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 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 Sustainable Supply Chain Management GSCM 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 lifecycle therefore, creating a sustainable supply chain. The whole idea of a sustainable supply chain is to reduce costs while helping the environment.

2. Sustainability and Profitability

A Green 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.

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. Some companies also started looking at the usage costs with a piece of equipment- total cost of ownership TCO.

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.

Other major companies have also reported significant savings thanks to a sustainable supply chain strategy:

Dell is saving over $20 million annually as a result of packaging improvements. They achieved its goal of becoming carbon neutral by 2008.

One of Sherwin-Williams facilities reduced disposal costs from $95,000 to around $39,150 in less than two years through source reduction, refurbishment of metal containers, and recovery of fiber and steel.

Texas Instruments is saving $8 million per year by reducing its transit packaging budget for semiconductor business by implementing source reduction, recycling and reusable packaging systems.

Raymour & Flanigan Furniture has saved more than 15 million pounds of waste after renovating a building to serve as a recycling center, now they have the capacity to prepare scrap polystyrene, plastic film, and cardboard for market.

Commonwealth Edison generated $50 million in financial benefits from managing materials and equipment by taking a lifecycle management approach to production management.

Dow Corning saved $2.3 million by using reconditioned steel drums in 1995 and conserved 7.8 million pounds of steel.

It is interesting to notice how several companies have developed new revenue sources on the waste they used to throw out.

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 sustainable supply chain initiatives.

3. 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 GSCM programs from compliance to creating value for customers and shareholders.

The implementation of Green Supply Chain initiatives has evolved from strictly a compliance issue into a means of generating value.

The following table shows how to create value out of traditional cost compliance, including environmental, safety and health business contributions.

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 to around 20 billion dollars by 2011. 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 succesful 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 prodcut, 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.

4. 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.

The reported supplier human rights and environmental violations done by Apple’s suppliers, is an example of the challenges that suppliers face in managing or influencing these issues on the ground.  Apple recently did the right thing by transparently releasing its Apple Supplier Responsibility 2011 Progress Report, which underscored just how challenging and difficult multi-tiered supply chain management can be.

GE and other multi-national companies- including Wal-Mart, Honeywell, Citibank and SABIC Innovative Plastics- have partnered to create the EHS Academy in Guangdong Chinese province.  The objective of this non-profit venture is to create a better trained and capable workforce of environmental, health and safety professionals and give them the management, implementation and technical knowledge to be able to proactively ensure that real performance is sustainable and integrated fully into the overall business strategy and operating system of a company.  Chinese regulatory agencies are also invited to participate as well. The model that GE is using in China offers a positive example of collaborative innovation.

One of the main difficulties is the enforcing of supplier sustainability, spceially 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.

5. Green SCOR model

Green SCOR incorporated within the SCOR framework can provide immense help by offering information on best practices, waste disposal process and metrics to increase the success of Green SCOR initiatives. It also provides environmental metrics that can be included in the calculations for optimizing the supply chain. GreenSCOR focuses on the impacts of SCM in each stage of the product life cycle.

GreenSCOR integrates best practices and metrics into the entire supply chain planning process. It also enables a systematic study of the supply chain to unearth opportunities for making the supply chain greener.

Best practices include collaborating with partners on environmental issues, reducing fuel and energy consumption and minimizing and reusing packaging.

It also includes the metrics to measure the effects of greening, including carbon and the environmental footprint, emission costs per unit, energy costs as a percent of production costs, waste produced as a percent of production and returned products disposed of versus remanufactured. Processes to address waste management, such as how to collect and manage waste produced during production and testing (including scrap and non-conforming product).

It also enables more efficient use of resources and increases the visibility of financial and operations benefits of supply chain practices. Lastly, the metrics can be effectively used to monitor the progress an organization is making towards a green supply chain.

By implementing this model a company increases the chance of success of any green initiative.

6. Challenges when implementing a GSC

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 deffinitely 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. The World Resources Institute is working on the new supply chain and product lifecycle greenhouse gas protocols that will frame the new expectations of value chain sustainability accounting and reporting. 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.  IKEA has the goal of having 35% of its solid wood sourced from certified forests by 2012.

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.

Suuply chain network and logistics optimization is also key when implementing a GSC, inefficient transportation methods represent a significant part of the ecological problem. It has been illustrated by a recent report that found that as much as 75 per cent of a company’s carbon footprint comes from transportation and logistics alone. 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 demanufacturing 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 remanufactured 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 esigning 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 I will include 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.

7. Findings and conclusions

Economic activity has an impact on the environment and the society; industries need to conmsider this into their business operations and costs. It is becoming critical to measure and manage the environmental and social impact of activities and procesess across the supply chain.

Green practices and a sustainable supply chain have become a necessity due to both regulatory obligations and economic benefits, yes; a green supply chain can help a company to discover hidden sources of profitability.

Increasingly the companies are giving more importance to sustainability to promote loyalty of customers, who are getting more aware about the socio-ecological implications of businesses.

A green sustainable supply chain enables business to improve products, process and supply quality and productivity. It also pushes the company to make innovative decisions that respond to green economy requirements, by doing this, companies gain access to key markets through diverse certifications.

By using a model such as GreenSCOR incorporated in SCOR version 9, the chances of success in any green initiatives increases.

Some key success factors and reccomendations in the implementation of a green sustainable supply chain were identified:

Stakeholders should be actively engaged in the sustainability strategies of the business.

Green initiatives should be aligned with the strategic objectives of the company.

GSCM Best Practices should be adopted when implementing a green supply chain.

Technology and models such as SCOR should be used to enable the green initiatives.

The company should boost its responsiveness to the expectations of the consumer.

Green practices should be designed for minimal environmental impact, focussing the efforts to reduce packaging and in-transit damage when shipping.

Planning and inventory management should pay special attention to reducing inventory and identifying optimal distribution solutions.

Transportation solutions should be improved by collaboration.

Procurement departments should perform lifecycle analysis for choosing products or solutions to minimize environmental impact.

Suppliers’ relationship management should include the regular monitoring of suppliers and sub-suppliers sustainability.

Benefits should be extended to the local community, as starting point.