Green and Sustainable Supply Chain Management

Environmental changes across the world have generated a movement to identify the causes of global warming and develop solutions to end it before it is too late. In an effort to achive this, many countries are creating laws and regulations with the specific aim to reduce carbon emissions and greenhouse gas effect.

The truth is that environmental change is upon us. Not only do we have climate problems but we are also dealing with a resource depletion issue. With economies like India and China growing at near double digit rates, the population of the world continues to grow creating shortages of many resources that we use to take for granted.

Many consumers, stakeholders and businesses are becoming more involved in the growing green movement. Influenced by customer loyalty shifting towards environmentally friendly products, businesses are trying more and more to make their supply chains greener by introducing sustainability strategies throughout their organizations and supplier relationships. The recent focus on sustainability has resulted in a growing need for integrating environmentally safe choices into supply chain management practices. The concept Green and Sustainable Supply Chain Management can be defined as the process of using environmentally friendly inputs and transforming them through change agents into outputs that can be reclaimed and re-used at the end of their life-cycle therefore, creating a sustainable supply chain. The whole idea of a sustainable supply chain is to reduce costs while helping the environment.

Sustainability and Profitability

A Green and Sustainable Supply Chain integrates ecological factors and supply chain management principles to identify the environmental impact of an organization’s supply chain processes. Businesses are becoming aware of the importance of this integration to enable a sustainable business strategy. Many are now seeking out solutions and guidance on how to implement a sustainable supply chain. A sustainable supply chain should not be only optimal for the organization, but also optimal in terms of a limited environmental impact. The sustainable supply chain is no longer exclusively about green issues, but also about generating efficiencies and cost containment. As organizations restructure to reduce their company’s environmental footprint, supply chains have become a key area of focus.

Green and Sustainable Supply Chain Management

Many people think that being environmentally friendly increases costs. In the past, most of the companies were focused on reducing unit costs. Only later, many companies could do the change and look instead at total landed costs with the on-set of global trade.

Sustainability is a tremendous weapon for companies to reduce their costs. There are many facets of the supply chain that could be improved by looking at it from a sustainability point of view. The consulting firm A.T. Kearney released an analysis of businesses submitting information to the Carbon Disclosure Project that finds more than half of them – along with 25 percent of their suppliers – are generating cost savings as a result of adopting sustainable supply practices. It is a major action because they believed that at least half of the carbon emissions attributable to some global companies are generated in their supply chains. The Carbon Disclosure Project 2011 Supply Chain Report, which covers 57 global companies and more than a thousand of their supply chain partners, shows that 86 percent of those companies derived value out of addressing their supply chain processes as part of a corporate sustainability initiative.

PepsiCo. Is a very good example of this. A.T. Kearney reports that the company saved more than $60 million in energy -16% reduction per-unit across its beverage plants – as the result of managing the carbon associated to those activities. Walter Todd, the vice president of operations for PepsiCo UK and Ireland, where many of these savings took place, says: “With a robust strategy and proven benchmarks in place, PepsiCo set out to engage and educate suppliers about potential opportunities to innovate their own operations. By providing suppliers access to the same energy assessment tools we use in our own operations, we’ve seen a mutual return on investment.” Pepsi-Co also saved around $44 million by switching from corrugated to reusable plastic shipping containers for bottles.

If a sustainable supply chain can be developed, money can be saved by not having to dispose harmful by-products, reduce of obsolescence, decrease the spent on scrap and resources spent on complying its regulatory issues.

Another key issue that sustainable companies are focusing on is the logistics and transportation of the product. A simple action such as filling the trucks as full as possible can represent significant savings; Dell has increased its average truck load and worked with UPS to optimize delivery strategies. Multinational company 3M has developed an innovative system to install adjustable decks in trucks. By placing pallets on two levels they were able to reduce the number of daily truckloads by 40% and save around $110 k per year.

Sustainability can be profitable. Improvements in transportation efficiency, operations, raw material selection and packaging are all in the top of the list of Green and Sustainable Supply Chain initiatives.

