ESSAY : The Triple Bottom Line and the Triple Triangle

2022 is the year I want to better understand sustainability and how it impacts the supply chain and supply chain thinking. I guess I am a bit late to the party but nevertheless, I am determined, and I have some expectations, that this sustainability party is going to last longer than some of the other popular ones like AI or digitalization. I also have the feeling that this party is different, with a different kind of impact, and with a different type of involvement from the global community.

In my two books[i] ,[ii] , I introduced the Supply Chain Triangle? of Service, Cost and Cash. The triangle captures the discussions in organizations, of different functions pulling a different side of the triangle. We also link the triangle to the Return On Capital Employed, or ROCE, as a financial metric spanning the three corners of the triangle. The link to ROCE allows us to state that balancing the triangle is not optional, but mandatory, as it equals optimizing value, as measured by that ROCE. It is about optimizing the EBIT (or Operating Income) over the Capital Employed (which equals the Working Capital + Fixed Assets). Or in spoken language, it is about optimizing the bang for the buck. If I invest 1 dollar in your company (the buck), what do you give me as a margin in return (the bang).

Sustainability talks about the ‘triple bottom line’, we shouldn’t just look at the financial impact, but also at the environmental and the societal impact. Sustainability talks about 3P’s: People, Planet and Profit. The SDG’s further broaden it to 5 sustainability pillars: Peace, People, Planet, Prosperity and Partnerships. In this text, we’ll make a start with understanding the 3P’s, in the context of supply chain.

In his co-authored book “Sustainable Logistics and Supply Chain Management[iii] ”, Dr Chee Yew Wong, extends the typical supply chain steps of ‘source-make-deliver’ with the ‘use’ and ‘end-of-life’ steps. He analyzes sustainability from a product design perspective and concludes we should also analyze sustainability aspects of the ‘use’ stage and the ‘end-of-life’ stage. When reading this, I didn’t just agree, I realized that instead of just looking at product design, we should also look at the supply chain design. We’ve long discussed about ‘design for supply chain’, but when you talk about ‘design for sustainability’ you immediately realize you should look at the product and the supply chain in conjunction. The materials we use contain so-called ‘embedded CO2’. The place from where we ship them and the global assembly process (the supply chain), will define the ‘added CO2’. That leads to the figure below. Next to the source, make, deliver, use and end-of-life, we have the design (product & supply chain) and the plan (which will need to take the people and the planet into account). The arrows linking back are about circularity: look for reuse (arrow 1), redistribution (arrow 2), refurbishing/remanufacturing (arrow 3), recycling (arrow 4). I believe that to embed sustainability, we need to extend the common definition of supply chain somewhat.

???????????????In my two books and earlier articles, I have described in detail how the supply chain impacts the financial bottom line, and what is the impact of strategy on the supply chain and the financial metrics. The next step is understanding the impact on the planet and the people and how we can come to a triple bottom line.

???????????????As I show in the following figure, I believe the planet and people can be captured in triangles as well. When we source, make, deliver, use and reuse, redistribute, remanufacture or recycle we have environmental costs and people costs. Think about emissions, pollution, food waste and pressure, stress, the burning out of people. Our raw materials and inputs like energy have embedded environmental and people costs. Think about water pollution from dying fabrics or child labour in clothing manufacturing. I believe we also use ecological and human capital. Capital is about ‘scarce resources’ that can be used repeatedly but for only one purpose at a time. Think about land, or the active labour population. We can use them to grow trees or grow crops. We can use them to build and operate warehouses. Next to generating financial value, supply chains also generate ecological and societal value. If we build a warehouse, we can install solar panels and windmills that generate sustainable energy. Jobs lead to prosperity, access to health care, and contribute to peaceful societies.

???????????????Governements provide regulations that impose restrictions on the supply chain. From a financial perspective these are the accounting standards like IFRS or US GAAP. From an environmental perspective think about the REACH regulation that deals with hazardous substances or the more recent green deal. From a people perspective, think about the many labour laws that regulate minimum wages, minimum holidays etc.

