FINANCE GLOBAL LOGISTICS MANUFACTURING PROCUREMENT [STRATEGY] TECHNOLOGY
Beyond carbon counting If a sustainability program is to have lasting value, supply chain organizations must move beyond carbon counting and take a broader view of their environmental responsibilities. OVER THE PAST SEVERAL YEARS, businesses around the world have taken an interest in environmental sustainability. Today “green” is everywhere: Companies both large and small are actively promoting their environ-mental practices, governments around the globe are imposing more environmental regu-lations, and technology companies are trumpeting new carbon mapping software. With so much attention being paid to the “green movement,” many organizations are finding it a challenge to develop a compa-nywide sustainability policy. This is particularly true for compa-nies that find themselves racing to keep up with a perceived trend and trying to avoid a potential threat to their brand image. This reactive approach has often led companies to adopt the latest green initiative—such as carbon-emissions map-ping or carbon counting—and then tout their activities as “sustainable business practices.” Companies that follow that path, however, need to step back and look at the bigger picture of sustainability. Carbon counting is the practice of calculating the total amount of green-house gas (GHG) emissions that an organization or supply chain emits; carbon mapping iden-tifies the sources of those emissions. Yet “business sustainability” is much broader than that. It’s easy to see, though, why many companies’ environmental efforts focus on reducing their carbon footprint. They are, in part, responding to efforts by governments to regulate carbon emissions. In the United States, for example, the Waxman-Markey climate bill would reduce GHG emissions by 17 percent
[BY TYRONE GLOVER]
CSCMP’s Supply Chain Quarterly
from 2005 levels by 2020 and establish a cap-and-trade system requiring companies to have “pollution permits” to emit carbon dioxide. At the start of the program in 2012, the government would give away 85 percent of these permits and auction off the rest. These permits could then be bought and sold. A similar carbon-trading market is already in place in Europe. Cap-and-trade regimes and other government-led initiatives worldwide are driving companies to focus their sustainability efforts primarily on mapping and reducing their carbon emissions. But a myopic focus on emissions may prove to be misguided. First, it can provide a onesided view of an activity’s environmental effects. (For an example of how that can happen, see the sidebar “Managing conflicting environmental objectives.”) Additionally, when a company focuses single-mindedly on reducing its own carbon emissions, it can end up simply shifting responsibility for those emissions farther up or down the supply chain. Finally, while GHG emissions do represent a clear and present danger to our environment, there are a host of other issues that also affect the www.SupplyChainQuarterly.com
quality of life. Over fishing; high levels of material consumption; increased use of pesticides and herbicides; water, air, and soil contaminants; destruction of our natural resources; limits on the availability of oil; and a stressed food supply are just a few examples of some of the issues threatening our future. While focusing on GHGs is worthwhile, it fails to directly address other environmental issues, such as those mentioned above. But a long-lasting, corporate sustainability initiative requires a broader, multipronged approach that considers the environment as a whole instead of individual components. With that in mind, this article will offer suggestions for developing a well-rounded environmental program that not only reduces greenhouse gases but also goes much further toward creating a truly sustainable business. Make “green” part of your culture Many companies fail to see the difference between the focused efforts associated with limiting GHG emissions and the broader issues of sustainability. A sustainable business is one that works to ensure that all processes, products, and manufacturing activities address environmental concerns while also maintaining a profit. Some describe it as striving for the “triple bottom line” of concern for people, planet, and profits. By broadening its focus, a company attacks the issues associated with greenhouse gases with true dedication and direction, but just as importantly, it works to affect change in all areas that could have a negative effect on our future.
