Regenerative Procurement is the new Procurement. Feb 27, 2024

Regenerative Procurement is the new Procurement

Good Procurement Practices taught and followed for decades have dug the bed of some of the major problems we face today. A procuremen department is expected to multiply its calls for tender. However, this is a method that destroys value and worsens the environmental and societal impact of companies.

The Good Procurement Practices followed by purchasing departments for decades are based on a few relatively simple principles:

 – Systematically negotiate spending budgets downwards each year, according to a percentage set by the finance department.

– Consolidate spending with a minimum number of suppliers.

– Systematically put suppliers in competition through increasingly complex calls for tender.

– Low-cost country sourcing.

Procurement performance is assessed primarily on the basis of price reduction. Cost reductions and avoided costs are, in the vast majority of cases, not recognized by finance departments.

For many years, these methods were the roadmap for procurement and the basis for assessing its performance. These approaches have led to the desertification of the Western industrial network we know today, with value chains blocked and weakened by the two recent crises, health and geopolitics.

Indeed, until recently, the search for solutions to reduce our environmental footprint and protect society was not part of the corporate agenda, pushing procurement departments towards essentially economic choices. Yesterday’s methods have dug the bed of the problems we face today, from which it is very difficult to extricate ourselves.

After demonstrating the negative impact of Low Cost Sourcing in a previous article, in this second article I address the consequences of systematic tendering.

For a long time, procurement strategies were reduced to calls for tender, i.e. simply putting suppliers out to tender, selecting the cheapest, and then presenting this result as the procurement  strategy to be implemented. This approach, which only aims to reduce prices, destroys value, as the selected supplier is forced, under pressure, to cut its margin.

They are then obliged to relocate, thereby destroying jobs in the industrial basins of origin to use potentially underpaid and mistreated labor on the other side of the world. In addition to the social impact, this exacerbates the greenhouse gas emissions required to transport products. The supplier may also be forced to use degraded production methods or inferior ingredients or packaging, which also worsens its environmental impact and reduces the quality of products made from these materials. 

There is another way to lower costs (and not just prices), to create 100% commercial and ESG value. It involves working in partnership with suppliers, based on the Regenerative Procurement matrix.

Partnerships are built over the long term. It’s impossible to develop collaboration and create value by calling a supplier’s relationship into question every two or three years through a call for tenders. So we have to find another way of ensuring that the prices paid are competitive, while protecting the customer-supplier relationship.

By developing partnerships with suppliers who share common values, companies are able to take an in-depth look at cost-cutting opportunities internal to the company or shared with suppliers, as well as creating commercial and ESG value. The subject of prices and their evolution needs to be addressed through the collaborative implementation of detailed cost models, including indexes that enable tariffs to be updated. Setting up contracts with no end date, and with exit clauses with notice periods, enables both parties to commit to the long term, while ensuring the freedom to leave the agreement if necessary.

The Regenerative Procurement method, whose aim is to contribute to the repair of supplier ecosystems, aims to modify the purchasing operating model. The aim is to propose an alternative approach to the application of an ESG “layer” over methods that have led to yesterday’s financial successes, but also to today’s environmental and societal disasters.