Profitability or Sustainability? It Doesn’t Have to be a Choice

Dr. Madhav Durbha of LLamasoft offers insight into why–with the proper tools–organizations don’t need to choose between profitability and sustainability, despite current economic uncertainty.

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When it comes to going green many organizations having been talking the talk for years, but the time has come to take action. Beyond meeting consumer expectations (81 percent of global consumers say it’s extremely or very important for companies to implement programs to improve the environment), companies are also increasingly seeing how sustainable practices can improve the bottom line.

According to research released by LLamasoft and the Economist Intelligence Unit, “economic performance” is the top ranking corporate sustainability priority for the majority of organizations. When asked about driving forces behind sustainable supply chain practices, growth opportunities and cost savings beat out “doing the right thing.” 

However, some are still struggling with making that vision a reality, citing “increased costs” as the largest impediment to supply chain sustainability, followed by responsibility of respondents, especially those representing smaller businesses. 

Supply & Demand Chain Executive recently connected with Dr. Madhav Durbha, group vice president, Industry Strategy at LLamasoft, who offered insight into whywith the proper toolsorganizations don’t need to choose between profitability and sustainability, despite current economic uncertainty. 

SDCE: Why are many supply chains still doomed to inefficiency and environmental waste? 

Durbha: Much more can be done to reduce inefficiency and environmental waste, but organizations have not given up on sustainability efforts. In fact, I’d say sustainability efforts are becoming increasingly popular and increasingly a requirement of doing business. However, for increased adoption, there are still barriers that many organizations must overcome. A research report that Llamasoft published in collaboration with the Economist Intelligence Unit found that cost (as reported by 38 percent of respondents), difficulty in monitoring complex supply chains (29 percent) and lack of structure to implement sustainability initiatives (24 percent) all stand as barriers to sustainability. 

As long as organizations think of cost reduction efforts and sustainability being at odds, they may be missing out opportunities to accomplish these dual objectives. As cloud-powered computer storage, processing and big data analytics make their way into supply chains, organizations that leverage these technologies can gain end-to-end visibility, identify ways to “go green” and streamline operations—both from profitability and sustainability standpoints. 

SDCE: What are the top mistakes companies often make when trying to make their supply chain green? 

Durbha: One mistake is thinking that sustainability is hard or requires a major overhaul throughout the entire business. This is not true. Going paperless is a simple example of a sustainability initiative. From a supply chain standpoint, several low hanging fruits exist that can make significant gains in making the supply chain greener. Projects that can be implemented with quick time-to-value, such as product flow optimization and inventory optimization, are examples of this that don’t require major structural changes.

Thinking of green initiatives as someone else’s job is another mistake. Going green should become embedded into an organization’s culture as opposed to centering all green initiatives around a dedicated group. While in large organizations a dedicated sustainability group can set the standards and best practices, the organization as a whole, in the supply chain and beyond, should embrace green practices. 

Not holding trading partners accountable is another mistake. Many organizations tend to focus narrowly on sustainability efforts within the corporation without engaging the broader supplier community. In a world where information is shared in real time, unethical employment practices or environmentally damaging supplier practices can cause significant, irreparable damage to brands. Leading organizations should measure their suppliers and hold them accountable by scoring their sustainability practices. 

SDCE: How can organizations strike a balance between profitability and sustainability despite current economic uncertainty? 

Durbha: Though some respondents (38 percent) believe that increased costs are the largest hurdle to overcome when implementing sustainable practices, especially in an uncertain economic climate, there are many supply chain projects that are geared toward efficiency and profitability that also deliver sustainability benefits—namely, creating an optimally designed network, consolidating shipments with streamlined routes, and taking advantage of postponement and inventory pooling strategies. 

Another logical place to look is packaging. As online shopping and direct-to-consumer business models continue to increase in popularity, organizations are relying more on consumer shipping and spending more money as they increasingly transition from moving bulk to moving eaches. For example, our joint report with the Economist found that some companies are developing boxes made of polypropylene, which can be melted and made into new boxes when broken down. While polypropylene is of lower density and accordingly lesser weight, this requires the companies to recover the packaging material for recycle and reuse.

