Green Thumbs Up
Want to grow profits? Plant the seeds of environmental concerns, rake in supply chain best practices, and watch what sprouts.
Not too long ago, supply chain management was cast as a supporting player in corporate boardrooms. Not surprisingly, environmental initiatives fell in a similar casting order, as companies believed the path to profitability lay in forward-moving production rather than concern over waste and social responsibility.
Times are changing, however, and so are perceptions of how green awareness and supply chain management can be co-stars.
"Concern over carbon emissions has added a third dimension to traditional supply chain management's two dimensions—cost and service levels," says Hemant Bhave, supply chain consultant for UK-based Radical Global Supply Chain Modelling.
"Carbon emissions have always existed, but until recently, businesses have not had the means or the inclination to factor them in."
Carbon emissions initiatives will take supply chain management to the next level by casting "decision making" as socially responsible, and fueling innovative research and collaboration to find more energy-efficient ways of doing business, Bhave predicts.
"Heavy and raw material industries use the most energy. They will feel the cost pinch from carbon emissions compliance, and will pass it on to their customers," he says.
"Interestingly, consumers say they are willing to pay more in the short term if it means companies can be more efficient in the long term. This will ultimately restore pricing to sustainable levels through technology and process innovation."
While technology service providers such as Radical are publicizing the importance of coupling environmental protocol with sound logistics strategies, some manufacturers and retailers are leading by example.
IKEA is one such innovator. The Swedish home furnishings retailer has made a name for itself selling affordable and functional home decor with a touch of minimalism.
It has pitched a similar approach to managing its global supply chain and becoming an industry bullhorn for environmental stewardship, a dual goal it lays out in its corporate vision:
"IKEA insists on minimizing costs. That means we have to work economically with raw material, energy, and other resources. As a consequence, we often reduce waste and discharges. Being economical when selecting raw material is second nature for product developers at IKEA. Since we develop products ourselves—often in close cooperation with suppliers—we can monitor all aspects of a product's life, from choice of raw material through production and distribution. When possible, leftover material from one product is used in the manufacture of another product."
Increasingly, global enterprises such as IKEA realize that green initiatives dovetail with supply chain management strategies, as they both strive to accomplish more with less.
"Companies that make a commitment to reduce carbon have to do two things: use less and be more efficient; and look for alternatives," says Erin Kelly, environmental affairs manager for Interface Inc., Atlanta, the world's largest manufacturer of modular carpet. "Using less—whether it is fuel, electricity, or shipping miles—translates into cost savings. If we buy less fuel and use less electricity, we lower our costs—a reduction that helps the bottom line."
Wal-Mart CEO Lee Scott made a similar observation in his presentation to employees last October, titled Twenty First Century Leadership.
"Being a good steward of the environment and being an efficient and profitable business are not mutually exclusive. In fact they are one and the same," he stated.
While critics may dismiss Scott's comments as public relations flack, there is growing consideration among global enterprises that good ethics—both financial and environmental—equals good business and ultimately pads bottom-line growth. This innovative approach hasn't always been common.
"More businesses today use environmental policies and protocols to screen suppliers than in the past," says Kelly. "Aside from good public relations, they enact these environmental policies for a number of reasons: Some want to make sure suppliers' practices are consistent with their internal corporate values of environmental responsibility; others eye cost reductions, knowing that environmentally efficient suppliers pass savings along to customers by having competitive prices; and still others look to meet pressures from the market and/or requests from their customers.
"Interface began its path to sustainability when customers started asking about our environmental position and how our products impact the environment," she adds.
Some suppliers report winning business specifically because they take action to address their impact on the environment, says Rani Virdee, senior sales manager, The CarbonNeutral Company, a UK-based environmental watchdog that works with industry to address climate change and make businesses more efficient and accountable for their actions.
"The Radio Taxi Group in London, for example, has attributed environmental awareness with winning $2.1 million in new business. And HSBC publicly requests environmentally aware suppliers," Virdee reports.
