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In this latest in a series of posts, Procurement Leaders once again invites Ernst & Young's Carlos Alvarenga to evaluate what might be some of the key levers for the function, a decade in the future.
By 2025 procurement functions will be asked to move beyond cost management and to create economic and social value. This change will be a consequence of the generational shift in the understanding of sustainability that will take place as the last of the 'Baby Boomers' retire. As the post-2000 generations come into economic power, the idea of a social model where economic growth is decoupled from resource exploitation will take hold.
This psychological shift will result in a movement from a linear economy of consumption and disposition to a circular economy of continuous use and reuse.
As the CEO of a major consumer electronics company recently noted: "… building a circular economy would require a fundamental restructuring of global value chains. Instead of selling products, businesses would retain ownership, selling the use of the goods they make as a service. Selling a product's benefits instead of the product itself would create a powerful incentive for producers to design for longevity, repeated reuse, and eventual recycling, which would enable them to optimize their use of resources."
Key characteristics of the circular economy will be customer access to a good versus actual ownership; business model evolution from individual transactions to managed relationships; reverse distribution cycles; innovations in material, component and product reuse; and products designed for disassembly and serviceability. This evolution will also result in a major re-evaluation of comprehensive sustainability risk identification/mitigation.
A decade from now, the best procurement organisations will employ sustainability as a lens with which to identify environmental and social risks. This is because risks associated with environmental factors will increase in the next 10 years, from resource and raw material scarcities (e.g., access to high-quality water) to weather volatility (e.g., storm events). Risks associated with social factors will also become more visible and less acceptable as a younger generation of consumers enters prime purchasing age.
Issues that are of secondary importance to many procurement and executive teams today — from unsafe worker conditions, to child labour/human trafficking, to the sourcing of raw materials from conflict areas — will rise in importance as a generation raised to a higher standard of global social connectivity begins to drive major purchasing decisions.
Increasingly, companies will be driven to consider environmental and social risks by laws demanding greater transparency of supply chains. By 2025, the act of purchasing products or services whose impacts have been found to be less damaging to the environment, human health and society — when compared to competing products or services — will be the rule rather than the exception.
As a consequence of a more comprehensive and intense social focus, sustainability methodologies will be much more embedded into the procurement process 10 years from now. The use of Total Cost of Ownership (TCO) analysis, Life Cycle Analysis and the use of third-party environmental certifications as a weighted screening methodology for selecting products and suppliers will become standard practices.
Likewise, in the acquisition of services, procurement organisations will employ sustainability screens at the vendor level rather than at the product level in the same way the financial industry uses credit ratings in 2014.
Sustainability's heightened priority in business operations, as a result of this generational value shift, will set the stage for a truly circular economy where the starting point will be economic value creation aligned with environmental improvement, not degradation.
Carlos Alvarenga is a principal in Ernst & Young LLP's Advisory practice, a senior research fellow at the Robert H. Smith School of Business at the University of Maryland, and the author of a blog on economics and risk (http://reconnomics.com). He is based in Washington, DC.
The views expressed herein are those of the author and do not necessarily reflect the views of
Ernst & Young LLP.