Companies are also creating more innovative product designs to reduce supply chain costs at the same time as carbon footprints. In 2014, Costco made the decision to switch from round to square-shaped cashew jars. This change allowed Costco to ship more bottles per truck, as the company could better utilize the space, reducing the need to have extra trucks on the road. By investing in sustainable packaging, organizations can reduce their environmental impact while ensuring that consumer convenience doesn’t suffer. 

Another easy place to implement sustainability is in transportation routes. Organizations are constantly moving products via air, rail, ocean or truck. To truly make the supply chain green, organizations must look closely to see where routes can be optimized and fuel usage can be lowered. Similarly, organizations can look to see if transportation sharing via platforms that connect shippers and carriers is an option. This opportunity consolidates shipments and reduces miles, creating a win-win situation for profitability and sustainability. 

SDCE: How are LLamasoft customers thinking about sustainability? 

Durbha: They are doing more than thinking about sustainability. Several of our customers are making carbon footprint optimization an explicit objective while designing their networks. Such focus helps them plan their flow paths and routes in consideration of Green House Gas (GHG) emissions. They are explicitly modeling carbon taxation and other penalties for emissions along with carbon offsets. 

They are also bringing a sharper focus to demand modeling, leveraging machine learning capabilities and external macroenvironmental data such as GDP, employment levels, weather patterns, housing starts and more to enable causal modeling. These customers are experiencing double digit percentage improvements in forecasting, which is contributing to reduced inventory levels, improved productivity, better asset utilization and reduced waste. 

These few examples show how our customers are going beyond “thinking” about sustainability. These customers are realizing that profitability and sustainability don’t need to be conflicting objectives. 

Our customers are also innovating in a number of other areas to incorporate sustainability into their supply chains. The Loop store, a circular shopping platform, is a very interesting, new innovation that recently announced it will launch in a pilot mode in the U.S. and France this year. Several brand owners taking part in this pilot happen to be LLamasoft customers.

SDCE: What impact can increased visibility into your supply chain have on both efficiency and sustainability efforts from an operational sense? 

Durbha: Increased visibility allows companies to see areas of redundancy and inefficiency when looking at the larger picture, helping them meet their sustainability goals while streamlining operations. The ability to gain deeper insights into points of consumption ensures that companies are only ordering and using the exact amount of materials necessary while aligning inventories with consumption patterns. This reduces the amount of product sitting on shelves, thus lowering warehousing costs, helping both sustainability initiatives and companies’ bottom lines. 

Along with core metrics around revenue, profitability, costs, inventory performance and asset utilization, incorporating specific sustainability metrics such as GHG emissions helps organizations ask the right questions and make necessary sustainability improvements. 

SDCE: Why are addressing sustainability needs throughout the entire supply chain important?

Durbha: Even the smallest decision can have a ripple effect through an entire organization, and all decisions have tradeoffs. When companies consider changing sourcing, production, distribution, transportation and inventory policies for sustainability reasons, they need to consider the impact that change will have on their entire operation, so they are confident they are making the best decision for the business. 

Modeling out the digital twin of the supply chain can help an organization implement the right strategy and makes executing these changes less risky for the business. For example, if a company is looking to decrease sourcing costs by choosing an offshore supplier that offers lower costs per unit than the near shore supplier, the company should also consider what the costs and sustainability outcomes would be through the distance traveled, associated carbon footprint and increased inventory levels. Though the per unit cost at the source may be lower, making a decision with end-to-end total landed cost modeling may show a near shore supplier can be far less expensive while also significantly improving sustainability.

As organizations continue to incorporate sustainability practices into their overall business strategy with an end-to-end view of supply chain, they will realize that “going green” will not only mean a better Earth but also better profits. 

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