Sustainability is key in supply chains.

Sustainability in the supply chain as a key differentiator

Our planet and its people face one of the greatest challenges in history – to become more sustainable. Supply chains do not escape this challenge and reforming the supply chain to become more environmentally friendly is one of the major tasks of the future. Sustainability is defined as meeting our own needs without compromising the ability of future generations to meet their own. Therefore, it is vital to maintain an ecological balance and avoid the depletion of natural resources to a point beyond recovery.

 

Sustainability is no longer a purely theoretical concept, as climate change and pollution impact our everyday lives. Corporations face increasing pressure from consumers, investors, and governmental institutions alike to engage in climate action and actively contribute to a sustainable future. This has an effect across all stages of the supply chain. For example, retail chains are putting increasing pressure on their suppliers, calling for sustainability labels on certain products (Eco, Fairtrade, etc.).

 

Sustainability requirements depict the seventh of eight root causes we defined for the supply chain performance gap - for companies lagging behind their supply chain potential. We already spoke about product portfolio complexity, speed of innovation, new types of competition, multi-channel sales complexity, the complexity of supplier networks, and regulatory changes. Let's jump right in:

 

First of all, we want to describe the concept of sustainability. A popular framework used is that of the “Triple Bottom Line”. This three-pillar model for sustainability is built to argue that the “bottom line“ of a business should not solely consist of profit, but maintain a balance between people, planet and profit. However – its inventor claims it is no longer of relevance, as in reality it was used by corporations to balance tradeoffs, merely functioning as an accounting tool. It has failed to guide businesses to do things fundamentally different, which is why, in past 25 years since the model's inception, the positive and tangible impacts of the sustainability movement have been few and far between. In other words: we need a new framework.

 

The United Nation's Sustainable Development Goals (SDGs) established in 2015 are a new framework, which sets out to tackle the most significant social, environmental and economic challenges. These goals are a blueprint for achieving a better and more sustainable future for all. Beneath each goal, there are a number of targets and indicators that concretely outline how success – or reaching an SDG on country or corporation-level – is defined, which makes them rather concrete. Another advantage is that these goals do not stand in conflict with one another, and the SDGs explicitly highlight the role of corporate supply chains for a sustainable global economy. 

 

How to transfer sustainable business into economic supply chain management

The increasing pressure on companies is also linked to the demand for sustainable supply chains - e.g., reliable proof of origin of the raw material.

 

In the context of climate change, greenhouse gases represent a central causal factor. If such emissions can be assigned to an activity or company, one speaks of its "carbon footprint." Significant proportions of global emissions arise from corporate production and transport, which leads directly to the responsibility for the sustainable design of supply chains. In particular, due to the global delivery structures, the transport routes are significantly longer than in earlier times, which considerably affects emissions. The global volume of trade has more than doubled in the last ten years. The food industry example illustrates which routes our products, i.e., our food, travel before consumption. They come from all corners of the world. One reaction of many consumers is the increasing demand for regional products.

 

Another cause of increasing environmental pollution in the area of ​​responsibility of the supply chain organization is anchored in the just-in-time (JIT) principles. These force small and frequent deliveries but also lead to high delivery intensity. Here it is argued that the savings in inventory holding costs are more significant than the increase in transportation costs. With the progressive importance of the environmental pollution caused by transport, a challenge lies in balanced control.

 

In social, economic, and ecological responsibility, the textile industry is a frightening and much-cited example. Unreasonable working conditions, including child labor, are accused and proven. Factories in Bangladesh, Indonesia, China, and India are proven to dump highly toxic viscose wastewater into local waterways. Consequently, marine life is destroyed, employees are exposed, and the local population is harmed.

 

Can certification solve the conflict in sustainable responsibility? 

Corporate Social Responsibility (CSR) comprises the voluntary action of companies to pursue sustainability goals. This includes, for example, voluntary certification by relevant standards. ISO 26000 thus comprises a framework for social entrepreneurial activity. In addition, ISO 14001 is a standard for setting up an environmental management system, the application of which is also voluntary.