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[BEYOND CARBON COUNTING]
Although companies often see the green movement as an opportunity for positive branding, few move beyond rhetoric to take action that will help them become sustainable businesses. In a recent study by McKinsey Consulting of 2,000 global executives, nearly 50 percent stated that climate change was either somewhat important or very important in purchasing and supply chain management, yet fewer than 25 percent said that their companies always or frequently take climate change into consideration when making supply chain decisions.1 A number of companies, however, have achieved some success when it comes to environmental sustainability. They represent a full spectrum of industries and include both smaller firms as well as large, global organizations. How have they moved beyond rhetoric to put successful sustainability efforts in place? A 2007 study by the Canadian consulting firm Stratos found that best-in-class companies do not just consider the immediate issue or challenge (such as GHG emissions) but rather incorporate senior-level sustainability mandates into their long-term strategic planning. Stratos’ researchers looked at the best practices exhibited by seven companies representing a variety of sectors: Bell Canada and Vodafone from the information and communication sector, Royal Dutch Shell and Suncor in the oil and gas industry, Hewlett-Packard (HP) from the manufacturing sector, Vancity from the financial services sector, and Rio Tinto from the mining industry. According to the report, “A number of companies … identified that their sustain-ability strategic plans were aligned closely with the overall corporate guiding principles, statement of values, and/or their business strategies.”2 As the Stratos study suggests, sustainable organizations strategically integrate environmental and social tenets into their overall business plans. By doing so, these companies embed the culture of sustainability into their corporate cultures. Indeed, for most best-in class companies, sustainability has been part of their culture for decades. For example, “global citizenship” has been a key part of HP’s value structure since it was founded back in 1939, and since 1957, the company has identified it as the most important of its seven core values. Like HP, Volvo has been emphasizing its environmental commitment for many years. In 1972, the company communicated the environmental challenges facing the automobile industry in front of the United Nations Environmental Conference and incorporated the following into its corporate mission statement: “We use our expertise to create transport-related hard and soft products of superior quality, safety, and environmental care.”3 Nike represents another example of a company that has incorporated environmental stewardship into its long-term business objectives. Since 1993, the company’s stated goal has been to “create performance innovation products that minimize environmental impact by reducing waste throughout the design and development process, use environmentally preferred materials, and eliminate toxins.” Employees are expected to make smart and sustainable design choices at the beginning of their creative process and report on results. In fact, Nike has set a target date of 2011 to have 100 percent of its footwear achieve design and waste-reduction goals. Apparel and equipment are scheduled to reach similar targets by 2015 and 2020, respectively. Such an achievement would mean a 17-percent reduction of waste within Nike’s supply chain and a 20-percent increase in the company’s use of environmentally pre-
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Communicate the plan downward While senior-level management sets the tone and the direction of environmental policies and initiatives, it’s the mid-level managers who translate those directives into action. For this reason, a company’s ability to become a sustainable business depends on how well it communicates and gains adoption of initiatives throughout the entire organization. In particular, companies must effectively communicate both the impetus for their sustainability initiatives and their long-term view of the efforts. Otherwise, associates may form their own ideas, which could potentially run counter to the message and achievements their company is trying to foster. This situation can translate into half-hearted efforts and the belief that the initiative is just one in a long line of short-lived corporate programs that were destined to fail. One way to communicate a company’s commitment to sustainability is to incorporate environmental considerations into departments’ and individuals’ key performance indicators (KPIs)—and to make it clear that management pays attention to them. The Stratos survey found that several of the best-in-class companies had sustainability prominently positioned on KPI scorecards or dashboards to ensure that results were communicated to the highest levels of management. Companies can also signal their commitment to sustainability by supporting the initiative with both capital and expense line items within their budgets. This can be an issue for managers who are already coping with both a directive to reduce operating costs and a limited, perhaps overburdened staff. If the company’s commitment to sustainability is not backed up with resources—both human and capital—then middle management will interpret the directive as lacking genuine executive-level support. Managers and associates also need to know what’s in it for them. One possible approach: By creating an incentive plan that rewards improvements (especially projects related to ROI), associates and managers are more likely to identify green opportunities and implement changes.
