Nudge don’t Judge​

James Marland
July 8, 2024

Everyone is talking about sustainability and meeting the Sustainability goals is a global challenge. However, solutions don’t always need to be big COP26/UN/G7 style initiatives. They have their place, but solutions need to be designed for the communities and economies in which they operate. 

 

In the UK we are a service-based economy. Services form approximately 80% of the UK's gross domestic product. This means that to achieve your sustainability goals, such as reducing the use of plastics, cutting emissions or improving labour pool diversity, you will need to look beyond the four walls of your company and start to measure what your suppliers are doing on your behalf.  

 

100 years ago Henry Ford owned railroads, coalmines, rubber plantations, saw mills and forests in addition to his factories. He owned the full value chain. One of his key policies was a minimum wage of $5 per eight-hour day, upped from a previous rate of $2.34 for nine hours.  The news shocked many in the industry—at the time, $5 per day was nearly double what the average worker made. His whole workforce could benefit. 

Companies can’t do that today, since most of the means of production are handled through a vast array of suppliers, outsourcing companies, service companies, joint ventures and contractors.  

 

Today, a similar improvement in employment practices such as diversity or access to health care cannot be initiated top down by even the most benevolent CEO, Board or Sustainability Officer. Because most of the people who will make the decisions don’t actually work for you. They are suppliers not employees.  

 

The old techniques of browbeating suppliers to adopt our ESG policies, however cumbersome they might be, won't work in a market of constrained supply. So, when considering your sustainability goals, and how to direct your suppliers to follow them, the best advice is "Nudge, don't Judge". 

 

The power in the buy/sell relationship has flipped: suppliers have the upper hand. With stocks hard to find and prices shooting up, buyers can't afford to be "too preachy". The old techniques of browbeating suppliers to adopt our ESG policies, however cumbersome they might be, won't work in a market of constrained supply. 

 

It doesn’t matter whether you are trying to source chicken breasts, resin, computer chips or copper. Procurement managers have discovered that the power in the relationship has flipped. Instead of the buyer issuing an RFP, then screening suppliers with complex ESG requirements, suppliers are increasingly standing up to buyer-imposed goals. 

 

I heard of a story of a 200-page ESG questionnaire which was so burdensome that most of the suppliers refused to fill it out. This approach can cause a "flight to incumbency", which can lead to your "approved" suppliers delivering goods or services outside their core competence just because on-boarding anyone else is too hard. This has the perverse effect of increasing your risk: often the exact opposite of what was intended. 

 

And a flight to incumbency will typically have a negative impact on your social goals about buying from small, local businesses, as only the Big Boys will have teams who can respond to complex questionnaires about recycling, diversity and emissions. I was at a Chamber of Commerce meeting of my town (Weybridge, Surrey) and local office cleaning business was complaining that she could no longer respond to commercial tenders, because the volume of questions about her use of chemicals, water usage, hiring practices, electric vehicles was overwhelming. 

 

It's often procurement teams who manage supplier relationships who are best placed to work with suppliers on how to do this. In one example, a company knowledgeable in electronics brought electrical components that they purchased into one of their labs, stripping them down and evaluating how much carbon was used in their manufacture. This was then used to engage with suppliers on how reductions might be possible. 

Align with Industry Groups to support smaller suppliers 

 

The old Purchasing mantra about supplier consolidation, "Fewer, Bigger, Better" needs to be re-visited. A side effect of being willing to consider more suppliers is in business continuity, as spreading demand across a dozen smaller companies will provide more resilience in the case of the Next Black Swan. 

with so many new regulations out there, from Scope 3 emissions to the German Lieferkettensorgfaltspflichtengesetz suppliers feel that they could be spending all day filling out ESG assessments and buyers need a better way.  

 

So what should Supply Chain leaders do? Surprisingly, they need to adopt the skills, processes and technologies that their sales colleagues do when managing their customers. Treat suppliers like customers: find out what they want, how to make their lives easier, how to become a customer of choice so they want to do business with you. 

 

Three areas come to mind: 

 

  1. Use Supplier Surveys to get closer to your suppliers (at SAP we call this Supplier Experience Management) 
  1. Don't treat your suppliers like a bank by paying them 60 or 90 days after delivery. If one of your competitors offers payment on delivery then you start to look very uncompetitive. Use a product like Taulia (now part of SAP) to allow them to get paid early with Supply Chain Financing. 
  1. Help them on their digital journey by sponsoring them on to the SAP Business Network. It will cut their admin costs, as well as yours, and makes you easier to do business with than their customers who still send order schedules as Excel attachments and want PDF invoices sent to them. It has the additional effect of standardising many of the ESG questions and certifications, so suppliers benefit from a Network Effect. 

 

The power has shifted, you can't dictate to your suppliers any more. Treat them like the partner they have always been and show you value them as much as any customer.