 

Companies should also be prepared for the fact that, with increasing social-environmental awareness, tighter, binding guidelines will emerge, such as carbon taxes. The legally anchored trade in emissions certificates has been taking place in the EU since 2005, and environmental policy in Germany, in particular, pursues the goal of guaranteeing the energy supply entirely through renewable energy generation by 2050. Corresponding regulations, in stricter and internationally applicable form, could shift the objectives of the supply chains significantly in the direction of "carbon footprint minimization." Energy-intensive production at locations with previously low environmental protection requirements or long delivery routes could become substantially more expensive. Here, companies will have the advantage of having already dealt with the relevant models at an early stage, i.e., they can already demonstrate the corresponding know-how.

 

Supply chain decisions impact the resource footprint.

In the course of the value chain process, companies find starting points for the integration of sustainability goals at all levels, as the following figure based on Martin Christopher illustrates:

 

SusBlog

 

To reduce transport, the following concrete fields of action can be cited:

 

  • Optimization of product design: Concerning regional component availability and recycling possibilities, companies can optimize their bill of material (BOM). A BOM is a detailed and centralized source of information containing raw materials, components, and instructions required to construct, manufacture or repair a certain product, usually in hierarchical order. 

 

  • Optimization of sourcing strategy: Due to shorter delivery routes, companies can adapt their strategic sourcing. It is important always to be aligned with suppliers and other requirements from the market, legal, etc. Therefore, strategic sourcing is a continuous, holistic, and proactive evaluation of sourcing activities. In general, strategic sourcing aims to reduce the Total Cost of Ownership (TCO) regarding sustainability. The evaluation, of course, must be extended to a broader perspective. 

 

  • Optimization of transport modes: The environmental impact varies according to the respective mode of transport (MOT). It is necessary to achieve a multiobjective optimization and consider the tradeoffs between cost and, e.g., carbon emissions. Companies aim for a greener mode of transportation while simultaneously optimizing the total logistic costs.

 

  • Optimization of transport utilization: Transport capacities (e.g., containers, trucks, etc.) are often not fully used, and route planning needs improvement. Empty return transports result in higher logistic costs and decreasing logistics efficiency. Better planning can reduce both costs and transport intensity.

 

  • Optimization of production planning: By using postponement strategies, you can carry out late value creation steps in ​​customization close to the source of demand, i.e., you can transport standardized preliminary products or raw materials in larger quantities. With skillful planning, you can also achieve a reduction in transport intensity.

 

Apart from transportation, resource footprint or resource intensity reduction focuses on water, energy, or raw material consumption. Becoming more efficient with the use of the aforementioned is key. Today, it takes 18 months for our planet to regenerate what has been consumed in 12. This ratio illustrates that investigation into alternative resources is vital to transition away from (over-) using scare or environmentally intensive materials. In Spain, a recent highway construction project near Valencia is showing the way. Paper ash is used to replace cement that would typically be used to fortify the road. By that, the resource- and carbon emission-intensive material cement is replaced. Paper waste is not fit for recycling any longer and would have been landfilled. This highway project smartly kills a couple of birds with one stone, substituting materials, reducing overall environmental impact, and finding a use for waste beyond the point of recycling. 

 

Circular economy - your chance to be one step ahead? 

The business model development in the direction of a circular economy represents a far-reaching and comprehensive step. We already examined the strategy of business model change in our article about speed of innovation, where you can find further details and examples.

 

"The circular economy is a model of production and consumption, which involves sharing, leasing, reusing, repairing, refurbishing, and recycling existing materials and products as long as possible. In this way, the life cycle of products is extended. In practice, it implies reducing waste to a minimum. When a product reaches the end of its life, its materials are kept within the economy wherever possible. These can be productively used again and again, thereby creating further value. This is a departure from the traditional, linear economic model based on a take-make-consume-throw-away pattern. This model relies on large quantities of cheap, easily accessible materials and energy. "

 

Circular economy and, in particular, the cradle-to-cradle philosophy promotes the rethinking of industries and products towards stimulating and optimizing a positive impact (eco-effectiveness, creating things that support our ecosystem), as opposed to solely focusing on the minimization of negative impacts. This challenges us to fundamentally rethink how business is done and sets new targets for inventors, engineers, and product designers. 

 

The transformation of the business model towards a circular economy is linked to the goal of achieving comparable sales with a linear economy while maintaining or increasing customer benefits.

 

For the targeted and effective implementation of sustainability projects and their control, a high degree of transparency concerning the effectiveness and efficiency of implementing measures is necessary. Tools provide support here, with the help of which you can implement measures successfully at the operational level.

