April 10, 2019
Balancing supply chain sustainability with profitability
Don Brenchley, director of industry strategy at software group LLamasoft explains how businesses can harness technology to achieve the optimal balance between supply chain sustainability and profitability.
There’s no doubting sustainability has become a major talking point in board rooms around the world. An estimated €966 billion opportunity exists for brands that make their sustainability credentials clear according to one Unilever study. That study also found a third of global consumers prefer buying from brands they believe are doing some form of social or environmental good.
Adapting the supply chain will be vital to increasing sustainability. More than 90% of companies’ environmental impact comes from their supply chains, McKinsey estimates. According to these estimations, retailers’ supply chains typically account for 11.5 times each company’s impact. That figure rises to 19 times for personal and household goods companies and 24 times for food and beverage companies.
But sustainability is about more than just the environment. In a business context, it is about the process by which companies manage their financial, social and environmental risks, obligations and opportunities, sometimes referred to as ‘profits, people and planet’. From a supply chain perspective, satisfying this triple bottom line is far from straightforward.
The tension between sustainability and profit
The Economist Intelligence Unit’s (EIU) recent ‘Sustainability, the Missing Link’ global report commissioned by LLamasoft revealed 60 percent of supply chain decision makers consider sustainability and profitability as being equally important. But the research also highlighted tension between these priorities in global supply chains, with respondents divided on whether cost is a motivator or a barrier to the adoption of a sustainable supply chain strategy. While 33 percent reported that costs savings are a top reason for adopting supply chain sustainability strategies, 38% believe that increased costs are the largest impediment to supply chain sustainability.
Luckily, organisations don’t need to choose between the environment and the bottom line; many initiatives geared towards supply chain efficiency and agility have sustainability as a by-product and vice versa. By making operational changes like using recycled materials, utilising renewable energy and optimising routes to reduce empty miles, organisations are able to correlate improvements in sustainability with an increase in savings. This is borne out by The Carbon Disclosure Project (CDP) – a non-profit organisation that promotes the disclosure of environmental impact data – which estimates that suppliers in its network collectively saved US$14bn in 2017 as a direct result of reducing their carbon footprint
Squaring the sustainability/profitability circle
Although there are many ways in which companies can make their supply chains leaner and greener, for organisations with potentially hundreds of suppliers, thousands of products and millions of customers, determining the best alternatives is far from straightforward, at times making sustainability and profitability an ‘either-or’ choice. According to the EIU report, 29% of businesses identify difficulty in monitoring complex supply chains as the main barrier to adopting a supply chain sustainability strategy.
In many cases, an adjustment which delivers an improvement in one area can drive in cost and/or waste elsewhere and the best decisions may often be counterintuitive. For example, while consolidating shipments to reduce empty running may seem like a no brainer, it could result in a disproportionate increase in inter-warehouse transfers, effectively cancelling out the original benefit. On the flip side, increasing inventory levels may seem like the worst possible strategy, however, in allowing for the use of ocean rather than air freight, the reduction in shipping costs and emissions will more than compensate for increased inventory holding costs.
In order to square the sustainability/profitability circle, the ability to evaluate these trade-offs is a critical capability and requires both a big picture view and a granular understanding of the end-to-end supply chain.
Data-driven decision making
Fortunately, as digitally connected supply chains produce and consume more data, the opportunities to increase efficiency and reduce environmental impact are increasing. According to the EIU report, use of the Internet of things (IoT)—for instance, tracking goods by equipping them with RFID and GPS sensors, or connecting shipments to mobile networks—is common.
Thirty-percent of survey respondents reported widespread us of the IoT in their supply chains, and a further 34% use it in some parts. Three quarters said they use data analytics across their supply chains in whole or in part, with large-scale use more common among large companies. A smaller but still significant number (59%) say the same about their use of Artificial Intelligence. Blockchains—open, decentralised, digital ledgers seen as a means of making records of transactions more secure —can also be used to hold suppliers accountable on sustainability. Half of all respondents (51%) said they use blockchain technology either widely or in some parts of their supply chain.
What is clear is that the rise of the analytics-driven supply chain has made implementing green practices that affect both the organisation’s carbon footprint and their bottom line easier than ever. By leveraging supply chain data, organisations can gain end-to-end visibility, identifying opportunities to be greener while also streamlining their overall operations.
For companies interested in incorporating sustainability in their extended supply chains, it’s essential to understand the network-wide impact of such efforts. By increasing visibility and considering trade-offs through shifts in various sourcing, production, distribution and inventory policies, sustainability decisions can be made in a holistic manner.
To perform such complex trade-off 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 associated constraints and policies, along with external environmental factors, essentially creating a ‘digital twin’ on which they can run and evaluate 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 which deliver both operational and sustainability improvements.