As the developers of the asbestos-ridden children’s hospital in Perth, the builder of Lacrosse in Melbourne and users of Plutus Payroll all found out the hard way – flaws in the supply chain can have catastrophic reputational and bottom-line consequences.
But a newly released standard could help businesses steer clear of the financial, environmental and reputational landmines hiding in supply chains.
The International Organization for Standardization’s guidance standard for sustainable procurement, ISO 20400, helps companies make better choices through their entire supply chain by providing guidelines for assessing suppliers’ ethical and sustainability credentials.
Jacques Schramm, chair of ISO/PC 277, the committee that developed the standard, said the risks of not understanding and managing practices throughout the whole supply chain were great.
“At best, poor quality products or ruptures of stock can result. At worst, disasters like the Rana Plaza [collapse] in Bangladesh in 2013 can happen. Sustainable procurement helps to minimise risks such as these by encouraging buyers and suppliers to work closely together for a better result for all.”
Changing the fabric of our cities
Jonathan Dutton, management consultant and former founding managing director of the Chartered Institute of Purchasing and Supply Australasia, said ISO 20400 has the “potential to change the fabric of our cities” as more companies interpret and apply it.
“In the past for procurement, cheapest was the limit of our imagination.”
The standard could be a “catalyst for changing the thinking of a whole raft of organisations”.
Mr Dutton is also a non-executive director of ACCSR, and was formerly marketing director for global commercial office management company Regus.
Huge property sector relevance
He said there were a number of focus areas in ISO 20400 of importance to the construction and property sector. They include energy, emissions, use of natural resources, biodiversity, water, waste, pollution and labour practices.
The standard also aligns with other toolkits such as Green Star, ISCA, WELL and the Sustainable Development Goals.
It is directly relevant to property because the procurement of property and property services such as facilities management are often one of the biggest lines of spend for any large company. FM and property support costs are one of the top three lines of spend for banks, for example.
Australia in particular needed to take it up because we are a serviced-based economy, Mr Dutton said.
With over 70 per cent of our GDP coming from services, procurement people in those firms are spending billions collectively on indirect goods and services such as furniture, FM, stationary, IT, utilities, insurance, fuel and property costs.
The ASX top 200 firms are all spending between 40 to 70 per cent of their revenue on their suppliers of third-party goods and services.
At the moment, how they leverage that massive spend strategically is very limited – it’s mainly just about getting the price down.
Tenders are a blunt-edged administrative tool
Instead of strategy, tenders are generally used.
Mr Dutton said they were a “blunt-edged administrative tool that work best in a competitive market, but we’re not really a competitive market in Australia.”
What companies should be doing is engaging in supplier relationship management.
That is how procurement can achieve best value and a secure supply chain, he said.
How to get the right frameworks in place
Chief executive of the Supply Chain Sustainability School Robin Mellon said ISO 20400 would help companies do things better, by putting the right processes and frameworks in place.
“What I find really exciting about the standard is it has a broader definition of sustainability,” he said.
It covers social aspects such as Indigenous procurement and human rights, for example, as well as environmental factors.
It is about knowing “where our stuff comes from”, Mr Mellon said.
He said that just as having NABERS in place had changed the property industry, the standard had the potential to achieve major change in businesses.
Large organisations with staff in specific procurement roles will probably be the early adopters, and they will hopefully help the smaller companies to also comply, he said.
The need is to make it simple for businesses to understand what they have to do differently, and how to track it, and where to go for more information.
Organisations such Planet Procurement, the Australian Centre for Corporate Social Responsibility, GECA and EY, for example, can be consulted for assistance and can help companies establish processes for documenting what they are achieving in relation to the standard.
Mr Mellon said there was a major difference between procurement and the conventional notion of purchasing. Purchasing is generally about getting the cheapest; procurement involves decisions around quality and reputation.
“Procurement is about taking a longer-term view … and long-term risk management.”
Failure to manage reputational risk is a business’s greatest cost
In a presentation last year on cleaning, FM and procurement trends for CMC Property Services, Mr Dutton, explained that the greatest cost any business can face is the failure to manage risk.
“Strategic risk management is the key to a new world of value,” he said.
This means aligning the company’s procurement with its other goals to create value.
The new way of managing supply and procurement is “getting there better, faster, cheaper, greener, safer”.
“Maturity is when you stop making excuses and make changes,” Mr Dutton said.
Risks that need to be managed include, for example, carcinogens in products.
“Sustainability is not just being green anymore; it is corporate social responsibility.”
Risk to a brand’s reputation can be the greatest cost to a business.
Having a social licence from stakeholders is key, as struggling coal companies in NSW are now discovering.
“The best thought leadership [in business] is talking about CSR as essential.”
It’s not just about value for money
Value for money is not the only consideration for procurement, Mr Dutton said.
To have a licence to operate, the “true total cost of ownership” has to be factored in.
He said research in 2005 that looked at the impact of supply chain shocks on 300 Wall Street firms showed that the major cost to these companies was not product recall. On average, the companies experienced a 20 per cent drop in share price that lasted on average for two years due to brand reputational damage.
Another example was companies selling clothing produced by the Savar factory in Bangladesh, where a building collapse caused the death of more than 1000 workers.
“The press got hold of it and consumers were at the forefront,” Mr Dutton told The Fifth Estate.
Consumers in the UK made it clear they would rather pay more for a shirt than have someone die making it for them, he said.
In the property sector, a 2013 United Voice investigation into conditions for cleaners in Melbourne’s CBD showed that many cleaning workers in Melbourne’s CBD offices were foreign students on below-award wages being exploited by subcontractor firms.
In 2012, a similar supply chain shock and consumer backlash hit Sherrin footballs in Australia, due to revelations of child labour exploitation used to manufacture goods.
In 2010, Foxcom in China was found to have engaged in worker exploitation and child labour in the manufacture of iPhones.
In 2007, Mr Dutton had to rip his own daughter’s Barbie out of her hands when it was uncovered that the manufacturer Mattel had allowed lead paint to be used in their production.
The bottom line is that some shareholders are willing to give up some degree of return for a “conscionable” product and a cleaner supply chain.
And consumers are “voting with their wallets”, Mr Dutton said.
They increasingly want to know where things come from and how they get there.
It’s also about business resilience
Supply chains in Australia have a “fragility” due to the low number of suppliers available within the domestic sphere.
When companies start sourcing goods and services from overseas, however, they encounter risks they may not have ever considered, such as volcanoes, pirates or floods in Pakistan.
Lean supply chains also mean fragile supply chains.
“We are quite vulnerable in Australia, therefore procurement becomes much more strategically important,” Mr Dutton said.