Isobel: Hey, everyone. Welcome to Status Sustainability, where we deliver key insights and unpack any sticky or tricky sustainability issues that have come up in conversations with us.
Today we're going to speak about supplier engagement and run through the pain points around engaging with the suppliers, getting a good response rate, all of that to come, and what to do about it. Saif, hello.
Saif: Hey Izzy, I actually feel like it's probably all pain points for most people we're speaking but it's nice for us to start to, let's say, pull out some of the main themes.
The situation today
Isobel: I guess on that point, what's happening today?
Saif: It's a really interesting time. I think that what's exciting, which I'm seeing now, and I wasn't seeing seven or eight months ago. I actually just got back from the Innovation Forum event in D. C. And for any of our listeners who know Innovation Forum, they'll recognise that Innovation Forum is one of the best event organisers I think we find in this space. They also put out a lot of great content. And I was at the DC event, and I was also at the Minneapolis event seven or eight months ago. And versus the Minneapolis event that they did, I felt that the level of understanding and awareness of the topic had just accelerated so significantly.
And what I mean by that is in Minneapolis, there were maybe 300 people.I think 250 people in D. C. There were around 150 people. So similar size ish. Both sets of the audience were very food-oriented, but also a bit of personal care, maybe a bit of peripheral packaging, other related sectors. And in Minneapolis. The conversation was still relatively high level. It's, you know, like, yes, sustainability is super important. Let's look at what's happening in farming. Let's look at what's happening in circularity, etc.
But then at the DC event, more recently, it was very specific. We're talking about insets. We're talking about specific regulation and the impact it has. We're talking about new reporting standards. We're talking about data gathering at a level of granularity that I just wasn't seeing seven or eight months ago.And I think for me, what was also really telling was to do those events in the US because my opinion, and I, I think this is shared by many of our listeners is that the UK and Europe has been historically much more advanced on sustainability as a topic than the US and that comes from just having been deeper into the topic for longer, both from their regulatory perspective, but also from the consumer awareness angle. As a result, you had corporations like Danone and Unilever which have just been really forward leaning on this in the big, you know, big fortune 500 sort of space.
Now what I'm seeing is that the US is actually catching up really fast. And I think that the US will actually accelerate. One of the drivers for that, acceleration is going to be just the scale of incentives available. And so a big topic of discussion at DC was the Inflation Reduction Act and its incentives. And when you just look at the sheer quantum of funding available, the sheer quantum of incentive available, It's just orders of magnitude ahead of whatever we see in the UK and Europe in the UK, you'll be talking about a big region agriculture program running with £800, 000, or you know, £3 million of capital or something.In the US, the conversation is in billions, and I think that's going to start to play through.
Obviously, a lot of the IRA incentives are carbon removals and renewable energy and hydrogen and so on. But I do think we'll start to see a lot of sort of ripple effect. And I think just a lot of farm incentives also coming through, which is going to be exciting to see.
The problems that everyone is facing
Isobel: And so maybe on a more granular level and whether this came from conversations you had in DC or , otherwise, what are the main problem sets that you're seeing emerge? Specifically around suppliers and supplier engagement, the buzzword that we all know and love.
Saif: I'm finding that there are these two camps in the debate and very little middle ground. It's a little like politics, both in the US and the UK.
First school of thought: There's this one school of thought that really champions a no-touch secondary data-driven approach. What I mean by no touch is that you no longer need to engage with your suppliers. You're going to have all your data available to you.It's either satellite-based data streams or it's AI, or it's better modelling, data science, etc. And so there's a school of thought that says, “Hey, you'll never need to go out there. You'll just have these data sets available to cover your supply chain almost as if by magic.”Second school of thought: There's another school of thought that is very primary data oriented. And that says that. Everyone around the world should be providing data for their environmental impact. And all of that data should ideally feed into one system. And the answer is this one platform to rule them all, which just has everyone's data.
