With increasing frequency companies are taking on “green” initiatives to improve their sustainability record and secure cost reductions.
Some of the impetus is from the marketplace: customers are increasingly demanding that their trading partners become more socially responsible with respect to the environment. If a company’s products and/or practices aren’t “green” enough, trading partners and consumers may seek alternatives. An important example – the various initiatives announced over the past year by Wal-Mart, including merchandise green tags supplied by their vendors.
Government actions to date include mileage targets and emissions limits, cap-and-trade regulations, and air and water quality standards. A wave of CO2 compliance deadlines in Australia, the United Kingdom and the United States is fast approaching, as well as tighter rules embodied in the European Union Emissions Trading Scheme. Companies are increasingly feeling the pressure to accurately develop energy consumption and carbon emission audits, to better insure themselves against future requirements and/or burnish their “green” image.
Start with Strategy
With all of the above in mind, it is natural to ask how best to prepare for this uncertain and rapidly evolving future. An excellent place to begin is with a comprehensive look at supply chain strategy on a regular basis. Leading-edge firms have long adopted a rigorous approach to designing their supply chains, balancing the typically conflicting metrics of cost minimization, customer service requirements and capacity availability/utilization.
Moreover, they do so by examining the whole of operations simultaneously, from raw material procurement to final delivery to the customer.
More recently, they have begun to incorporate sustainability measures such as energy usage, carbon emissions and process waste reclamation or disposal into the study.
But the most advanced firms approach the analysis via the goal of profit maximization rather than cost minimization and explicitly incorporate both the cost and the impact of marketing initiatives, thereby generating true corporate strategies. Note that all of the above is consistent with a continuous improvement philosophy.
More Than One Metric
In contrast, far too many supply chain initiatives focus on a single metric such as cost reduction for a particular function (for example, reduced manufacturing or transportation costs). Setting aside for the moment that such myopia typically leads to the wrong conclusions (with attendant cost increases and profit reduction), sustainability considerations demand a comprehensive approach. One rarely encounters a reference to procurement or manufacturing or transportation or warehousing energy consumption or carbon footprint in isolation. Rather, the guiding principle is the environmental impact of the firm as a whole.
To illustrate the preceding, consider outsourced manufacturing. Far too often the outsourcing decision has been predicated on manufacturing labor cost minimization, a remarkably myopic perspective.
In contrast, a proper outsourcing decision requires, at a minimum, consideration of raw material acquisition, manufacturing, warehousing, inventory, transportation, duty, tax, and port handling costs; product quality standards; the risk of intellectual property theft; and the ability to respond efficiently and effectively to rapidly changing market requirements.
Even when all of these elements are properly reflected in the analysis, the introduction of energy consumption and/ or carbon emission minimization goals may change the final recommendation yet again. For example, if only North American markets are considered, it is often difficult to justify, from a comprehensive cost perspective, 12,000-mile-long supply chains which originate in the Pacific Basin. When sustainability goals are introduced, it is often next to impossible to do so. Global demand coupled with global supply is much more complex, although it can be dealt with using the same tools. It is possible to find the most efficient supply chain designs by minimizing cost, energy consumption or carbon emission. All of these answers are useful in understanding the true workings of the supply chain. On the other hand, it is ultimately more realistic to consider these objectives simultaneously.
For example, one could do a cost minimization (or profit maximization) analysis, subject to additional constraints of energy consumption and/or carbon emission. The latter might take the form of cap-and-trade restrictions imposed by various governments or regions.
This suggests a macro approach to considering sustainability. Additional micro considerations include:
• Product designs that minimize resource consumption, facilitate efficient manufacturing, distribution and returns processing, and promote recycling.
• Differential impacts of energy cost changes across functions (manufacturing vs. transportation, for example).
• Explicit consideration of manufacturing by-products, either as a secondary (profit-generating) market opportunity or with respect to the costs of recycling and/ or disposal (this has traditionally been ignored in supply chain design studies).
• Increased attention to proper mode selection, with special emphasis on small shipment and premium mode volume reduction, intermodal opportunities, and comprehensive carrier bid packages that promote consolidation practices
In short, the marketplace, governments, trading partners and supply chain providers are increasingly focused on sustainability best practices. An ideal vehicle for developing an environmentally responsible “green” approach is to begin with a comprehensive examination of supply chain strategy, one that encompasses all of the important operations of the firm.
Jeffrey Karrenbauer, Ph.D. is an expert in strategic mitigation and president of INSIGHT, Inc., a supply chain service provider in Manassas, VA. Visit www.insightoutsmart.com for more information.