Watch your “triple bottom line” Some companies have successfully integrated sustain-ability into their business plans and then communicated it to the rest of the company using a concept called “triple bottom line (TBL) accounting.” Triple bottom line accounting expands the traditional accounting and reporting framework to track ecological and social performance in addition to financial performance. Among the organizations that consider themselves to be, at least in part, TBL companies are Hewlett-Packard, M&M Mars, and Volvo Trucks. By adopting a TBL approach, these companies have made a commitment to corporate social responsibility and to measuring the results. With this commitment comes the requirement to capture and report on areas in which their businesses have an impact on people (employees, customers, communities in which they operate), the planet (global and local environment), and profits (for the company, associates, and www.SupplyChainQuarterly.com
suppliers). TBL reporting involves first defining the company’s key emphasis. For example, management may decide that it is committed to reducing the environmental impact of its products and operations, increasing workers’ safety and wages, and considering a product’s entire lifecycle in its business decisions. Next, the company would develop a baseline for current practices, construct indicators, and set performance standards and targets.
Find the ROI With its focus on profits, Triple Bottom Line accounting acknowledges one of the main factors that may keep managers and executives from fully embracing sustainability: concern that the costs will outweigh the benefits. To allay the concerns of skeptics, it’s necessary to demonstrate how sustainability initiatives can yield a tangible return on investments. Some companies have crossed this chasm by emphasizing the long-term benefits of sustainability, such as increased brand awareness and loyalty and the reduced cost of industrial cleanups. Manufacturer 3M Corp. made that decision 30 years ago when it realized that cleaning up a mess was harder and more expensive than preventing it in the first place. Since taking that stance, 3M has not only prevented the generation of more than 2.2 billion pounds of pollutants but it also has achieved about $1 billion in first-year savings from its environmental projects.5 It can also be helpful to use projects that will quickly provide ROIs to fund initiatives that are more complicated and whose benefits are less tangible in financial terms. One such quick-return opportunity lies in reducing a company’s energy and water consumption. When energy markets were regulated
in the United States, for example, it was easy to budget for utility costs. Now that those markets have largely been deregulated, rates have skyrocketed and operating costs have risen dramatically. As a result, energy- and water-saving efforts offer huge opportunities for cost reductions with fast ROIs and a potentially significant impact on a company’s sustainability plan. M&M Mars, for example, saw both sustainability and cost-saving potential in an unlikely place: the landfill located near its Waco, Texas, USA manufacturing plant. The company used low-cost methane gas generated by the landfill to help power the plant and reduce its electricity usage from 30 million kilowatts to 20 million kilowatts in five years. The effort also reduced carbon emissions by 10,000 tons annually. At the same time, the initiative decreased the candy company’s reliance on the local utility, stabilized its annual budget, and cut costs by $600,000 annually.
Identify opportunities companywide Once a company has established a broad commitment to sustainability, it can focus on specific initiatives. It’s important to note, however, that opportunities for sustainable business practices can be found in all departments and functions. In fact, a business needs to involve all parts of its supply chain in this effort if it is to become a truly sustainable organization.
[MANAGING CONFLICTING ENVIRONMENTAL OBJECTIVES] Supply chain managers who look for opportunities to improve their companies’ environmental positions may encounter conflicting objectives that they will need to consider and address. One example can be found in the decision to engage in reverse logistics. In reverse logistics, items that in most cases have already reached the customer are captured within the supply chain and redirected for further processing, such as repackaging, repair, recycling, decomposition, or destruction. The process has long been seen as a way to reduce the cost of operations by reusing returned products or parts. But reverse logistics can be costly in other ways. It can, for example, raise a company’s greenhouse gas (GHG) emissions because it increases handling and transportation of a manufactured item. Increasing pressure to reduce GHG levels has led some companies to reassess their reverse logistics activities. By doing so, they demonstrate a failure to understand the overall objectives of sustainability. Instead, they should consider the positives and negatives of both alternatives—reversing product flow or not—and then find ways to offset the negative aspects of the path they decide to take. On the one hand, a company that employs a reverse logistics strategy would enable the continuous flow of items through the supply www.SupplyChainQuarterly.com
