Sustainability Metrics In Purchasing DecisionsMarch 17, 2015
The new Center for Sustainable Procurement, formed by the hotel company Hilton Worldwide and the global sustainability specialists BSR, is trying to build new tools for procurement professionals. The goal: help them bring sustainability data into their everyday purchasing decisions.It’s one thing for companies to figure out the best ways to embrace sustainability within their own operations.It’s another thing to figure out the best ways to get other companies — specifically, suppliers — to embrace sustainability, too.
One new lever in that challenge is an initiative called the Center for Sustainable Procurement (CSP). It was formed by Hilton Worldwide (Hilton), the global hotel company, and BSR, the global consultancy on sustainability, in what they term a “partnership in sustainable recruitment.”
CSP’s website notes that “although more sustainability data has become available in recent years, companies don’t always know how to apply this information to the products they purchase.” CSP is designed to help procurement professionals get the “methods and guidance that will help them integrate product sustainability data into everyday purchasing decisions.”
William Kornegay, senior vice president, Hilton Supply Management, Hilton Worldwide, and Eric Olson, senior vice president, advisory services, BSR, are in the heart of the project.They realized two things: First, that there wasn’t a way for procurement professionals at Hilton who were trying to weigh sustainability factors to easily differentiate between products they were buying for the hotels — products from computers to towels to soap. And second, that if there wasn’t an easy way for Hilton employees to do it, there probably wasn’t an easy way for a whole lot of other people to do it.
“Through Eric and the guys at BSR,” says Hilton’s Kornegay, “we talked about creating a standard tool set that will work, hopefully, globally.” Says BSR’s Olson: “What we realized is that there was a real white space and a real need to supplement all the existing work on sustainability with efforts that focus on the procurement manager.”
In a conversation with David Kiron, MIT Sloan Management Review’s executive editor of the Big Ideas Initiative, Kornegay and Olson talk about how the two organizations got together, the challenges of driving sustainability down to the level of a purchasing decision and why AT&T is an early model.
Let’s start with suppliers. I have a picture in my head of suppliers as passive movers in the sustainability movement. Is this about companies like Hilton giving them instructions? Or is there an opportunity for suppliers to be proactive?
Olson: You raise an interesting question. First let’s think about what a supplier is. That depends very much on who the company is. So, for Hilton, Dell is a supplier, it sells them computers. In Dell’s case, it’s going to be innovating and bringing something interesting to Hilton without having been asked by Hilton.
Similarly, Walmart’s suppliers are some of the largest, most innovative branded product manufacturers in the world — Unilever, Proctor & Gamble and what have you — and many of them have their own proactive sustainability programs.
But as you go further and further up the chain, to the suppliers of the suppliers, if you will, in most industries you do get to a point where now you’re facing a basic manufacturing operation. Now we’re talking a middle-market metal-stamping enterprise in China, which will have a different capacity and level of sophistication for this kind of work. When you get that far up, then yes, generally conversations and parameters about sustainability features are flowing from the brand or the customer upstream as a requirement to them.
Kornegay: And, David, from my perspective, that’s why this sustainability metric becomes important. We can determine what the cost of an item is, or, to some degree, the quality of an item, but how do we measure sustainability? The further away you are from the beginning, the more you need a metric that helps you articulate and differentiate between products’ sustainability.
Bill, you must have run into issues at Hilton with suppliers when it comes to wanting them to be more sustainable than they’re already being in the products you’re getting from them.
Kornegay: Well, the first thing I’d say is that this only works when sustainable products are not more expensive than nonsustainable products. As an entity, cost is one of the primary measures that we measure. If you have the most sustainable product on the market but it costs 50% more than a nonsustainable product, it’s really about what our end user is willing to pay for that experience. And most of the end users that we have, in our opinion, at this point in time, would not be willing to pay a 50% premium for the ability to say it was sustainable.
Most of our suppliers are trying very hard to meet our expectations and they develop a range of good, better, best kind of options, laying out, “here’s our most sustainable product, but here’s what it costs” and that kind of thing.
Are suppliers presenting that in terms of the transactional costs or as a total cost of ownership?
