Companies Value Environmental Sustainability—If Payback is Right

Aug. 9, 2013
Top two strategies are expansion of programs to recycle raw materials and consolidation of less-than-truckload shipments to truckload.

Even though most supply chain executives agree that sustainability is becoming an increasingly important issue among customers and senior management, cost still trumps environmental impact as a driver of behavior, according to the results of AlixPartners’ 2013 Executive Survey on Supply Chain Sustainability. That said, the results also indicate that companies implementing cost-effective supply chain sustainability improvement strategies and marketing them to customers have a competitive advantage.

Green but Lean

Although 72% of respondents said their companies have corporate policies or sets of objectives regarding sustainability, 84% said lower costs are more important to customers than is improved environmental impact.

Some 70% indicate they could pay no more than 2% more for sustainable initiatives. European companies are more likely to emphasize sustainability, with 88% of respondents from Europe having sustainability policies in place. Similarly, 33% of European executives surveyed said green initiatives were extremely important or very important.

Yet no matter where companies are based or how important their executives said they feel sustainability to be, the majority (53%) of respondents said green initiative policies or objectives do in fact affect supply chain operations moderately or a great deal. Just 14% said green concerns affect supply chain operations very little or not at all.

Sustainability Drivers

Nearly a third (32%) of executives surveyed said that senior management is the primary driver behind current policies on sustainability initiatives. Customers, at 20%, and government regulations, at 18%, are the other big factors.

According to those surveyed, for companies that have made efforts to green their supply chain, the top two innovations are expansion of programs to recycle raw materials (42%) and consolidation of less-than-truckload (LTL) shipments to truckload (TL) shipments (again, 42%). The runner-up at number three, with 34% of companies reporting this in 2012, is introduction of energy conservation programs or solar energy use.

Last year, surveyed European companies placed more emphasis on recycling raw materials (50%) and conserving energy or switching at least partially to solar—whereas in the United States, consolidating LTL to TL was the top sustainability initiative. It’s worth noting that on both continents, nearshoring as a way to go green came in dead last, with just 7% of companies employing this method.

In the coming year, executives reported those top three methods will continue, although their rates will be reduced. Thirty-eight percent reported planned LTL to TL; 35%, expansion of raw-material recycling; and 30%, energy conservation or solar energy use.

Paired with that are what executives cited as the most important aspects of a sustainable supply chain: reduced emissions (43%), packaging (41%), miles (36%), and increased fuel economy (also 36%). Similarly, executives reported that the main emphases of sustainable supply chain efforts are on energy use reduction (66%), sourcing decisions (57%), transportation mode shifting (55%), and packaging (53%).

Cost concerns

Given the fragile state of the world economy, it comes as no surprise that cost is the top inhibiting factor when it comes to implementing more far-reaching sustainable supply chain initiatives. Eighty-four percent of executives surveyed said lower costs are more important to their customers than is improved environmental impact, which 9% said was more important. Eighty-nine percent of the European executives said lower costs were more important, compared with 82% of their American counterparts.

It is for that reason—a higher price tag—that the vast majority of executives reported little latitude in their prerogative to choose sustainability over increased net costs, with just 3% reporting complete flexibility in making such decisions. The rest say they have some (37%), little (24%), or no flexibility (15%) in this regard; 21% of executives were unsure.

Executives also expressed concern about return on investment in green supply chain practices. Less than a third (31%) of American executives surveyed said they’d be willing to invest in green logistics initiatives that do not produce positive financial returns. In Europe, however, more than double that number—62%—reported willingness to so invest.

Ripe for Improvement

Nevertheless, certain sustainable supply chain opportunities are seen as having greater potential for financial return than others are, with freight consolidation and network optimization—both of them cited by 53% of executives surveyed—topping the list. Similarly, third-party logistics and trucking (49% each) are seen by executives as the segments in which the most-cost- competitive sustainable innovations can be found.

According to those surveyed, for companies willing to spend on sustainable technologies, nearly 60% require a cost payback within 18 months or less.

Just 17% are willing to wait longer to see a return on their investment. That lack of return on investment is the largest obstacle to achieving greater supply chain sustainability, cited by 65% of executives surveyed (and 81% of European execs). Lack of return on investment is followed by implementation costs, which was cited by 59% of respondents.

For all of those reasons, active investment in sustainable supply chain projects remains a question mark for many company executives. Twenty-nine percent do plan to actively invest in these types of projects, and 13% said they have a plan, although it will not be implemented in the next year. Nearly half—43%—are undecided.

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