The Green Supply Chain

Friday, February 1, 2008

Sustainability Can Be A Competitive Advantage

By Patrick Penfield
Whitman School of Management
Syracuse University

Environmental change is upon us. We are seeing turbulent weather patterns - everything from record heat waves, rains, snowfall and hurricanes - that are becoming extreme in every sense throughout the world. "People should be concerned about what we are doing to the climate," said Jay Lawrimore, Chief of the Climate Monitoring Branch of the National Oceanic and Atmospheric Administration. "The burning of oil and other fossil fuels releases carbon dioxide, which rises, blankets the earth and traps heat." Brenda Ekwurzel, a Climate Scientist with the Union of Concerned Scientists, a public interest group, states, "When you look at temperatures across the globe, every single year since 1993 has been in the top 20 warmest years on record." 1

Not only do we have climate problems but we are also dealing with a resource depletion issue. India and China are growing economically at double digit rates, and the population of the world continues to grow creating shortages of many resources that we use to take for granted. "The World Bank reports that 80 countries now have water shortages that threaten health and economies while 40 percent of the world - more than 2 billion people - have no access to clean water or sanitation."2 We will ultimately run out of natural resources if we keep up this torrid pace of use. "Humankind has inherited a 3.8 billion per year store of natural capital. At present rates of use and degradation, there will be little left by the end of the next century."3

Many of us may not be around by the turn of the next century but our children and our children's children will be suffering from our over-indulgence.
In the United States we will soon start to see more legislation enforcing stricter environmental regulations. Europe has already passed several laws with the most notable being the Restriction of Hazardous Substances directive (RoHS). This legislation restricts the amount of certain substances in electrical and electronic equipment. There are also other initiatives being pushed in Europe to control and curtail resources that may damage or deplete the environment. China has also passed its own RoHS law which is more stringent then the European version. The Chinese law restricts all of the same substances that the European law does but it allows no exemptions and requires "laboratory testing and labeling requirements." 4

In the next several years you will be hearing more about Supply Chain Sustainability or the Green Sustainable Supply Chain. A Green Sustainable Supply Chain can be defined as "the process of using environmentally friendly inputs and transforming these inputs through change agents - whose byproducts can improve or be recycled within the existing environment. This process develops outputs that can be reclaimed and re-used at the end of their life-cycle thus, creating a sustainable supply chain." The whole idea of a sustainable supply chain is to reduce costs while helping the environment. Many people would argue that being environmentally friendly increases your costs. In the past, most companies were focused on reducing unit costs. Many companies later evolved into looking at total landed costs with the on-set of global trade. Companies also started looking at the usage costs with a piece of equipment (i.e. what are my cost per copy when using a copier). In today's "sustainable" world the thinking should be what is the life cycle costs of this part, piece of equipment or supply chain process.

The chart to the right shows what a Green Sustainable Supply Chain looks like within a company. Sustainability could be a tremendous weapon for companies to reduce costs. There are many facets of the supply chain that could be improved by looking at it from a sustainability standpoint. The first issue that sustainable companies are focusing on is the design and production of the product. "Interface Corporation is a leading maker of materials for commercial interiors. In its new Shanghi carpet factory a liquid had to be circulated through a standard pumping loop similar to those used in nearly all industries.

A top European company designed the system to use pumps requiring a total of 95 horsepower. the Interface engineer working on the project re-designed the system by using "fatter pipes" and straightening/shortening the length of the pipes used in the system. The overall horsepower requirement was now 7 horsepower or a 92 percent reduction. His re-designed system cost less to build, involved no new technology and worked better in all respects. This engineer used whole system thinking which can help managers find small changes that lead to big savings that are cheap and free." 5

Many forward thinking companies are using the environmental issues to their advantage. They are innovating and coming up with cutting edge solutions that help them become more profitable while helping the environment. In the book Green to Gold the authors talk about 3M and their program Pollution Prevention Pays (3P). "Anything not in a product is considered a cost, it's a sign of poor quality. As 3M execs see it, everything coming out of a plant is either product, byproduct (which can be reused or sold), or waste. Why then should there be any waste?"6 If every company thought along those lines would we have the landfills and environmental problems that we have today? Many companies are also focusing on their indirect purchases (packaging and transportation) to reduce environmental issues. Reducing the amount of cardboard or filler by designing "smart packages" can save companies money. "Filling your trucks as full as possible. Dell has upped its average truck load from 18,000 to 22,000 pounds and worked with UPS to optimize delivery strategies. 3M developed an innovative system to install adjustable decks in trucks. Placing pallets on two levels allowed one 3M facility to reduce the number of daily truckloads by 40 percent and allowed them to save $110,000 per year."6

One of the bigger issues facing companies these days is the actions of suppliers. Companies today are being held accountable for environmental problems created by suppliers. Unfortunately, the press is quick to link companies who deal with environmentally unfriendly companies especially if a catastrophe occurs. Can your company afford that type of exposure? Many companies are performing environmental audits or implementing "rules of conduct" to check the actions of their suppliers.

Sustainability can also be profitable. GE now has an "Ecomagination program where they are focused on growing their revenue stream from environmentally friendly products to the tune of 20 billion dollars by 2010."7 They recognize the opportunity associated with saving the environment. Many utility companies are offering customers environmentally produced power and charging a premium for that offering. Grocery stores are able to charge a higher price on organic food because people are willing to pay a premium for food grown organically. Sustainability can be a competitive advantage for many companies. If you can develop a sustainable supply chain think of the money that can be saved by not having to dispose of harmful by-products, reducing obsolescence, decreasing the amount of money spent on scrap and the resources spent on adhering to regulatory issues. Several companies have developed new revenue sources on the by-products they used to throw out! Many companies are using sustainability as a competitive advantage to grow market share within their industry.

So how would your company develop a sustainable supply chain? The United States Environmental Protection Agency (EPA) has written a guide called the "The Lean and Green Supply Chain: A Practical Guide for Materials Managers and Supply Chain Managers to Reduce Costs and Improve Environmental Performance." This is an outstanding guide that provides a systematic approach to implementing a Green Supply Chain. "It's a four step decision making process. The first step is to identify environmental costs within your process or facility. The next step is to determine opportunities which would yield significant cost savings and reduce environmental impact. The third step is to calculate the benefits of your proposed alternatives. The last step is to decide, implement and monitor your improvement solutions."8 The manual also gives several great examples of what companies have done to "green" their Supply Chain.

In the future companies will be moving to a sustainable supply chain. The harsh reality is that we need to change what we are doing from a supply chain standpoint in order to ensure that future generations will have resources to use in their lifetime. The benefit of implementing a green sustainable supply chain is that we can improve the profitability of our company and help the environment. Green can not only be profitable, but the right thing to do.

To learn more about Green Supply Chains, plan now to attend the NA 2008 Kenote by Green to Gold author Andrew Winston entitled How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build High Performance Supply Chains.

3. Hawken, Lovins & Lovins, Natural Capitalism, (New York: Back Bay Books, 1999)
4. Purchasing Magazine "China RoHS demands more from buyers" page 43 - February 15, 2007
5. Hawken, Lovins & Lovins, A Road Map for Natural Capitalism, Harvard Business Review, 1999
6. Esty and Winston, Green to Gold (New Haven and London, Yale University Press, 2006)