Kornegay: The way we work, we have category owners, and then there are managers and buyers in the category. The primary tools that we’ve given them are total quality and total delivered cost. So, where is it manufactured? What’s the distribution? How much do you pay to get it, land it, where we need it, in the quantity that we need it, at the time that we need it?
We haven’t given the front-line purchasing agent, the buyer, a tool to help them understand sustainability. And so no, most of our vendors are not providing us with that because we haven’t asked the best questions. It’s still something in development for us.
Olson: This all ties back to why we saw a need for a Center. This is exactly the take-off point that we were at when we were designing the Center.
We’re working on the buyers and the suppliers at the same time. The whole point is that we went out in our early supply-chain work and used all the great third-party metrics, saw that there’s certified this and more sustainable that, but the way that it works today, a) it’s confusing and b) the business case in a lot of these cases are unclear. So we thought, we have got to develop some tools that are going to enable the buyers to ask the right questions of suppliers.
Suppliers will say things at a high level, like, “if you do business with us, your brand will be more protected, you’ll be doing the right thing — it’s consistent with your overall corporate values and high level sustainability commitments.” All of which is worth something for sure, but when you drive it down to the level of a purchasing decision given current incentives and constraints, there’s been really no guidance in how to translate that into something that people can hold up alongside their measures and say, “that’s worth 20% on my scorecard.”
How did your two organizations go from working together for something internal for Hilton to working together for this Center?
Olson: One of the things that’s interesting about Hilton is that it’s similar to what people say about the impact that Walmart has on its supply chain, in that Hilton, as a buyer, buys everything. So it’s a great example, it’s a great place to consider the challenge of implementing these practices in an extremely complex organization. Complex in terms of the number of products, complex in terms of the global scope, complex in terms of actually taking this growing intelligence about sustainability about better products and putting it into operation with literally thousands of people who’ve got to make decisions on a daily basis.
BSR was engaged with Hilton for a couple of years tackling that problem specifically at Hilton and trying to make it tangible. That meant we had to know what “better” or “more sustainable” looks like, how you actually define that in a product. Then you have to know how to ask for it, which in turn means you’ve got to be able to get information about it that’s useful and credible. Then you’ve got to be able to integrate that information into the decision, which by necessity still includes considerations of cost, quality, delivery — all the things that procurement folks are rightly expected to deliver for their companies.
And then, obviously, you need to be able to track and verify that you’re having the impact, both economic and in sustainability terms, that you set out to have. If you look at this world today there is a lot of really exciting activity that’s been spearheaded by big retailers, such as Walmart, Marks & Spencer and Unilever, as well as hundreds, if not thousands, of eco-label certification programs — that whole field that has emerged to help us define what is more sustainable, from a computer to corn.
What we realized is that there was a real white space and a real need to supplement all the existing work on sustainability with efforts that focus on the procurement manager. How do we help them figure out how to integrate it into what they’re doing so that they really can buy better computers, buy better furnishings for their store, buy better food for their food service areas?
The impetus was to help make sure that all this great investment that’s going into the world of defining better life cycle analysis can actually get traction and have the positive impact we’re all hoping for.
Kornegay: I’ll add a couple things. Let me be clear: we weren’t doing this for altruistic measures to better the planet. I think that’s a wonderful thing, but as business people, we wanted to be able to provide the people making these decisions with tools that allow us to be sustainable, but in an environment where I always have to measure least-landed cost.
The transition really occurred as we recognized that we were not in the world alone doing this in an isolated environment. We didn’t want to be reinventing the wheel, and we wanted to see what other people were doing. And not just in the hospitality arena, but we wanted to be able to look across industries. We thought, in conjunction with Eric and his team at BSR, that the establishment of the Center would allow for that to happen in an environment that was focused on the tools of how you do it and not on the esoteric of why it’s the right thing to do.
Allowing this process to happen in a space where like-minded organizations could wrestle with an opportunity that we all have, we thought we could extrapolate all that knowledge into a toolset that we can all use.
Olson: The way that I summarize that, David, is it’s about opening the front end of the funnel so that we can accelerate the learning. We spent the better of two years starting the cycle through just a small number of literally hundreds of categories that a company like Hilton needs to address. It quickly became clear that if you don’t have a lot of organizations working in parallel, there’s no way they’re going to cover this territory in any kind of reasonable period of time.