chain and route the output (returned product) appropriately for its best reuse or for elimination. The negative side of this strategy would be the incremental creation of GHG. Alternatively, the company could decide to focus more heavily on reducing GHG. This might involve limiting or even eliminating its reverse logistics program in favor of directing items toward immediate destruction. Such an approach would limit the creation of additional GHG by reducing the additional handling, transportation, and transformation of returned items. On the surface, the latter approach seems like a good plan because GHG-reduction objectives would be reached more easily. But this direction fails to address the holistic, multi-pronged approach needed for long-lasting corporate sustainability. Instead, the company could decide to continue its reverse logistics plan with the idea that the energy saved by using returned products and parts instead of manufacturing new ones will balance out the energy used for transporting and reclaiming returned products. A company that wants to continue its program could also offset the GHG emissions associated with reverse logistics through the use of carbon-offsetting activities such as purchasing carbon credits, planting trees, and investing in renewable energy. [QUARTER 3/2009]
CSCMP’s Supply Chain Quarterly
other materials. Volvo Trucks, for instance, developed reusable packagHere is just a sampling of the areas where supply chain professionals ing that increased load capacity while reducing shipping costs, packaging can find green opportunities: Product design. Much can be gained by considering a product’s environmental impact from the very beginning of costs, shipping frequency, and product damage. The initiative also rethe design process. Companies can get helpful data for guiding this effort duced fuel usage and GHG emissions by decreasing the number of outbound shipments. And because the trucks are carrying the packaging by engaging in “supply chain environmental archeology.” This back to the warehouses for reuse, it also reduced the number of empty involves tracking a product’s lifecycle backwards— from final disposal return trips. Sourcing. A company’s sustainability efforts needn’t be conback through distribution, purchase, manufacture, and ultimately the sourcing of raw materials. An “archaeology” exercise helps research and fined to its own four walls. Its purchasing organization has a huge oppordevelopment (R&D) design and package products in a more sustainable tunity to encourage suppliers to adopt sustainable business practices. It fashion by considering not just how the product will be used but also how can, for example, require products to be eco-certified and encourage vendors to use eco-friendly products themselves. Large buyers in particular it will be disposed of, reused, and/or recycled. This “cradle-tocradle” can take advantage of the power of their annual spend to influence supapproach might encourage R&D to minimize the number of products pliers to adopt more sustainable business practices. Rutneeding disposal by designing durable products gers University in New Jersey, USA, for example, has levthat are easy to service. Or researchers can look ——————eraged its US $500 million annual spend to require supplifor ways to use waste as a feedstock for another When a company focuses ers to offer green products, include a statement about the application and try to select parts and materials only on reducing its own product’s origins and the supplier’s interest in sustainabilthat minimize toxicity. carbon emissions, it can end ity on their invoices, and provide a “corporate social reThey also can work to reduce the use of petrochemical materials in the production of textiles, sponsibility” up shifting responsibility for plastics, and films, a switch that can reduce the report. Those reports must include information about the those emissions farther up energy used and greenhouse gases emitted during vendors’ own suppliers and how they treat their own emor down the supply chain. production while creating a more recyclable end ployees, product information such as energy efficiency ——————product. Manufacturers can reduce the total and water usage, and the cost to maintain amount of waste entering landfills and/or requiring the product and how long it will last. This information recycling (and the energy needed for that process) by reducing their helps Rutgers to prepare KPI reports about its own sustainable business products’ size. In addition to the environmental benefits, such efforts can practices. Hewlett-Packard is another organization that includes suppliers increase operational efficiencies and reduce shipping in its sustainability efforts. HP audits suppliers to ensure that they comply costs. That was the case at one distribution center in Delaware, USA, with the company’s key policy requirements. HP’s status as a very large where the reduction of a product’s cubic measurements translated into customer appears to have successfully influenced suppliers’ practices. In shorter run times. Because the product was smaller, fewer trays were 2008, Chairman and CEO Mark Hurd said, “We audited 142 suppliers at needed on the conveying line during picking and packing. As a result, a 246 facilities for compliance with our code of conduct, and incidences of day’s orders could be processed in less time. The smaller product also nonconformance, such as discrimination practices, have been substantranslated into fewer outbound trailer loads. Designing for the environtially ment also takes into account the environmental impact of a product’s reduced.”6 packaging. In designing packaging, companies can not only use environ- Initially it may be difficult to gain acceptance and compliance from venmentally friendly materials but also can reduce the need for packaging. dors. But as they adopt the new practices, they undoubtedly will see Additionally, they can scrutinize the recyclability of pallets, totes, and benefits as they find opportunities to add similar value to other customers
