Sustainability: Green is the New Black

April 2007: Stanford Business School’s Center for Social Innovation sponsors a “Socially and Environmentally Responsible Supply Chains” conference, featuring corporate giants Starbucks, Wal-Mart, Disney, Gap, Timberland, and Hewlett-Packard discussing their efforts to make the supply chain more environmentally friendly.

September 2007: The first U.S. carbon footprint event, “Measuring and Reducing Your Carbon Footprint,” takes place in Chicago. Firms including Nestle, Aveda, Nike, Intel, and Pepsi are on hand to share their experience in reducing carbon footprints across the supply chain.

October 2007: The annual Council of Supply Chain Management Professionals (CSCMP) conference in Philadelphia dedicates an entire track to supply chain sustainability, featuring case studies of green supply chains from Herman Miller, Whirlpool, Campbell Soup, and Stonyfield Farm.

Clearly, the green movement has hit the logistics sector. Supply chain professionals across all industries today are tasked with helping their companies improve supply chain sustainability and become more environmentally friendly.

From reducing carbon footprints to retrofitting warehouses and minimizing transportation routes, greening the supply chain is no longer a fringe movement, but rather an integral part of many companies’ strategic plans.

“The advent of sustainability—like the 1970s energy crisis or 1980s threat of low-priced, high-quality products from Japan—has vaulted supply chain management into the corporate spotlight,” says Tim Minahan, senior vice president of marketing for Procuri, an Atlanta-based supply management solutions provider that helps companies meet internal sustainability goals.

Indeed, TV and magazine ads are rife with companies touting their environmental commitments, and corporate initiatives around sustainability are becoming commonplace.

Among Fortune 100 firms in America, 21 have published sustainability reports, 44 have published corporate social-responsibility reports, and 63 maintain Web pages devoted to sustainability or the environment, according to the Center for Logistics Management at the University of Nevada, Reno.

An Emerging Concern

The supply chain is in the early stages of its green makeover, however.

“In many ways, supply chain sustainability is still an emerging area,” says Adrian Gonzalez, who chaired the sustainability track at the CSCMP conference and is director, logistics executive council at Dedham, Mass.-based ARC Advisory Group. “Many companies are just beginning to get involved in sustainability efforts. They’re developing their plans and trying to get a sense of what others are doing.”

For many companies planning sustainability efforts, cost is the looming question: Will we be able to meet our green goals while holding on to the green that makes up the bottom line? Will customers pay more for our goods because they’re produced in an environmentally friendly manner? Will sustainability efforts pay off in the long run?

Cost can be a roadblock—it’s sometimes tough for businesses to balance doing what’s good for the planet with doing what’s good for the company.

“Companies know what the ‘right’ thing is from an environmental standpoint, but we operate in a consumer-driven economy,” says Gonzalez. “Businesses are geared and structured to be profitable, but some environmentally friendly strategies contradict that,” says Gonzalez.

An increasing number of companies, however, see sustainability and profitability as mutual goals. They often embrace green supply chain initiatives as part of a larger strategy to factor sustainability into practical business plans that help the environment and contribute to the company’s growth and success.

“Part of sustainability is sustaining the company. If we can’t make money, we won’t be around to be the good guys for the environment,” says Drew Schramm, senior vice president, global supply and quality for furniture maker Herman Miller, Zeeland, Mich.

For Herman Miller, being around to be the good guys means carefully weighing cost-cutting against sustainability goals. While the company passed up the chance to save $2.4 million by replacing the metal components in one of its cubicles with PVC because of the detrimental effect on the environment, it doesn’t always choose the greenest route.

“Sometimes we can’t make the environmental changes we want to if it means costs rise to a point where customers are not willing to pay for it,” says Schramm. “It’s a balancing act.”

Many initiatives companies have already implemented in the name of supply chain efficiency can be translated into sustainability efforts, making it easier to go green.

To help reduce the cost and increase the reliability of transportation, for example, many companies have implemented transportation management systems (TMS) to minimize the number of routes and consolidate shipments into single truckloads.

“Companies have been optimizing transportation for years to save money, but from a green perspective, fewer trucks on the road also equals less fuel consumption and lower CO2 emissions,” says Gonzalez.

