Sustainability has quickly become one of the biggest priorities for organizations seeking to remain competitive and wanting to guarantee a long-term future both for themselves and the world we live in. Within a company’s overall sustainability journey, working towards a sustainable supply chain is now crucial.
In this article we will focus on why sustainability has become such a key topic and provide some concrete examples of actions that you could take to make your own supply chain more sustainable.
Sustainability as the key driver for your decision making
The traditional view of the supply chain has been around for many years. Raw materials are bought from suppliers and transported to a manufacturing facility. There they are transformed into an end product which is then distributed to different customers.
How do you decide what your own specific set-up should look like? Depending on the overall strategy of your organization, the following three dimensions would be considered:
- Service - How often do you deliver to your customers? How much of the time do you deliver the correct things to your customers?
- Cash - How much inventory do you keep on hand to deal with fluctuations in supply and demand?
- Cost - How much are you willing to pay for faster or even last-minute transportation? Are you prepared to pay more for your raw materials to ensure timely and flexible delivery?
Ultimately, it all boils down to one thing: a monetary cost-benefit analysis. However, this very traditional way of working may no longer yield the best outcome. If you look only at your own operations, you will not be taking into account the potentially severe and unwanted impacts of your products up- or downstream.
More and more, these unwanted effects are being internalized. This means that the costs of these effects no longer fall on the community, but are being redirected to the companies themselves. An example is the penalties imposed on organizations for unwanted waste disposal. In this way, the conversation about the sustainable supply chain becomes more important.
Taking a more holistic view of your supply chain and making sustainability a key driver in your decision making will guarantee a long-term future for your organization – and ensure that the traditional cost-benefit analysis is positive.
What do we mean by ‘sustainability’?
Before going any further in the sustainable supply chain topic, this seems a good moment to quickly discuss what we mean when we use the term ‘sustainability’ in this context.
Most people will automatically make a link between sustainability and environmental impact. In producing certain goods, your manufacturing facility will emit all sorts of by-products, ranging from heat and gases to waste. Greenhouse gases (GHG) are by far the most well-known when talking about environmental footprint, but these are just the tip of the iceberg. Finding ways to reduce your harmful emissions and waste must be a central part of any sustainability journey.
It is important to note that sustainability goes beyond pure environmental impact. One way to look at this is with the UN’s Sustainable Development Goals (SDGs). These goals were adopted by all UN member states in 2015 with the goal of ending poverty, protecting the planet and ensuring that all people enjoy peace and prosperity by 2030. They offer a broader framework within which to think about sustainability and what your personal ambitions and priorities should be.
One dimension to consider is your impact on people and communities. As an organization, you are responsible for the people you employ. They should be able to work in a safe, respectful and equal environment. Making sure that all unethical practices such as child labor are extinguished also falls under the umbrella of sustainability.
What is the problem?
Of the 92.8 billion tons of minerals, fossil fuels, metals and biomass that enter the global economy, only 9% is circular, i.e., re-used annually
(Circle Economy, 2019)
As suggested above, the typical view of a supply chain is linear. It runs from obtaining raw materials, producing something out of them and then selling this on to a customer who disposes of the waste or leftovers when they finish using whatever the product is. It is logical to assume that this process will end up depleting our resources. Even if organizations do not use these resources directly as raw materials, they may consume them indirectly through energy consumption.
Next to the depletion of natural resources, the traditional organization-centered view does not consider the many external effects of production and use of resources. As mentioned above, this includes impacts on the environment such as pollution in the form of waste, and Greenhouse gas (GHG) emissions which have an environmental impact serious enough to jeopardize our current climate and way of living. These points, for instance, are considered when talking about the sustainable supply chain.
While most people would concede that these are issues worth addressing, it is not clear at all who owns them. If a classic cost-benefit analysis is conducted with the typical organization-centric view, it is not surprising that these issues have not traditionally been considered. The overall wellbeing of our planet – and the people who inhabit it – must be a shared responsibility among us all. A study by Unilever proved this point back in 2008. Looking at total GHG emissions over the full lifecycle of the company’s products, it showed that the impact from pure manufacturing and transport (which are typically considered within supply chain decisions) accounted for only 5% of total emissions.
A similar study by BASF revealed a much larger weight of upstream activities and production on GHG emissions. The message remains: only looking at your own operations will not help guide your actions in the fight against global warming.
Sustainability: Shift from ‘nice-to-have’ to ‘must-have’
For a long time, sustainability efforts were seen as a ‘nice-to-have’. Certainly not a must-have, let alone a key priority. This narrative has been changing in recent years. One of the biggest reasons for the shift has been public scrutiny. Customers are more likely to demand that organizations take responsibility for reducing their environmental impact and provide fair working conditions for their staff. It is important to note that, in the eye of the public, ‘an organization’ is not limited to that organization’s own production and logistics operations. Scope 1, 2 and 3 impacts should all be considered when assessing one’s own priorities for change.
What are these different scopes?
- Scope 1 emissions: All direct emissions from sources owned or controlled by an organization. This includes its own production facility and fleet
- Scope 2 emissions: Indirect emissions from the generation of the energy it purchases as an organization (electricity, steam, heat and cooling)
- Scope 3 emissions: All indirect emissions (excluding Scope 2 emissions) that take place within the complete up- and downstream activities of an organization
All impacts and emissions up and down the supply chain should be considered in a sustainable supply chain. For example, none of the big multinationals employed children in sweatshops themselves. However, their own suppliers were keen to ensure low prices when selling to these multinationals that may have led to just that. Several scandals have come to light in recent years and the public’s awareness and expectations are only increasing.
