09/23/09

Reduce Supply Chain Carbon Footprint

A green supply chain is like a mystery. The idea always conjures images of a higher cost and investment to the business. However, is that really the case? Will companies need to spend more to be green? How can green initiatives drive financial and social benefits? I hope my short article can answer these questions. In my last article, I discussed the approach to collect data in the supply chain to quantify carbon emissions. Once we can quantify and start measuring the carbon footprint of the company’s supply chain, we can find ways to reduce it and measure their improvement.

Before I start discussing the possible solutions, I would like also to express my opinion for the recent trend of using “green” as a reason to call for nationalization or deglobalization. The trend suggests that manufacturers should be moved back to the U.S. to shorten the supply chain distance thus reducing the carbon footprint. I agree that a short supply chain close to production or the end consumers can be beneficial in some cases, such as the JIT practice. However, according to IEA, International Energy Agency, international shipping accounts for approximately 2.7% of world CO2 emissions, which is small relative to the benefits brought by global trade.  Hence it’s not the reason to prevent globalization and international trade. I’m a strong believer of “competitive advantage”, which is the way to promote global welfare and technological development. “Green” initiatives should focus on innovation and waste reduction, in either technology or process. “Green” shouldn’t be used for a political reason and incur more costs for the whole society. According to the North American Supply Chain Carbon & Sustainability report, moving production closer to home is 12% of all environmental initiatives. Practically, companies will be interested in the green initiatives only when they are able to achieve a lower financial cost and a better customer satisfaction at the same time. That is true that companies can develop products more environmentally friendly and some consumers are willing to pay a premium for the green contents, such as for a Toyota Prius. However, the majority of consumers are not ready to pay more for green, especially for commodities. Hence, to enhance a company’s competitiveness, the approaches to reduce the carbon footprint of the supply chain should also aim to drive cost efficiency and customer satisfaction.

Just like the total cost analysis for supply chain, there are many trade-off decisions to be made in green supply chain optimization, and the goal is to maximize carbon emissions reduction. I’d like to suggest the environmental initiatives from supply chain functions’ point of view, represented in the below matrix.

green initiatives

As we can see, many of those initiatives are day-to-day initiatives and process improvement activities to drive operational efficiency, increase recycling, reduce waste, and enhance communication and visibility in the supply chain. Hence, the outcome of the green initiatives not only improve operational effectiveness of balancing costs and service, but also reduce the carbon footprint from movements, spaces and materials in the supply chain. A “green” KPI or measurement enables companies to associate the positive financial results to the carbon footprint reduction. Once the mystery of “green” is discovered, the cost of green initiatives won’t become an implementation barrier and companies can benefit from quick financial and social return from those initiatives. As a result, the “green” strategy is not just a social responsibility. It becomes the “sustainable” and “desirable” strategy for any company.

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08/22/09

Quantify Your Supply Chain Carbon Footprint

A carbon footprint is “the total set of GHG (greenhouse gas) emissions caused directly and indirectly by an individual, organization, event or product” (UK Carbon Trust 2008). Once the size of a carbon footprint is known, a strategy can be devised to reduce it. Recently there are a lot of discussions around measuring carbon footprint in supply chain. UPS announced that they plan to reduce their carbon emissions by 20%, with an ability to capture and report on the carbon footprint of each package shipped by each customer, based on distance and mode. Wal-Mart announced the “green label” program to label the sustainability index each of products it carries, so “the retailer’s 100,000 suppliers around the world will have to calculate and disclose the total ecological costs of their products” (Daniel Goleman, Wal-Mart Exposes the De-Value Chain). Software companies are catching up to develop programs for supply chain optimization around a lower carbon footprint (Roberto Michel , Supply chain network design: its Green powers not exactly new). With government commitment to reduce global carbon emissions by 50% by the year 2050, businesses are scrambling about the opportunities to reduce carbon emissions.  However, there is also a survey of company executives showing that it is “not the best time for launching big corporate initiatives” to calculate a company’s carbon footprint (Robert J. Bowman, Supply Chain Visibility: Lots of Talk, Little Action).

An end-to-end supply chain is a material flow from suppliers to manufacturers to distributors and ultimately to  consumers in the end.  So it can become a huge task to measure carbon footprint especially when many companies are also struggling with poor supply chain visibility. However, I believe that companies can take some easy steps to start quantifying their supply chain carbon footprint, and at the same time improve their supply chain efficiency and visibility.

From a supply chain management point of view, energy is used during transportation and manufacturing, and thus creates carbon emissions, also called greenhouse gases. The challenge for companies to reduce their carbon footprint is whether they have ability to quantity their current emission levels.

There are three key components in supply chain contributing to carbon emissions:

1. Movement

Any movement in supply chain, from inbound or outbound shipping to transferring products in the warehouse or on the factory floor, consumes energy and directly produces carbon emissions. Energy consumption is different based on different transportation modes, distances and weights. The calculation can be based on gallons of fuel consumed for transportation, and hence the footprint measurement can be calculated at the unit level during transportation.

