Green is Global

Is Your Supply Chain Ready?

By Andrew K. Reese

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Governments continue to issue regulations aimed at mitigating the impact of chemicals on human health and the environment. Channel masters like Wal-Mart (and many other companies) are incorporating sustainability criteria into their supplier codes of conduct. And consumers increasingly are turning to "environmentally preferred products," even in the wake of the downturn.

Supply chain sits at the confluence of all these pressures bearing down on the enterprise. In fact, supply chain has a critical role to play in choreographing and synchronizing the various functions and stakeholders within the enterprise and across the value chain to meet the challenges of sustainability. Supply chain has played this role before, of course, in the sales and operations planning process that harmonizes everything from long-term planning to daily operational execution. Sustainability's long-term impact on supply chain will necessitate similar core competencies going forward. It will bring together everything from corporate social responsibility to product innovation, design and development, and regulatory affairs and compliance management.

The question is, is your supply chain ready to mitigate the risks — and leverage the opportunities — of "green"?

What Is Green?

Oftentimes people have very different perspectives on what sustainability means, or where they see the applicability of sustainability to their own function. So sustainability can refer to:

  • Energy consumption — the electricity, gas and fuel consumed by your company and/or your entire supply chain.
  • O2 & other emissions — greenhouse gases emitted by you and your supply chain, as well as other types of emissions into the air that could be detrimental to air quality, including ozone depletion.
  • Materials — including waste and scrap, recycling materials, packaging, what you put into sewers and landfills.
  • Hazardous materials — including chemicals, substances and materials.
  • Natural resources — how you and your supply chain use water, for example, and how you relate to the natural habitats, your policies on species protection and so forth.
  • Building standards — Leadership in Energy and Environmental Design (LEED) certification.

It's important to note that, while issues around sustainability often are fraught with emotion, C-level executives and boards of directors are taking a pragmatic approach to "green." Randy Watson, a partner with consultancy A.T. Kearney, notes that when sustainability showed up in the firm's 2008 "Assessment of Excellence in Procurement" (AEP) study, it ranked No. 5 on the list of top CEO expectations for their procurement leaders. "That opened our eyes that this issue really is something that chief procurement and supply chain officers can't ignore," Watson says. "It's on the top of the CEO agenda now."

Market Drivers

The drivers that have made sustainability top of mind in the C-suites and boardrooms are straightforward enough. Again, it's the pressures coming from:

Customers — Think Wal-Mart and its 15 questions for suppliers, or environmentally preferred product (EPP) policies promulgated by, for example, healthcare group purchasing organizations. Wal-Mart has publicly stated that more than 100,000 global suppliers are being evaluated on sustainability by virtue of its Sustainability Index. That's going to affect companies either directly because they are a supplier to Wal-Mart or indirectly because they have suppliers that also supply Wal-Mart. And Wal-Mart is using the index, obviously, as an additional measure of its suppliers' performance. They're looking to find out where the waste is, who are the most efficient suppliers and where are the opportunities for cost savings in the supply chain. This trend is spreading as other companies begin taking sustainability into account in the supplier selection process. In fact, the Supply Chain Report for 2010 from the Carbon Disclosure Project (CDP), authored by A.T. Kearney, found that "6 percent of leading companies already deselect suppliers who fail to manage carbon, while 56 percent are committed to do so in the future" (emphasis added).

Government — Think E.U. REACH & RoHS, China RoHS, U.S. EPA mandatory reporting rules and pending CO2 legislation. As just one example of how these regulations impact the supply chain, IHS, a provider of information and insights around product lifecycle and sustainability issues, has pointed out that 25 percent of the end-of-life notices (EOLs) issued by providers of technology products and components in the year after RoHS enforcement started were because of RoHS and lead free initiatives, resulting in tremendous discontinuity in the supply chain and a wave of product redesign.

And, lastly, Market Forces — Think end consumers looking for "green" products and/or tracking the "greenness" of companies from which they buy products. Ryan Humphrey, director of professional services with ModusLink, which offers a service to help companies "green" their product packaging, notes that consumers are becoming more demanding in terms of the sustainability of the products they purchase — and that those demands are only likely to increase as consumers become more educated about sustainability. "We're telling our customers to expect a revolution when it comes to consumers wanting green packaging," Humphrey says.

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Passing the Inflection Point

As supply chain leaders are becoming more aware of the impact that sustainability is having on and within the supply chain, what our research and the research of others are pointing to is really a transition that is taking place in how the supply chain is viewed. The traditional mission, if you will, of supply chain has been to focus on areas like network complexity, globalization, outsourcing and growth in the supplier portfolio as representing major opportunities to rationalize, leverage, and optimize product delivery, customer service and total landed cost.

