Posted byon January 24, 2019
Over the past several years, companies have been incorporating sustainability in the supply chain, thanks in part to younger consumers who place a higher premium on environmentally-friendly practices. In fact, according to a Nielsen study, 81 percent of global consumers feel strongly that it’s a company’s duty to help improve the environment, making “going green” a must for many organizations.
Of those organizations that have embraced green initiatives successfully, many have seen not only improved bottom lines, but also a significantly enhanced brand identity. However, for organizations that are in the earlier stages of implementing these practices, increased costs owing to upfront investments required for the change are seen as an impediment to supply chain sustainability, according to new research from LLamasoft and the Economist Intelligence Unit in a new report, “Sustainability: The missing link.” The report, which surveyed senior executives from 250 manufacturing and retail organizations in the United States, Latin America, EMEA and APAC regions, found that 38 percent of respondents cited increased costs as the largest impediment to supply chain sustainability and responsibility. This was especially true for respondents representing small businesses.
But organizations don’t need to choose between profitability and sustainability as if they are mutually exclusive. In fact, many initiatives geared toward supply chain efficiency and agility have sustainability benefits as a byproduct. An optimally designed network, consolidation of shipments with efficient route design and multi echelon inventory optimization are all examples of projects that can deliver profitability and sustainability. Beyond direct supply chain projects, intelligent product design can reduce logistics costs while also reducing carbon footprint. Costco’s switch from round to square shaped cashew jars in 2014 has been helping it ship more bottles per truck by better utilizing the space, driving the dual objectives of profitability and sustainability. However, such initiatives require upfront investments, though the payoff can be many times over with a quick time to value.
The Current State of Sustainability in the Supply Chain
Large global organizations, by virtue of their scale and leverage with their trading partners, are taking the strongest lead to improve supply chain sustainability. According to LLamasoft’s aforementioned research, there has been a 33 percent increase in companies submitting public audits to score transparency and environmental action since 2013. While some of it may be voluntary, increased regulation towards environmental protection over the years, such as tougher emission standards and recovery and reuse of packaging, clearly is a major driving force. In fact, 93 percent of organizations have implemented some supply chain sustainability initiatives, and over the next five years, respondents made clear that environmental initiatives will remain a priority.
Though implementing green initiatives certainly has its benefits, respondents said that obstacles such as difficulty in monitoring complex supply chains (29 percent) and a lack of organizational structure that prioritizes and embraces sustainability (24 percent) impede sustainability plans from taking flight. Respondents were torn on if cost is a motivator or a barrier: 38 percent believe that increased costs are the largest hurdle to overcome, yet 33 percent reported that costs savings are a top reason for adopting environmentally-friendly initiatives. This divide can be attributed to the fact that some companies believe that investment in sustainable practices is significant with unclear financial benefits. To understand how sustainable initiatives impact the supply chain, companies need to look at the big picture.
To help increase sustainability, many respondents are looking outside of internal practices and are engaging with suppliers to go green: 88 percent of respondents measure and incentivize supplier sustainability through a variety of techniques, including:
- Scoring – companies have integrated sustainability scores into a supplier scorecard, which allows executives to look at two comparable suppliers. All else remaining the same, the supplier who takes a more actionable approach to sustainability will win the business.
- Public targets – some companies have set public targets that their suppliers must meet or risk having contracts end. For example, Hewlett Packard Enterprise has said that 80 percent of its suppliers must set science-based emission reduction targets by 2025.
- Awards – to give suppliers recognition for their sustainability efforts and to incentivize others to adopt green practices, some companies are using sustainability awards.
Ensuring a Sustainable Future for All
For the companies interested in incorporating sustainability in a greater capacity, it’s important to understand the networkwide impact of such efforts. By increasing visibility and considering tradeoffs through shifts in various sourcing, production, distribution and inventory policies, sustainability decisions can be made in a holistic manner. For example, organizations can possibly decrease their sourcing costs by opting for an offshore supplier whose per unit costs are significantly lower than the near shore supplier. However, when the distance traveled, associated carbon footprint, taxes and tariffs, increased inventory levels due to longer lead times, variability, holding costs and reduced responsiveness are accounted for, the decision may turn out myopic and far more expensive.
To perform such complex tradeoff analysis with an end-to-end view, companies are turning to technologies that allow them to model the depth and breadth of their supply chains with all the constraints and policies, along with external environmental factors, essentially enabling a digital twin on which they can run scenarios and simulations. When companies combine their intuition with deeper predictive and prescriptive analytics powered by data, they are in the best position to drive decisions impacting both operational and sustainable aspects.
The idea of improving sustainability is increasingly embedded into management thinking and organizations are implementing various practices to turn environmentally-friendly ideas into reality. As consumers continue to place an emphasis on conducting business with the organizations that go green, sustainability can be a strong competitive differentiator. Organizations that continue to build out supply chain sustainability practices will thrive, while helping build a better planet for all.
Dr. Madhav Durbha is the Group Vice President of Industry Strategy at LLamasoft, where his team helps customers and prospects solve various supply chain challenges. Prior to his role at LLamasoft, Dr. Durbha held positions at Kinaxis, JDA Software and i2 Technologies, Inc. With more than 20 years in the supply chain industry, Dr. Durbha has broad experience in strategy & process consulting, supply chain software, program management, software application development & deployment, machine learning and data science. He received his Ph.D. in chemical engineering from the University of Florida and his bachelor’s degree in chemical engineering from the Indian Institute of Technology at Madras.