Courtesy : www.bearingpoint.com

Green supply chain

In January 2011, Munich Re, one of the leading global reinsurers, said: “The high number of weather-related natural catastrophes and record temperatures both globally and in different regions of the world provide further indications of advancing climate change.”
According to the reinsurer, 2010 has experienced the second-highest number of natural catastrophes since 1980, with total economic costs of US$130bn. It seems that it is now definitely the time to move from green awareness to green action.
In 2008, BearingPoint delivered its first green supply chain survey (in collaboration with ESCP-EAP and Supply Chain magazine). The research found that environmental actions undertaken by European firms were mostly driven by the need to comply with environmental regulations.

In this 2010 monitor we explore companies’ green supply chain practices in Europe in order to identify the significant improvements in the most representative industries.
The results show that executive management is increasingly interested in developing products with a low environmental impact.

“The two main reasons for launching green actions are to improve brand image and gain executive sponsorship”

European companies now see that green supply chain can create value for their activities in the long term. However, they need to move on from the classic customer-supplier relationship model and to think about new internal and external collaborative forms.

Classic supply chain strategies focus on cost, time-efficient movement and coordination of goods and services from upstream suppliers to downstream consumers. For sustainable leaders, these strategies are not enough. They expect to extend their strategy by involving suppliers in emerging economies, but also their suppliers’ suppliers and in tiers beyond that. 

In this survey, for which we interviewed more than 600 professionals worldwide, we outline ideas that can be implemented in every organisation, regardless of the maturity of its green supply chain. 

The 2008 survey found that the environmental regulations adopted in Europe (Registration, Evaluation and Authorisation of Chemicals (REACH), Waste Electrical and Electronic Equipment Directive (WEEE), Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS), European Union Emissions Trading Scheme (EU ETS)) had created a profound sense of urgency. Companies had trouble defining their green priorities and how to handle the necessary actions. 

In 2010, we found companies’ priorities had changed (see figures 1 and 2). The emergence of Sustainable Development departments in companies, and the greater emphasis placed on environmental issues by executive management, has enabled a better understanding of regulation mechanisms and their consequences.

The two main reasons for launching green actions are to improve brand image and gain executive sponsorship. The support of companies’ managing committees significantly facilitates and often guarantees the funding and implementation of ‘green projects’.

Companies’ increased motivation to improve practices shows that they are becoming more mature about green issues. Two thirds of companies have intensified their green actions over the past three years.

Successful implementation of green practices requires careful management of the risks they can present. For instance, in Retail, the environmental impact of the large players’ suppliers accounts for 95% of companies’ total impact. They therefore ought to manage their exposure to specific risks. Risks can be linked to brand image (for example, atmospheric discharges due to bitumen sand extraction, deforestation for palm oil tree plantations), compliance issues with European laws (such as REACH or RoHS) or customers’ health and potential penalties.

NEW DIRECTIONS FOR THE GREEN SUPPLY CHAIN

Convergence of economical and environmental interests

More than one third of the companies interviewed declare that they are ready to start up environmental actions in spite of their low present profitability, provided they create value in the medium term.

Companies now see a convergence of economic and environmental interests for their supply chain. Most (70%) believe green supply chain is a true economic lever and a source of easily measurable profits (56%). For 47% of the companies, the return on investment is reached before three years. 

Environmental commitment planned for the long haul

Companies that chose to implement a green supply chain invest and commit to it for the long haul: for instance, 70% of companies who already measure their carbon footprint evaluate it at least yearly.

Green actions also seem able to weather the storm created by the recent economic crisis. Two thirds (66%) of companies declare that the crisis did not have a braking effect on planned and ongoing environmental initiatives: in fact, they accelerated most of them.

Ecology as a performance indicator for the supply chain

In order to assess environmental actions in the supply chain, companies must introduce green key indicators and metrics. Key performance indicators (KPIs), such as the share of recycled packaging material, or the share of trucks better than Euro-class 4, come into consideration. The measure of performance is essential to gain the trust of executive committees and to meet regulations. More than half of European companies have adopted this approach in their corporate relationships. Scandinavian companies led the way, as 77% of them already use ‘green criteria’.