 

Let's have a look at the example of Pocheco, a French envelope producer:

Pocheco operates without destroying and produces without leaving any toxic trace. Therefore, Pocheco invented the method "Ecolonomy "and has been using it for 25 years. The company understands "Ecolonomy "as the art of reducing its impact on the environment while improving social conditions and saving money. This is how Pocheco describes its approach: 

 

The transactional envelopes for high-speed inserting machines are distributed throughout Europe. Banks, insurance companies and mutual insurance companies, telephone companies, and public services send bills, statements, and account statements in tens of millions each year in a "Pocheco," which means: the high-quality, recyclable, biodegradable, and zero waste envelope.

 

The "Pocheco" is designed and produced in the ecolonomic factory of Forest sur Marque in the suburbs of Lille, North of France. Paper fibers, water-based inks, vegetable glues, recyclable cardboard boxes, returnable wooden packaging and transport boxes, all the raw materials that make up the "Pocheco" and its packaging are selected to promote productivity and to preserve the ecology. The site is self-sufficient in regards to energy and also maintains a permaculture garden with a vegetable garden, flowers, beehives, wastewater treatment with bamboo filtering, a waste sorting center for cardboards, green roofs with solar panels and skylights that spend natural refreshment as well as wood-fired heating fed by pallet waste.

 

Furthermore, the company put their strategy to market and share their proven circular economy solution to other businesses and have therefore acquired a whole new market.

 

Decarbonization along the Supply Chain 

To meet the challenging yet essential EU targets of cutting 55% of greenhouse gas (GHG) emissions by 2030 and attaining climate neutrality by 2050, everyone must act: from individuals to corporations. Looking at the breakdown of GHG emissions by source, it is apparent that global trade, multinational enterprises, and their globalized supply chains have a major stake in making or breaking climate targets. Roughly 73% of all emissions can be attributed to energy use. Thereof, twenty-four percentage points (energy in industries) and 16 percentage points (energy in transport) are directly linked to supply chains. Beyond energy, waste (3%) and industrial processes (5%) produce a significant fraction that occurs largely as part of a company's network operations. 

 

As supply chains are one of the biggest greenhouse gas emitters, their swift decarbonization is required. This is supported by a recent Carbon Disclosure Project finding, which states that supply chain emissions are on average more than 11 times higher than a company's operational emissions. 

 

While offsetting carbon emissions has become a favored strategy employed by many companies, actual and lasting GHG footprint reduction is not easy to come by. Apart from determining a supply chain's carbon footprint baseline and subsequently setting GHG emission reduction targets, the measures to realize the reduction potentials require customization on the industry and company level to be effective. Firstly, it is paramount to properly categorize a company's carbon emissions in scope 1, scope 2, and scope 3 emissions. For instance, in the construction or chemical industry, processing-related emissions (to manufacture chemicals or materials like aluminum or cement) constitute a large proportion of overall carbon emissions for companies active in these sectors. These emissions would be classified as "scope 1". An effective reduction of the corresponding carbon footprint would require established physical and chemical processes to be upgraded with new technologies, which can be a challenging task. Scope 2 indirect emissions related to energy purchased could be more easily reduced if companies buy solely renewable energy from providers. Scope 3 emissions are occurring due to company activities but from sources outside of the company's control. For example, transportation logistics outsourced to a 3rd party provider would contribute to scope 3 carbon footprint. It is most effective for companies to measure and understand affiliated emissions and engage in discussions with their cooperation partners on reducing scope 3 carbon footprint.

 

Unfortunately, there is no one size fits all approach to decarbonizing a company's supply chain. Yet, we can fulfill international climate targets by making decarbonization a core element of the company strategy, following established carbon accounting methodologies, engaging with supply chain partners, and committing to executing specific GHG emission reduction measures. 

 

Sustainability - a chance for change

Many companies meet sustainability requirements with pessimism. Of course, it means adaption and changes in strategic and operational business. Most companies expect costs to increase significantly with the implementation of sustainability requirements. There are ways to act economically and ecologically with great support from the right technology.

 

Our upcoming article will capture the last of the eight root causes we analyzed due to the supply chain performance gap: Internal complexity. Have you already popped into the previous article about regulatory complexity?

 

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Georg Hantschke
By Georg Hantschke Aug 31, 2021 2:05:45 PM
Supply Chain Brief