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that want to be greener. Forecasting and demand management. Forecasting and demand management might not be the first things that come to mind when one thinks of areas that are ripe for sustainability initiatives. But they should: Poor forecasting and demand management can lead not only to high obsolescence and destruction rates for unwanted and outdated product but also to constrained resources being dedicated to unwanted product. By working to increase forecast accuracy, companies can make great strides toward reducing the amount of product destined for landfills. Better collaboration with both vendors and customers can lead to increased accuracy by providing a better understanding of market trends and demand surrounding the product. Reverse logistics. On the surface, it might seem obvious that recycling is the environmentally responsible thing to do. But there are instances when recycling creates an environmental problem rather than a solution. When an item is discarded for recycling, it often is combined with dissimilar components or products. While these items can be processed together, chemical additives may be required to bring the resulting material back up to acceptable levels of integrity for reuse. Even with those additives, the finished product will still fall short of its original integrity level. Each time the waste is processed more additives are required, until disposal is the only remaining option—yet the landfill-bound item is more toxic than before. In this situation, a good reverse logistics program would seek to keep those materials out of the waste stream.
Turn green to gold While best-in-class companies do not make improving their brand image the main impetus for their sustainability efforts, they do take advantage of the opportunity to turn environmental initiatives into marketing gold. Any company with a strong sustainability program should make sure that it has an effective environmental branding message to inform all stakeholders, including local communities, about its green initiatives. If marketed correctly, a company’s green efforts can create a competitive advantage. Sustainable businesses should also be sure to back up their environmental message by getting a third-party stamp of approval. To help consumers understand the difference between fact and fiction when www.SupplyChainQuarterly.com
it comes to companies’ marketing of their green programs, some organizations are developing environmental standards and certifications. These certifications by themselves can create a competitive advantage. It is therefore worth the effort to search out reputable certifications for the appropriate industry and make product adjustments to ensure that products can be certified. The current emphasis on “greening” our society and the increasing threat of global warming have led many companies to say that they are sustainable businesses. Corporate management has issued directives, and people throughout those enterprises are working hard to ensure that GHG emissions are documented and reduced. Some of these businesses have established their goals based on concerns over potential governmental regulation, while others seek to profit from the green trend. But as the suggestions highlighted above emphasize, the scope and vision required for a successful sustainability program are far broader and deeper than that. The companies that will be truly successful in becoming a sustainable business are the ones that embed sustainability into their overall corporate governance and culture, communicate the benefits to everyone throughout the supply chain and earn their support, and measure results to find the return on their investment. ∆ Endnotes: 1. “Talk is Ahead of Action on Green Supply Chain, According to McKinsey Study,” Supply Chain Digest, Aug. 5, 2008: www.scdigest.com/assets/ On_Target/08-08-05-5.php?cid=1840 2. Sustainability Integration into Business Practices: A Study of Leading Canadian and International Companies, Stratos, 2007: www.stratos-sts.com/ page.php?page=55&subpage=74 3. Volvo web site, www.volvo.com 4. Nike Corporation web site: www.nikebiz.com/ responsibility/ 5. James Pressley, “Kermit’s Friends: How 3M, Ikea and Intel Profit by Being Green,” Bloomberg.com, Oct. 24, 2006: www.bloomberg.com/apps/ news? pid=20601088&sid=aTiKxILzqbLQ&refer=mu 6. “Letter from Mark Hurd,” HP Global Citizenship Report 2008: www.hp.com/ hpinfo/globalcitizenship/gcreport/intro/ceoletter.html [QUARTER 3/2009]
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