OPERATIONAL TRENDS

Eco-design: a ‘must’ for the development of activities

“80% of the environmental impact of a product is determined during its design,” according to the German Environment Agency.

At BearingPoint, we believe this percentage is under-evaluated. Anticipating the environmental footprint of a product from the very start of its development (the eco-design approach) is becoming more and more important.
Although few of the interviewed companies claim to have taken the path of eco-design, the results are very encouraging for those that did, as the main objectives they had when beginning are generally reached: compliance with laws, improving brand image, meeting the final customer’s requirements or optimising recycling capability.

Procurement: the ‘green requirements’ in sustainable procurement

Beyond the requirements that Procurement departments have traditionally been promoting over the years, such as respecting work conditions and non-discrimination, there are new issues about reinforcing environmental requirements to suppliers. According to the survey, two thirds of companies adopted, or plan to adopt, a ‘green’ policy for their purchases. This approach enables better compliance with existing norms (such as REACH), improved brand image and better ranking by non-financial rating organisations.

Companies also encourage suppliers who consume fewer raw materials, control emissions and pollution levels, and who track their materials accurately. Companies also tend to select products made out of a large proportion of recycled and recyclable materials, and which are stamped by reliable eco-labels.

Logistics: classic optimisation approaches, source of ‘green’ quick wins

In the past, classic optimisation was driven by costs and lead time. Nowadays, a third dimension appears: the environmental impact. There are various ways to optimise processes and technical improvements: every company can launch ways to reduce its environmental impact.

Lean manufacturing at the time of green supply chain

In the 1980s, cost cutting focused on reducing all kinds of waste and through the use of the minimum resources: the expected result was operational efficiency. Nowadays, cutting costs and maximising efficiency remain unchanged, but are now promoted inside the company as an environmental necessity as well as financially important.

Carbon footprint: Measurement as a prerequisite for the optimisation

Defining a baseline by measuring an initial carbon footprint is the prerequisite for setting up realistic reduction goals. Four fifths (80%) of the companies who measured their carbon footprint identified immediate improvement initiatives, such as reducing resources consumption and getting rid of waste.

Beyond action, communication

Communicating the environmental improvements made for the ‘last mile’ makes good sense for a logistics contractor. 

“…it is possible to address both business objectives and environmental needs with sustainable development”

Showing that your company cares about the environment, through the products you use, or through your choice of components, suppliers, packaging, distribution network, and so on, has become an asset… and will most certainly be a survival need tomorrow! 

GREEN SUPPLY CHAIN STRATEGY AND MODELS

The European Union has stated that a number of unsustainable trends require urgent action. For instance, significant additional efforts are needed to curb and adapt to climate change, to decrease high-energy consumption in the transport sector and to reverse the current loss of biodiversity and natural resources.

From sustainable development to the green supply chain

We define sustainable development as: “the development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.

Sustainable development policy has a bearing — either direct or indirect — on the supply chain and a company’s environmental impact. Consequently, supply chain has a key role to play in terms of protecting and preserving the environment.

What is green supply chain?

Green supply chain is about minimising the environmental impact of a product throughout its lifecycle.
As early as the design phase, environment impact will be determined by the functional integration of all the components to the product lifecycle:

• Sustainable sourcing, by the choice of raw materials by type and region to come from 
• Green manufacturing, including energy consumption and the use of technology and techniques to reduce waste
• Green logistics, through combined and alternative transport means, and with optimised reverse logistics
• Second life logistics and operations, recycling and giving value to the used product and its components.

Green supply chain covers all the phases of a product’s lifecycle, from the design, the extraction of raw materials and production and distribution phases, to the use of products by consumers and their disposal at the end of the product’s lifecycle (reconditioning, reuse, recycling). BearingPoint has coined the term ‘second life logistics’ to characterise these concepts.

About two thirds of the sample consider green supply chain as a strategic priority now or in the short term. The same proportion has intensified their green supply chain offering over the past three years.

Scandinavia countries are the undisputed leaders in green supply chain initiatives. In fact, 90% of the Scandinavian companies surveyed consider it as a strategic priority, as opposed to just 57% of French companies and 59% of GSA (Germany, Switzerland and Austria) companies.

Companies are now convinced it is possible to address both business objectives and environmental needs with sustainable development. It has therefore become more integrated into business thinking and decision processes.

