Journey to a Sustainable Supply Chain – It’s hard and long but achievable
Avanish kumar
Business and IT Transformation Advisor | Enterprise Architect | SAP Center of Excellence | Integrate Sustainability into ERP Programs
In one of my last year’s blog , I have covered how digital and sustainable transformation converged across industries. A sustainable supply chain requires a digital business foundation supported by digital technologies.
With some more wisdom, I thought I would reflect on why it is the most appropriate time to achieve a sustainable supply chain in this blog with more focus on?comprehensive solutions?framework by enabling?the proper transition plan in the journey.?
The pandemic has pushed businesses to embrace digital transformation. This accelerated transformation agenda provides an unprecedented opportunity to create green business models by?shifting the focus from productivity enhancements and efficiency improvements?to sustainability.?
There are questions in everybody's mind "How are you?embedding sustainability into the core business strategy and operations"?from capturing it to applying scalable, sustainable solutions across the organization in a commercially viable manner? ?How can we embed internal carbon pricing in decision-making by tracking carbon through products? How can we exchange information between companies, across borders, and?all the way to planetary accounting?
The pandemic and growth of e-commerce exposed the limitations of a global supply chain which is driving the re-examination in order to provide that resilience. To provide resiliency and manage massive supply chain disruption, there is a need to re-look the redistribution of suppliers, ports, logistic routes, energy-efficient sites, and warehouses etc. So, as you are reinstalling the supply chain, you have to rebuild them and apply ESG (Environment, Social and Governance) principles during the process to boost readiness, rather than trying to make all these investments later on.
There is no one-way approach for attaining a sustainable supply chain. It could be balancing short-term imperatives with long-term goals by doing business and applying sustainability. However, the winner will be the one who can?embed sustainability during the digital transformation.?
The embedding of sustainability during the digital transformation describes how an organization look for the future enterprise value and not just revolve around the present value by extending beyond the organizational boundary to include risks and opportunities in the supply chain.
Why is it so hard to define a sustainable supply chain??
There are many versions for the supply chain – Responsible, Resilient, Agile & Responsive, Digital, Sustainable, Compliant, Green (Net Zero), Transparent, Touchless and Circular supply chain.?
Let's talk about the commonly heard term "sustainable supply chain”. What do we mean by this? To keep things simple to start with, I thought of putting my view to decode the differences.?
Please see below the diagram, where I have defined the different types of the supply chain in three broader categories under the umbrella of an overall sustainable supply chain.
Supply chains may operate within legal and responsible guidelines but still may not be sustainable. A sustainable supply chain integrates ethical, compliant, and environmentally responsible practices without compromising long-term efficiency.?
The Covid crisis and growth of e-commerce leading to supply chain challenges?
Many supply chain challenges and issues emerged throughout the last year and this year, highlighting the true importance of an end-to-end supply chain.?
Many challenges started with outbreak of Covid-19, which triggered an economic slowdown. The manufacturers and shipping companies assumed that demand would drop drastically. But that assumption proved to be a mistake, as an unpredictable and sudden demand surge led to port congestion, a shortage of containers in China that needed them the most, where factories would begin producing goods, immense shipping costs, domestic and international freight capacity constraints and costs.
Meanwhile, businesses across the economy struggled to hire workers,?including truck drivers to haul cargo to warehouses. The continuous labor shortages worsened the scarcity of goods. A dearth of computer chips, for example,?forced major automakers to slash production.
The consumers reacted to shortages by ordering earlier and extra, which has placed more strain on the supply chain. These issues resulted in rising inflation, which will be more likely to last through 2022.
Growth of e-commerce and trend to continue
Here's what continues to exist:
Now, let's scale the problem up??
The supply chain is a complex non-linear system with a myriad internal/external constraints and variability to include in better modeling, and organizational alignment across the end-to-end supply chain.
Supply chains have many nodes with interconnected flows. The global supply chain will persist?as some materials (for example, rare minerals) are available only from specific countries, which require a global supply chain.
There are many existing challenges in optimizing supply, logistic network and last-mile delivery.
Supply chains are fit for purpose and asset intensive. To design an?optimal supply and logistic network?based on a demand pattern that is futureproofed to move manufacturing to a new local or regional location will require a longer time.
Setting up?a sourcing network?with appropriate contract management, supplier quality and performance management by finding local, regional, or global suppliers is another a challenging task.
Circular supply chain?- There are many challenges in ownership of end-of-life materials management, quantity collection of end-of-life materials, determining the residual (loss) material value, and product complexity for recycling/component use/refurbishment.
That's a lot of problems! - How about solutions??
In this core section of the blog, I will cover the following solutions framework.??
Procurement function strategic role for Scope 3.1 Emission
It is difficult for many suppliers to measure their emissions, so buyers rely on multiplying material spend or material quantities it purchases with category-specific carbon emission factors in the country of origin from industry-specific Lifecycle Carbon Assessment (LCA) Databases, like Ecoinvent, GABY, or CDP and report them in an external carbon accounting solution.
Based on historical performance and benchmark values, the carbon data generally do not reflect the exact carbon profile for a specific purchased product from a specific supplier at a particular point in time.
Please see below the diagram where I have summarized the strategic role of the procurement function to manage scope 3.1 emission and adapt to a new operating model together with ecosystem players, suppliers, industry forums and initiatives and using tech tools.
