The greening of the supply chain

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The greening of the supply chain It’s clear from the results of a recent study thatenvironmental sustainability is fast becoming a critical element insupplier selection and performance evaluation. In short, logisticsand supply chain mangers need to begin thinking“green,” and quickly, or they chance riskingrelationships with prime customers. By Dan R. Robinson, Advisory Services Principal, Ernst & Young LLP,and Shanton Wilcox, Advisory Services Senior Manager, Ernst & YoungLLP -- Logistics Management, 10/1/2008
When should logistics and supply chain leaders begin to takedefinitive steps to “green” their operations? Based onthe results of a global survey of more than 250 C-suite executives,that time is now.
The survey, conducted by Ernst & Young LLP in collaborationwith the Economist Intelligence Unit, was designed to show theincreased level of awareness as well as the operational changestaking place as more companies go “green” on a globalbasis. For example, according to the survey, more than half ofcompanies (52 percent) report that they are implementing some formof green-minded supplier qualification. An additional 39 percentsay they have such plans in the works. By adding the two figures,this means in the very near future, 91 percent of firms willevaluate their suppliers based on environmental sustainabilitypractices.
Now, consider the fact that all 257 of the executives in the surveyrepresent companies with revenues of more than U.S. $1 billion.These are large companies, likely to be drivers within their supplychains. It is clear from these results that environmentalsustainability is fast becoming a critical element in supplierselection and performance evaluation. In short, suppliers need tobegin thinking “green,” and quickly, or they chancerisking their relationships with prime customers. The greening of demand
Whether or not one believes that global warming is a threat to theplanet, it’s clear that consumers, in tandem with governmentsand even investors, expect businesses to become moreenvironmentally conscious.
Already, consumer electronics in North America feature labelingsuch as Energy Star. Developed jointly by the U.S. Department ofEnergy and the U.S. Environmental Protection Agency, Energy Starratings provide consumers with an objective gauge of aproduct’s energy efficiency. Meanwhile in Europe, theindustry-funded Green Dot program (originally, Der GrünePunkt) provides certification to consumers that a product’sproducer chooses optimal packaging and contributes to the cost ofrecovery and recycling.
On U.S. highways it’s becoming impossible to miss the growingnumber of higher-mileage cars, hybrids, hybrid SUVs, and flexiblefuel pickup trucks—as well as the surging inventories ofunsold traditional heavy vehicles seen on lots. It’s becomingmore and more apparent that products that can demonstrate genuinelygreen attributes are beginning to enjoy commensurately higherconsumer attention and significant market premiums.
So, the marketplace itself is already on a trend to green. However,regulators have also been busy on the green front. EuropeanUnion-based businesses are already experiencing an ever-expandingrange of environmental legislation. This includes carbon limits andemissions trading requirements, energy efficiency standards,hazardous materials limits and handling regulations, as well asrecycling targets. Authorities in the U.S. have already signaledthe end of the incandescent light bulb, and companies should be onthe alert for even more potentially stringent legislation.
Similarly, look to investors who now view failure to addresssustainability as a source of potential business risk. They, inturn, will be ratcheting-up the pressure on management teams toprovide credible and tangible evidence of the pursuit ofenvironmental responsibility. There are even investment funds thattarget and therefore reward sustainability-focused companies aswell as a growing number of non-governmental organization (NGO)watchdogs seeking to uncover organizations that are not abiding bythe new rules of green.
But if the aforementioned trends aren’t enough to stimulateaction among supply-chain participants, then consider thehighly-visible strides of a handful of industry leaders. It mightbe a good time to start thinking seriously about green initiativeswhen: A leading global retailer announces that this year it will beginusing a green scorecard as a key element of supplierselection—and will begin providing consumers with greenratings for electronics. A major foods company begins using spent coffee grounds andbiogas—gases produced by the biological breakdown of organicmatter—from wastewater to fuel its boilers in the U.S. andEurope and then enlists its entire supply chain to help reduceenergy consumption and cost within a global logistics initiative. Household name consumer and commercial electronics companies beginimplementing supplier certification programs that includesignificant green standards for power consumption, waste products,hazardous materials, shipping characteristics, and packaging.
These are unmistakable signs of leading companies—all globalbrands—taking a keen interest across a range of environmentalsustainability issues. Others are following. And what they’rerecognizing is that end-consumers and other stakeholders assess aproduct’s environmental footprint based on the entire supplychain operation. This means newly environmentally-focused companieswill in turn look to their suppliers as collaborators in the rushto minimize carbon, wastewater, packaging, hazardous substance, andrelated footprints. The green pull
There is no question that leading companies are poised to turn thegreening of their supply chain into major initiatives. Respondentsto the survey were asked to evaluate the degree of risk oropportunity across a range of attributes relating to their supplychain and procurement operations. While the survey demonstratesthat executives see both significant risk and opportunity they seemmore focused on the latter.
