Difficult Market in the Trillions

Never before has there been as much global purchasing as today. Risks are also increasing in this respect because companies cover large parts of their materials demand in emerging countries.

> Two thirds of German small and medium-sized enterprises control their suppliers' standards.

> Breach of ethical and ecological rules may become a corporate risk.

Sustainability is the top priority on the agenda of German companies – in theory. According to a study by the Wirtschaftsinformationsdienst D & B, three of four heads of purchasing and experts had predicted that this topic would be of major importance for them in 2011. Yet, in a 2012 retrospective, not even half of those interviewed were able to state that sustainable procurement had actually been of importance for them in the year before. And that although there has never before been as much global purchasing as today. Risks are increasing with procurements from outside the developed industrial nations because many emerging countries still have a lot of catching up to do in terms of sustainability.

Procurement is a market in the trillions. Thus, for example, the 7,500 members of the German Federal Association of Materials Management, Purchasing and Logistics (BME – Bundesverband Materialwirtschaft, Einkauf und Logistik) make procurements in the amount of EURO 1.25 trillion per year. "German companies want to make further investments in China, for example. They expect higher sales and profits, also on the assumption that Chinese competition will increase significantly", says Sebastian Schröder, Head of Service Law & Compliance at the BME. On the other hand, many companies meanwhile also procure large parts of their materials demand in the People's Republic.

Customers question the societal legitimacy of companies.

Drivers of the development are cost savings with qualities being supposedly identical. Savings in the amount of 10 to 30 percent are possible. But the price is high – because companies frequently buy the proverbial pig in a poke. If checks or controls show that suppliers allow child labor or process harmful substances, German companies will have to take responsibility for the consequences – all the way to insolvency.

Neglecting control measures may then question a company's "societal legitimacy" – thus the conclusion of the study "Sustainable Procurement" by the University of St. Gallen.

The risk is higher, the further away the corresponding procurement region is from social and ecological minimum requirements. Actually, at least two thirds of Germany's small and medium-sized enterprises carry out standardized supplier evaluations, regular visits and audits at their suppliers. However, they are still lagging significantly behind large companies and consolidated groups. More than 80 percent in this category check their suppliers systematically. That was the result of a study by the Kerkhoff Competence Center of Supply Chain Management at the University of St. Gallen.

"Visiting suppliers once a year is not enough," says Sebastian Schröder. The BME's legal expert developed, for medium-sized enterprises, standardized operating procedures for sustainable procurement which can be integrated into a company's supplier management. About 30 medium-sized businesses are using it – among them group companies like the household appliances manufacturer Miele with 15, 000 employees. But it's also used by small and medium-sized enterprises such as the packaging specialist Schütz with 3,250 employees or the plastics engineering company Kunststofftechnik Jantsch with a workforce of 60.

While major groups are already under massive pressure from the outside by such initiatives as the Dow Jones sustainability index, in small and medium-sized businesses, top management takes care of sustainable purchasing. "The decision for or against sustainable purchasing depends on the personality", says Schröder. But not exclusively: "Small and medium-sized enterprises will only remain competitive if they supply sustainable quality – they will not be able to score against cheaper products from abroad", says Schröder in conclusion.

"The customer asks about ethical standards already when buying. If a company cannot provide a credible answer, it will no longer be able to sell its products", explains the purchasing expert Jens Hornstein, partner at Kerkhoff Consulting in Düsseldorf. "The market dictates new rules."

Thus, sustainability not only has an ethical dimension – it's becoming a business purpose. Accordingly, new standards apply at Kerkhoff Consulting since 2010: "We systematically expanded the three purchasing criteria of price, availability and quality by ecological and social issues in production. We audit suppliers on location", says Jens Hornstein. In the end, sustainable purchasing need not be more expensive: "If the supplier produces efficiently and saves energy in the process, sustainability may even pay off financially", says Hornstein. An additional "profit": Employees in sustainably managed companies are more motivated and loyal. Theft will be reduced significantly.

For the German Federal Ministry of Economic Cooperation and Development, the German Association for International Cooperation (Deutsche Gesellschaft für internationale Zusammenarbeit –– GIZ) prepared a guide to sustainable procurement. This guide is provided on the Internet under www.kompass-nachhaltigkeit.de.

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