Logistics: The greening of the supply chain

Companies may worry about the cost of environmental compliance, but inaction could cost them significantly more.

by Jane Simms, World Business
Last Updated: 23 Jul 2013

The way in which companies make things has changed beyond recognition since the early days of manufacturing. Globalisation, outsourcing and just-in-time production have led many traditional firms to separate into
different parts, many of which no longer fall under their direct control.

The internet allows such firms to co-ordinate their activities and exchange information quickly and efficiently. Products and components can be transported by land, sea and air through complex webs of suppliers in increasingly elaborate ways. Companies are learning that there is competitive advantage to be gained in the way they orchestrate their supply chains, to the extent that some experts predict that in future it will be supply chains that compete, rather than individual organisations.

But the ability of firms to gain advantage in this way is under threat amid growing concerns about the damage that complex supply chain strategies cause to the environment. New figures from the UK's Department for the Environment, Food and Rural Affairs (Defra) show that 18 million metric tons of carbon dioxide (CO2) was generated in transporting food for the UK in 2004, a rise of 6% on 2003. The increase followed a 15% rise over the decade to 2002. If you imagine how these figures would look if they were expanded to incorporate all the product categories being transported by road and air in every country in the world, the scale of the problem becomes clear.

As a result, companies' supply chains are being scrutinised more closely than ever before, especially 'food miles'. For example, it was recently reported that Tesco flies English apples to South Africa to be waxed
before flying them back to the UK to be sold. Salmon farmed in the UK is taken to the Far East to be filleted before being transported back again to this country.

Even Dell, held up as an exemplar of supply-chain excellence and of the supposedly environmentally friendly direct-selling approach, is not beyond reproach. In The World is Flat (2005), New York Times columnist Thomas L Friedman worked out that the 400 or so different components in his Dell laptop computer had travelled hundreds of thousands of miles through China, Taiwan, Japan, Malaysia, the Philippines and Thailand in the process of assembly and delivery to him.

This business paradigm is unsustainable, argues Martin Christopher, director of the Cranfield Centre for Logistics and Supply Chain Management: "The cost of making things has never been as low, but the cost of moving things will rise as a result of increasing legislation and carbon taxes. This will force a move back to local manufacturing."

Christopher has recently been asked by the UK's Department for Transport to look at the true costs of global sourcing, and in particular its environmental and infrastructure impacts. "There is growing concern by governments, especially at EU level, about the impact of carbon," he says.

He cites the new generation of container ships, which hold nearly 10,000 containers and which he believes will have "a significant impact" on road and rail congestion: "Only a few UK ports can take these vessels and each
container will be put on a lorry. A train to carry the equivalent load would be 25km long. There will inevitably be an increase in tax on in-bound container movements and there will also be taxes on aviation fuel."

Given this, it appears that companies worried about the cost of 'greening' their supply chains should instead be worrying about the cost of not doing so. As Luk van Wassenhove, Henry Ford chaired professor of manufacturing
and professor of technology and operations management at INSEAD, says: "If the cost of complying with environmental legislation is going to be high for a company, it may as well be proactive about it and see it as an
opportunity rather than a burden."

Ironically, the companies that have gained most from establishing global supply networks are the ones under most pressure to adapt their practices to meet environmental concerns. Wal-Mart is one example. "Because Wal-Mart uses hundreds of thousands of suppliers around the world, its reputation could suffer as a result of an accident or pollution anywhere in that network. So it works very hard to manage its environmental exposure and portray itself as a good corporate citizen in the process," says van Wassenhove.

Those companies that have decided to go beyond mere compliance with environmental legislation are reaping unexpected benefits. Coca-Cola, for example, has won plaudits - not least from environmental lobby group Greenpeace - for its efforts, with its supply chain partners, to eliminate hydro-fluorocarbons (HFCs) from its commercial coolers and freezers (see box).

Starbucks, meanwhile, has acted to secure its future growth by working with its suppliers to ensure a sustainable supply of high-quality coffee beans. Starbucks realised that the usual objectives in supply chain management - cost, speed, quality, flexibility - would be insufficient to guarantee the continued supply of beans from the small-to-medium-sized family-owned farms in Latin America, the Pacific Rim and East Africa.

Switching its focus to sustainability, Starbucks formed a partnership with Conservation International, an environmental not-for-profit organisation, to develop CAFE (Coffee and Farmer Equity) Practices. CAFE Practices is based on the notion that a sustainable supply of high-quality coffee beans depends on a stable source of coffee farmers who are not exploited by their trading partners, have lands that are farmed with environmentally sound methods and who live in healthy, secure environments. Starbucks also offers affordable credit through various loan funds and incentives aimed at encouraging innovation.