Two findings are particularly telling. Seventy-one percent ofexecutives view sustainability, green, and carbon-related issues asa source of brand/reputation opportunity. Similarly, 63 percent seethese areas presenting the opportunity for significant growth. Inother words, companies believe that if they are able to achievegenuine standing in terms of green operations and products, theycan reap significant marketplace benefits.
But now, turn these ideas around and recognize the implication forsupply chain members. Consumers, regulators, shareholders, andother key stakeholders are growing increasingly sophisticated.Green washing—the practice of claiming a product or processis green when it really isn’t—won’t hold waterfor long in today’s environment.
This means that the heavy hitters within any product’s supplychain will most likely be turning the sustainability spotlight onthe operations of their upstream suppliers. How green anend-product can be is governed by the greenness of the individualsupply chain members needed to produce that product.
Therefore, the penultimate assemblers or name brands may be lookingto pull green subcomponents from their suppliers. Unfortunately theindividual suppliers who don’t fit the mold—those whodon’t follow state-of-the-art green practices—willeither need to shape up fast or be culled from the herd. So therethe risk is real: the slowest to act or the furthest behind mayfind themselves at a significant disadvantage. Cost savings
Another surprising finding is that, as opposed to being a source ofadded costs, exactly half (50 percent) of the responding executivessee green initiatives as an opportunity for cost savings. This is aview that is undoubtedly built on a handful of realizations. Forexample, a huge element of greening operations is the pursuit ofenergy savings. Indeed, in an era of surging energy costs, anyinitiatives that can pare utility bills or cut transport costs arelikely to have a direct impact on the bottom line.
Of course, as legislation such as the EU emissions trading schemebecomes more widespread, there will be even more incentives to cutenergy usage and therefore carbon emissions costs. Undoubtedly,international corporations are already beginning to worry what thefull extent of their supply chain’s total emissions mightbe—if only to better gauge the extent of their potentialregulatory agency-enforced carbon trading compliance costs.
Similarly, when members of a supply chain begin collaborativelythinking green in the product design phase, significant costefficiencies often arise. Consider the fact that makers oftelevision sets, PC monitors, and even cell phones and MP3 playersoften enter into early discussions with component makers tooptimize design and packaging for overseas container shipping. Theycollaborate in the design phase to minimize hazardouswastes—sometimes even pooling R&D resources relating toalternative materials—and address eventual recycling/recoveryissues.
Also, a focus on total carbon footprint and total energy andrelated costs—particularly amid historic highs for energycosts—may begin to alter existing practices. What is thecarbon footprint of a China-based supplier of heavy componentsusing coal to generate electricity and then factoring in theemissions and costs of shipping? Or, which is less expensive:shipping produce from faraway Africa or relying on nearbygreenhouse growers? The answers from a carbon footprint and energycost perspective may no longer be so obvious. Further initiatives
The survey also looks at the broad range of green initiativesunderway at major corporations. Today, 58 percent of companies arealready pursuing waste/packaging minimization, with 33 percentplanning to implement such programs. Broadly similar numbers arephasing out hazardous wastes from their products and relatedprocesses or implementing energy efficiency improvements to theirfacilities (also known as estates).
Of particular note to members of supply chains, over half ofcompanies, 54 percent, are seeking to optimize their logisticsoperations—with an additional 38 percent planning to do so.Such changes will undoubtedly exact an impact on suppliers.
Perhaps most on point, as mentioned earlier, is that over half ofcompanies, 52 percent, say they are implementing some form ofgreen-minded supplier qualification. An additional 39 percent saythey have such plans in the works. In other words, if your companyis an intermediate member of a supply chain and you have not beenapproached regarding your performance versus greenissues—most likely you will be soon. Time for action
So, can companies afford to play a game of “wait andsee”? Might hesitation risk not only a damaged reputation butpotentially the loss of customers to faster-moving competitors? Oralternatively, could genuinely green operations become a source ofcost savings, product differentiation, and growth?
It doesn’t matter where you’re seated within a supplychain and it won’t matter whether you view the demands ofsustainability as a source of risk and cost or as an opportunity.As a member of any supply chain, it is only a matter of time beforeyou are called upon to demonstrate your progress relating to greeninitiatives. Suppliers that aren’t green, and that cannotdemonstrate that commitment—or move too slowly—areplacing future sales and customer relationships at risk.