Our inaugural report with the Center’s first year findings is now out. It looks at the year-long pilot projects we did with AT&T, Best Buy and Dell.
Bill, can you tell us a little about where Hilton is in its sustainability journey? What’s the LightStay platform?
Kornegay: LightStay is our sustainability management system, and it really is a tracking system. We assess more than 200 different measures across the portfolio. We built in a way to look at all of these stock-keeping units that we’re purchasing, how the properties are using them, what their footprint is in energy, waste, water, material, carbon and packaging.
And so, the tool itself works as a measurement, but it’s not going to help a procurement professional make a good decision from one product to the other. It doesn’t provide us with that specific data.
Olson: I would add, David, that we’re so close to this, we’ve had a lot of time to sift through and think about it. What Bill just described is generation one and maybe even two of LightStay. It’s property-level operations management, for managing energy use, waste, water, et cetera, for a hotel. They built it, it’s their tool and it’s deployed on what I consider a breathtaking scope and scale already. I’ve never seen anything like it.
Hilton then got to the point of saying, “okay, now we want to take that same idea and apply it to the things we buy.” And it was then that our partnership came into being. We do a lot of supply chain and product sustainability work with a lot of companies, including a lot of the companies that supply to Hilton.
We figured all of us would benefit if we could get a lot more organizations involved.
That’s fantastic, a very clear picture. But it does beg the question of whether the LightStay platform is that something that is being shared.
Kornegay: Right now it’s proprietary tool for the Hilton Worldwide portfolio of over 4000 properties and we’re not necessarily sharing it with others.
Do you see it as something that is a potential source of revenues in terms of sharing licensing?
Kornegay: I’m thinking it hasn’t even evolved quite that far, David.
Part of where that question is coming from is that there are these transition points that sometimes happen in the development of sustainability programs where organizations see sustainability as a way to do cost savings and even an opportunity to generate revenues and possibly profit.
Kornegay: I think it’s fair to say that for Hilton this was predominantly done for the cost savings. I would also say that Hilton Worldwide prides itself on being the leader in our industry, and we thought that this would be a proprietary tool as part of our offering to our franchisees in those management companies that do business with Hilton Worldwide. It would be another distinguisher of the Hilton promise to make us the best product and the best hotel brand to do business with.
Finally, tell us a little about the research that the Center has been doing. You’re about year in, right? What kind of findings have you had so far?
Olson: Like I mentioned, the three companies we’ve been most active with so far and the cases are outlined in the paper are AT&T, Best Buy and Dell. We deliberately chose different kinds of procurement challenges because that is fundamental to the message that there is no one size fits all approach to sustainable procurement.
I’ll tell you a little bit about AT&T’s case. AT&T has a massive, massive real estate footprint and massive related spend on energy, particularly electricity — it’s well north of a billion dollars a year.
We wanted to take a look at one of their equipment buys where we could run the case for an equipment change. In this case, it was related to their HVAC systems, where the cost of the change, switching cost and to some extent component cost, might involve a price increase or at least a one-time expense for switching that would be offset by very substantial savings over time in the form of reduced electricity expense. So, this is not a pure purchasing initiative.
And, indeed, in this case it required getting the right internal stakeholder group together that included the facilities manager, people in purchasing, people in the sustainability team, people responsible for a forward energy strategy at the company — AT&T had to get all of them together in order to identify the requirements for making this kind of a switch and being able to calculate the relevance to the business case.
So we started with a purchasing problem, and we ended up with a change effort that touched no fewer than five different departments.What did we learn? We learned that, number one, you’ve got to have the right players in the room to scope the problem and to make it happen in order to get to these bigger, broader business cases.
Number two, I think what this illustrates is the value and the importance of starting with what’s easily measurable and then building from there. What we needed was an approach that would put some value into the system relatively quickly, and then we will build on bigger questions beyond the energy usage, like what are the other attributes of this equipment, its operation, ultimately disposal of the equipment. A total life-cycle approach that would be much broader.
I think that had we started with that, there’s no way we would have gotten traction with AT&T’s energy and facilities teams. It’s just too complicated. The lesson there? A step-wise approach was fundamental.