Greening the Supply Chain, Part I

If you Google “green supply chain” you get over 12 million results. This is now one of the hot topics and, as with most of things green, there is a wide variety of interpretation of what, exactly, the term means.

So, here is my interpretation!

First of all, I am not a supply chain expert. I have come to realize over the past few years that there are companies that make almost everything themselves (fewer and fewer but they still exist) and rely on some outside suppliers and there are companies that make almost nothing themselves and rely on an extensive network of suppliers. And, most important, I’ve come to know some supply chain experts here at Berkeley (particularly Professor Max Shen in Industrial Engineering and Operations Research) so I am emboldened to charge ahead!

Let’s start with some definitions. Remember the Ricoh Comet Circle? That shows the path of a product to the consumer and the fate of the product after it leaves the consumer. The consumer can be you or me, a company using a machine (product) or consumable, etc. This diagram visualizes the forward and reverse supply chain.

A supply chain can be defined as the “network of retailers, distributors, transporters, storage facilities and suppliers that participate in the sale, delivery and production of a particular product” (source: http://www.investorwords.com/4823/supply_chain.html). These are usually stratified into first tier, second tier and, sometimes, third tier suppliers depending on where they are in the “food chain” so to speak.

The image below shows the inter-relationship among these suppliers and manufacturing, etc., including material and information flows.

And, one could add 3rd tier suppliers to this as well. All the components of the Comet Circle are represented. The locations of these elements in the figure can be anywhere in the world (and usually are) that the company feels the best value can be obtained. The time, cost, and now, environmental impact of all these flows is of major importance.

Recently, I wrote about the UK’s goal of CO2 reduction and the comparison of the actual vs “apparent” reduction. The actual, if you included “outsourced CO2,” was moving in the opposite direction of the target reduction. The figure above tells you how that happens – make sure the heavy CO2 contributing elements are outside the UK. Bad for the accounting and, incidentally, for domestic manufacturing!

These supply chains can be impressively complicated for sophisticated products, for example the laptop computer I’m writing this on. This is due to the large number of different parts and elements, the large number of suppliers (at all tiers) of these parts and, importantly, their location and the transport means for getting all this together to result in my laptop.

Our concern here is with these material flows and the embodied energy, water, resources, for all aspects of the manufacture, including transportation and storage/distribution associated with those.

Depending on how much a company relies on its supply chain will determine to what extent that company can affect the impact of its product. Wal-Mart’s sustainability initiative is a major example of this new trend. It is estimated that, for Wal-Mart, as much as 90% of a product’s associated carbon emissions (transportation, manufacturing, farming, etc.) are from the suppliers. So for a company like Wal-Mart, if they want to reducing their emissions overall, they need to find a way to affect their supply chain.

Recall that a firm’s environmental performance is usually evaluated in terms of energy consumption and carbon footprint. Most companies focus on direct emission (Scope 1) and indirect emission from purchased energy (Scope 2). Direct emission from company owned or controlled activities and indirect emission from purchased energy make up only a small percentage of the total supply chain emission, excluding emission from the use phase.

The supply chain emissions will vary with the product and industry. For example, the figure below, derived from the CEDA database from Professor Sangwon Suh at the University of Minnesota, shows the carbon emission in the supply chains in several selected manufacturing industries.

The range is impressive. For some electronics only about 10% of the carbon emission is direct. The bulk of the emissions for computers, more than 80% in the figure, is from embodied emissions of the purchased parts. Ditto for motor vehicles. The lowest supply chain impact in this example, plastic materials and resins, is still showing that less than half of the carbon emission is due to direct emissions and electricity consumption – rest from the supply chain.

Some companies have started to look at overall supply chain carbon emissions. However, they often tend to ignore the interaction between different elements of their supply chains. This could be due to the complexity of tracking material flow through all the elements. These elements include all the components seen in the first figure above.

Ignoring interactions can have deleterious effects. For example, if one changes the shipping mode to a lower-carbon option such as rail, the carbon emission per product will decrease. However, delivery by train may result in a longer lead-time and, thus, necessitate a higher safety stock at the retailer or production facility. In turn, greater inventory at the retailer or plant will increase the energy consumption and carbon emissions of their storage facility and warehouses. At least it will likely require more floor space and the related impacts of that in energy, etc. Thus, the overall CO2 reduction may be smaller than expected or, perhaps, non-existent.

As another example, suppose there is a manufacturing process changeover that consumes more materials and resources. One may want to increase the batch size to reduce carbon emissions. However, larger batch sizes will require an increase in the system WIP, and thus increase inventory level carbon emissions.

I’ll continue this discussion with a more detailed example next time to show how we account for some of these interactions and weigh the impact of a particular supply chain.