2. Space

In supply chain, space such as office, factory and warehouse are used to support supply chain activities. However, space consumes energy, such as electricity or heating oil. Excess or unnecessary space caused by supply chain inefficiency, such as excess inventory or poor packaging design, not only increase supply chain costs, but also produces unnecessary carbon emissions.

3. Material

Material will be more difficult to be directly measured than movement and space, especially if the company is responsible for the end-of-life material management of toxics, hazardous materials, and waste. So a good way to capture the carbon footprint caused by different materiasl is to evaluate total energy consumed to process the material including its life cycle production and the end-of-life waste management. For example, a new material might take a longer time and more resources to produce from its raw components to finished goods, but it might require very little energy to process its waste.  Therefore the total size of the carbon footprint for the new material is smaller.

A very good information source to calculate CO2 emissions can be found at http://www.carbonfund.org/site/pages/carbon_calculators/category/Assumptions

For any company who is interested in taking actions to capture and quantify their carbon footprint, as an easy way to begin with, they can start from collecting data in their end to end supply chain, and convert those data into energy consumption and carbon emissions.  The below matrix represents the data collection plan for a traditional manufacturer through different supply chain phases:

Carbon Emissions data collection

Absolutely data collection can be a big task, especially when a large amount of materials and products are involved. But once the database is established, the company can use those energy consumption formulas to quantify their carbon foot print of their supply chain, and thus implement sustainability KPI to measure their global citizenship accountability and environmental sustainability improvements. Once companies start to take action to measure their carbon footprint, they will not only see the reduction of their greenhouse gas emissions, but also the reduction of their supply chain costs, which I will discuss more in a  future article.

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06/17/09

When “Green” encounters “Efficiency”- What supply chain executives can do to achieve both

I enjoy reading the article Can You Have a Lean-Green-Global Supply Chain by Mollenkopf, Tate and Ecklund. It explains the possible conflict and synergy between lean and green supply chain. At least it gives me a very clear definition of “sustainability”, which I often misused as well.

Like the authors say, “green” or “sustainability” are buzz words for today’s business environment. To be green means to avoid negative impact to the environment, including air, land and water, and sometime even creating positive impact. But when “green” encounters “efficiency”, companies often choose “efficiency” over “green”. In the end, executives need to be responsible to the stockholders for company bottom line. Going “green” becomes something nice to have as part of a company’s social commitment. I had personal experience that a famous warehouse club resists to optimize truck in order to keep their dock loading efficiency. But actually, many components in supply chain can provide companies with “green” opportunities and at the same time help companies achieve cost and efficiency objectives. Below are some of my thoughts:

  1. Use “green” material for product design and packaging. Companies can choose to use green materials which can be recycled and reused, which will not impact the environment negatively. Using recycled pallets is a good example in packaging. It’s more challenging to substitute direct materials of the products. However with the green initiatives from governments, there is more and more R&D invested in developing “green” materials. That is true that green substitutes can be more expensive today. However, working with suppliers closely in product development and increasing the economic scale of the material can optimally reduce the material cost and achieve “green” prospective.
  2. Reduce unnecessary movements in operation and logistics. It’s back to Lean concept to reduce waste of movements. In a factory or warehouse, layout improvement can eliminate unnecessary travel of the workers and forklift trucks, and improve efficiency. Postponing inventory deployment can ship the products to the right locations to meet customers demand, thus avoiding possible stock transfer movements among different regions. For unavoidable small batch or LTL orders from the customers, the efficiency can be achieved through LTL consolidations. All of those reduced movements will not only save significant transportation cost, but also resulting CO2 omission reduction and contribute to a greener environment.
  3. Improve reverse logistics. Reverse logistics hasn’t been paid too much attention by many companies. But how to reuse, return or dispose of the defective products will have a huge impact on both “green” and logistics costs savings. Companies need to re-examine their reverse chain for more value creation. For examples, instead of shipping the consumers returned products directly to the overseas or local suppliers for inspection and repair, the company can source local service providers to sort the returned products, resell the nondirective ones and then send the defective ones to repair, locally if possible. There is additional service fee incurred, but the savings from unnecessary shipping is tremendous. Just thinking about it, most of returned products from the consumers are actually not defective products. When disposal or scrape is avoidable for end-of-life products, the company should be socially responsible to make sure the wastes are properly handled by the recycling service provider. The goal is to create zero landfill. And keep in mind, any hazardous disposal will damage the company’s reputation and cost more for damage recovery.

Going green is not just a slogan. Going green in supply chain can help a company achieve cost savings or cost avoidance. Executives need to commit to support green initiatives and engage their employees to identify any green opportunities inside and outside the company. As the article says, companies embracing green, lean and global supply chain strategies may in fact continue to gain momentum and find themselves poised on the leading edge of competitiveness.

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