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
Not surprisingly, much of the potential for directly reducing carbon emissions lies in a supply chain's facilities and assets. Warehousing, vehicle fleets and data centers can consume huge amounts of energy.
Investing in facilities with low carbon footprint and energy-saving equipment offers an effective first step with a palpable return on investment. Instituting carbon-based asset management helps to ensure that the most direct savings potential concerning emission and cost can be realized.
For example, a leading Canadian pulp and paper company currently uses its own byproducts (biomass) to power its operations. It also regains heat from effluence to warm process water and to thereby further reduce its carbon emissions. Together with efficiency gains and a switch to natural gas, the company has lowered its greenhouse gas emissions by 70 percent and its energy use by 21 percent since 1990. In 2005 and 2006 alone, the company saved US$4.4 million through a 2 percent reduction in fuel consumption.
3. Address emissions in supply chain functions
Each supply chain function can make a specific contribution to help reduce greenhouse gases. Generally speaking — and depending on carbon diagnostic results and "green" supply chain management strategy — the ability to reduce carbon emissions is usually greater when measures are taken early in the process. Considerations in product design, customer fulfillment, and even "reverse" logistics offer a range of functional optimization opportunities.
When considering any functional optimization there is always the question of whether outsourcing could be an option to help lower carbon emissions. In many parts of the supply chain, outsourcing has led to more specialization and efficiency (contract manufacturing is one example). However, these activities are often more geographically dispersed, increasing transportation needs.
A service provider is typically much better positioned in terms of scale (and consequently reducing more greenhouse gases). This is especially true for third-party logistics providers, which can offer carbon-optimized bundling for transportation needs. Although it always needs to be evaluated closely, outsourcing of specific supply chain functions can indeed lead to a reduction in the overall carbon output.
4. Find the optimum solution for integrating across functions
Depending on the type of supply chain, the most pertinent areas for carbon reduction vary, as does their complexity. With today's globally distributed supply chains and customized products, that complexity has often increased to the point where specific functional improvements have a very limited reach. In contrast, a horizontally-integrated approach across functions permits much greater leverage.
Similar to the "design for manufacturability" or "design for serviceability" concepts, "design for environment" takes emissions into account. This includes carbon's impact on sourcing, manufacturing, and distribution. Modified packaging for reducing transportation efforts is another commonly practiced approach for various supply chain areas.
A good example of modified packaging comes from a Netherlands dairy foods company. Baby food, one of its businesses, has become a highly diversified product. In contrast to the past, a multitude of product varieties is available, including those for increasing resistance or treating allergies. The company produces, packs, ships and maintains an inventory of baby food — all from different locations. To reduce transportation efforts, the company is now adjusting its recipes and its production processes to create variants of a basic product. Specific ingredients are added late in the supply chain. This has the potential to cut needed inventory — and thereby transportation — by an estimated 127,000 miles (or roughly five times the earth's circumference) per year, with corresponding carbon reductions.
5. Collaborate with supply chain partners to realize overall potential
While internal horizontal integration might increase leverage, the full potential for reducing emissions can be obtained only if all plays in the supply chain pull at the same string and collaborate on end-to-end optimization.
Glass is the biggest single contributor to the packaging weight that a UK retailer passes on to its customers. By prodding the industry to produce lighter-weight wine bottles, the company reduced its annual glass usage from one single supplier by 2,600 tons — a 15 percent savings.
An estimated 4,100 tons of carbon emissions were avoided by importing "new world" wins in bulk and bottling them in lightweight glass in the UK. Improving product design not only produced savings for the glass manufacturer, but reduced the carbon emission through the entire lifecycle of a glass bottle.
Coordinating inventory and transportation among supply chain partners to reduce carbon impact can dramatically reduce mileage. Combining these efforts with low-emitting transportation options can further lower carbon output. Following this approach, Unilever, together with first- and second-tier suppliers and supermarkets, identified possible avoidance of 2.7 million miles per year.
Another example of collaboration among supply chain partners is returnable packaging, which unlike disposable packaging is intended for repeated use and can significantly reduce the impact of packaging-related carbon. This has proven effective for material supply in automotive and fresh-produce retailing supply chains.
Based on a defined environmental strategy, common ground should be cultivated with partners — especially in the areas of product design, packaging and logistics. Once the opportunities for improvements in carbon management are clear, collaboration and end-to-end supply chain optimization — based on balancing the desired outcomes in cost, service, quality and now the environment — can create a winning situation for all parties.
As you begin to tackle the issue of carbon management in your supply chain, there are several key questions to think about:
- What is the "model" of your current carbon footprint? What processes within the enterprise and the extended enterprise are carbon-intensive? There are "componentized" modeling techniques that can help you to answer these questions.
- What are the key green indicators that you should be measuring? What are the current targets and thresholds for improving and/or meeting regulatory requirements?
- What are the critical tradeoffs, and the constraints and considerations, regarding the reduction of carbon in your supply chain — all the while maintaining service and quality and easing the cost impact? (Remember, the goal is not to reduce carbon at the cost of meeting your traditional supply chain objectives; rather, it is to make carbon reduction a means for achieving those objectives.)
- If pursuing a collaborative approach for carbon management, how do you get partners on board, and how will you share risk, responsibility and value?
Fortunately, these are questions that companies do not have to ponder in the abstract. There are now modeling tools available that help companies come to grips with multiple and mutually-reinforcing challenges like packing options, alternate operational processes and transportation modes, and inventory and sourcing policies. These tools not only evaluate the problems, but make innovative recommendations as to the best ways to solve them.
In any event, the companies that turn the tables on the carbon conundrum could well be the leaders in the 21st century global economy.
About the Authors: Jim Bramante is managing partner, Americas, IBM Global Business Services; Sanjeev Nagrath is global leader, Supply Chain Management, IBM Global Business Services; and Karen Butner is global supply chain management leader, IBM Institute for Business Value. Jim Bramante can be reached at firstname.lastname@example.org, Sanjeev Nagrath can be reached at email@example.com and Karen Butner can be reached at firstname.lastname@example.org.
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