July 5, 2019
Sustainability versus Profitability
Companies across industries are torn between sustainability and profitability. But is this really a contradiction? Suppliers hold a key role when it comes to making supply chains more sustainable. The chemical and pharma sectors have broad experience with certification processes and can use this knowledge to help suppliers become more sustainable along the supply chain. A digital twin helps to make the right decisions for an optimized supplier network.
When it comes to sustainability and environmental protection, the chemical and pharma industry are under extreme scrutiny. Wastewater, other waste and scrap as well as the handling of gas and oil pose potential environmental hazards. So do many chemicals and explosives that are being processed on a daily basis. Accidents can lead to fatal outcomes and the public is usually concerned when there is a chemical plant near a residential area. More than in other industries, it is imperative for the pharma and life sciences industries to have sustainability high up on the agenda.
However, environmental protection practiced in a plant is not the only factor impacting sustainability. Companies processing chemicals and related materials need to obtain those ingredients in a certain quantity as well as a certain quality. This poses questions on sustainability: where do materials come from, how do they get to the plant and how do they continue their voyage? The question is how pharma and chemical companies can design their supply chains to make them more sustainable. A digital twin of the supply chain network can help to disentangle complex supply chains in order to streamline processes and to make better decisions faster.
The Supply Chain as a Sustainability Factor
A look at the pharma supply chain makes it obvious that incorporating suppliers is a key for a more sustainable network. According to a McKinsey estimate, 90% of companies’ environmental impact derives from their supply chain — from multiple sources. Carbon emissions are one. Although supplies can be delivered to plants via pipelines, a large proportion is still shipped on roads or water.
However, it is not only transport; the processing of chemicals at industrial scale can lead to the emission of pollutants as well.
A study conducted by Llamasoft and the Economist Intelligence Unit found that growing concern for sustainability is changing how companies do business. They are caught between a growing demand for sustainable business and the necessity to be profitable. However, sustainability goes far beyond an organization’s environmental footprint and includes social and financial risks. In this report, sustainability is defined as an organization’s ability to operate without violating ethical norms, compromising social structures or depleting natural resources for future generations.
According to the report, the majority of companies perceive sustainability and profitability as equally important. Especially large enterprises measure the impact on their supply chains. Pharma and chemical companies are mainly large enterprises and are consequently more likely to invest in sustainable supply chain strategies.
The reasons for this are manifold, as the study results underline. The importance of responsible business practices, cost savings and growth opportunities all rank around 35%. Public goodwill, pressure from customers and regulatory compliance are important factors too, all ranking around 20%.
There are fairly obvious examples illustrating how profitability and sustainability are not mutually exclusive. To reduce emissions means to spend less on gasoline and electricity. Creating less waste, e.g. by using less packaging material, also helps to cut costs as does the re-use of packaging material. Yet the study shows that increased costs are the largest impediment to supply chain sustainability. 38% of respondents believe this. At the same time, 34% of supply chain decision makers expect a more sustainable supply chain to cut costs.
Supplier Management for a more Sustainable Supply Chain
Supplier management is a key ingredient for companies to make their supply chains more sustainable. Popular approaches are to score and certify suppliers on relevant metrics and link these scores to purchasing decisions, developing public sustainability awards, and advising suppliers on technology and approaches. The chemistry and life sciences industries are generally well-versed when it comes to certification processes.
Incorporating suppliers into the sustainability strategy however brings a number of organizational questions as many factors need to be looked at. The sheer number of third parties large chemical and pharma companies’ work with pose the biggest challenge. Some of them provide raw materials and other chemicals others are logistics partners or sub-contractors. Third party manufacturers are another example. They all contribute to expanding the supply network’s complexity.
While there are dozens of steps a company can take to make their supply chains leaner and greener, in these highly complex, global supply chains, the most obvious solutions may not be the right ones, with a small improvement in one area often driving disproportionate cost and waste in another.
A Digital Twin for a more Sustainable Supply Chain
Making the right decisions, taking into account all trade-offs and constraints, requires both a complete view of the end-to-end supply chain and a detailed understanding of product flows, assets, customers and mechanisms by which their requirements are met. To achieve this, many global organizations are turning to technology to build “digital twins” of their real-world supply chain, providing a risk-free environment in which to ask, and answer, unlimited “what-if questions”.
This allows them to identify where there is potential for improvement from a sustainability point of view and also shows how these improvements affect operational costs and service levels. The digital twin visualizes distribution routes, gives insights on taxes, tariffs, prices for raw materials, supplier and distribution costs as well as CO2 emissions, allowing companies to identify the optimal supply chain to meet their service, sustainability and profitability targets.
Thus, assessing the outcome on costs, distribution routes, product quality, time to market etc. will get easier. Based on these results, companies can assess whether a supply chain optimized on sustainability will lead to increased or reduced operational costs. As a digital twin supports the revision of distribution routes, it can enable companies to find more efficient routes with a positive effect on both transportation costs and the CO2 footprint. It is fed with the data from supplier assessments, with prices for raw materials, tariffs, taxes, energy and many more. Companies get the big picture of the entire supply chain network and can identify the potential for improving its environmental footprint.
Companies across all industries recognize the need to improve their sustainability footprint and increasingly see an economic necessity for action. The concept of incorporating their supply chain networks into their sustainability strategies is still in its infancy. However, it gets increasingly important. Working with sustainable third party suppliers can form an important part of a sustainable supply chain. This may not solve the dilemma of sustainability and profitability but the potential is there. Customers, shareholders but also employees increasingly demand sustainable business practices. So do regulatory requirements, especially in the pharma and life science industries. This can impact sales results directly. Additionally, sustainable business partners do not necessarily need to be more expensive.
A digital twin of your network helps to monitor the sustainability of the entire supply chain. It lets users see the prospective outcomes of a supply chain optimized toward sustainability in a digital environment. Companies using such technology will find it easier to keep their supply chains and thus their entire business more sustainable.