I actually think that more people in our community subscribe to the latter, the primary data oriented approach than the former. There's very few in the middle ground around hybrids. And I actually find that the primary data approach is one that I oddly enough disagree with. And I say this not just as someone in a, in a software business focusing on the data and championing often primary data gathering approaches. But I say this also as someone whose previous startup was a farming business growing flowers for the fragrance industry.
The reason I can say this from that experience is that a universal primary data approach means that we will need to be able to capture data from, what is it 2 billion people working in agriculture or agriculture related sectors around the world, many of whom sit in emerging markets.
On my farming business, we employed over 200 people. It was a reasonably large farming business, the largest flower grower in Pakistan. And I would be surprised if more than 20 of those had a primary school education. So if we're talking about actually managing to get these people to put in data into a survey of some sort - good luck, right?You actually need to solve much deeper societal challenges like education and literacy if you're going to move the needle on that. My farm was really big in context. If you just take my example, the country I know best in emerging markets is Pakistan.And in Pakistan, 1% of the agricultural land is farmed on 100 acres or more. What that means is that the vast majority of the landholding is fragmented smallholder farms, where it's someone farming 5 acres or 10 acres or 15 acres, and that person is not going to fill out a survey tool, and no one is going to, no one is going to pay for any level of data capture that you would believe in and trust.And what I mean by that is, we orient around getting something into the form, and that only makes sense to us because we attach such a low-quality standard to what data exists out there. But actually, once we start to have a higher expectation of quality, we'll realise that none of this data is auditable.None of this data is accurate. There are typos. There are incompletions. The idea of solving for primary data as a universal expectation around the world just makes no sense to me. It's not cost-effective. It's not practical. It's not going to happen anytime soon. And even moreover, it's not necessary.
I actually think that there's a really nice middle ground.Where we say, actually, we need maybe a significant minority of primary data capture, 30 - 40% at best. But what we need is really good distribution. The problem is not that we don't have enough people entering data. The problem is that we don't have really good coverage of the data points. And so rather than saying, let's get everyone in Europe to do this, what actually makes more sense is let's have really good coverage in terms of sampling. So you can have, for example, and if you have enough data points on cocoa in, in Cote d'Ivoire and in Ghana, you actually have really good coverage of the cocoa industry, given that I think 50-60% of the market comes from those two countries, or maybe there's a third country adding in.So you can get pretty good density of data points. actually, if you have a good spread. And that allows you to then get better secondary data better modelling, better use out of the AI tools available where we can actually solve the problem holistically. Then, we need to move away from the sort of fetishisation of data for data sake, and actually think about what data solves the problem.What is the problem we need to solve? How do we make better decisions and what data is good enough? For us to make those quality decisions. Sorry, there's a bit of a rant.
Isobel: It sounds like quite a good hybrid approach.
Who are the right suppliers to engage?
Saif: I'd love to also say in that smaller set of supplies that you do want to engage with, how do you solve the low response rates?I think that there's a few angles to this and each of them one could talk about for quite some time:
Materiality: I think the first angle is one that most large companies that have been doing supply chain engagement for more than a couple of years will already be familiar with, and that is that you want to have good materiality assessment as the first pass.So the first pass run of your emissions data, let's say, is probably spend based is perfectly fine because it will already give you a sense of what are my most material categories. Is it dairy? Is it cocoa? Is it sugar? Is it packaging? What are the 7, 8, 9, 10 most important sectors?And, that can be a bit different depending on business. I've found that actually what's interesting is, okay. Personal care has a lot of agricultural materials in the value chain, and so does food, but in personal care, you also have a lot of petrochem derivatives, which actually end up being a pretty high contributor, and you don't have that always in food.So, you know, there's some, some nuances you'll find in that.
Volume: And then the second is who are my biggest suppliers. And therefore, just by volume, they're in a high materiality sector and they're a high volume supplier to me.
Location: And the third is, let's say they're in a location. I'm expecting the emissions intensity to be a bit higher.And depending on what emissions factor database you're using for your spend based analysis, you can probably get that coverage as well. And that first pass already gives you a sense of where to focus. And so most of the companies that we work with and know best will already be aware that there are out of maybe, in the larger cases, 20, 000 suppliers, there are probably 2000 that really matter.And that already starts you, you get to be able to really distill this down.
Use case: I heard it really nicely put by Mars in a couple of instances where they said, look, “our footprint is so big that if there's a thousand tons of emissions from a supplier, it doesn't really matter if that's actually 1500 or if that's actually 500 because it's not enough to really move the needle, but if it's 100,000 tons, or if it's 10,000 tons, then actually it merits a closer look. Because that difference could be material if it's not super accurate. And I think that's a robust way to look at it. And I think that makes a lot of sense. That's consistent with how most other companies that we know are looking at the problem, most of the larger companies.So I think the first area is this materiality. I think there's another piece, which is just how do you unify with other players in the value chain in specific sectors? And so I think that the idea of having one platform to rule them all for all types of products doesn't make sense.But for instance, to say, look, we are the five companies buying the most dairy products in the U. S. or in Europe or around the world. Let's have a unified approach to what this looks like for dairy and what our expectations are for dairy. I think that makes a lot of sense, and we're already seeing a lot of that happening.
Use case: Starbucks is a really good example of a company that is taking a really holistic view to a few key materials that have the biggest contribution to their impact. They think about dairy. They think about coffee, obviously and few other materials, and they really then try and also reach across the aisles to sort of partner with other companies that are big players in these spaces to see if they can have a joined up unified approach.And what I really like about the way that Starbucks thinks about this is that they say We have to solve for coffee. Coffee is on us. Other parts of the challenge, you know, where we're maybe a supporting actor and there are other parts of the challenge where we don't have to play. But coffee is on us. We have to solve for coffee and we have to bring others along with us. And that mindset, I think, is a really nice way to go out to the supply chain.
Isobel: I think Rude Health actually referred to the ingredients as their “hero ingredients”, and those are the ones that are going to focus on, like, the top five, and then “the others” which I thought was quite a nice phrasing.
Another phrasing that really stuck with me was at an event the other day, was when Nestlé started speaking about “collecting dead data”.
I think we slightly touched on it earlier, having mass surveys and getting all this data, and then being like, actually, what do I need this data for? What's your view on centralising all the asks for supplies in one as it were like ESG survey?
Saif: Yeah, again, I think it's an important question and this dead data is a phrase I'm going to start using as well. Was this Emma Keller?
Isobel: Yeah, thanks Emma.
Saif: I'm going to start using this phrase as well. I think that there is a very superficial level of data that many companies are out looking for right now, which is just sort of an emissions factor, and that already requires a lot of context. It requires an understanding of what methodologies were used, what types of business activity data were used, and what types of emissions factors are underlying the emissions factor that's being shared with me.So if you're getting, let's say, an emissions factor for, you know, I don't know, let's say, oats, for example, right? Just to take the alternative milk instance, you want to understand what went into the emissions factor combination that's resulted in the factor that you're getting, like the, the oats, the milling, the logistics, and whatever else went into it.And I think that that level of context is, is one important aspect. So businesses need to start being able to get. A sort of data package that is a little richer and that explains what went into creating this. What we like on our side of the fence is the PACT framework as a way to sort of protect the business-sensitive data and share the environmental data and to make that fairly seamless for that to flow across organisational boundaries.
And this goes back to one of the challenges with the primary data only approach is that the assumption that everyone is going to feed into one central platform loses a lot of the data security that most IP heavy companies will value. Which means if you have a secret sauce, like literally, right? A secret recipe for your sauce or a formulation for your product. And bear in mind, if you look at like a Rude Health or an Oatly, actually the formulations can be super important. You don't have a lot of ingredients, but the actual marginal fractional percentages. Of your rapeseed oil or whatever else went into this is important.It defines the taste and you know Pepsi and Coke can easily tell you stories about this as well.