Supply chain sustainability efforts sometimes repay the favor—changes businesses make under the banner of becoming green can help reduce costs and boost the bottom line.

“If a company reduces its carbon footprint, it uses fewer resources and less energy, so it ultimately cuts costs,” explains Curtis Greve, executive vice president, GENCO, a third-party logistics provider headquartered in Pittsburgh, Pa.

GENCO’s unique recycle-and-reuse program helps companies cut down on waste and earn revenue by either recycling or reselling end-of-life products. Last year on behalf of its customers, GENCO recycled 17 tons of office paper, more than 300,000 pallets, 4.2 million pounds of plastic, and 6.6 million pounds of metal. The company also sold approximately $1.4 billion in original retail merchandise on the secondary market.

“Keeping product in the commerce stream is a good way to recycle and eliminate disposal costs,” explains Greve.

Cost-cutting, however, rarely serves as the primary motivation behind corporate sustainability efforts. Several factors drive the push for greener supply chains:

The Wal-Mart Effect. “The biggest driver of sustainability in the supply chain is Wal-Mart,” says Greve. The retailer is leading the charge with its commitment to spend $500 million on sustainability efforts.

In a landmark speech introducing its “Sustainability 360” program in 2005, Wal-Mart CEO Lee Scott pledged three major goals: to be supplied 100 percent by renewable energy, to create zero waste, and to sell products that sustain the environment.

Specifically, Wal-Mart has committed to reducing the energy needs of all existing stores by 20 percent by 2009; total CO2 emissions by 25 percent by 2012; and packaging across its global supply chain by five percent by 2013.

As supply chain professionals know full well, any effort of Wal-Mart’s ends up being an effort of its suppliers. Case in point: In February 2007, Wal-Mart implemented a scorecard evaluating suppliers’ packaging practices based on specific metrics including greenhouse gas/CO2 per ton of production; product/package ratio; cube utilization; and amount of recycled content.

The scorecard was rolled out to more than 60,000 global Wal-Mart suppliers as part of a one-year trial period, and in February 2008, the retailer will use the packaging scorecard to measure its entire supply chain.

“The implication to the broader business community is vast,” says Procuri’s Minahan. “If history is any indication, Wal-Mart’s sustainability strategy will likely spur suppliers and other companies to develop, manufacture, and source in a more environmentally and socially responsible manner.”

Regulations. While U.S. companies don’t currently face nationwide regulatory compliance when it comes to environmental and sustainability standards, many in the industry say it’s only a matter of time.

Regulations in Europe—such as the Restriction of Hazardous Substances Directive, which curbs the use of certain ecologically harmful chemicals, and the Waste Electrical and Electronic Equipment Directive, which makes electronics manufacturers responsible for facilitating the safe disposal of used hardware—are already in full swing, impacting U.S. companies selling goods in Europe.

Closer to home, President Bush has proposed cutting U.S. gasoline usage by 20 percent over the next decade and is asking businesses to use more sustainable energy sources.

Meanwhile, top corporations such as DuPont and General Electric are pushing for mandatory CO2 emissions caps and the development and adoption of additional sustainable energy sources.

Why would companies voluntarily push for restrictions? Some experts say companies may be able to prevent more stringent government intervention by being proactive.

“Supply chain managers need to take action to adopt environmentally and socially responsible supply practices today, before they’re forced to tomorrow,” says Minahan.

GENCO’s Greve agrees: “If we wait, the government will come out with a solution that will end up costing us all money. Companies are saying, ‘Why don’t we lead the way and let the regulators follow us?'”

At the U.S. state and local levels, many environmental laws directly impacting the supply chain have already been passed. California’s Air Resources Board, for example, has enacted air pollution regulations—including a recent proposal to reduce the pollution impact of cargo-handling equipment and ship auxiliary engines at the state’s ports—that are among the strictest in the United States.

Companies such as Herman Miller have come to view these regulations as an added cost of doing business.

“In order to comply, we had to create formaldehyde-free workspaces. It may cost us several hundreds of thousands of dollars, but we predict the same type of laws will show up in other states, so the effort is worthwhile,” says Schramm.

Rising Fuel Prices. With oil costs hovering near the $100-per-barrel mark and the natural flow of the supply chain being what it is—placing goods on a truck and transporting them long distances to stores or other distribution channels—efforts to minimize the impact of rising fuel costs take front and center at many companies.