Examples of some of the industries on how they are addressing climate change for Scope 3.1 emissions:
Uniliver:?Climate Transition Action plan is the guiding strategy to achieve net-zero by mapping the largest sources of GHG in the value chain, segmenting and prioritizing suppliers, creating mandatory standards for suppliers around sustainable and regenerative sourcing of agriculture commodities, establishing the climate program to help 300 prioritized suppliers with implementing climate action.??
Nike: Building long-term supplier relationships to find alternatives for production methods and energy sourcing. Launched Supplier Sustainability Council (SSC) to work directly with eleven strategic suppliers to drive collective internal action, developed the supplier climate action plan (SCAP), which provides suppliers with management tools to set and achieve ambitious climate goals (corporate GHG inventories).
Microsoft: Carbon-negative ambition is a 3-part strategy of accountability, education, and engagement that works closely with its supplier to reduce scope 3 emissions. Enhanced supplier code of conduct for the supplier to disclose scope1/2/3 emissions and provide plans to reduce emissions, charging fees on carbon emissions ($ per metric ton) across everything, including suppliers.??
There are some more initiatives underway:
Internal carbon price in comprehensive decision making?
The World Bank ?defines carbon pricing as an instrument that captures the external costs of greenhouse gas (GHG) emissions and ties those costs to their sources, usually in a price on the carbon dioxide (CO2) emitted.?
There are also two main types of carbon pricing:?emissions trading systems?(also known as ETS) and?carbon taxes. ?ETS ?introduces a cap-and-trade system, which caps the total level of greenhouse gas emissions. The second type of carbon pricing is?carbon taxes , which set a fixed price that must be paid for every ton of CO2 emitted into the atmosphere.
Finland was the world's first country to introduce a carbon tax in?1990. Since then, 16 countries have followed. The?world's first?carbon cap and trade system were the European Union Emission Trading System (EU ETS), launched in 2005. Today, it's the world's largest carbon market.
Carbon accounting is now part of business technology. Microsoft discourages corporate travel by?increasing internal carbon fees ?from $15 per metric ton of carbon dioxide equivalent to $100 per metric ton?from July 2022?to help incentivize more aggressive measures to reduce Scope 3 emissions.
Please see below the diagram, where I have summarized the carbon pricing types and comprehensive decision-making approach to adopt the pricing type as per the company’s maturity.
Design for sustainable processes – Improve maturity of digital processes?
Some examples of designing sustainable strategies and improving digital process maturity and KPIs:
·?Supplier innovation and long-term partnership -?The company takes responsibility for making suppliers part of product innovation and long-term strategic partnerships – % of suppliers identified for Renewable Energy, Sustainable Product development. Sustainability goals are connected to supplier agreements.?
·?Sustainability - Strategic Sourcing -?The company takes responsibility for moving the supply base to green supply bases, and KPIs are defined – % Green base suppliers and spend tracking.?
·?Incorporate sustainability KPIs apart from Supply chain KPIs (Perfect Order Pointer, Cash to Cash Time, Supply Chain Cycle Time, Demand satisfaction rate, Inventory Turnover, Freight Bill Accuracy, Days Sales Outstanding, Inventory Days of Supply etc.) to Sustainability KPI's?(% reduction in customer returns from previous year, % product going to landfill vs. recycle/reuse, % reduction in shipment miles compared to last year, % of recyclable vs. non-recyclable packaging material content).
Platforms based solutions - How industries are responding to it
Digital Sustainability platform (some examples):?
Agri sector:?Olam International, a global agribusiness company, took a big step by launching?AtSource , a groundbreaking digital sustainability platform. It makes possible for customers to trace their products' origin, measure the environmental and social impact of supply chains from source to factory for more than 20 ingredients across 60 supply chains. In many cases, customer can trace crops to specific groups of farmers, calculating the environmental footprint of a particular crop by volume, origin, and destination.
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Pharma Sector: The Energize platform collaborates with 10 global pharmaceutical companies to engage hundreds of suppliers in decarbonizing the pharmaceutical value chain to drive system-level change. The benchmarks, targets, and guidelines are spelled out. They must then be shared – and agreed to – among all the stakeholders and suppliers across the chain. In this way, companies can share information and allow businesses to commit to Scope 3 action more quickly. A bigger ecosystem will make supply chain management easier, as all partners will be working together in a business-as-usual fashion.?
Ecosystem driven sustainable supply chain business models??
The emerging ecosystem business models (marketplace, scaling, or value chain) will drive sustainability for aggregation of supply (circular economy support), create scale (energy solutions), or manage better business value from the collection of partners in new operating models.
In a supply chain ecosystem, organizations share and combine capabilities and develop relationships to generate and exchange value with trading partners, multi-tiered suppliers, third-party logistics, and customers by building a "culture of sustainability" at the center of decision making.
A new type of data is being exchanged - supply chain risks, disruptions, returns, reverse logistics, customer data (e.g., Voice of Customer). Ecosystems that share end-to-end information in real-time will enable supply chain organizations to enable faster responses to unexpected changes, risks in supply or demand, increase customer experience and business growth by reducing cost.?
Industry Collaboration
One example is where?Kering pioneered an innovative tool ?for measuring, monetizing, and monitoring the environmental impact of business activities within its operations and across the entire supply chain. The Environmental Profit & