The volume of global trade has more than doubled in the last decade, reaching six times the rate of growth in the world's GDP during that time. This phenomenon has been fueled by relatively cheap energy with little attention given, unfortunately, to the impact on climate change.
With an estimated economic damage of about US$85 for each ton of carbon dioxide, capping greenhouse gas emissions — and putting a price tag on them — became inevitable. Indeed, under the European Union (EU) emissions trading scheme (EU ETS), such a setup is already in effect for certain industries. Similar schemes are popping up across the United States in separate groups of states and in other industrial economies worldwide.
Going forward, firms should expect to be charged for their carbon dioxide emissions. And most certainly, this will force a change in the way companies run their supply chains. Common practices of the last century — like long-distance airfreight, small batch size, just-in-time concepts and energy-intensive production in countries with low environmental standards — will likely go by the political and economic wayside.
In short, reducing the supply chain's carbon footprint will become an inescapable obligation.
The companies that act now can reap advantages that might be denied to those that delay and wait for the regulatory hand. These benefits include the "mindshare" of a growing cadre of ethical consumers, the attraction and retention of top talent and more sustainable growth overall.
The goal will be to optimize supply chain products, processes, information and cash flow in the face of four main factors, or "tradeoffs": cost, service, quality and carbon emissions. The first three factors are doubtless familiar to most readers; the fourth — carbon emissions — is likely new. Still, even with the addition of the carbon factor, the supply chain is not fundamentally going to change. What is going to change, however, is that the economics of optimization is going to become more complex.
As IBM has learned in numerous client engagements, in studies of the matter by the IBM Institute for Business Value and in managing its own massive, global supply chain, there are five major steps that a company should take to tame the supply chain carbon challenge.
1. Diagnose and assess
Today's global economy and the interdependencies between and a company and its partners require business to gain a holistic understanding of the carbon impact of their entire supply chain — from supply strategy, to distribution and warehouse management, to product operations and customer service. Using a carbon "diagnostic" that evaluates each high-level supply chain component according to a simple set of carbon statements and key performance indicators, a company can begin to define its own "maturity" level, identify gaps and set target levels.
Priority areas for taking action are determined by combining the results of the assessment, the maturity level, the ease of taking action and the strategic positioning. The higher the strategic importance of an activity and the bigger its performance gap, of course, the more important it is to take action.
2. Initiate asset management and realize "point" solutions