Whether they are more interested in saving the planet or saving their cost structure, companies are finding that reducing their carbon footprint can help reduce fuel costs.

Many organizations are turning to fuel-efficient vehicles and/or alternative sources such as biodesel to help cut energy costs and boost sustainability.

UPS, for example, operates a large alternative fuel fleet, which includes more than 1,500 compressed natural gas, liquefied natural gas, propane, hydrogen fuel cell, electric, and hybrid electric vehicles. And FedEx’s OptiFleet E700 delivery trucks, which began operating in 2004, use one-third less fuel than its other delivery vehicles.

Consumer and Investor Pressure. Perhaps no entity has more impact on environmental efforts than customers who can directly support or boycott companies whose policies they like or dislike.

“Consumers can drive companies to change by speaking with their wallets,” says ARC’s Gonzalez.

This ethical tendency is making its way into the investment arena as well, with interesting consequences for supply chain operations.

For instance, a large investment group notified Campbell’s that it might sell its stock if the soup company’s sustainability efforts were not aligned with its socially responsible investment criteria, according to Robert Shober, Campbell’s director of infrastructure engineering and environmental programs.

Taking Action

What can companies do to respond to these sustainability drivers and act as good corporate citizens while boosting profits and keeping goods moving effectively throughout the supply chain?

“Start by identifying ways to eliminate waste, excess packaging, and shipping,” advises Procuri’s Minahan. “This reduces carbon footprint and also cuts costs.”

Procuri client Kellogg’s, for example, has implemented energy-management systems and procedures, including the use of heat recovery systems, at all its plants.

The cereal and food giant recycles 80 percent of waste, including converting waste food to animal feed. Kellogg’s also practices water conservation and is emphatic about packaging recycling and reduction programs, says Minahan.

Developing environmental and social responsibility guidelines, incorporating them into business practices, and extending them to the supply base is crucial to the success of supply chain sustainability programs.

In addition, gaining buy-in from C-level executives can help get these efforts off the ground and drive their continued prominence within the organization, Minahan notes.

Here are some specific examples of procedures, strategies, and practices companies are embracing to drive supply chain sustainability:

Design for the Environment. Many companies have found that building an environmentally friendly supply chain starts long before their products hit the logistics department.

“To truly make a lasting impact, companies realize they have to rethink their processes and factor in sustainability from the front end,” says Gonzalez.

Creating products and supply chain operations with sustainability in mind is the goal of Herman Miller’s Design for the Environment (DfE) protocol. To develop DfE, Herman Miller teamed up with Charlottesville, Va.-based McDonough Braungart Design Chemistry (MBDC), best known for its innovative “cradle-to-cradle” philosophy of eliminating waste and designing products and services based on patterns found in nature.

MBDC conducted a detailed chemical analysis of Herman Miller’s products and helped it develop ways to eliminate “nasty” chemicals from its products, says Schramm.

The company’s Mirra chair was its first product to be designed entirely under the cradle-to-cradle protocol. It’s PVC-free, made of 42-percent recycled content, and designed for easy disassembly—it comes apart in 10 minutes or less.

“Originally, the chair’s spine had a metal rod embedded for structural strength, but embedding metal inside plastic doesn’t work for disassembly. So we developed a new plastic spine with better strength that had no metal embedded and could easily come apart,” notes Schramm. “It ended up costing less, made for a better product, and is kinder to the environment.”

Designing with sustainability in mind also extends to Herman Miller’s suppliers and employees. The company’s Supplier Quality Plan (SQP) measures its top 80 suppliers on up to seven categories, one of which is the ability to cooperate on DfE initiatives.

“The more points suppliers score on the SQP, the more likely they are to get future business from us, so they are motivated to comply,” Schramm explains.

Internally, Herman Miller directors are tasked with a variety of DfE projects, which can account for as much as 10 to 20 percent of their performance review.

In addition, the company maintains an Environmental Quality Action Team, a cross-disciplinary group of employees that meets every quarter to plan corporate action around environmental affairs, green building, air quality, and other sustainability issues.

Responsible Packaging. Supply chain professionals have always worried about products contained inside boxes, but they’ve recently started paying more attention to the boxes themselves.