What we're seeing now is that we're reaching an inflection point to where now the mission of supply chain is being expanded to encompass many of the issues around sustainability. So optimizing for product delivery, customer service and total landed cost are all still important, but supply chain is also being called upon to optimize for things like energy, emissions, toxicity, consumption, waste, resources and ethical business conduct.

As a result, whether a company is focused on the explicit regulatory compliance and social responsibility aspects of sustainability or the implicit risks and rewards associated with business disruption and new innovation around sustainability, the supply chain is central to the discussion. If one believes (and the evidence seems to increasingly point to the fact) that the market has passed an inflection point and companies must begin to weave sustainability into their supply chain strategy, then a logical next step would be for sustainability to be viewed as an opportunity for executives in and around the supply chain to rise up and take a lead role in delivering compelling value to their organizations by driving sustainability.

Understanding the Impact

Given the potentially far-reaching impacts of supply chain discontinuities caused by these green transitions, supply chain leaders must begin now to take action to mitigate the risks and leverage the opportunities inherent to those transitions, according to Rory King, director of global product marketing with IHS. King points to several logical steps that supply chain executives can take today to begin preparing their supply chains for sustainability.

"The first step," he explains, "is to identify the regulations, customer requests, or sustainability or other external pressures that are impacting, or that will impact, your company, and link them to obligations, consequences and ultimately the company's existing or planning products or markets. You need to understand and document the impacts, and be able to share them with business leaders in a language they can understand." That means articulating the potential disruptions from green product transitions — as suppliers phase out leaded parts, for example, prompting redesigns — in terms of lost sales due to extended redesign cycles. It is critical to help senior management understand, King adds, that the regulations are increasing in scope and severity, and are constantly changing.

"The next step," King continues, "is to go deeper and link the product impacts to revenue and market share." This means identifying customers' RFPs and inquiries about your approach to environmental compliance, CO2 emissions, environmentally preferred products or use of less toxic materials. "It's important to document these customers and link them to current revenue, future revenue and product lines with exposure." Again, you must be able to articulate those impacts to senior management in terms they can readily grasp, such as customer satisfaction, revenue at risk and market share implications.

Third, draw an organizational map and identify all the internal stakeholders impacted. This includes not only engineering, operations and logistics, but also sales, marketing, legal and finance, or field service, where appropriate. As above, you must be able to not only understand but also be able to explain how the different functions are impacted, and also be able to demonstrate the potential for organizational disruption and inefficiency, as well as the beneficiaries of a common, unified corporate approach that links revenue to products, and products to supply chain and delivery.

For companies manufacturing products that are subject to green transitions, the next step is to identify the redesign implications of product and material exposure, and then link those implications to time, lifecycle and supply risk. Working backwards based on those cut-off dates, you can "reverse engineer" a timeline for redesign broken down by product or product line, based on the lifecycle of each given product, and then link these to supply risk, revenue at risk and legal risk. Compliance cycles that extend beyond compliance deadlines, of course, are clearly a risk. But compliance cycles that are targeted for completion in advance of deadlines offer opportunities to iterate product designs with new materials, collaborate with new suppliers, and redesign processes, potentially leading to new innovations.

Views on the End Game

King notes that the urgency around preparing the supply chain for green transitions stems, in part, from the anticipated transparency that companies now believe will be the end state for sustainability in the supply chain. He cites an AMR Research study showing that among top-performing companies and those in industries most severely affected by environmental compliance issues, 70 percent agreed that the end state is full disclosure of substances for globally developed products. If true, that represents a tremendous challenge for companies that today have product data dispersed across disparate enterprise systems, let alone paper design documents residing in filing cabinets scattered around their own organizations and at their suppliers — and their suppliers' suppliers and so on down the tiers, for that matter.

Stephen Easton, a principal with A.T. Kearney and one of the authors of the supply chain report for CDP, says that the supply chain practitioner community still has not formed a consensus on where green is headed. "People are still working through exactly what the end game is going to be," Easton says. For example, A.T. Kearney has seen a few companies establish long-term targets for carbon reduction throughout their supply chains, but much more commonly companies are establishing, at most, goals for the next three- to five-year period. "Three to five years is still not quite an end state," he says.

Donny Askin, chairman and CEO of Arigo, which offers supply chain solutions for the retail industry, suggests that there isn't necessarily an end game when it comes to green supply chain. "There isn't a fixed end point here," he says. "Green supply chain is about continuous improvement." In the absence of a point on the map toward which companies can navigate, Askin suggests that companies think in terms of a principles like meeting demand without depleting or destroying resources — or, at the least, having reusability and regeneration as core to the product strategy.