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Why Your Firm Should Consider Products’ Total Cost of Ownership

total-cost-of-ownershipAs corporations look to cut their environmental costs, evaluating total cost of ownership — or the total direct and indirect costs of owning a product or service — provides a way to achieve greater environmental accountability and better resource management.

It’s not an easy task. It requires executives to dive deep into the value chain, and look at factors including manufacturing time, costs of parts, research and development, and environmental sustainability. This includes emissions from suppliers as well as those of consumers using the products and services.

But when done effectively, a total cost of ownership approach to goods and services can provide financial savings and other business benefits, according to a CDP report. By assessing cradle-to-grave impacts, including environmental factors, companies can reduce their costs and “push innovation in business,” according to A Paradigm Shift in Total Cost of Ownership.

The report focuses on Global 500 firms. “We looked at whether they were seeing opportunities through climate change, whether they were engaging their suppliers — not just where the emissions are but where the solutions are,” said Dexter Galvin, CDP’s head of supply chain, in an interview.

It found 55 percent of responding Global 500 companies report finding business opportunities resulting from modified consumer behavior due to climate change. And 69 percent report increased demand for lower-carbon products and services in 2016.

For example, in its 2015 disclosure to CDP, industrial gas maker Praxair said it is investing significant resources into meeting customer demand for products with a lower carbon footprint. Its 2015 eco-portfolio accounted for 32 percent of company sales, or more than $3 billion in revenue.

Alcoa is another company reporting growing customer demand — and subsequent revenue gains — from climate-related goods and services.

In its disclosure, the company says “our customers are increasingly asking for innovations and products to enhance their energy efficiency and reduce the CO2 emissions associated with the usage of their products…As a result of increased customer demand for energy efficiency, our Engineered Products & Solutions business group signed a number of valuable contracts throughout 2014, including a $1.1 billion 10-year supply agreement with Pratt & Whitney for enhanced, energy-efficient jet engine components.”

Also in the report, 77 percent of responding Global 500 companies said they engaged with their suppliers on climate change strategies in 2016, up from 67 percent three years earlier. Fifty-eight percent of these companies engaged with their customers on climate change, more than three times the number just three years earlier.

It paints a rosy picture for Global 500 value chains. But, Galvin says, when evaluating total cost of ownership, there is still much work to be done.

“We’re seeing 77 percent of these Global 500 companies actually engaging their supplier on climate change, and that paints a very positive picture,” he said. “But if you look at the 4,000 companies responding to CDP’s supply chain program this year, we see a massive lack of engagement with supply chains: only 27 percent of those companies are engaging their supply chains. So for the vast bulk of organizations, they are not doing enough at all.”

The report highlights some of the world’s largest purchasers — Walmart, Unilever, General Motors the US Navy and the US General Services Administration — as examples of total cost of ownership approaches to embedding environmental sustainability into business decisions. These organizations are using their massive purchasing power to reduce natural resources required to make and use their products. They are also asking suppliers to monitor and disclose their environmental impacts.

It also includes a case study that analyzes the potential cost savings of Hewlett Packard Enterprise’s Moonshot servers based on the US military’s draft Acquisition Guidance, which assesses the life-cycle impacts and costs of purchase systems. The study finds that replacing traditional servers with extreme low-energy servers like Moonshot would have the potential to cut annual greenhouse gas emissions by up to 100 million tons. It could also save customers up to $12 billion in internal energy costs, and reduce total environmental impact by up to $20 billion.

“And that would only work with this collaborative action” between Hewlett Packard Enterprise and the military, Galvin said. “By taking a total cost of ownership view, by taking the full life cycles of these products and services into account and a longer-term view with customers and key suppliers, there’s a real opportunity to work collaboratively to reduce emissions.”

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