Monday, September 8, 2008

Supply Chain Strategy Trend Two: Environmental Consciousness

In the previous post, I highlighted the two emerging trends that will shape the future of the supply chains. This article follows up on the second of these two main trends that affect us. We will call this trend "Environmental Consciousness" as this trend primarily focuses on the changes happening in today's manufacturing, and distribution industries in response to the enhanced awareness of the impact of these activities on the environment.
While this trend has been in the making for some time, it has gained great momentum in the recent years. The rising awareness of the impact of the human activity on the environment is the subject of discussion in more and more political, social and economic forums. It is also the subject of numerous reports from World Bank's Environmental Sustainability to Human Development Report 2007/2008 from United Nations.
Manufacturing and Distribution are two activities that affect the environment on a large scale. Manufacturing needs raw materials that come from natural resources in a number of cases, and the manufacturing process invariably needs energy to convert these raw materials into the finished products. Along the way it may produce wastes that must be treated, if toxic, before it can be released back into the environment. Distribution needs energy to move the products from one place to another and is a direct contributor to green house gases and resulting warming.
Supply chains manage manufacturing and distribution processes. And that is what brings them into sharp focus from this point of view.
While there are not many regulatory requirements that constrain the supply chain processes directly at this time, the indicators suggest that such requirements will exist pretty soon. For a look into what the future may look like, review the proposed carbon labeling act in California, Carbon emissions trading is already a reality in EU, and there is active talk of this system as a mechanism to control and govern the environmental effects of the industrial activities in the US as well. (Note that the US has operated cap-and-trade systems for emissions of sulfur dioxide and nitrogen oxides for year now).
Both of the above systems, namely the carbon labeling as well as the trade-and-cap systems can directly contribute towards controlling the environmental effects of manufacturing and retailing activities. Both affect the supply chain functions and its future evolution. The first achieves it through direct consumer discrimination based on the consciousness and the second one achieves it through regulation that affects the competitiveness of enterprises that are less environmental friendly than others.
While some of these measures will be voluntary and others regulatory in nature, it is clear that such measures will effectively change how we as consumers behave and react to products we buy. For example, consider the nutrition labels that were required to show the Nutrition Facts, basic per-serving nutritional information, on foods under the Nutrition Labeling and Education Act of 1990. These were introduced in 1992, and since then it has become an important part of the consumer behavior. It is not uncommon to find people checking the nutrition information in the grocery stores prior to putting the merchandise in their carts. A similar concept for carbon labeling will undoubtedly affect consumer behavior, and hence the retailer's behavior in how these products are assorted, sourced, processed, distributed and sold.

Carbon Labeling

California's Carbon Labeling Act of 2008 proposes to "Establish a methodology for determining and communicating the carbon footprint of a consumer product. If feasible, the state
board shall establish standards and methodologies for determining and communicating to consumers on a product label whether a product has a lower carbon footprint than the average comparable product available in the state."
Chances are that such a methodology will include some measure of (1) energy consumed in the production of a product, and disposal of any harmful byproducts (2) energy consumed in the distribution of a product from the manufacturer to the retailer's facilities, and finally (3) recycling characteristics of the materials used in production. Most of this information can be collected from the manufacturer and the retailer, and standardized in a format that is easy to understand and discriminate. And such labels will in turn affect the consumer preferences that drive the merchandising, sourcing, purchasing, distribution and stocking processes.


The trade-and-cap system will primarily affect the manufacturing costs and affect the overall price paid by the consumer. Environmentally unfriendly products, even if cheap, will still have some impact in the same way as the allegations of using child labor had in recent years. This combination of regulatory and voluntary pressures will affect the consumer behavior albeit in a slightly indirect manner than the carbon labels. Managing costs eventually affects the same supply chain processes as above: merchandising, sourcing, purchasing, distribution and stocking.
The decision parameters and the metrics that define and measure these processes will change in response to these changes. So far these were primarily back-end supply chain processes that were merely enabling getting the right product at the right place at the right time and quantity. In the new context, they become front and center processes whose decisions affect the ultimate profitability and success of the company.
How will these process emerge in the future? How should they emerge? That is the subject of supply chain evolution strategy that we will continue focusing in the coming weeks.
©2008; Vivek Sehgal

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