Sustainability and Supply Chain Drivers

Opportunities for improving supply chain sustainability can be identified by matching the social (workforce, customer, society) and environmental (resource reduction, emission reduction, prod­uct innovation) pillars we have described with the various supply chain drivers discussed in this text. The goal is for every firm to measure its environmental impact for each driver along each of the social and environmental categories. In this section, we discuss some of the opportunities available for each driver and provide some examples.

1. Facilities

Facilities tend to be significant consumers of energy and water and emitters of waste and green­house gases and thus offer significant opportunities for profitable improvement. Once a firm measures the direct impact of each facility in terms of energy, water, emissions, and waste, it should separate the improvement opportunities into those that generate positive cash flows and those that do not. Successful companies start by identifying and implementing the profitable projects first. According to its 2011 Corporate Social Responsibility (CSR) report, Walmart has designed and opened a viable store prototype that is up to 25 to 30 percent more energy efficient and produces up to 30 percent fewer greenhouse gas emissions compared with the 2005 baseline. Using more energy-efficient light bulbs and building skylights for natural light has cut energy consumption at its existing stores. Walmart has also worked to convert waste management at its stores from a cost to a profit generator. The company reported that in 2011 it prevented more than 80 percent of waste generated by its stores and distribution centers from going to landfills. Most of this success came from “working with vendors to eliminate materials from becoming part of the waste or recycling stream in the first place.”

Another example of profitable improvement comes from using technology to balance the peak load for energy across a chain of convenience stores. By suitably staggering the time that air conditioners and freezers at its stores are turned on, the chain can reduce the peak demand for energy across the store network, resulting in lower costs for the chain and a reduced demand for peak load in the grid. Several companies are designing the hardware and software necessary to operate such systems. Efforts to reduce peak load are likely to be most successful when utilities include a peak charge, thus rewarding customers that reduce peak consumption.

Production facilities often have significant opportunity to reuse heat energy generated and reduce water usage during the process. Coca-Cola has worked hard to reuse heat energy from boilers in its production process and reduce its total water footprint. Lee (2010) gives the exam­ple of Posco, which worked with its equipment supplier, Siemens VAI, to create a new produc­tion process that cut costs and emissions without hurting product quality by using local iron ore that was of lower quality but less expensive. As a result, Posco reduced the cost of a new mill by 6 percent to 17 percent and decreased its operating costs by 15 percent while producing lower levels of greenhouse gases and other waste. As these examples illustrate, facilities often offer the best opportunity to simultaneously improve the environmental and financial performances through innovation.

2. Inventory

Most supply chains focus on raw materials, work in process, and finished goods inventory, as we have done in this text. Although this form of inventory is viewed as an asset and included in the financials, few firms even consider the inventory sitting in a typical landfill. When a firm’s prod­uct is discarded in a landfill after use, the cost of this inventory is borne collectively by society. Even though the inventory in the landfill may not show up in a firm’s balance sheet, it does show up as one of the most damaging aspects from a sustainability perspective. The damage may be in the form of harmful additives or in the form of valuable energy and materials that are still locked in the landfill. Arguably, the most significant waste in any supply chain occurs when a product is thrown into a landfill because both materials and energy used to produce the product are now lost forever, potentially doing harm. The goal of every supply chain should be to track its landfill inventory and separate it in terms of harmful additives and unused value. Life-cycle assessment can be used to assess the environmental impacts associated with a product’s life from cradle to grave. The goal should be to reduce (or at least limit) the harmful inventory and unlock the unused value in products when they are discarded. In Section 17.5, we discuss the challenges of designing closed-loop supply chains that reduce landfill inventory through effective recycling or remanufacturing.

McDonough and Braungart (2002) discuss the importance of “cradle to cradle” design if we are to truly limit the landfill inventory generated by a supply chain. They suggest designing products “that, when their useful life is over, do not become useless waste but can be tossed onto the ground to decompose and become food for plants and animals and nutrients for soil; or, alter­nately, they can return to industrial cycles to supply high quality raw materials for new products.” For example, Cyberpac, a British company, has developed several products that seek to replace plastic packaging with compostable equivalents using starch-based resources and hydro-degradable plastic. The Bioplastics Feedstock Alliance, formed by several companies and the World Wildlife Fund, encourages the development of plastics from plant matter.

3. Transportation

Transportation is another driver with which firms are likely to find several positive cash flow oppor­tunities that improve environmental performance through resource as well as emission reduction. Any supply chain design innovation that lowers transportation costs also tends to reduce fuel con­sumption, as well as emissions and waste generated from transportation. As fuel costs increase in the future, firms are likely to restructure their products and supply chains to reduce transportation costs. Along with a decrease in transportation costs, these changes (such as near-shoring or onshor- ing) are also likely to decrease fuel use and emissions. In its 2011 CSR report, Walmart reported that in the United States, it decreased the amount of fuel used to deliver a case of product by 65 percent between 2005 and 2010. This improvement—through increased aggregation, a more efficient loading of transportation vehicles, and an increase in their fuel efficiency—cuts both costs and environmental damage. Lee (2010) cites four companies—Hewlett-Packard, Electrolux, Sony, and Braun—that have formed a joint venture, the European Recycling Platform, to gain better economies of scale in their recycling efforts. Lee reports that HP’s cost of recycling digital cameras is only 1 or 2 euro cents in countries with the environmental platform, compared with 7 euro cents to 1.24 euros in countries without the platform. Ocean Spray and Tropicana, with presence in Mas­sachusetts and Florida, respectively, have collaborated to take advantage of empty delivery trucks to backhaul each other’s product along the U.S. East Coast, saving both fuel and money.