And so you actually will never want to be able to be partying with the bill of materials data in a publicly accessible data set. But you you might be gotten around to partying with the environmental outputs and sharing that in a system to system way, and those can be good enough for the receiver on the other side, if they're aligned to a same, the same standard or the same framework.And that I think is what PACT gives you. So we're, we're big supporters of that model.
We're also a PACT conformant solution ourselves. And what we're finding exciting in the space that we're working on is we're able to generate PACT-conformant carbon footprints for our customers. But we're also able to facilitate the export effectively of those footprints into other companies through an API. And I think that's the direction of travel that we see happening.
The other thing that I think that enables, and this you don't get with surveys, surveys are basically like effectively just a flat file passing across organisational boundaries, and even with a single platform, all you get is the data output. You lose the connection with the business. And what a lot of companies are used to is having that collaborative connection of some sort, whether it's through a workshop or otherwise, where they can actually engage the supplier in a conversation.
And I think that what's nice about the way that we approach this through PACT is that you can potentially build other tools on top of the same structure, where you can maybe start collaborating also on interventions and on change. And that can be very exciting. Think about not just data moving through, but also, concepts moving backwards.
If you think about concept creation, what I mean by that is the largest food brands have done an incredible amount of research on what can actually move the needle on sustainability. Not just in terms of their own formulations, but also in term, but also in terms of things like, you know, the actual ingredient constitution, Unilever has made a number of its patents actually, I think, available on this recently for ice cream to just enable people to store ice cream at higher temperatures, which then conserves energy.And I think that sort of research and R&D is accessible to the larger players. But for them to be able to almost export concepts into their supply chain right now is a very high-touch manual process and what I think is exciting about having a data exchange foundational layer is that you can also build on a concept exchange layer on top. Then ultimately a financing exchange layer on top of that, where you have the data informing where the emissions are coming from, you have a concept for reducing the emissions, and you have funding to now deliver that concept. And that's the stack that we think is really exciting.
Isobel: It's also exciting the value you can then give back to your suppliers as well because at the moment it's quite a, as you're saying, a resource heavy, task to fill out these surveys. But actually if you can push finance back or concepts like commercial value, educational value, that will really help this whole like cyclical cycle of engagement happening.
Saif: Yeah, for sure. I mean, ultimately, it's also just about leverage. I was speaking yesterday with one of the top two or three fast food chains brands in the world. And what they were telling me is that in an individual region, they might have one individual running procurement. And that's maybe unique in the fast food industry.I don't see that level of leverage requirement in FMCG necessarily, but if you take just that one person in a region having to pivot across probably thousands of suppliers and, you know, at least dozens of unique types of materials, if not many more, what you want to be able to do is give that individual the leverage to drive change without loading on just the high-calorie, high touch requirement of having to run a thousand workshops. And that I think is a, is a really exciting technology challenge as well as a data challenge.
The supplier engagement formula: advice for professionals
Isobel: So we've discussed what this "amazing supplier engagement looks like". How do we get there? Do you have any practical advice for professionals?
Saif: Yeah, I think that we need to be aware of what the shifts are going to be. And I believe there are three shifts that I find that are under considered.
One shift is that contracts and the nature of contracts with your suppliers are going to change quite radically. Some of those aspects is just around term, because right now, we generally have short term contracts with our suppliers, like most food, apparel, personal care, right, all these sort of sectors will tend to have relatively short term contracts, which don't actually de risk the supplier, such that the supplier can make any meaningful change interventions.If you want to switch a farm to organic farming, it takes you around three years of just leaving the land fallow or empty and getting your registration. And that three years is an investment you make on the promise of future value. If your contract is not a five year or even frankly, a 10 year contract, an investment of three years, does it make sense?And we're going to have to see more and more of that de risking to allow and give comfort to suppliers, not just farmers, but even processors and others to give them the security and confidence that they can actually invest time and effort, let alone money in driving the change. So I think that durations are going to be different.I think we're also going to have to see more in terms of commitment to play around with volumes or preferential terms, pricing, et cetera, in exchange for progress on actual sustainability. We're already seeing some requirements to share data coming in. And I think what needs to go into contracts alongside those requirements is also transparency on what the data will be used for and what the data won't be used for, such that you kind of explain that the data will be used to calculate our own environmental assessment.It will be used for us to get a sense of where to focus on for driving change. And it won't yet be used to discriminate across suppliers, but at some point it might. And so, I mean, that sort of transparency is going to be important. Elements of target matching. That's also frankly under thought about. In that, if you're setting a target, you do want your suppliers to take on the liability of that target. Otherwise, given most of that target is a scope three target, it's just sitting with you, the brand. So I think all of these sort of aspects in the contract are going to be one thematic area of shift.
