How to make greener supply chains
With the rising risk of climate change, sectors across the global economy need to adapt, and none more so than carbon-intensive supply chains. However, because of the international nature of supply chains, it is difficult for any individual government to make sweeping changes to the industry’s CO2-intensity.
So, what is the solution? Arguably, policies need to operate at the firm-level.
Imagine, for instance, a setup where purchasing teams made decisions on whether to use supplier A or B depending on their CO2 score based on their suppliers, products and processes. Firms concerned about the environment could specifically select those companies more invested in eco-friendly solutions.
Interestingly, this isn’t the first time experts have put forward this concept. Ecorys’s Study on Incentives Driving Improvements of Environment Performance of Companies suggests that the most effective incentives “appear to be those that relate to economic and reputational factors.” It also highlights the importance of regulation: the idea that companies must meet minimal environmental standards in order to operate.
Policy experts believe that the carrot and stick approach will work best. On the one hand, they want to formalise company compliance into law. But on the other, they believe they can improve supply chain environmental performance by simply rigging the game in favour of low-carbon technologies.
The UK government spells out its vision for the future of greener supply chains in The Ten Point Plan for a Green Industrial Revolution. The report makes all kinds of suggestions such as advancing offshore wind, implementing jet zero and green ships, reducing building energy consumption (so-called “green buildings) and accelerating the shift to zero-emission vehicles.
However, the solutions it puts forward are quite general. It is not clear precisely how these initiatives would lead to sustained change at the firm level. However, there are potential policies that they could put in place.
Greener Supply Chain Policies
For instance, assume for a moment that you could calculate the carbon footprint of every product or unit that you sell to see how your company contributes to tackling climate change. International bodies could agree on a standard set of codes (similar to the ISO system) that would allow governments to see the CO2 impact of your activities. They could then offer incentives – such as subsidies – to financially support firms protecting the planet while discouraging those that aren’t.
Putting these plans into action is technically less challenging than you might think. For instance, for supply chain planning, the costs associated with CO2 emissions could be brought into environmental management systems as another data stream. This software could, in theory, base supply chain decisions on their carbon footprint (not their cost) if the product- and process-linked CO2 scores were presented to the platform as a data source.
How Can Companies Implement Green Supply Chains In Practice?
How would they work in practice? Mainly by asking the right questions.
Questions would vary according to the type of planning being conducted. Requirements planning questions (questions that relate to meeting unconstrained demand forecasts) could include:
- Is it better to move products from one plant to another, instead of building another batch?
- Should the firm buy from Supplier A in China at the current price or pay more and get the product from Poland? A Polish supplier could give the company a better CO2 score since the product doesn’t have to travel as far to Western European markets.
- Which of these suppliers has the best CO2 score (when two suppliers are otherwise identical based on price?)
Strategic financial planners (operators tasked with figuring where to hold stock) will need to drill down and ask whether it is better, environmentally-speaking, to warehouse more centrally or to set up a hub and spoke system. They can then use this data to provide their CFOs with insights to make better strategic investments on where to set up international operations.
IT spend planning could benefit too. Supply chain companies could ask themselves whether they should use Software-as-a-Service (SaaS) or locate their IT locally. By calculating the costs-benefit to the environment of each option, they could develop optimal in-house policies for the firm.
You can also imagine flipping the question on its head and looking at whether you could incentivise more environmentally-sound decisions from a demand forecast perspective. So, for instance, are there products and services that your business could deliver today that would lower its CO2 score? Would this action lead to an increase in sales? How might you respond to it?
It’s clear that if supply chain companies are going to lower their carbon footprints rapidly, they need to operate under the right incentives. A carbon-based incentives structure could accelerate the shift towards sustainable logistics and move the sector away from pure price signals. Furthermore, supply chain management solutions could easily accommodate such incentives, effectives changing the rules of the game.