Too costly to ignore, too good to not embrace
The supply chain landscape is changing
Following the Industrial Revolution, companies' primary focus was on output and subsequently, cost. This left for little consideration of social and environmental impacts in the profit maximisation equation.
This paradigm has drastically changed. Organisations are under mounting pressure to limit how their offering impacts the world before, during and after use. Consumers are consistently less willing to tolerate a lack of sustainable awareness and will actively choose a substitute which minimises environment and social impact. The change in consumer sentiment has translated into direct government action, with policy-makers around the world increasingly seeking to sanction inaction. In this new paradigm, organisations which wish to continue to remain relevant or achieve even modest growth targets, must adopt sustainable practices and limit their impact on the environment.
More so than ever, the supply chain should play a central role within any organisation’s sustainability considerations. Upstream and downstream activities are often more impactful to the environment than any other facet of the organisation, including the final product itself. Organisations with a myopic approach to their supply chain design risk a rushed and sub-optimal response to government and consumer pressure or worse, being left behind altogether. On the flip side, organisations able to incorporate sustainability within their value stream, will stand to benefit from a wider consumer base, and be in a position to leverage their supply chain as a competitive advantage in the long run.
This article explores sustainability within the supply chain through consideration of the costs of holding out, the ‘do nothing’ scenario and the business case for sustainable supply chain design. Discussion is focussed on the Australian climate with some reference to global examples.
Holding out will hurt
The movement towards sustainable offerings has never been more commercially attractive. Unilever ANZ recently reported that their sustainably-focussed ‘brands with purpose’ are enjoying 50% more growth than the rest of the business. Similarly, Nespresso are looking to leverage Rio Tinto’s sustainable sourcing of aluminium, (certified with regard to rights of Indigenous groups, water management and carbon emissions), for their coffee pod lids in an effort to appeal to a more premium and conscious market segment.
But what is the cost of inaction? Why can’t I just focus on top line growth and wait until the spotlight is on me to adopt more sustainable practices?
The answer is you can, but there are significant risks to brand association and market share in doing so.
In 2017, Greenpeace released a sustainable canned tuna guide, revealing Greenseas had the lowest sustainability rating of all Australian tuna brands. The poor rating was based on their use of cheaper, yet unsustainable sourcing methods of tuna, and lack of transparency on human rights and labour issues. Greenpeace’s release prompted 18,000 consumers to petition Woolworths to delete the Greenseas tuna range. Faced with losing this revenue stream in Australia altogether, parent company Kraft/Heinz was forced to adopt a more sustainable sourcing approach. Motivated by this backlash, Kraft/Heinz have since taken further steps to improve their “unsustainable” brand association such as new artwork on cans and declaring a commitment to sustainable sourcing on their website.
Volkswagen, Europe’s largest car manufacturer, has also suffered from prioritising profitability over sustainability. In 2015, it was revealed by the US Environmental Protection Agency (EPA) that the manufacturer installed ‘emission cheating’ technology in its diesel engines. The ramifications are still being felt globally, with penalties exceeding €26B, as well as endless class action suits and forced car buy-backs. Growth has also been significantly hampered in major markets, such as the US, UK and Germany, since the controversy despite relentless attempts by the manufacturer to regain consumer trust.
Needless to say that for both organisations, a sustainable focus would have been a lot less painful in the long run.
The ‘do nothing’ scenario has become untenable
The change in consumer preferences to products that are sustainably sourced, manufactured and delivered is now translating into government action. The Australian Federal Government, as well as a number of State Governments, has recently passed legislation forcing organisations to consider and even report on sustainability measures. One such measure, ‘The Modern Slavery Bill’, requires companies operating within Australia with revenue over $100M, to report on the risks of modern slavery within their supply chains and efforts undertaken to improve upon these risks. Reports will be published on a registry for public viewing, creating a deeper level of transparency for consumers.
At a State level, the recent expansion of the Container Deposit Scheme to all States and Territories, (except Victoria and Tasmania), has placed accountability upon Australia's beverage manufacturers. The Scheme is an extension of the SA/NT model, where consumers are incentivised to recycle by receiving a 10c refund per container deposited. Beverage manufacturers are forced to fund the Scheme through both the refund and the additional costs of running it, placing accountability on these organisations for the post-life management of their product (total cost for manufacturers approximately 11-14 cents per container). Following the ABC’s ‘War on Waste’, consumer pressure is also now mounting on the Victorian and Tasmanian governments to roll out the Scheme within their respective states. This speaks to the circular relationship between consumers and government, where one entity feeds the other creating change along the way. Further initiatives will certainly follow from this relationship, leaving organisations whom are unsustainable and unwilling to adapt, the likely losers in the long run.
The business case for a sustainable supply chain is strong
The good news is that there is a strong business case for sustainable supply chain design. It presents an underutilised opportunity within medium to large businesses to release trapped resources to be deployed elsewhere within the organisation or to sell to other organisations above cost. Further, when sustainability is pursued by two partners in the supply chain, it can generate mutually beneficial outcomes, both financial and non-financial, including cost reduction, loyalty, security and innovation.
Consider the opportunities that exist within the three main buckets of a commercial supply chain: pre-manufacturing, manufacturing and warehouse & distribution:
When choosing suppliers, an organisation has the ability to influence product requirements, such as sourcing locations, product specifications and ethical standards. Take the Nespresso example used earlier. By electing to leverage Rio Tinto’s responsibly sourced aluminium, Nespresso can appeal to a new and more premium market segment, as well as its existing customer base, enabling it to increase market share and sales. The benefit for Rio Tinto is that it has created a new revenue stream with the potential for growth as other large brands follow suit in their pursuit for ethically sourced materials. Subsequently, Rio Tinto’s cost to source is lowered, which is a ‘win-win’ for the company and their customers.
