Dialogue 2015

Stable procurement is crucial to the ongoing delivery of the “Joy and Satisfaction of Food” (Part 2)

Aiming to improve competitiveness through process-focused procurement activities

In 2014, employees of Asahi Group companies involved in procurement operations came together for dialogue with external experts and suppliers to discuss the issues faced by the Group in the stable procurement of raw materials. The dialogue identified considerable procurement risk in the future from water resource shortages, so the Asahi Group has began research and analysis of water-related risk. The following dialogue was held in 2015 to develop future directions for the Asahi Group based on these progress reports.

Aiming to improve competitiveness through process-focused procurement activities

Participants

  • Dr. Naoki Adachi Dr. Naoki Adachi
    President
    Response Ability, Inc.
  • Kaoru Sakita Kaoru Sakita
    General Manager, Procurement Section
    Asahi Group Holdings, Ltd.
  • Tomohiko Sata (facilitator) Tomohiko Sata (facilitator)
    General Manager,
    Corporate Social Responsibility Section (hereafter CSR Section)
    Asahi Group Holdings, Ltd.

Outline of risk analysis for the raw material water

Purpose

Analyzing water risk in relation to the procurement process for raw materials for the Asahi Group, and assessing the economic impact on Group business

Details of analysis

Raw materials analyzed: Key raw materials that are used in large amounts in the manufacture of Asahi Group products, and that are difficult to substitute and procured from overseas

Procurement locations: 59 regions worldwide

Analysis conducted:

  • Water footprint of raw materials*1
  • Natural capital costs (external expenses)

Analysis schedule: September 2014 - May 2015

Analysis methods
  1. Water scarcity investigation in supplier regions
  2. Water footprint investigation for raw materials in each region
  3. Assessment of natural capital costs
  4. Comparison with market prices

*1 The water footprint is the amount of water used both directly and indirectly throughout the full manufacturing lifecycle for foods and other products

Malt procurement risk identified through water risk analysis

Sata:At our 2014 forum, Dr. Adachi brought up a number of issues that reminded us of the importance of water as essential for the agricultural products and other raw materials needed in our business. We have desired to understand the current state of water risk so we have started by asking him to conduct these investigations.

Sata

Adachi: As you say, water is important for the procurement of raw materials, and it is extremely important for companies to be fully aware of this fact. Beverage manufacturers are naturally aware of the importance of water, but they tend to just look at water as being the “packaged water” content of their beverages. Compared to the actual amount of packaged water involved though, the amount of water used in the production of agricultural products used as raw materials is on a different order of magnitude, so it is critical to consider water issues as extending throughout the value chain. In this respect, society also values ongoing efforts to understand water risk and resolve issues related to your procurement process for key raw materials.

Sata: Thank you. So what issues have been identified from the current investigations, and what direction should be taken with future initiatives?

Adachi: Our analysis of Asahi Group's key raw materials is still in progress, but interim results indicate that malt, which is used in the Group's main products of beer and whisky, carries the highest potential for steep price increases through the impact of water risk in production areas. There is little awareness of water risk in Japan because of high rainfall and a decreasing population, but companies will have to start thinking of the importance of water risk to their procurement activities since many of them procure their raw material overseas.

Sakita: Of the raw materials handled by the Asahi Group, malt is an essential key raw material. Procurement divisions like ours should be very aware of the high risk it carries in the mid- to long-term. The procurement environment is constantly changing due to climate change, increasing demand for raw materials from emerging nations and other factors. Thanks to the specific and quantitative risks identified through these investigations, I am now able to personally understand the cost of water and the associated risk to procurement of raw materials. One important outcome from this is the opportunity to become aware of issues related to procurement for the Asahi Group from the mid- to long-term perspective.

Sata: And in addition to raw material procurement, it is also important for us to establish mid- to long-term policies and plans for reducing our impact on the environment.

Supply chain holds the key to reducing environmental impact

Adachi: This following graph (figure 1) shows water usage across the entire supply chain (divided into “operational water use,” “first-tier suppliers” and “other supply chain”) for the top six water-using business types among companies that make up the Nikkei 225 index. The “food and beverage” sector has the highest water usage among the six groups, with usage by “first-tier suppliers” and “other supply chain” accounting for as much as 98% of its total water usage. With only 2% of water usage attributable to “operational water use,” the supply chain itself uses an overwhelming amount of water. If we drill down further, we can also learn which supplier is using the most water and where in the supply chain the most water is used. This is how we know that our suppliers actually have the greatest impact on the environment. It is hard for the CSR Section to deal with this issue alone and therefore needs the cooperation of the procurement divisions.

Figure1. Six sectors with the highest levels of water use in the Nikkei 225
Figure1. Six sectors with the highest levels of water use in the Nikkei 225 Source: KPMG AZSA Sustainability Co., Ltd. “Peak water: Risks embedded in Japanese supply chains”
Source: KPMG AZSA Sustainability Co., Ltd. “Peak water: Risks embedded in Japanese supply chains”

Sakita: Our mission in the Procurement Section is to achieve stable procurement of raw materials. By going back up the supply chain, we have developed a real feeling for this risk and have found that the risk of price increases has a significant impact on Group business.

