Supply Chain Management (SCM) 101: Sourcing and Procurement - Sustainable Procurement, Ethical Sourcing, Supplier Diversity, Environmental Criteria

What This Is

Sustainable Procurement is the practice of procuring goods and services while considering the social, environmental, and economic impacts of the supply chain. It involves evaluating suppliers based on their sustainability performance, ensuring that they adhere to ethical standards, and promoting diversity and inclusion. For example, Amazon has implemented a sustainable procurement program that aims to reduce its carbon footprint by 50% by 2030, and has set targets to power 100% of its facilities with renewable energy.

Key Frameworks & Formulas

• SCOR (Supply Chain Operations Reference) Model: A framework for evaluating and improving supply chain performance, which includes five processes: Plan, Source, Make, Deliver, and Return.
• Fisher's Model: A framework for classifying products based on their demand variability and lead time, which helps determine the optimal inventory strategy.
• Triple Bottom Line (TBL): A framework for evaluating the social, environmental, and economic impacts of business decisions.
• Life Cycle Assessment (LCA): A method for evaluating the environmental impacts of a product throughout its entire life cycle.
• Supplier Development Index (SDI): A framework for evaluating supplier performance based on their sustainability, quality, and delivery performance.
• Environmental Impact Quotient (EIQ): A formula for evaluating the environmental impact of a product based on its material usage, energy consumption, and waste generation.
• Social Responsibility Index (SRI): A framework for evaluating a company's social responsibility performance based on its labor practices, human rights, and community engagement.
• Supplier Diversity Index (SDI): A framework for evaluating supplier diversity performance based on the number of diverse suppliers, their spend, and their representation in the supply base.
• Cost-Benefit Analysis (CBA): A method for evaluating the costs and benefits of a business decision, including the costs of sustainability initiatives.
• Return on Investment (ROI): A formula for evaluating the return on investment of a sustainability initiative.

Step-by-Step Application

1. Conduct a supplier assessment: Evaluate your suppliers based on their sustainability performance, using frameworks such as the SCOR Model, Fisher's Model, or the Triple Bottom Line.
2. Set sustainability targets: Establish specific, measurable, achievable, relevant, and time-bound (SMART) targets for reducing your environmental impact, improving labor practices, and promoting diversity and inclusion.
3. Develop a supplier development program: Create a program to support the development of your suppliers, including training, capacity building, and technology transfer.
4. Implement a sustainable procurement policy: Develop a policy that outlines your company's commitment to sustainable procurement, including the criteria for evaluating suppliers and the process for selecting suppliers.
5. Monitor and report progress: Track your progress towards your sustainability targets and report on your performance to stakeholders.

Common Mistakes

• Mistake: Focusing solely on cost savings when evaluating suppliers.
• Correction: Consider the total cost of ownership, including the costs of sustainability initiatives, when evaluating suppliers.
• Mistake: Ignoring the social and environmental impacts of suppliers.
• Correction: Evaluate suppliers based on their sustainability performance, using frameworks such as the SCOR Model or the Triple Bottom Line.
• Mistake: Not setting specific, measurable targets for sustainability.
• Correction: Establish SMART targets for reducing your environmental impact, improving labor practices, and promoting diversity and inclusion.

Exam / Certification Tips

• Be prepared to apply frameworks: Expect to apply frameworks such as the SCOR Model, Fisher's Model, or the Triple Bottom Line to evaluate suppliers or make business decisions.
• Understand the importance of sustainability: Recognize the importance of sustainability in supply chain management and be prepared to explain its benefits.
• Know the difference between push and pull strategies: Understand the difference between push and pull strategies, including the use of postponement and the impact on inventory levels.

Quick Practice Problem

A company is considering a new supplier for its raw materials. The supplier has a lead time of 5 days and a service level of 95%. What is the reorder point?

Answer: 0.95 × (5 days × 365 days/year) = 173.25 days

Explanation: The reorder point is calculated by multiplying the service level by the lead time in days, multiplied by the number of days in a year.

Last-Minute Cram Sheet

• SCOR Model: A framework for evaluating and improving supply chain performance.
• Fisher's Model: A framework for classifying products based on their demand variability and lead time.
• Triple Bottom Line (TBL): A framework for evaluating the social, environmental, and economic impacts of business decisions.
• Life Cycle Assessment (LCA): A method for evaluating the environmental impacts of a product throughout its entire life cycle.
• Supplier Development Index (SDI): A framework for evaluating supplier performance based on their sustainability, quality, and delivery performance.
• Environmental Impact Quotient (EIQ): A formula for evaluating the environmental impact of a product based on its material usage, energy consumption, and waste generation.
• Social Responsibility Index (SRI): A framework for evaluating a company's social responsibility performance based on its labor practices, human rights, and community engagement.
• Supplier Diversity Index (SDI): A framework for evaluating supplier diversity performance based on the number of diverse suppliers, their spend, and their representation in the supply base.
• Cost-Benefit Analysis (CBA): A method for evaluating the costs and benefits of a business decision, including the costs of sustainability initiatives.
• Return on Investment (ROI): A formula for evaluating the return on investment of a sustainability initiative.
• Postponement delays final configuration, not production – it's a push-pull boundary strategy.
• The SCOR Model includes five processes: Plan, Source, Make, Deliver, and Return.
• Fisher's Model classifies products based on their demand variability and lead time.