Sustainability as a Competitive Advantage

Greener supply chain management practices represent a competitive advantage thanks to the increasing customer awareness and regulatory norms. Across industries, there is also a shift in the focus of Green and Sustainable Supply Chain programs from compliance to creating value for customers and shareholders. More and more companies are using sustainability as a competitive advantage to grow market share within their industry. A green supply chain usually pushes the organization towards an improvement of their products, processes, quality and productivity. It can also be considered as an enabler for innovative decisions and brand differentiation improvement.

GE now has an Ecomagination program focused on growing their revenue stream from environmentally friendly products. They recognized the opportunity associated with saving the environment. Nowadays many companies are offering customers environmentally produced power and charging a premium for that offering. The green initiatives also help a company to maintain and enlarge their customer portfolio. Environmental concern and social responsibility are now considered as an important part of a successful business strategy.

All competitors are under same market force to change their direction and priority towards a more green initiative, therefore, efforts and investments on this area are becoming more and more important. In addition, more countries will enforce importers to import green products to their nations with tax incentives and this will trigger the chances to do global business.

In the same direction, new product development should not be only the responsibility of product design and engineering department; it should also include the fully team-work among marketing, engineering, procurement, logistics and materials operations in order to find the best solutions, like how to ship the products effectively, how to ensure that processes will not generate hazardous wastes and emissions to the environment, what green components can be purchased, what is the optimal packaging size and re-cycle materials to pack each product etc. In brief, companies have to consider the new product development process as part of the green supply chain strategy.

The development, implementation and commitment of green supply strategy are not only to fulfill the customer needs; but also to meet general public’s expectations to improve and enhance the role in social responsibility and environmental concerns. In exchange, the company will gain sustainable competitive advantage in the industry.

Sustainability and Suppliers Management

One of the bigger issues facing companies these days is the actions of suppliers. Companies today are being held accountable for environmental or social problems created by their suppliers. Corporate buying practices can impact suppliers’ ability to improve their business conduct. Pressure on cost and efficiency can force suppliers to contravene some of their own standards in order to meet their customers’ commercial requirements. But as the opposite effect, companies can use their purchasing power to help install best practices in small and medium-sized companies. In fact, the companies that engage their suppliers around these issues constitute one of the most important drivers for spreading corporate green and sustainable principles around the world. Collaboration is the key.

Many companies are performing environmental audits or implementing rules of conduct to check the actions of their suppliers. The most successful green efforts in supply chains are based on the creation of value by sharing with suppliers and subcontractors the intelligence and know-how about environmental and emerging regulatory issues and emerging technologies.  Suppliers and customers can strengthen each other’s performance, share cost of ownership and social license to operate and create a reciprocal value.  Supply chain sustainability must be driven by the originating manufacturers that rely on deep tiers of suppliers and vendors for their products.

One of the main difficulties is the enforcing of supplier sustainability, specially in growing economies like China or India.  Only a small percentage of suppliers meet the requirements in the codes of conduct- including worker compensation and environmental requirements- of major multinational companies. There are still major challenges related to wages, working hours, overtime compensation, lack of unions and social insurance. One factor contributing to the difficulties is the high presence and mobility of migrant workers.

Challenges when implementing a Green and Sustainable Supply Chain

Contrary to what many people could think, making a business sustainability operational within a supply chain is becoming easier, not harder. There is more information available from procurement managers, environmental directors, design engineers, marketing, communication staff and operations managers- among others- and this definitely makes a difference when a supply chain decides to go green. But still big challenges like the lack of information about the green supply chain practices and the lack of tools to optimize the supply chain with environmental management makes the implementation less easy. With the trend of global sourcing tracking the carbon footprint of finished products can be difficult; however, new initiatives have emerged for adopting the practice of requesting a carbon footprint from suppliers.