Product design can also play a significant role in reducing transportation cost and emis­sions by reducing packaging and allowing greater density during transportation. IKEA has always worked hard to design products that can be shipped flat to achieve high volume and weight density during transportation. As a result, the company not only lowers its transportation costs, but it also reduces emissions and energy use.

4. Sourcing

For most firms, the greatest social and environmental impact occurs in the extended supply chain outside their own enterprise. This impact has grown as firms have increased their global sourc­ing, especially from low-cost countries. Thus, to truly have an impact on sustainability, powerful players must look at the extended supply chain and work with their suppliers to improve perfor­mance. As we have mentioned earlier, the C.A.F.E. program at Starbucks encourages suppliers to improve their environmental and social responsibility scores by providing a price premium. Walmart and IKEA have also set aggressive targets for their suppliers to improve overall supply chain sustainability. Failure to work with suppliers on sustainability should also be viewed as a potential source of risk that can cause considerable damage to the reputation and sales of a firm. The presence of lead paint in some of its most popular toys, for instance, forced Mattel to recall hundreds of thousands of toys sold between April and July 2007.^[1]

Verifying and tracking supplier performance with regard to sustainability, however, contin­ues to be a major challenge for most firms. This challenge arises, at least partially, because of the tragedy of the commons. After all, the benefits from improved social and environmental respon­sibility at suppliers are shared, whereas the verification and tracking efforts are often concen­trated. As a result, firms rarely put in as much effort in this regard as they should. It often requires outside activists and third parties focused on social and environmental improvement to push a company to change. The journey of Nike is a classic example. It took revelations by activist Jeff Ballinger, protests at the Barcelona Olympics, and protests by students on college campuses to end the use of sweatshops by the company. The company has since moved on to become a leader in social responsibility. Given the challenge of the tragedy of the commons, activists will always have a significant role to play in pushing firms to consider the social and environmental pillars when making sourcing decisions.

5. Information

Good information continues to be one of the biggest challenges to improved supply chain sus­tainability. The absence of standards for measurement and reporting has led to claims of improve­ment that are often not verifiable. In the short term, this has led to company-specific standards and an explosion of certifications and certifying agencies. Companies talk of working toward a common set of standards, but it is unlikely that such standards will emerge because incentives are not aligned across different firms. This poses a challenge both within firms and across supply chains when it comes to improving sustainability. The C.A.F.E. standards and supplier rating are an effort by Starbucks to encourage suppliers to focus on sustainability. Plambeck (2007) describes efforts within Walmart to measure and motivate both suppliers and associates. To reduce packaging, Walmart implemented a web-based scorecard that evaluated the packaging of each product along nine metrics, such as cube utilization and recycled content. This scorecard was used to measure and recognize improvements in packaging. Even though universal stan­dards may not be possible, the use of consistent scorecards within a supply chain can go a long way toward aligning the sustainability efforts of all members of the extended supply chain.

6. Pricing

As discussed in Chapter 16, intelligent use of differential pricing can improve the utilization of assets, leading to resource reduction. Planes that are fuller through differential pricing improve airline profits while reducing the fuel consumption and emissions per passenger. This also delays the need for additional capacity in the form of new planes. Consumption visibility and differen­tial pricing by load or time of day have the potential to make a significant difference in the usage of energy by consumers. Some studies have found that when people can see how much electric­ity they are using and the impact of turning off different appliances, their usage decreases by between 10 to 15 percent. If this visibility is simultaneously coupled with lower-price off-peak electricity, there is a potential to reduce peak load demand. In general, lower peaks and improved utilization of assets through differential pricing improves both the environmental and economic performance of a firm.

One of the biggest challenges to improved sustainability of a supply chain is changing the customer’s willingness to pay for a product that is produced and distributed by a supply chain in a more sustainable manner but ends up costing more. According to a 2011 survey conducted by the market research firm Mintel for the food service industry, customers are willing to pay a mere 1 to 5 percent more for sustainable fare. The lack of willingness to pay also extends to corporations when making supply chain choices. For example, Walmart has not hit its targets for the use of renewable energy because these sources have higher costs compared with other sources of energy. Walmart’s use of renewable energy in 2013 declined relative to 2012 because it was “unable to renegotiate an expiring contract with competitive pricing.” Similarly, Starbucks classified its use of renewable energy as an area that “needs improvement” in its 2013 global responsibility report.

In the short term, government incentives can encourage customers and firms to behave more sus­tainably. In the long term, however, efforts toward increased sustainability will pick up speed only when customers place greater value on it, allowing supply chains to grow the supply chain surplus by being sustainable (despite higher costs).

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.