????????????????So when we make supply chain or business decisions, we need to start thinking across three triangles to understand the impact on three bottom-lines. An example is shown in the figure below. We’re talking a lot about ‘re-shoring’ but let’s look at the original rationale behind the massive offshoring in the 80’s. The primary driver was financial. Offshoring to low-cost countries gave an important cost advantage, which boosted margins. Some of the investments in fixed assets were left to the outsourcing partners, though operating a global supply chain was increasing inventories and working capital. The net effect on the ‘PROFIT’ triangle was certainly positive. That was the primary driver.

???????????????The impact on the ‘PEOPLE’ triangle was double. The access to more jobs and gradually better paid jobs has helped to reduce poverty in South East Asia. At the same time it has led to a loss of primarily low-skilled jobs in the US and Europe, increasing poverty, increasing crime and leading to an alienation for those affected.

???????????????The impact on the ‘PLANET’ triangle has primarily been negative. Production has shifted to countries with less environmental control, increasing the pollution of land, water and air. The offshoring has led to a boom in container and land logistics, increasing CO2 and pollution.

???????????????If we’d agree we have three triangles to account for and to manage, we could also expand the integrated dashboarding I proposed in my books as shown in the figure below. Where my books focused on the financial triangle and bottom-line, we could easily add a people and a planet triangle and bottom-line. As I’m reading myself into the sustainability domain, I see that making the connections between the three dimensions is still a bit fuzzy. Take the example of centralizing the distribution into 1 central major DC. What if we need to cut trees to free up the space to build the new DC? Or what if the land is currently used to grow food? What if we install more automation? What does that do to employment and the availability of low-skilled labour? Even if it is hard to come to conclusions on all three dimensions. Just listing them broadens the thinking process.

???????????????I believe we can also nicely link sustainability and the above to strategy. What if I have 2 suppliers, once close by, but more expensive, the other in Asia, at a much greater distance and significantly cheaper. Should I as a company opt for the lower CO2 or the lower financial cost? I believe it depends on your strategic positioning.

In my books I use the model of Crawford & Matthews to talk about strategic value propositions. I believe we can add sustainability as an extra dimension as shown below. From a strategy perspective I’ll need to decide whether on that sustainability dimension, I want to play at par, differentiate or dominate. Differentiating or dominating will create extra costs and capital employed, just like it does when I want to differentiate or dominate on product quality. Once I decide to differentiate or dominate the question becomes “is the customer willing to pay the associated premium”.

If I’m an operational excellence player, focused on efficiency, to get to the lowest cost, to get to the lowest price in the market … I will just play at par on the sustainability axis. Amazon, Primark, Ryanair are not known as the ‘best place to work’. They’ll do what is legally required and what is needed to avoid bad press but they’ll not do more. Other companies like Patagonia are known to differentiate on the sustainability dimension. They’ll use yarns from recycled fishing nets and advertise the durability of their products. Conscious consumers are willing to pay a significant premium. They’re not just buying a product, they’re buying a lifestyle. In that sense we believe differentiating or dominating on sustainability goes well with a product leadership positioning.

???????????????These are some first thoughts as I’m trying to work myself into the sustainability domain. Where would you agree or disagree? What extra thoughts does it trigger at your side? What are good books or references on the subject? I’d be glad to read your comments here or feel free to send me an email [email protected] . I might be late to the sustainability party and I’m certainly not a good dancer, but I like a good drink and a good chat so let’s get that started!

[i] DeSmet, Bram.?Supply chain strategy and financial metrics: The supply chain triangle of service, cost and cash. Kogan Page Publishers, 2018.

[ii] DeSmet, Bram.?The Strategy-Driven Supply Chain: Integrating Strategy, Finance and Supply Chain for a Competitive Edge. Kogan Page Publishers, 2021.

[iii] Grant, David B., Chee Yew Wong, and Alexander Trautrims.?Sustainable logistics and supply chain management: principles and practices for sustainable operations and management. Kogan Page Publishers, 2017.