Barriers to global trade because of the increasing environmental regulations, more restrictions on hazardous substances, bigger emphasis on lean manufacturing and increased supplier auditing and verification are creating the critical road toward new supply chain management expectations. The seek for efficiencies in supply chain management and producing products while reducing waste is a vital imperative in a recovering economy.

Shareholder value, company valuations and possible mergers and acquisitions are affected by supply chain sustainability. This impacts cash management and liquidity, for example, carbon-intensive sectors may see an increase in the cost of capital. Increased attention will be paid on conflict minerals, fair labor and other social aspects of sustainability, management of hazardous substances in toys and other consumer products. It is acknowledged by all organizations that the needs of the community are as important as those of other traditional stakeholders.

Larger companies are identifying the critical supply chain partners that have the greatest product impact and collaboratively address the environmental and social footprint of their products through the value chain. Consumers will play a leading role behind greater supply chain collaboration. Consumer awareness about sustainability demands a more CO2-friendly supply of products and services.

Other main challenge is in monitoring sub-supplier sustainability, this has become a tough task for companies with complex global supply chains. It is the responsibility of the direct suppliers to ensure that their sub-suppliers acknowledge, understand and accept the companies’ sustainable requirements.  However, when a supply chain is long and complex, ensuring compliance at many thousands of sub-suppliers represents a major challenge.

The future of sustainability will inevitably include the sustainability of entire supply chains, not just direct suppliers. One example of this recently has been Dell’s use of bamboo in its packaging.  The company worked to secure Forest Stewardship Council (FSC) certification for its entire bamboo supply chain, from forest to manufacturing.  The packaging is still a small percentage of Dell’s overall packaging needs, but it is a start.

Another example could be IKEA, according to their sustainability annual report, the company is moving in the right direction.  Although the company they fell short of its goal of having 30% of its solid wood sourced from verified responsibly managed forests, they are working actively to increase the number, especially in China and Russia. The company has a team of nine forestry specialists who are dedicated to the two countries and is working towards certifying forests which are closer to the production facilities of IKEA’s suppliers.

If companies are not able to manage product compliance such as regulatory norms, they can suffer business interruptions such as product redesigns, delayed market launches, product returns and recalls. Therefore, effective lifecycle management is a key differentiator for short-term as well as long-term to get an advantage and stable position in the market.

Supply chain network and logistics optimization is also key when implementing a Green and Sustainable Supply Chain, inefficient transportation methods represent a significant part of the ecological problem. Transportation management includes load consolidation and route planning to drive cost savings and reduction of environmental impact.

Another important challenge is related to establish a reverse logistics network that supports life cycle design and de-manufacturing processes. Producers are required to meet specific targets for material recycling and recovery, relative to the total amount of packaging that they have put into the marketplace. This helps to shift the responsibility for collecting packaging and end of life products from local government to producers. Reverse logistics manages the handling and disposition of returned goods, improving a company’s ability to put returned goods back on the market. Companies implementing reverse logistics processes can dramatically reduce the waste going into landfills and increase opportunities to reintroduce products to market. Xerox implemented a reverse logistics solution and achieved huge financial benefits of equipment re-manufactured and parts reuse amounting representing over $100 million and reduced the waste from landfills.

Another important point is the ability to simulate the unpredictable events in the supply chain network flow and evaluate the supply network design frequently. Companies need to work designing optimum supply chain networks for sustainability incorporating criteria like fuel usage and carbon emissions. Process optimization is another challenge; companies should improve the synchronization of production with customer demand and supplier capacity. The main areas of green manufacturing are reduction in energy, water consumption, waste and emissions that are part of manufacturing processes.

And the last challenge is the green reporting. Measuring and reporting the environmental impact is the first step towards reducing them. There are direct benefits to organizations from measuring and reporting as because it gives a better understanding of the risks and exposure. Globally, sustainability and environmental reporting are becoming one of the most important management concerns due to increasing pressures of legislation as well as other initiatives. The challenge remains to quantify and report the emission and environmental footprints. It can be a time consuming and costly process that requires extraction of data from multiple systems and manipulating it to arrive at required reports.