Factoring carbon emissions into the supply equation.
In today’s global economy, companies often work with literally thousands of suppliers, partners and service providers throughout the world to create and provide their products and services. They rely on these relationships to do everything from procuring raw materials to delivering finished goods.
Up until now, companies measured the efficiency of such a complex network of interconnected relationships – its global supply chain – in three areas: cost, service and quality. But concerns about climate change, ranging from increasing regulation to rising consumer awareness, have introduced a fourth element to the equation: carbon emissions.
Free ride ends
Driven by cheaper energy, worldwide trade has more than doubled in the past decade and global GDP has grown six times, all with little regard to the impact on climate change. Virtually none of the cost of the damage caused by carbon emissions – estimated at roughly $US85 per ton of carbon dioxide (CO2) generated – is reflected in supply chain costs.
This free ride is coming to an end for companies. Reducing carbon output, or attaching a price tag to it, will become an inescapable obligation. And with energy costs now generally rising, companies have an additional incentive to lower energy use, and consequently reduce carbon emissions.
Companies that begin addressing this issue now will reap the benefits, and not only in near-term lower energy costs. They also will enjoy an increased mindshare and market share among savvy, socially conscious customers, better retention of ethically motivated top talent, fewer government restrictions, and more overall sustainable growth.
The goal is to optimise the supply chain equation – striking a balance between cost, service, quality and carbon emissions – by taking into account various options and performance factors: design, packaging, processes, components, energy, inventory and transportation.
Key areas that can have a major impact on reducing carbon emissions are:
* Shipping consolidation: While many just-in-time and direct customer delivery policies now require more frequent shipments of smaller loads, they also increase energy costs and carbon emissions.
* Sourcing locations: In the past, procurement primarily looked at purchase cost when sourcing components, but distance between supplier and customer can have a major impact on carbon emissions and energy costs.
* Modes of transportation: Trains, planes, ships and trucks all have different carbon tradeoffs. With newer, greener transportation infrastructure coming online, companies can make tradeoffs when selecting mode of transportation for moving products.
* Network optimisation: Facility location, manufacturing, distribution and transportation operations all have varying impacts on carbon, and analysing those factors will help strike the right balance.
Finding the right balance when adding carbon management and energy use reduction to the supply chain metrics can lead to significant benefits, improving overall operational efficiency and substantially reducing costs.
A few examples:
* An American bath and kitchen products manufacturer reduced carbon emissions 34 per cent by relocating its warehouses without incurring additional costs.
* UK retailer Tesco asked suppliers to provide lighter-weight wine bottles, reducing its annual glass use by 2641 tonnes per year and lowering carbon emissions from transport by 4165 tonnes.
* The Lazy Shag backpackers in Kaikoura slashed 92 per cent off its hot water bill by reusing cooking oil from local takeaways and restaurants to fire its boiler. That represents a saving off 49,000 kilowatt hours a year and a 12 tonne-per-year drop in carbon dioxide emissions.
* Through targeting electricity and fossil fuel use and making energy efficiency improvements across its production and distribution systems, the New Zealand Wine Company became the first winemaker in the world to achieve carboNZero status.
Key steps to managing carbon throughout a supply chain are:
* Diagnosis and assessment: Evaluate high-level supply chain components according to a simple set of carbon statements and key performance indicators to begin identifying gaps, quick fixes and set target levels.
* Carbon asset management: Facilities and assets such as warehouses, machinery, vehicle fleets and data centres can consume huge amounts of energy. Making changes such as introducing new energy-saving equipment and technologies can effectively help lower both carbon emissions and costs.
* Functional optimisation: Determine where and how each supply chain function is performed and, in some cases, even outsource activities or procedures to gain economies of scale both in cost and carbon emissions reduction.
* Internal horizontal integration: Just as a company can look across its design process to make a product easy to manufacture and service, it can do the same to make it environmentally friendly.
* Collaborative, end-to-end optimisation: The full potential of reducing emissions can only be attained by looking across all players in a company’s supply chain, both internally and externally, to reduce carbon emissions and cost.
Doing the sums
IBM’s consulting offering, SNOW (Supply Chain Network Optimization Workbench), helps companies reduce carbon dioxide emissions, fuel use and costs by providing a detailed analysis of their supply chain logistics and suggesting improvements. This allows clients to optimise decisions for cost, service levels and lower CO2 emissions.
Making your operations ‘greener’ and making them more economical are complementary, not contradictory. When you improve the overall efficiency of a system you can almost automatically lower cost, waste and environmental impact. For example, Chinese shipping and logistics giant COSCO reduced the number of distribution centres it uses from 100 to 40, lowering logistics costs by 23 per cent and reducing CO2 emissions by 15 per cent. This allowed COSCO to avoid 90,000 tonnes per year of CO2 emissions, while maintaining service levels for clients and incurring no additional costs.
Companies are coming under tremendous pressure from shareholders, employees, governments and non-governmental organisations, and, most of all, customers to reduce their environmental impact. At the same time, they are under increasing constraints to reduce costs and improve efficiencies, particularly in the current economic climate.
An IBM global corporate social responsibility (CSR) survey of more than 250 c-suite executives shows that most understand this trend are responding to it: 68 per cent of them are already focusing on CSR activities to create new revenue streams and 54 per cent believe it’s giving them a competitive advantage. In addition, 85 per cent said they were using CSR initiatives to reduce costs.
This trend holds despite the current global economic crisis. In an IDC US survey released in December, 47 per cent of the respondents said they will buy new applications in support of green and sustainability issues.
A Forrester Research survey also released last month showed 52 per cent of respondents saying they are creating or implementing a green IT action plan, with reducing energy-related operating expenses to lower costs as the primary motivator.
In this era of growing concern about carbon emissions and rising energy costs, companies that address the carbon issue in their supply chains stand to gain major benefits. By adding carbon management to the traditional concerns about cost, quality and service, companies can develop new sustainable growth opportunities, differentiate themselves from competitors, and burnish their brands.
SNOW was developed by IBM’s China Research Laboratory and is built on a service-oriented architecture foundation, using WebSphere and other IBM-brand software products.
The tool is designed to look across five major logistics areas:
? Product – evaluating CO2 emissions impact of materials to aid in identifying alternatives
? Sourcing – considering impacts of CO2 emissions in selecting suppliers
? Production – determining CO2 emissions associated with manufacturing processes
? Warehousing – considering storage requirements and their attendant environmental impacts
? Transportation and distribution – analysing CO2 emissions for transportation modes, shipment sizes and service levels.