Next to pressure from end users, policy makers are also exerting their own pressure. The need for accurate carbon accounting is becoming more and more pressing. Very soon, many different aspects of sustainability will be addressed directly by policies and regulations. GHG emissions are already being taxed and this taxation will only become more precise and less easy to evade.
We have now looked at the pressures that mean you need to change. But why should you want to change towards a more sustainable supply chain?
Organizations that truly put sustainability at the heart of their strategy will be best equipped to handle the volatile, uncertain, complex and ambiguous world that we live in, now referred to by the acronym ‘VUCA’. When sustainability is allowed to drive the innovation and digitization agenda, it will give organizations a clear competitive advantage, leading to top and bottom-line growth.
How to make it happen: Five concrete ways towards a sustainable supply chain
In the previous paragraphs, we have set the scene of what we mean when we talk about sustainability and why there is an increasing need to transform your supply chain to address the different impacts you have as an organization. Let us make this more tangible from a supply chain perspective by giving five specific examples of how you can implement a more sustainable supply chain.
1) Optimize your end-to-end supply chain network
Your supply chain network consists of multiple suppliers, production facilities and distribution centers, as well as interconnecting routes. The design of a typical supply chain network is often the combination of deliberate decisions, constraints and costs, as well as historical legacies.
As stated at the start of this article, the typical considerations when making these supply chain decisions are classic cost-benefit arguments. Rethinking your network in a sustainable supply chain context, when considering GHG emissions, routes travelled and the right balance between off-shoring and near-shoring allows for an incredible improvement in terms of emissions and environmental impact.
The graph below provides a perfect example of one of our EFESO Management Consultants clients. Redesigning the way that the different customers were supplied with products and which suppliers were used for the production facilities allowed for a decrease in kilometers transported and GHG emissions, evolving from a global to a ‘glocal’ footprint.
2) Improve prediction of demand and align supplies to optimize inventory levels
It seems very logical in theory: excess inventory and waste puts an unwanted burden on the environment through the needless consumption of natural resources. Moreover, excess inventory also puts a burden on the organization’s financials. So how or why would an organization be able to solve this issue within the context of sustainability?
For one thing, the additional potential benefits from a sustainability perspective might just be the benefits which create a positive business case to invest in advanced analytics or a robust inventory management system.
Second, truly embracing your sustainable supply chain journey will require more up- and downstream collaboration and transparency. This will allow you to have a clear view on Scope 2 and Scope 3 impacts, but it could also lead to a much better view of product requirements and how to lower excess inventories.
3) Source and purchase environmentally friendly materials and packaging
Increased collaboration and transparency up- and downstream, linked to new decision-making factors, can help make full end-to-end improvements regarding your sustainability targets. Organizations should keep striving to impact Scope 2 and Scope 3 emissions and it is perfectly possible that the biggest impacts will come from your upstream supply chain. When talking about a sustainable supply chain, the materials used for your own production deserve scrutiny: what emissions were necessary to retrieve and deliver these materials to your production facility? Going beyond basic criteria such as financials or the flexibility to select suppliers is a first step that any organization can take.
Making the right decisions on which suppliers to go for is a key way to decrease your overall impact. A trusted relationship with these suppliers is crucial if you want to receive enough information to assess which materials to source in line with your own priorities.
4) Move more with fewer emissions
These new possible selection criteria regarding sustainability targets can also be applied to the different transportation modes that are being used within your organization. The ‘modal shift,’ a change from one form of transport to another, is deservedly an important attention point for both policy makers and organizations. Multi-modal transportation has been applied by organizations from a crude financial perspective, but it is also clear that increased use of rail or shipping by sea and inland waterways has a positive impact on emissions of GHG.
5) Create a circular economy to reduce waste
As stated above, the typical view of a supply chain is linear. This puts a heavy burden on our Earth’s limited resources and is a missed opportunity to take more advantage of reusable materials. A sustainable supply chain addresses this point as well.
Many books have already been the topic of circularity so we will not present an extensive overview of it here, but within the context of creating a sustainable supply chain, it is a topic that deserves consideration. Embedding circular thinking into your company DNA is a massive cultural change, however, and needs dedicated effort on human dynamics to be able to succeed.
From a pure supply chain perspective, one of the first steps any organization can take is to deliberately improve, or indeed set up, its return flow. In this way, moving away from the previously mentioned linear supply chain view and towards a more sustainable supply chain. Three types of flows can be identified:
- Reusable assets such as sustainable packaging
- Unsold or damaged finished products which can be repurposed
- Waste which can either be recycled or disposed of in a way that is environmentally efficient
Identify the relevant flows for your own organization, look at your own targets and impacts to be decreased, and prioritize the necessary projects to implement a sustainable supply chain.
Sustainable supply chain: think and act end-to-end, with full transparency Sustainability has become a top priority for many organizations. Putting sustainability at the center of your decision making can deliver a true competitive advantage and lead to both top and bottom-line growth.
To truly capture the possible benefits from a supply chain perspective, it is imperative to broaden your focus and also to incorporate Scope 2 and 3 impacts. Collaboration and transparency will prove necessary to be able to make this a reality.
About the author
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Max Vermeeren |