Wednesday, November 25, 2009

Green Supply Chains: Beyond the Cost of Energy

When you talk about green supply chains, a lot of attention is being paid to the cost of energy. A lot of companies believe they are pioneering the green supply chains primarily because they have become aware of the cost of energy and are explicitly working to control it. Energy used in transportation, lighting, manufacturing are quite visible. Retailers are talking about optimizing their transportation efficiencies, in turn reducing the energy used and saving a bundle. Some of them are also looking into store design as well: Wal-mart started using skylights a few years back to reduce the lighting needs during the day. Manufacturing companies are also looking at various ways to reduce energy consumed, some of them have taken a pioneering approach of not only looking at manufacturing alone but review the design of their products with sustainability in mind. One example is P&G: in redesigning their Tide detergents, the company managed to save water by concentrating the detergent, which also yields considerable savings in packaging (smaller detergent packages for the same number of washing loads), transportation costs (less weight and volume), warehousing (less volume).
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What P&G example shows is that there is more to a green supply chain than reducing vehicle-miles in the distribution network.
I propose building an industry-wide data model that would capture the sustainability in a single number. In my book on enterprise supply chain management, I called this index as the Carbon Cost Index. Here is the basic concept:
This carbon cost index will model and support the effort to measure and control the human carbon footprint and related costs, legislative or otherwise. The following scenarios are likely possibilities to measure, impact, and control the carbon footprints of supply chains. A single corporate supply chain does not generally reflect the complete product life-cycle. Therefore, viewing the requirements of a green supply chain from a single corporate supply chain point of view constrains the scope of the thinking itself.
When viewed from a product life-cycle point of view, supply chains consist of three main phases of production, distribution, and disposal. Between the phases of distribution and disposal is the product usage, but since that phase is directly controlled by the consumer, I am excluding it from the supply chain point of view. Eventually, we must build a green index that reflects all these three phases of a product life-cycle in a supply chain. This index, can then be used variously for designing green supply chains across industries as a sustainability measure that goes across industries, corporate supply chains, and consumers to create sustainable business practices.
  1. Energy profile (Production). The energy profile will model the total energy requirements of producing the raw materials as well as the manufacturing process that converts them into finished merchandise. Such data will be typically supplied by the manufacturers, through a process very similar to the product specifications that the manufacturers provide today. The existing data pools like GDSN may be expanded to include this data for the energy profiles of the manufacturing process and the energy profiles of the raw materials.
  2. Distribution profile. This will capture the carbon footprint of the material movements required to manufacture a given product, with elements such as the distances traveled by the raw materials from their source to the factories, and by the finished goods to reach the retailer’s warehouses and stores from the factories. The modes available on these routes and energy profiles of these modes may affect such scores. It may also capture the distribution unit profile based on packaging that affects distribution costs.
  3. Recycle profile (Disposal). This profile will model the material’s recycling characteristics, types of facilities required, and regional laws governing recycling requirements by collecting data on the recycling profiles for the merchandise as well as for the packaging materials.
The Carbon Cost Index then will be a composite reflection of the above profiles that can be used in several planning and optimization functions for the supply chain processes. Of course, having such data available will also change the supply chains processes. For example, how sourcing may get affected if such an index were available today. And, assortment that may require matching products with a recycle profile that is aligned with the local regulations and available recycling facilities. Futuristic, yes, but I think that is where we must go for sustainable growth.
© Vivek Sehgal, 2009, All Rights Reserved.
Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

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