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 / Summer 2008 / Issue 51(originally published by Booz & Company)


Start with Sourcing

Just as the current state of green sourcing reminds senior managers of the excitement of the early days of the quality movement, it has also spurred other emotions. The dawn of any change movement in operations and practices is marked by uncertainty, concern, even fear. But green sourcing has amassed enough evidence of its value to prove that it, like quality, is no flash in the pan. For those who persevered with quality, the rewards were substantial in cost savings, more effective operations, and a stronger connection with customers. Those companies that fully engage today in green sourcing can look for comparable results.

A Permanente State of Green

At Kaiser Permanente, green sourcing is just one part of an overall corporate strategy that reflects the deep roots that environmental awareness has in the organization’s culture. 

“Rachel Carson, who is still recognized as one of the people who kicked off the environmental movement, came to address a number of Kaiser Permanente physicians back in 1963,” says Robert Gotto, senior sourcing director for Kaiser Permanente, an integrated health plan and pro­vider based in Oakland, Calif., that provides care to members through a network of hospitals and clinics. “She was a pretty controversial figure at the time, and Kaiser Permanente reached out to her because the physicians wanted to understand her ideas and how they were relevant to the health-care industry.”

Nearly a half century later, care for the environment is almost as firmly embedded in the organization’s culture as is care for patients. In 2001, Kaiser Permanente formed an environmental stewardship council that chose three major areas of focus: green buildings, environmentally re­sponsible purchasing, and environmentally sustainable operations. The decision to make purchasing a major part of the strategy stemmed from the fact that Kaiser Permanente spends about US$14 billion per year on various products and services, and it wanted that money to be spent in a way that supported the company’s values. It turned out that making purchasing decisions based in part on environmental criteria didn’t just “save the earth,” it also saved money. 

“One of the myths you have to address right up front is that cost-cutting initiatives and environmentally responsible initiatives are in any way in conflict,” says Gotto. “We have a list of more than 30 initiatives, delivered through the green sourcing program, in which we made environmentally pref­erable choices. Most of those initiatives have been cost-neutral, but there have been a significant number that have delivered cost savings — about $9 million annually. None of them have involved a cost increase.”

Some savings have come from measures unique to the health-care industry, such as replacing some single-use medical devices (such as trocars, which are ports that introduce instruments into blood vessels) with those that can be reprocessed by suppliers and safely used again; this initiative represents savings of about $2 million annually for Kaiser Permanente. Others are more widely applicable, such as the organization’s policy that all desktop and laptop computers be purchased according to Electronic Product Environmental Assessment Tool guidelines, which ensures that the level of energy consumption and the extent of toxic materials used are factors in the purchasing decision. Thanks to the reduction in energy consumption in the use of these computers, the U.S. Environ­mental Protection Agency (EPA) estimated that Kaiser Permanente would save about $4 million per year. 

These examples underscore the key role that Kaiser Permanente’s suppliers play as external partners in its green sourcing program. The relationships were a challenge in the early stages of the program: Suppliers were slow to respond or even resistant to Kaiser Permanente’s environmental goals, whether because they were concerned that revealing the chemicals in their products would make them vulnerable to litigation or because they felt there was not enough demand for environmentally friendly products from the rest of the health-care industry. 

In response, Kaiser Permanente established a strategic supplier program in which it works with key suppliers to identify environmental opportunities and find mutually acceptable solutions. Kaiser Perma­nente’s sourcing department also makes a point of seeking out other companies in the health-care industry that have environmentally sustainable cultures, such as Johnson & Johnson and Baxter International Inc. Finally, Kaiser Permanente has recently begun using an automated sourcing tool that measures environmental criteria in weighing suppliers’ proposals. 

The organization’s holistic approach to developing a green sourcing program led it to the conclusion that it could accelerate the impact through partnering with others. Therefore, in 2007, Kaiser Permanente launched a global health and safety initiative that brought together supply chain leaders from more than 20 U.S. health-care systems, as well as government agencies, including the EPA; nonprofit organizations, such as Health Care Without Harm; and group purchasing organizations, which do the contracting for 90 percent of medical expenditures in the U.S. The members of this informal consortium recognized that a united approach to green purchasing would accelerate change within the supply chain. To that end, Gotto now meets monthly with a number of U.S. health-care supply chain colleagues. One of the group’s first goals is to identify the products in the industry that have the most environmental impact and to find more sustainable alternatives.

— M.T. and P.H.

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  1. Daniel C. Esty and Andrew S. Winston, Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage (Yale University Press, 2006): Numerous examples of companies that prove that sustainable can also mean profitable.
  2. eyeforprocurement, “Green Purchasing Report,” July 2007: Results of a survey on current practices in green sourcing.
  3. Georgina Grenon, Joseph Martha, and Martha Turner, “How Big Is Your Carbon Footprint?” Supply Chain Quarterly, Fourth Quarter 2007: Companies are looking for opportunities to conserve energy and reduce carbon emissions in their supply chains.
  4. Art Kleiner, “Materials Witnesses,” s+b, Fall 2005: The hidden challenges of green sourcing, including learning to overcome competitive secrecy and diverging specifications.
  5. William McDonough and Michael Braungart, Cradle to Cradle: Remaking the Way We Make Things (North Point Press, 2002): Discussion of the need to create carbon-neutral products.
  6. Hardin Tibbs, “How Green Is My Value Chain?s+b Leading Ideas Online, 10/23/07: An argument for turning the value chain into a value loop.
  7. Carbon Trust Web site: Provides a variety of resources for reducing carbon footprints, including case studies.
  8. For more on global perspectives, sign up for s+b’s RSS feeds.
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