By using sustainable packaging materials and eliminating wasteful elements, many companies are finding that designing environmentally friendly packaging also makes good business sense.

Computer giant Hewlett-Packard (HP), well known for its efforts in this arena, developed the Bulk Pack program, detailed in a recent AMR Research report, The Value of Green—A Case Study of Hewlett-Packard’s Social and Environmental Responsibility Strategies in the Supply Chain.

Targeting package waste reduction, the Bulk Pack effort places multiple units of products in a single large, reclosable carton. The method cuts receiving, inventory, and deployment costs for customers by 73 percent, while also eliminating 75 percent of waste disposal costs.

A single pallet of individually packed cartons (servers, in this example) comprises 24 units, while the Bulk Pack holds 32 units with better security and item tracking, note Kevin O’Marah and Eric Karofsky, the report’s authors.

Leading alcoholic beverage producer Diageo is also a proponent of responsible packaging efforts. To help meet its goal of achieving carbon-neutral status within the next five years, the company uses sustainable and environmentally friendly packaging, says Michael Eaton, procurement director, chateau and estate wine.

“We’re always actively looking for less expensive and more sustainable packaging materials such as bottles, labels, caps, corrugated boxes, and point-of-sale materials,” he says.

The company also uses a large amount of recycled glass for its bottles, and gains from these efforts not only a bottom-line impact but a touchy-feely one as well.

“As a consumer goods company that touches consumer feelings, we push for corporate and environmentally responsible messaging. We don’t want people looking at our products negatively,” he says.

Network Design. Manufacturers, retailers, and other companies to whom supply chain strategy is a crucial part of business spend a lot of time and effort determining where to locate distribution centers, offices, and manufacturing facilities.

Known as network design, this strategic-level analysis takes into consideration where demand comes from, where customers are located, and how to balance transport costs with inventory costs based on that demand.

Today, supply chain professionals are starting to include sustainability in the network design mix, and software vendors such as iLog, i2, and Infor offer solutions that factor in sustainability issues when performing network design analyses.

“Companies that are looking to reduce their carbon footprint may decide, as long as it makes sense from a big-picture perspective, to build a facility in a different location than they might have considered in the past,” says ARC’s Gonzalez.

Bringing in goods from low-cost countries, for example, often reduces costs on the production side, but may ultimately result in prohibitive sustainability expenses.

As Herman Miller’s Schramm notes, “We can often save 15 to 20 percent by bringing in materials from China, but once we can accurately measure it, we may find that the carbon footprint offsets will cost more than what we save.”

It’s unlikely that a company would currently optimize its network solely on carbon footprint, says Gonzalez, but by understanding the environmental vs. cost tradeoffs, companies may reach different decisions and prevent sustainability constraints from being designed directly into their networks.

Distribution Center Overhauls. With their mega sizes and propensity to use energy around the clock, distribution centers can be a primary source of waste in the supply chain.

But like other sustainability efforts, warehouse operators find they can achieve both environmental and operational benefits by greening their DCs.

As with TMS solutions, warehouse management systems (WMS)—which many companies already use to improve efficiency—can also play a sustainability role.

Using a WMS can help companies maximize the efficiency of conveying and handling processes, increase flow through, achieve higher levels of cross-docking, and even cut down on forklift usage by reducing the number of touches necessary to move product—all of which helps reduce energy consumption.

Companies can also make changes to warehouse buildings and processes—both inside and out—to lessen their environmental impact.

Examples include implementing energy-saving motion sensors for lights; installing solar panels to power all or part of DC operations; using hydrogen fuel cell-powered forklifts; switching to reusable pallets; and implementing RFID, voice-based technologies, and other electronic interfaces that help reduce paper consumption and waste.

Green Rewards

In the end, whether companies opt to overhaul their entire supply chain in the name of sustainability or start with small improvements to reduce their carbon footprints, their efforts are likely to make a positive difference.

The good news is that the inherent moral benefits of sustaining the planet and protecting the earth’s resources are not at complete odds with building a better supply chain and sustaining a profitable business.

Whether driven by a major customer such as Wal-Mart, impending government regulations, consumer input, or a desire to reduce fuel costs, companies aiming to improve supply chain sustainability are likely to be rewarded in the end.