“Green” Supply Chain Optimization
Hardly a day goes by anymore when we don’t see sustainability issues making headlines in our newspapers, magazines or on TV. Terms like, “global warming”, “greenhouse gases”, “watershed impact” and “energy reduction” are all becoming more important in both the news media and in the supply chains of large and small companies around the world. The US EPA’s Smartway Transport Partnership, the EU’s “Climate action and renewable energy package” and the UN’s “Water for Life Decade” are but three of the many programs that are already underway or are under consideration by major government bodies around the world. Clearly, the case for improved sustainability has been made and will be a major driver of change in the coming years.
So, how do you, as a supply chain manager, integrate your company’s sustainability goals into your supply chain without burdening it with unnecessary costs or adding additional steps that slow it down or impact customer service? Is it possible that you can implement changes that both improve sustainability and your profits at the same time? I’ll try to answer both of those questions in this article.
Integrating Sustainability Goals into Your Supply Chain
Green Optimization is Profit Point’s next generation of supply chain design. Here are 7 steps we can take to integrate your sustainability goals into your supply chain:
1. “Sustainability” is a term that is used very broadly throughout industry, regulatory agencies, communities, and the news media. We need to determine what, precisely, we are trying to accomplish with respect to sustainability. Are we trying to reduce our impact on the watersheds in which we operate? Are we trying to reduce packaging waste? Are we involved in a regional plan to cut certain types of emissions or reduce peak energy consumption? Are we trying to reduce our carbon dioxide (CO2) footprint? And, for any of these questions, is there a certain targeted reduction that we have in mind? Without answers to these questions, it is very difficult to analyze your alternatives and develop a plan to meet your goals.
2. We need to determine the boundaries of the supply chain we are trying to improve. Are we looking at our entire global supply chain, or are focusing on our distribution operations in a single region of the world? Are we bounding our analysis within assets and processes that are totally controlled by our company, or are we including our suppliers and/or customers in the analysis? Are we trying to achieve our sustainability goals within our existing supply chain infrastructure, or do we need to factor in potential expansions or contractions of the supply chain?
3. Once we have unambiguously defined our goal and have clear boundaries around the supply chain we must improve, we need to collect and understand the information that is available to analyze and model our supply chain. This will be information will include things like production capacity, plant operating costs, grams of CO2 produced per kg of finished goods, transportation costs, and product pricing. We may want to include the sources of electricity used by our manufacturing facilities or raw material suppliers to favor those sites using renewable sources of electricity over those that use coal-based electricity. Likewise, we may want to include our transportation suppliers so that we favor carriers with more fuel-efficient fleets. This step is usually the most time-consuming step in the process but is critical to the generation and implementation of the changes you will make to meet your goals.
4. With this collection of information, we need to model the supply chain to generate options that both meet our sustainability goals and maximize our profitability. In this step, the “art and science” of green optimization comes to bear. It is here that we may need to make trade-offs between sustainability goals and profitability or cost goals. For example, we may be able to make a very significant reduction in our CO2 footprint with a very slight increase in cost or reduce peak energy consumption by carrying more inventory. Where these trade-offs can be accurately quantified, the “science” is used. However, where the sustainability improvements cannot be quantified, then we use the “art” to bracket the value and the cost of the improvement.
5. Now that we have selected the top options, we need to discuss them with the key stakeholders and decision-makers to get buy-in for a single option so that a successful implementation can follow. This discussion is especially important when future-based assumptions have been made in the analysis. For example, if we’ve assumed a 5% growth in demand and assumed the price of crude at $85/bbl to choose the best solution, will our choice still be the best one if our demand only grows by 2% and the price of crude moves to $100/bbl? If there is a lot of uncertainty in these key parameters, it is important that all stakeholders have a good understanding of the risks associated with each of the options presented. In fact, it may well be time for a more robust type of optimization analysis, but that will be the subject of a future blog article.
6. With all stakeholders on board, it is time to implement our new plan to achieve our sustainability goals. In addition to the communication, selling and training/education facets of our change management plan, we need to include a measurement system ensure we are getting the improvements we anticipated and to check for unintended consequences of our change. This measurement system will also directly feed the last step in this process…
7. … which is to periodically recheck our assumptions and refine our analysis and plan as external events like new customers or unanticipated costs present themselves, or as we find that a key assumption does not hold true for our sustainability gains.
Can Sustainability and Profitability Go Hand in Hand?
As in many broad-based business questions, it depends. Many companies are finding that their search for sustainability is also leading to reductions in cost, particularly in the area of greenhouse gas reduction. In these companies, the addition of the carbon footprint to the optimization equation further strengthens the case to improve transportation efficiency or improve production planning and scheduling to produce only what is needed by a customer and only when it’s needed.
In other companies, for example those that are looking to reduce watershed impact, they may find that a small increase in cost will result in a very large reduction in watershed impact. Although this may show up as a short term “hit” to the P&L, it can be a large source of goodwill that will translate into greater customer loyalty for years to come. It is important to remember that from our neighborhoods to national governments and international organizations like the UN, we all receive a “license to operate,” both from the regulatory and the public opinion perspective. Our customers want to know what we’re doing about sustainability and so do our communities and governments. We need to be able to show them tangible results.
In the end, adding sustainability into your supply ch
ain goals is simply another tradeoff in an existing decision making process based on tradeoffs. However, considering sustainability from the beginning of the process allows you to influence your corporate culture and processes to be more responsive to an ever growing set of business objectives.
This article was written by Ted Schaefer, Director of Logistics and Supply Chain Services at Profit Point.