Circular procurement: Driving value through values

Circular economy

Editor’s note: This article originally appeared on Supply and Demand Chain Executive.

Nearly every major corporation in the developed world has corporate social responsibility (CSR) goals—some ambitious and others window-dressing. With programs to blunt negative environmental and social impacts fairly requisite, many are reducing consumption or buying carbon credits. Few are advancing to a closed-loop, zero-waste system with detailed reverse logistics and cradle-to-cradle design. Sound too ephemeral and utopian? Enter circular procurement, an idea born of the circular economy. In the future, it may be standard business practice.

The circular economy is an industrial system that is restorative by intention and design. The idea is that rather than discarding products once their full value is extracted, consumers return them for recycling and upcycling such that there is no waste or pollution. Circular procurement is the application of this concept to the massive amount of purchasing in the business world.

Sustainability Means Profitability

2016 saw an exceptional upswell of awareness around the potential positive impacts of corporate buying. In the past, eco-friendly brands were often niche players, determined to hold their values above their bottom lines. But a recent surge in creativity from procurement is breeding a new hybrid model in which profit and values go hand in hand. And it’s imperative that this thinking catches on given the increasing demands placed on the the Earth’s resources.

Savvy business leaders are recognizing the tectonic social shifts originating with the economic maturing of the developing world. Consider that, by 2050, the world economy is expected to quadruple and the global population is projected to approach 10 billion.[1] As regions grow more economically secure, their national consumption is going to rise even as birth rates fall. That means that the velocity and volume of goods produced and shipped across global supply chains is going to grow exponentially.

Going Beyond Costs

The decisions businesses collectively make on how they buy and whom they buy from can seal the fate of future resources. Those that invest in smarter and sustainable inputs now, and plan for the long term are likely to far excel beyond their more short-sighted peers who may be unconcerned about a solid supply chain base.

Focusing only on costs and quick wins tends to breed tenuous supplier relationships, and can even contribute to the very problems CSR goals are designed to alleviate. If a buyer sends the message that cost is king, a supplier isn’t motivated to make any additional investment in safety or environmental measures. This can be problematic in countries that have lax regulatory oversight.

It is going to be a difficult transition to rid procurement departments of the heavily ingrained cost-based mindset. Instead, practitioners and executives have to embrace a holistic view of buying that takes into account the entire lifecycle of a good. The more Fortune 1000s that demand and provide this circularity in the supply chain, the more likely others follow suit. Such a shift would have a huge impact on procurement practices and policies, supplier relationships and overall supply chain transparency.

A Linear Journey to a Circular Solution

But how to get there? The first step is to start thinking about suppliers as partners. This collaboration allows for developing new business models based on services or usage as opposed to outright ownership. One of the key pieces to achieving all of this is bringing aboard technology to enable collaboration, knowledge sharing, transparency and accountability. Digitizing the supply chain is a key enabler for this transition. Procurement organizations and suppliers need to play a key role in helping to make the right choices early on in the product design phase, ensuring materials are selected based on repairability and reusability.

Up next is fostering innovation within the supplier ecosystem. As the frontline, it falls to procurement to challenge suppliers to focus on solutions that support the circular economy. It’s going to take more than traditional sourcing, namely letting go of a fixation on short-term cost reduction (not to say lower total cost of use may not be a byproduct).

The benefits of circular procurement are focused on the long term, but begin to accrue quickly. According to McKinsey & Company, for Europe alone, a circular economy could result in overall benefits of $2.05 trillion by 2030. Many new business opportunities may bubble up as a result of improved product design, and a focus on new production technologies and materials. Small and medium-sized businesses have an opportunity to differentiate through better product design, and more durable, efficient and reusable products.

From an enterprise (and procurement) perspective, there is a huge potential to reduce total cost of use or ownership. Buying in this manner can result in less frequent purchases and heightened visibility into future costs. Additionally, it can also reduce waste management-related costs.

Circular procurement is a vision that’s increasingly becoming a reality. Companies from Phillips to General Electric are embracing initiatives in line with the core pillars of the circular economy. Much as responsible timber companies must harvest some trees, but leave many more and find uses for all the wood, modern enterprises that buy intelligently and with sustainability in mind are going to be able to continue to rely on their resource bases to continue supplying them.

Travis Bickham is the content marketing manager at Tradeshift. He manages the company’s public-facing commentary and journalism. Prior to Tradeshift, he worked in the financial industry, and has written extensively on the global economy and markets, including for The Economist and The Daily Californian.

[1] United Nations Department of Economic and Social Affairs. “World population projected to reach 9.7 billion by 2050.” July 29, 2015.

About the Author

Tradeshift connects buyers, suppliers, and all their processes in one global network. We help you transform the way you work with suppliers today – and adapt to whatever the future brings.

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