Greening your vendors

Greening your vendors

 

Many organisations around the world are adopting green initiatives to help make an impact on our environment. Green initiatives could be adopted internally to reduce the carbon footprint of the organisation as a whole or can be adopted externally by helping the community achieve a greener environment. With global warming taking a key place on the world stage, consumers are warming up to organisations that adopt significant green initiatives.

One of the key initiatives organisations could target is to use more recycled input materials in their supply chain process. There are many possible ways you could adopt a green procurement processes. In this blog I intend to discuss how you could choose vendors who have reciprocal commitment to green environment.

When selecting vendors, you should rate them (among other factors) on how eco-friendly their products and processes are. In fact, Vendor’s eco-friendliness could be one of the key criteria to shortlist vendors if your organisation has committed to bolster your green initiatives. By selecting green vendors you are enabling an entire supply chain that could be proud to call itself “green”.

 

Rate your Vendors

The following could be some of the parameters to rate a vendor’s eco-friendliness:

  • Does your Vendor supply green products? For example, for high-energy consumption products, has the Vendor rated their product for energy consumption? Has the Vendor provided documents and certificates to evidence that their products are eco-friendly? Does your stationary vendor provide recycled products?
  • Does your Vendor use green products in their supply chain? For example, does the Vendor’s production process use greener technologies? Does the Vendor use some renewable energy in his production process?
  • Does the Vendor accept outbound documents in electronic format? For example, will vendor accept Purchase Order in electronic format sent by email?
  • Does the Vendor provide documents in electronic format? For example can the vendor send documents like Invoices, Statements of Account by email rather than by post?
  • Does your Vendor accept used products for reuse or recycle? For example, do computer vendors accept used computer for reuse or recycle when an order for new computer is placed?
  • Does your Vendor agree to communicate using newer communication and web technologies? Vendors need to communicate with your staff for several reasons over the life cycle of procure to pay process. Paper and fax communications should be avoided. Ideally you should use portal technology or use SaaS technology to communicate with Vendors; these technologies will allow your organisation and your Vendors to log communication, add attachments, manage status of communication; these technologies leave an audit trail of the communication which helps in troubleshooting issues in future. Your organisation should take care of Security of access and Confidentiality of data as these are the key concerns to organisations and Vendors adopting these technologies.
  • Does your Vendor have a local warehouse from where the products are supplied? For example, the cost of transporting products and the impact that transportation has on environment should be factors to select vendors.

 

How can you implement the rating?

Your Procurement department along with your Accounts Payable department should develop a list of criteria by which your organisation could measure Vendor’s green rating. There should be a review of the ratings, preferably, every year. This review should be based on the Vendor’s performance against criteria. This review might recommend new rating for the Vendor. Vendors that have fallen in their ratings should be forewarned about possible consequences.

Points should be allotted for each criteria weighed by the importance of the criteria. For example, your organisation might allot higher points for criteria of Vendor supplying green products over the criteria of Vendor accepting used products. This could be because your local council accepts recycle waste as a free community service and you could use this alternative should Vendor not accept used products.

For each criterion, sub-points (or fractions) should be allotted for each sub-item in the criteria. For example, if you allot 10 point for criteria whether Vendor sends documents in electronic format; allot 5 point for electronic Invoices, 1 point for Statement of account etc. The sub-point allocation could use parameter of the volume of documents received from the Vendor – if Invoices from Vendors are larger than other documents; give that document a larger weightage.

The challenge your Procurement and Accounts Payable will face in this task is in assigning a single set of criteria or points to all vendors. Criteria and points for vendors who supply goods could be different from criteria and points for vendors who supply services. There might be other distinguishing factors that might make one set of criteria difficult to apply to all Vendors.

 

How can rating be captured in SAP?

You could create a new custom field on SAP Vendor Master for storing the Vendors green rating. For this purpose you could use BADI IF_EX_VENDOR_ADD_DATA and IF_EX_VENDOR_ADD_DATA_CS. I will not document the details of how to use this BADI to create the field; consult your technical team to get a field created.

 

How can you use this information?

You can create custom reports in SAP or in your data warehouse to report on this field to suit your reporting needs.

You can, for example, query all Vendors for a particular product. The report will list all vendors along with their Green rating.

You can generate a report for all Vendors with a low rating and the volume and amount of procurements made from them. Your Procurement department could log comments against each line on why this Vendor was chosen (“monopoly Vendor”, “no other local green Vendor”)

Your IT team could develop a custom message when a Purchase Order is created on a Vendor with a low Green rating or when the Purchase Order is created on a Vendor with a lower Green rating than other Vendors who supply the same product.

 

How do you measure savings from your initiatives?

Many of the green initiatives supported by your organisation can be easily measured. For example, you can compare electricity usage or paper consumption before and after the initiatives are started. However, measuring the savings from greening your Vendors might not be easy. Your organisation might purchase products that are green but slightly more expensive than before the initiative. Hence, the savings cannot be measured against the bottom line profitability on the company or in dollar terms. Savings from greening of Vendors should be measured in qualitative terms of reduction of greenhouse gas emissions achieved by the organisation.

U.S. Environmental Protection Agency, for example, has a Simplified GHG Emissions Calculator. You could use this to measure the savings from your greening initiative.

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