A second one is going to be blended procurement models.I remember five years ago, I was working with a large packaging company, and we were actually trying to craft a procurement index. That would allow them to blend in the carbon value and the dollar value together so that they could actually say to suppliers, you're going to get different rates because you're a supplier with a low carbon product and you're a supplier with a high carbon product.We're not there yet. And so the companies that are most advanced on this have typically had some level of ESG waiting. BT, for example, is a good example, a good instance where they've had a ESG waiting in their procurement for some time. But it's a percentage waiting on the overall procurement. And so it's not actually like, unless they've changed, it's not actually like a blended price.And I think what we're going to move towards is this blended price. And you won't be able to do that for the social and governance aspects easily or at all, even frankly, and arguably you shouldn't, but I think you will be able to do it for carbon and progressively potentially also water, nature, biodiversity, et cetera.So that, that area I think is going to be the second big shift, these blended procurement models.
The third, which also frankly builds on that is going to be the massive upskilling required. For procurement teams or supply chain teams, ─ and I'm already hearing this from some of the larger FMCGs where they have a procurement team leading the buying activities, but then they actually bring in a sustainability supply chain team to have the sustainability conversation.And as a result, the suppliers end up having at least two touch points or at least two interfaces. There are some large FMCGs where they have multiple divisions, so they'll have like food and personal care and something else. And then this whole thing might end up duplicated. So you might actually have the same supplier having four or five or six interfaces.with one customer from their perspective and having to effectively either repeat the conversation, even fill out multiple different forms for the same customer. And all of that, I think, is not very productive for anyone and burns a lot of relationship value. And what will help solve this is if there's appropriate training and upskilling on sustainability for procurement teams so that they can manage the shift.From what has been a zero sum game for over a thousand years, buying and purchasing and procurement has been a zero sum game, literally since the dawn of human civilisation where whatever, whatever I bought from you, it was in my interest to leave as little on the table for you as possible and vice versa. And we're moving towards a world where we need more win-win collaborations where it's actually a holistic view. Where we say this is the pie. Collaboration between us can make the pie bigger. And let's now work and figure out how that collaboration works. And that's through resource optimisation overall, for instance.
Isobel: That makes total sense. What about for SMEs who perhaps don't have as much purchasing power to have this sway over their suppliers, don't have as much internal resourcing to spend time with their procurement team? What advice would you have for them?
Saif: That’s a really good question. Um, I think it depends very much on what the SME wants to do and what do they want to be known for.And so I would say that depending on what the scale of the resource is that you have available, you can address. More or fewer challenges to more or less depth. What I mean by that is if you look at a Nestle or a Unilever or PNG, they have sufficient resources to either address multiple challenges, many different challenges, or to go really, really deep.
