Address the sustainability agenda with clear and measurable KPIs
By 2023, major companies will be required to present detailed public plans on how they intend to move towards a low carbon future, in line with the UK’s 2050 net zero target. Establishing the right Key Performance Indicators (KPIs) is therefore essential – Efficio’s Edward Cox explains how companies can tackle the sustainability agenda head-on with clear and measurable KPIs.
It’s safe to say that the global pandemic has moved the topic of sustainability forward. No longer a lip service, the looming threat of climate change has sparked a call to action for governments, businesses and individuals.
Within companies, purchasing is increasingly recognized as one of the most influential functions in terms of sustainable development. Organizations are, for the most part, a product of what they buy: a set of decisions about the supply chain of goods and services. Procurement teams are therefore uniquely positioned – and equipped with the necessary skills – to help redefine and improve the sustainability of organizations through their procurement decisions and processes.
However, many companies struggle to define how to turn an aspiration for more sustainable purchasing into action plans and practical, tangible results. After all, as the saying goes, “If you can’t measure it, you can’t improve it.”
Establishing the right KPIs is therefore crucial for sustainable sourcing, allowing organizations not only to identify baselines and priority areas for improvement, but also to communicate the impacts and trade-offs of critical sourcing decisions to internal and external stakeholders.
Principles for establishing KPIs
When making conscious decisions about which aspects of sustainability are a priority for your business – whether to enhance transparency or to drive tangible improvements over time – it is important to remember the key principles of a effective design and deployment of KPIs. Sustainability KPIs should be:
- Specific and Measurable – KPI values should be clearly measured and specific to a vendor or category. When there is performance ambition but no data, new processes and data indicators should be implemented to establish a baseline.
- Results-based – They should measure a change in results, not just activities performed from a to-do list.
- Aligned to top-down business goals – KPIs should be easily translated between category-specific performance and overall business goals.
By keeping these principles in mind and focusing on the areas of sustainability that matter to your business, a suite of key performance indicators can be developed to effectively drive improvements.
What does sustainability look like for your organization?
The first step in establishing sustainability KPIs is to define what sustainability means, as this can vary greatly in scope and focus across industries and organizations. Even companies with world-class, sustainability-focused sourcing functions look almost exclusively to supplier labor practices and natural resource sourcing.
While these are two important areas, other factors underpin a sustainable supply chain. It helps leverage a triple bottom line of three dimensions – people, planet, and profit – to prioritize key areas of focus for your industry or specific categories.
1) People (social sustainability)
Ensure work practices are ethical, safe and fair.
Companies often seek to mitigate reputational risk by avoiding suppliers that use unethical business practices, such as forced or child labor, modern slavery, and unsafe production environments. By requiring transparency in the procurement process, they can ensure their social sustainability. There is typically a demand for visibility into outsourced labor, offshore production, and complex supplier prioritization and distribution.
KPIs for social sustainability focus on promoting transparency fair treatment and equality for all workers throughout your supply chain. These may include diversity reporting on gender and racial parity, compliance with labor management or health and safety policies, and may be limited to first-tier suppliers or mandated by multiple levels of management. a complex arrangement.
What does this look like in practice?
Social sustainability assessment is often carried out by independent third-party audit firms, supporting either supplier self-assessments or comprehensive on-site audits. While KPIs can be implemented for ongoing monitoring and management, practices are most often assessed by evaluating supplier compliance with codes of conduct and broader governmental or professional regulations.
With regard to fair and ethical work, for example, it is important to involve trade unions recognized by the supplier or the number of industrial disputes in the last 12 months. For diversity and equality, you can also view diversity spend by category — how much money your company spends with various suppliers — and supplier diversity reports on gender and racial parity.
2) Planet (environmental sustainability)
Focus on the supply, distribution, consumption, production and disposal of physical goods to mitigate negative environmental impact.
Key performance indicators for environmental sustainability should be designed to ensure responsible sourcing, distribution, consumption, production and disposal of key materials and energy resources. For example, in the case of sourcing, does a product come from a renewable, sustainable and conflict-free source?
Distribution – what is the carbon footprint associated with shipping products to you, or from you to your customers? Production – are sustainable sources of energy and water used? Are you limiting the use and eliminating waste of energy and water? Disposal – how much are you sending to landfill? Recycle/recover? After-sales sales?
What does this look like in practice?
These KPIs must be tailored to specific categories, vendors, and products to be effective. Although they often focus on direct materials, they can apply to indirect categories such as fleet, waste management, travel, IT and office supplies.
Within distribution, for example, measuring the carbon footprint of your fleet, supplier logistics and delivery to your customers. When looking at consumption, you can look at the percentage of products purchased with virgin plastic or recycled content. Similarly, you can measure the percentage of products purchased on the secondary market.
3) Profit (financial viability)
Often confused with supply chain resilience, this involves ensuring that a company’s profitability remains well protected even in the face of market disruption or change.
Following major global events, such as the Covid-19 pandemic or natural disasters, priorities for security of supply and price stability are at the forefront of decision-making. Added to this are more holistic reviews of category management around the company’s competitive differentiators and its ability to meet ever-changing customer demands as consumers increasingly seek sustainable options.
Your KPIs for financial viability should include supply and distribution risks, aiming to increase transparency of your supply chain and lower-tier suppliers by identifying unstable or high-risk suppliers and regions.
What does this look like in practice?
Sourcing risk should be assessed at the vendor level and focused on segmenting vendors that represent high business value and high potential risk.
You can view the number of approved vendors by source location, level, and dedicated inventory locations; deadlines per product; and the supplier’s financial history. To establish price stability, commodity index and currency tracking can provide clarity, and for profitability, the percentage of revenue from durable goods sold is a good metric to compare against.
When it comes to sustainability, needs and priorities vary widely from industry to industry. Therefore, KPIs are unlikely to be the same from company to company. However, if the principles of effective KPI design are adhered to and developed to drive transparency and action at each stage of the value chain, a variety of performance measures may be appropriate to drive improvements. .
Sustainability, whether it relates to people, planet or profit, is a growing priority for organizations. The first step in scaling up improvement programs and performance goals is to establish awareness. No matter where a company is on its sustainability journey, there are substantial benefits to be gained from making conscious and deliberate choices.
Having the right combination of specific and measurable KPIs enables your organization to achieve tangible sustainability results where it matters.