Evaluate & Validate

Consider Total Cost of Ownership (TCO) and Life Cycle Costing (LCC)

It is important to consider not only the initial price, but the entire cost picture. This is where Total Cost of Ownership (TCO) and Life Cycle Costing (LCC) can play a role. TCO involves looking at all expenses over the product's lifetime, like maintenance and energy use and even disposal. Considering these costs upfront helps you make decisions that save more in the long run. LCC takes this a step further by accounting for environmental and social costs.

To use TCO and LCC, you must clearly define your evaluation criteria. And assign numerical values to both direct costs and potential externalities, like environmental impact or disposal costs. Then, during the supplier evaluation process, assess products or services based on these comprehensive criteria. This approach ensures your procurement decisions make financial sense upfront, but also align with your sustainability goals and have lower hidden costs over time.

EXAMPLE: Walmart creates category-specific sustainability scorecards

Walmart’s Supplier Sustainability Assessment (SSA) Scorecard consisted of 15 questions covering four topic areas, energy and climate, material use, natural resources, and community. Working with The Sustainability Consortium (TSC) the company developed well-researched category-specific questions for its scorecards across 100 categories. This provided a much more comprehensive assessment of sustainability performance. For instance, scorecards for the laptops category included questions on factory workers’ chemical exposure; while the laundry detergents category considers cold-water-wash messaging.¹^, ²^, ³

Put a price on negative sustainability impacts

Consider accounting for negative social and environmental impacts of the product or service you are procuring by assigning a monetary value to its impacts. For instance, putting a price on carbon emissions will make it a cost factor that affects the assessment of bids.

There are a number of frameworks available to help you calculate the negative environmental and social costs of a product or service. These include, True Costing,⁴^, ⁵ Social Life Cycle Costing (S-LCC), or Environmental Life Cycle Costing (E-LCC).⁶ For instance, to calculate the price of carbon associated with a product or service, it multiplies total associated emissions by a carbon price.⁷ When using these methods, procurement documents should outline the calculation method and required data to ensure fairness and transparency.

EXAMPLE: Global brewers estimate the true cost of water usage

Brewing and beverage companies estimating water usage costs, inclusive of energy and chemical inputs, found their total spend was 2 to 4 times higher than expected. By accounting for broader costs, they developed a financial justification for water conservation and reuse opportunities.⁸

EXAMPLE: How A. P. Møller-Mærsk differentiates good costs and bad costs

“Criteria such as price will always be relevant. The way that we look at it though is good cost and bad cost. If there’s something that costs more because it’s driving the sustainability agenda forward, then we see this as a good cost. It doesn’t mean that we’re not discussing prices and that we’re not adding arguments to our negotiations, but we look at it from the total cost of ownership and the total value of ownership perspectives and calculate what possible positive advantages could come from the extra costs.”⁹

Validate the credibility of supplier sustainability claims

You will need to validate and verify the sustainability claims of proposals and bids received. You can do this by seeking clarification on proposals and collecting sustainability performance data from suppliers. For instance, if you are asking for a recycled product or material(s), make sure the supplier has provided evidence such as ISO type I eco-label, technical files, or test reports. If needed, and proportional to the procurement’s scale and impact, you may also request independent verification of the supplier's sustainability claims.

Possible verification process include, third-party audits or certifications from recognised sustainability organisations, analysis of supplier sustainability data, such as greenhouse gas emissions, energy use, and waste generation. Verification may also require digging into the value chain to review of the environmental and social performance of the bidders' suppliers to ensure that they also meet the sustainability requirements set out in the tender documents.