On several challenges and what we're seeing with Unilever's recent, you know, some would call it a step back. I actually think it's a step forward in that Unilever has kind of retracted from the breadth of its commitments and said, we're actually going to go much deeper on a few things and really, really try and deliver value.That's how I read it. Anyway, and I think that with an SME to come back to your question, there's less resource available, which means that maybe you can actually only go really deep on one thing. And so, you know, Rude Health is a great example, right? Or just companies of that size and scale where you can say, well, I'm going to own one thing and do this one thing really well.Let me give a great example from this week. Actually, I was speaking with the team at Davines, and for those who don't know Davines, it is a, Is a really exciting company. I'm actually a customer of their products as well. They're a personal care brand. They're mostly B2B. So they sell, you know, hair products, conditioner, salons and hairdressers. They're a B Corp and they're not a huge company relative to some of the others that we've just mentioned. But Davines has decided that they really want to go deep on regenerative agriculture. And that's one of the topics that they really want to own in a big way.And what Davines has done is they've set up their own region ag research facility. And that facility they're not just using for their own innovation and research on new, I don't know if it's botanicals or new kind of varieties and just how to grow them and how to, how to, how to really reduce the impact, but they're also trying to now commercialise that as an offering to non competitive businesses that also have an interest in regen ag. So what they're looking for is can they find like a food company that also buys some of those materials and can they offer their innovation studio effectively, their lab as a, as an offering. And while that's a slightly adjacent answer to your question, Izzy, it's a way that you can punch above your weight you pick something and you go really deep. And if you want to go even deeper, you figure out how to commercialise it. For Davines to go deep on this would have been just to figure out what is Regen Ag change look like if we facilitate and try and move the needle with suppliers. Going even deeper than that means let's set up our own actual intervention pilot or not even pilot, but full scale facility, and that is only then justified if you can actually even commercialise it. And so that's the model that I think is actually quite exciting.
Isobel: That sounds like a lab that I really want to go to. What are the tools that we can use for like the piece, the areas that we can leverage for engagement to help us get to where we want to be?
Saif: I think that the first place to start is probably better contracting, just to go back to what I'd mentioned, which is. ─ If there's actually, you need some combination of carrot and stick, there's basic principle but still holds true here. And so ─ the first place to go is do your contracts actually incentivise any kind of real, real change?Is there a reason for your suppliers to play ball? And a good example from an event we had recently with Patagonia is Patagonia actually goes the extra level to invest in the supply chain. And so there is sort of funding available for change, and it's transparently available. And what Charles Conn, Chair of Patagonia Board, was telling us at our latest event, is that they see it as taking out the mortgage and then charging other stakeholders rent.And so they try and bring other brands on board and other brands pay the rent.
But Patagonia is holding the mortgage and that they're the ones who went out with the first commitment to solve the whole problem for this part of the supply chain. And I think that ultimately needs to work itself into contracts. And that's probably one of the easiest places to start. If you say we're actually adjusting our contract. And so we're now requiring data sharing. We're requiring some sort of target matching, but we're also going to give something in exchange. And that, I think, helps demonstrate to your suppliers that you're serious about this and that there is value on the table.So that's, I think, one good place to start.
The second, I think, is around resourcing. I still think we're seeing a lot of sustainability teams heavily under resourced. We're seeing some heavily over resourced as well. But a lot of the teams, particularly in mid sized businesses between, let's say, 500 million revenue, And a few billion, 5, 6 billion revenue.We're seeing a lot of under resourcing for the scale of the challenge. And it's not really possible for one person to manage data reporting. and supply chain action. And so if you really, if you want to do, if you kind of be wondering how to even explain it, but like if you want to do reporting well, you're going to need to do data well.If you're abused your data and reporting to set any kind of challenge, you're going to need to do supplier chain engagement well. And so the sooner that business realises that the choice is either don't set a target and don't put your brand equity on the line. Or if you are going to set a target and build brand equity on the line, this will take more money, more resourcing, more capacity to do it justice.That's the trade off that I think more and more companies need to appreciate and come to terms with.
Isobel: I think on that note, our next episode is going to be on how to run a supplier engagement workshop, which Saif might run through with a few others. But thank you so much for tuning in and please give us any feedback anything at all that you want to see or you want to hear in terms of content themes also style and setup. And thanks Saif for all your wisdom.
Saif: Thanks Izzy for having me. And see you soon. Take care. Bye
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