Sata: Developing relationships with suppliers has enabled important issues to be raised alongside normal procurement activities, but we need the cooperation of all operating companies within the Group, in addition to the CSR Section and the Procurement Section of Asahi Group Holdings, to resolve these issues. We are currently promoting CSR initiatives to suppliers, with the added commitment of management, as a measure to raise the level of social value for the Asahi Group, but going forward we must sort out the issues and gain the active participation of our operating companies as well.

Sakita: In the Procurement Section, we believe it is of the utmost importance to consider stable procurement for ten or twenty year into the future. For about a year now, members of our section have been screening the raw materials that can significantly impact Group business sales, and they have mapped the risk for those key raw materials according to difficulty of supply. We have investigated risk measures and other solutions based on this mapping, and over the year we have considerably expanded awareness of the issues.

Sata: The CSR Section also considers issues from the perspective of stable procurement to be extremely important. As a functional division of Asahi Group Holdings, it is also our role to gain the full commitment of everyone in the Asahi Group going forward to make this a management issue for everyone within the Group, including top management.

Sakita:Asahi Group procurement personnel are holding section strategy meetings once a fortnight to discuss future procurement strategies. We have discussed the vision of the Group's procurement function to be shared and have come up with a succinct slogan: “Green, Group, Global – The path to world-class procurement.” We have just started promoting this vision, including using an English version for our overseas Group companies.

Supply chain holds the key to reducing environmental impact

We think it is important that suppliers also understand the CSR policies, approaches and initiatives of the Asahi Group, so we have begun raising awareness from about the end of 2014 through briefings and other channels. We are also conducting surveys of our suppliers and producers to proactively work towards solutions for the risks and issues facing the entire supply chain. Through these surveys, we hope to understand what CSR initiatives suppliers are undertaking, such as initiatives to reduce environmental impact, and to enhance joint initiatives with suppliers and producers in order to achieve collaborative and sustainable procurement activities.

Treating stable procurement as a management issue

Adachi: Surveys and interviews can uncover areas needing improvement in the factories and other areas of operation. However, there is a risk of backlash and deception if rules are established unilaterally and are then required to be strictly observed, so it may be more effective to engage with suppliers to collaboratively develop solutions. It might take time to work through issues together with the supplier if something arises during procurement, rather than just ceasing to trade, but this is what builds strong relationships with suppliers that will lead to more stable procurement in the end.

Sakita: Specific procedures are important for future procurement activities, such as deciding what initiatives to implement with suppliers. The Asahi Group uses a wide variety of raw materials, so it is important to decide which of those to focus on and to remember that for a single raw material, there might be both large-scale and small-scale farmers. Of course different methods of support should be used for each, so again I am reminded of the importance of the process, to understand the total supplier situation and devise suitable measures.

Treating stable procurement as a management issue

Adachi: Going forward, it is important for the CSR Section and the Procurement Section to collaborate and communicate the actual situation to management and everyone else within the Group. Procurement risk has a considerable impact on the smooth running of business activities, so you must be able to appropriately show risk and solution scenarios to management by properly analyzing the investigations currently under way and closely studying the supplier responses to the surveys.

Sata: We inevitably tend to approach targets and strategies for the current period on a division-by-division basis, and to think of business operations in terms of six months or one year at the most. CSR and Procurement sections' initiatives on the other hand collect data from a slightly longer-term perspective and need to communicate with each section and Group company and share any risks and issues identified for three or five years into the future.

Adachi: QCD*2 is an often-used term that is essential in procurement activities. While QCD is certainly essential, I want to add an important letter P to that acronym, for Process. QCD represents three visible attributes of procured goods, while P is the invisible one, and I believe that this invisible attribute is becoming more important for competitiveness. I hope the Asahi Group to enable visualization of the normally invisible Process and to be socially proud of its own processes.

Sata: Do you have any final words for the Asahi Group in relation to its procurement activities?

Adachi: In 2020, Tokyo will host the Olympics and Paralympics but in 2012, London hosted what was known as the “sustainable Olympics.” From drink and food provided in venues and athlete's villages, to building materials used in the stadiums, to flower bouquets given to the winners and tickets for entry to the events, all raw materials used were certified as sustainable. If London and the UK could achieve this feat, then I hope Tokyo and Japan can match it, or even exceed it if possible. This would have a huge impact both domestically and overseas, and companies that could quickly deliver those products would be at an advantage. I hope the Asahi Group takes the lead in developing this standard, and I look forward to them bringing it to fruition.

Sata: Thank you Dr. Adachi. We appreciate your invaluable comments and opinions.

*2 Quality, Cost and Delivery