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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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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