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August 23, 2009

Supply Chain: Green Or Gold Or Both?

Keith Burgess
Simon Glass
IBM Global Business Services

Companies face increased stakeholder pressure and government regulation to reduce carbon dioxide and other greenhouse gas emissions. To address this issue, companies must take action within their supply chains, which account for the vast majority of their energy use and CO2 emissions.

But in a recent IBM survey of more than 400 supply chain executives, 89 percent of the respondents reported that cost reduction was either very important or critically important .

As companies struggle to address both concerns – particularly in the current economic climate – it’s important that they view them as complementary, not conflicting. By executing the right sustainable business strategy, they can successfully improve efficiency, reduce energy use and costs, and lower environmental impact.

Sustainability in the new economic environment

There are three key factors driving sustainable business practices up the corporate agenda:

1. Laws, regulations, and standards — governments worldwide are committing to key environmental targets and introducing climate change legislation, supported by taxation frameworks to drive improvements. For example, emissions “cap and trade” requirements go into effect in the UK next year, and legislation with similar provisions is currently making its way through the U.S. Congress.

2.  Stakeholder pressures — increasingly, a company’s “green” credentials are being used as selection criteria by a range of key stakeholders, such as customers, investors, business partners, and potential employees. For example, the Carbon Disclosure Project identifies green-focused investors with assets of more than $41 trillion.

And in our 2009 global survey of c-level executives on green and sustainability issues, half of the respondents said they are being compelled to adopt new CO2 standards by their business partners.

3. Costs — With volatile energy prices and other rising supply chain costs, CO2 emissions reduction and cost containment are increasingly compatible – when you burn less, you pay less and emit less, and the benefits can ripple further. Within our own company’s experience, we estimate a $1 reduction in energy costs can lead to an additional $6-8 in operational savings.

Supply Chain Levers

As supply chain executives look at approaching these challenges, there are some common levers for reducing costs and CO2 emissions:

• Transportation and supply — increased local sourcing may well increase the costs of raw materials, but this could be more than offset by reducing the distance travelled. It will also reduce exposure to certain supply chain risks, including volatile fuel prices, long and unreliable lead times, currency exchange risks, etc. The introduction of enhanced vehicle technology and design can also improve fuel efficiency. Such measures can help to reduce both emissions and total supply chain cost.
• Product lifecycle management — How products are designed, assembled, labeled, packaged and recycled can have a profound effect on the carbon efficiency of the supply chain. For manufacturers, there may be product redesign opportunities that reduce energy consumption in manufacturing, distribution, or end use. Every conceivable change is an opportunity — from reducing the weight of the product to making it easier to disassemble. In some cases, innovation or new technologies may make it possible to eliminate some components or sub-components entirely and thereby eliminate discrete portions of the supply chain. Products that are recalled from the market, that must be upgraded or refurbished during their useful life, or must be recycled at the end of their life require some kind of reverse supply chain. By planning for these lifecycle events in the original design phase, it is possible to eliminate or reduce unacceptably high energy costs later and minimize the CO2 emissions of the reverse supply chain.
• Low-emissions manufacturing — there are various opportunities to reduce cost and GHG emissions simultaneously in the manufacturing process. Applying Lean Six Sigma principles to streamline production steps can reduce water, energy and waste. Maximizing asset utilization through predictive maintenance, which can be aided by smart asset monitoring technologies that provide real-time analysis to help predict when an asset is going to fail, can improve efficiency and lower costs. Moreover, as legislation is introduced that taxes pollutants, toxic materials, and harmful emissions, organizations that reduce such issues also will reduce potential punitive costs.
• Shipment — if service-level agreements with suppliers and customers contain unnecessary requirements, waste is the result. When agreements force small, expedited deliveries, energy use goes up dramatically. For example, our company recently worked with a major brewery to help redesign its trade terms with its customers. By incenting pubs and clubs to accept larger, less frequent deliveries, the brewery can increase full truck-loads, saving significant costs and simultaneously reducing GHG emissions. Furthermore, as the trend toward Internet shopping drives an increase in home deliveries, successful first-time deliveries will have a major effect, both on costs and carbon footprint. Organizations that take steps to improve first-time delivery success, will reduce both cost and carbon footprint, while improving the customer experience.
• Packaging — intuitively, reducing the amount of packaging on a product might seem to be the best way to reduce both the cost of a product and its environmental impact. But not if it results in safety, spoilage, damage and return issues. Grocery retailers are constantly under pressure to reduce plastic packaging, but many have pointed out that a significant proportion of packaging is there to protect food safety and prolong shelf life. This reduces waste in the supply chain, which consequently reduces cost and environmental impact. Also, for manufacturing companies, typically up to 25 percent of packaging waste might be generated by returned or damaged shipments . Once a shipment is damaged, it is returned and another product shipped out, doubling the costs of packaging and fuel. A major US computer manufacturer has introduced the use of logistics bars and air bags between pallets to stabilize the loads, thereby reducing the number of damaged shipments to less than 1 percent, while improving customer service and eliminating packaging waste . So the best way to address this issue is increased investment in new packaging designs and technologies that reduce waste and maintain product safety.

Turning green into gold

The real winners in the new economic environment will be those who recognize that developing sustainable business practices is fundamental to saving money now and preparing for the future.

These leaders will seek out cost-effective, sustainable business opportunities to reduce environmental impact and business costs while identifying new opportunities to increase market share. A survey by Aberdeen group showed that the top green supply chain organizations had on average reduced supply chain energy costs by six percent in one year. Other supply chain costs had reduced on average by two percent. At the other end of the scale, laggards saw overall increases in supply chain costs.

In addition, environmentally responsible and energy efficient products are one of the few market sectors currently recording growth. So businesses that focus on process improvement, cost control, product and service innovation and reducing environmental impact will position themselves for leadership now and in the future.

Keith Burgess and Simon Glass are management consultants for IBM Global Business Services. They work with clients across a wide range of industries to identify opportunities to promote sustainable business practices, particularly in supply-chain management, as a fundamental element of core business strategy.

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