According to Hau Lee, Thoma professor of the Graduate School of Business at Stanford University and author of a case study on Starbucks published in Building Supply Chain Excellence in Emerging Economies (2006), the indirect benefits Starbucks reaped included a stronger supply base, greater visibility in the supply chain, better relationships with growers, enhanced marketing ability (awareness of the initiative helps justify Starbucks' premium prices), an improved reputation as a socially responsible company and higher morale. The cost was a short-term reduction in profit.

Both Starbucks and Coca-Cola adopt a collaborative approach to working with their suppliers to green the supply chain. Here again, there is a strong business case. Salvatore Gabola, director of European public
affairs at Coca-Cola's European Union Group, explains: "We buy most of our supplies from suppliers in the countries where we operate. Many of them lack the size and expertise to change to a big new technology on their
own, so we need to go step-by-step and help them through the process. If we didn't do that, it would compromise our ability to source locally, which is very important to us."

Diane Holt is senior lecturer in environmental management at Middlesex University and, with Purba Rao of the Asian Institute of Management, is joint author of new research on the link between green supply chains and economic performance. "The role of supplier education, mentoring or coaching is critical in determining whether green initiatives actually ripple down the supply chain," she says.

Holt cites a number of studies that suggest that environmental issues often help to turn traditional adversarial and power-based supply chain relationships into more equal partnerships based on discussion, co-operation and loyalty.

Next year the 'producer responsibility' aspects of the Waste Electrical and Electronic Equipment (WEEE) Directive are due to come into force in the UK, requiring producers that have put products on the market to take
responsibility for those products once they have reached the end of their life. Similar legislation is likely to bite in China and many US states very soon. Paradoxically, one of the side-effects of what is known as 'reverse logistics', or 'closed-loop supply chains', is that the transport of waste and used materials it involves can add to CO2 emissions.

Here also, companies that have worked with their supply chain partners to tackle the need to reuse, recycle or dispose of products in more environmentally friendly ways have saved money. Hewlett-Packard has lowered its manufacturing costs by 'designing for localisation' - that is, building a standard product and configuring it for local needs at regional centres. "In so doing, it has created a more efficient and responsive
supply chain that is local, global and greener," says Christopher.

Many companies embark on 'greening' initiatives as a defensive measure, only to find they lead to cost savings and other efficiencies. Others find that seeking more cost-effective ways to make or move things round the
world has a positive environmental impact. 

Rao and Holt claim that their research paper Do green supply chains lead to competitiveness and economic performance? (2005), based on a sample of firms in south-east Asia, presents the first empirical evidence of the link between green supply chain management practices and increased competitiveness and improved performance. They write: "These research findings suggest that if they green their supply chains, not only would firms achieve substantial cost savings, but they would also enhance sales, market share and exploit new
market opportunities to lead to greater profit margins."

Indeed, Mike Browne, professor of logistics at the University of Westminster, believes companies are reaping fewer benefits from their complex global supply networks than they would have us believe. "The sheer complexity of these networks makes it difficult to synchronise initiatives, which means that while some aspects in any one chain may be excellent, others will be far from excellent," he says.

For companies such as Coca-Cola and Starbucks, the visibility they have built into their supply chains through environmental initiatives is an unexpected benefit, but one that perhaps will prove most powerful of all.

 

COCA-COLA
Coca-Cola is pioneering the use of highly efficient hydro-fluorocarbon-free coolers and vending machines, and by the end of the year it will be market-testing 6,000 such machines in Europe and Japan. It had been researching HFC-free technologies for a while, but Greenpeace upped the ante in the run-up to the 2000 Olympics in Sydney, threatening Coca-Cola with a negative publicity campaign if it didn't agree to start phasing out the use of HFCs.

"At the time there was no short-term economic or competitive pressure to do this, and without the threat to our reputation we wouldn't have put the effort we did into finding an alternative," admits Salvatore Gabola,
director of European public affairs, European Union Group, at Coca-Cola.

Coca-Cola invested $10 million in research and development, persuading its refrigeration equipment and technology partners to stump up a further $20 million. The benefits have been considerable.

"Not only have we learnt a great deal about our value chain, but we have also gained significant competitive advantage from a corporate responsibility point of view. When we move to commercial deployment, we
expect to replicate that advantage in commercial terms, not least because of the competitive energy savings our customers will make by using the new machines," says Gabola.

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