental issues, says Denton. He adds that it is only when the rising energy costs and higher carbon taxes – along with compulsory legislation – kick in that the majority of companies will address this issue.

Any procurement organisation that intends to tackle the issue of sustainability will need to look beyond its own company boundaries, says Nelson Reddy, a consultant at PricewaterhouseCoopers based in South Africa.

“No matter how well an organisation manages its direct impacts, if its suppliers are not managing the future challenges around regulation, reporting, scarcity of resource or the effects that climate change could have on their business, their ability to operate in the marketplace could be dramatically affected,” 
he says. “When managed well, there are many achievable and sustainable benefits to be gained, including short and long-term cost removal, improved supplier loyalty, long-term supply risk management, and competitive advantage.”

Janine Hansby is former CPO at Mobile Telephone Networks South Africa and currently an independent procurement consultant. She warns that many organisations take a predominantly inward-looking approach, and urges procurement teams to introduce environmental and other requirements into tender processes. “This allows for a proactive approach,” she says. “We tend to wait for legislation to drive change.”

The policy of broad-based BEE, which often encourages the use of smaller suppliers, could create problems, she says. “With these types of suppliers, concerted effort should be made to provide developmental assistance to ensure that aspects around environmental management are introduced into the business.”

Balanced skills

The emphasis on sustainability means procurement professionals will have to master new skills, working with suppliers in a collaborative fashion and ensuring they strike the right balance between sustainability and financial performance, says Reddy.

“Procurement professionals should firstly develop a strategy on: what supply commodity to target; who the participating suppliers are; what the measure of success is; when the change is required; and who is accountable or responsible,” he says. “Then sustainable supply forums should be established to encourage and monitor collaborative efforts.”

Ultimately, though, organisations are only likely to pay the required level of attention to the issue of sustainability if it makes sense from an economic, reputational and legislative point of view.

“Some of the bigger industries in South Africa have pressure from overseas and do really well in the sustainability stakes,” says Watson. “But a lot have been able to just push it under the carpet and not deal with it. These companies are not fully aware yet of the impact that it will have in the very near future.”

* Nick Martindale is a freelance business journalist