While uber enterprises such as HSBC, IKEA, and Wal-Mart are capable of facilitating compliance simply by exerting clout with global suppliers, a number of smaller shippers and carriers—including Interface—have chartered a voluntary initiative with the Environmental Protection Agency (EPA) to reduce greenhouse gas emissions and air pollution, and improve ground freight transportation fuel efficiency.
The Smart Way on the Highway
The EPA's SmartWay Transport is an innovative partnership between the U.S. government and the freight industry that aims to reduce 66 million metric tons of carbon dioxide (CO2) emissions, 200,000 tons of nitrogen oxide emissions, and 150 million barrels of oil annually by 2012.
The program has three primary components: creating partnerships, reducing all unnecessary engine idling, and increasing the efficiency and use of rail and intermodal operations.
While green politicking is nothing innovative, the recognition that good supply chain management can go a long way to reaching environmental compliance benchmarks is.
Businesses that embrace initiatives such as SmartWay and CarbonNeutral foster better environmental awareness within their supply chains, and learn to apply logistics best practices to reduce fuel waste and carbon emissions, while reverse-engineering these efficiencies to evolve better supply chain networks. Cross-pollinizing ideas in this way similarly allows for enhanced creativity in identifying and implementing new solutions.
"The need to reduce carbon drives an examination of alternatives that can lead to cost savings. At two of our facilities, for example, we use renewable fuels that cost less than fossil fuels," explains Kelly.
"Our Guilford, Maine, location uses waste wood chips to fuel manufacturing processes, and in LaGrange, Ga., we use landfill gas that offers significant carbon reduction and cost savings when compared to conventional fuel sources."
IT developers are meeting their end of the bargain as well. At the Council of Supply Chain Management Professional's October 2005 annual conference in San Diego, Radical's Bhave demonstrated the company's proprietary modeling technology that helps shippers measure carbon emissions. Radical's CAST-FE module lets users calculate their supply chains' environmental impact, incorporating industry standard data with user input to estimate the carbon footprint of a particular distribution network.
Defined as the CO2 emissions produced as a result of operating a specific supply chain, carbon footprint accounts for both transport and storage facilities. Users can then reconfigure their distribution networks to be environmentally efficient while considering the impact on overall cost and service levels.
"Increasingly, businesses are looking at carbon abatement costs as part of their supply chain planning process," Bhave explains. "When shippers consider redesigning their supply chain networks, they can now simultaneously look at the effect of any changes on cost and service level, as well as the carbon footprints by running their network models through technologies such as CAST-FE."
Environmental supply chain innovations are occurring on the transportation side as well. Businesses are investing in new equipment, retrofitting old engines to reduce pollution, and using alternative fuels such as biodiesel and other blends that lower emissions.
The Road to Savings
Carriers are also implementing efficiency practices such as checking tire inflation regularly, installing equipment on trucks to reduce wind resistance, and asking drivers to turn off engines instead of idling them during rest stops and long waits.
Many of these changes come as the EPA's 2007 vehicle emissions deadline draws closer, but many businesses are willing to entertain cost-saving measures now to stay ahead of the curve and the government.
"Carbon emissions legislation already exists in some industries, and will increase as climate change becomes more of an issue.
Companies that comply with legislation early on gain competitive advantage in terms of brand position," says CarbonNeutral's Virdee.
"They also realize how to drive out or reduce carbon costs by establishing less carbon-intensive systems and processes, which are cheaper. When legislation is enacted, they are ahead of the curve, another competitive edge," he adds.
For Bhave, one thing is clear: matching environmental and supply chain innovations is "a long-term commitment and strategy. Businesses not willing to play in the long-term horizon will be forced out of the game."
Companies such as Interface and IKEA that recognize the holistic vision melding environmental initiatives and supply chain management into a common goal have one distinct advantage: The grass and the cash are greener on both sides.