The green supply chain model

This chart (below) shows our own representation of a green supply chain model. Many facts trigger initiatives at the company. Triggers can be external, such as brand image or customer demand, or internal, such as cost reduction and employee motivation. Once these triggers have an impact inside the company, they will soon be on the corporate agenda. C-levels need to validate the business case for green initiatives and ensure that objectives are fully aligned with a company’s strategy.
When C-levels have validated that a green initiative can be launched, there are two main categories of action: optimisation and redesign.

Practically, the motivations for implementing green actions are about mastering risks and having the best external and internal brand image. 
Increased media exposure and stakeholder attention force companies to get into the habit of managing risks in a more holistic way. This means a company will see its products ‘from cradle to grave’, from their manufacturing to end of warranty. With this new challenge, risk management has to be deeply ingrained in the governance of any strategic department of the company.

External brand image is driven by the final consumer, opinion leaders and shareholders. Companies’ motivations are also driven by increased scrutiny from various organisations which provide ratings or opinion. For example:

• Rating agencies such as SAM, VIGEO, INNOVEST and so on provide an overall assessment of a firm’s performance in the sustainability field.
• ‘Green’ stock exchange indexes flourish in the financial landscape, such as DJSI, DJSI Europe, FTSE4GOOD, Domini 400 Social Index and so on.
• A company with a good rating can appeal to social responsibility investment funds, as such funds value the environmental friendliness of supply chain operations.
• Multiple sector specific initiatives (such as Oil & Gas, Cement, Textile and Banking) have defined frameworks and ratings to define what a sustainable company. 
• Eco-labels greatly influence how manufactured goods are perceived. Eco-labels now exist in every industry sector: Forest Stewardship Council (FSC) and Programme for the Endorsement of Forest Certification Schemes (PEFC) for wood, Global Organic Textile Standard (GOTS) or Oeko-Tex for textiles, Marine Stewardship Council (MSC) and the various organic schemes for foods… we all are surrounded by dozens of eco-labels. The main thing is to adopt the one label that is really valuable for your market share, because being certified has a cost, especially for small and medium companies. On the other hand, we know that Purchasing departments feel much more secure when suppliers do have these certifications.

The C-level influence

C-level influence is a key element to push green initiatives forward. Sustainability is a hot topic in terms of entrepreneurship and long-term thinking and acting. A good example is a German household manufacturer which we talked to: since 1990, all its managers have green KPIs in their score card.

To ensure that all governance aspects are fully addressed, either the C-level asks the Governance department to work tightly with the Sustainable Development department, or they ask for a ‘green watch unit’ inside these new departments.

For the 2008 study, Sustainable Development departments were 7% of the respondents, whereas in 2010, they represent 42%. They are now increasingly responsible for coordinating green initiatives in companies. 

The 2010 study enhances a maturity matrix that we designed in 2008. This matrix has five criteria:

• Awareness of potential benefits & motivation deals with people motivation and leadership engagement for turning green initiatives into reality.
• Eco-design describes how the company is engaged in eco-design, and how deeply this engagement is linked to supply chain functions.
• Dedicated function & link with other functions deals with the dedicated function to manage green initiatives and the business integration between this function and all other functions to achieve green objectives.
• Involvement of partners deals with depth of involvement of all external partners to achieve sustainable goals. This is key, because all major initiatives go beyond the walls of the company. Companies interact by competing and collaborating with many partners.
• Follow-up & measurement assesses whether the green strategy results can be measured and followed, to prove sustainable benefits.

Optimisation vs. redesign

Optimisation and redesign can be done beside the green supply chain. To better understand this, let us consider a company that intends to change its obsolete heating system. A type of optimisation can be to change the company’s actual boiler to a brand new boiler with latest technology.
Redesign can be to change the boiler system to geothermal installation. In the best case, we can produce extra energy, sell it on, and as a consequence, modify the company’s position in terms of its energy dependency. Optimisation and redesign should be considered regarding three axes: benefits, efforts to take action and resilience of action.

There is no right or wrong decision in launching an optimisation rather than a redesign initiative. It is more a matter of urgency, regulation or strategic orientation. For a new range of products, for instance, a trade-off has to be made between starting from an existing point or designing from scratch.