Taking it one step further, an organisation can partner with key suppliers to evaluate their own value stream to identify where unnecessary resources are used in manufacturing or distribution. Larger minimum order quantities (MOQs), consolidated transport loads or engineering reverse logistics solutions are all options that can lower a supplier's environmental footprint and result in cost savings that both businesses can enjoy. Walmart has successfully constructed a symbiotic relationship of this kind. Over a two-year period Walmart was able to save its Chinese suppliers $2.8M by providing an online tool that identified initiatives to help make factories more energy efficient. Walmart can expect a lower material cost in return as a result of the initiative.
Finally, where to source is a key consideration for any business, presenting a trade-off between cost and responsiveness. Choosing local suppliers or locally produced products will often have a carbon positive effect as sea freight contributes 300M tonnes of CO2 annually and 2.6% to global emissions. While product cost may increase, the advantages in supply chain resiliency and responsiveness can free up cash from reduced inventory to offset the higher cost.
Within manufacturing there are direct costs and indirect costs to consider in the sustainable supply chain framework.
Waste off the line through inefficient conversion of materials is a direct cost requiring active management for most factories. Although there are many different methods to dispose of the waste, many factories send their waste to landfill, evident by the 46,422 tonnes of manufacturing waste sent to landfill in Victoria alone in 2010/2011. This is in spite of levies for landfill dumping in all states except Queensland (due July 2019) that present an oncost over recycling. Such levies mean that eliminating waste to landfill and opting for sustainable waste disposal can lead to savings, as well as a marketable sustainable image. Many of Australia’s largest FMCG manufacturers, including Mars, Ingham and Unilever, have recognised the financial benefits that can be realised through adopting a ‘Zero waste to landfill’ policy and pursuing more sustainable waste disposal methods.
On the point of indirects, the benefits of sustainable product design is definitive for any modern manufacturing company. The manufacturing supply chain should always be looking for opportunities for marketing or R&D departments to strip non-value adding product features out of their offering. In doing so, organisations can decrease conversion cost while simultaneously limit their products’ impact on the environment.
Eliminating unnecessary packaging will soon become a priority beyond indirect cost savings for UK-based organisations, after the Government announced a tax will be imposed on single-use virgin plastics from 2022. Discussions to roll out a similar initiative in Australia have already begun in response to the waste crisis generated by China’s ban on importing plastics. With the South Australian Government considering banning single-use plastics altogether, manufacturers should have sustainable product design front of mind in their innovation development process in order to avoid any disruption to business continuity.
Warehouse & Distribution
The warehouse and distribution arm within an organisation’s supply chain offers a plethora of opportunities to exploit the cost and sustainability equilibrium. It would be too much to list them all, but a few prominent examples have been identified below.
Reusable Transport Packaging (RTP) provides a framework for such a network where reusable pallets and totes can be moved bilaterally between the warehouse and end distribution point at a reduced impact to the environment and lower cost to the business. The cost savings from RTP can be in the order of 30% with usage rates beyond 50 compared to a single-use of corrugated cardboard. Furthermore, transport utilisation stands to improve with reusable totes, as the uniformity of design is effective when building mixed pallets.
Designing a logistics network with RTP is capital-intensive so deferring to a 3rd Party Logistics (3PL) providers to manage RTP maintenance and retrieval can be a smarter option for many organisations than doing it in-house. A 3PL provider also reduces the likelihood of 'empty miles' from return trips, as the pickup of RTP is consolidated into a larger route, thereby reducing total freight costs.
Last mile logistics (delivery to the consumer's doorstep) is another critical element where significant gains in the bottom line and sustainability agendas can be realised. Last mile logistics is becoming an increasingly prominent challenge for supply chains as consumers come to expect this as the norm. Unfortunately for organisations, it is the least efficient leg of a logistics network, comprising 28% of the total delivery cost and contributing 20-25% of greenhouse gas emissions from the total transport sector globally. However, delivery specialists UPS have taken steps to achieve a low-cost and low-impact last mile through a commitment to source alternative fuels to petrol and diesel for 40% of its fleet by 2025. Investment in route optimisation technology has also resulted in annual savings of $400 million for UPS through a reduction in fuel consumption and labour.
Crowdsourced delivery (or crowd logistics) offers another solution to the last mile conundrum through the gig economy, where non-couriers deliver on behalf of an organisation through low emissions transport options, such as bicycles, scooters or public transport. Major organisations such as DHL, Walmart and Amazon have all experimented with crowdsourcing as an alternative distribution model due to its advantages in responsiveness and flexibility of its courier workforce.
In 2008, The Economist identified the Supply Chain as the ‘weak link’ in striving to make a business more sustainable. Ten years on, whether it’s the cost of inaction, the risk of government sanction or the benefits from embracing it, it’s clear that there is a strong case for sustainability in the supply chain.
Many organisations are already reaping the benefits of leveraging their sustainably focussed supply chains as a competitive advantage. Those that aren’t will be forced to adapt quickly as both consumers and government change. We challenge you to take a moment to consider how your supply chain is placed to meet the growing sustainability-focussed agenda of your consumer base. In other words, are you doing enough?
This article was first published in MHD Magazine July/August 2019Download – PDF (676 KB)
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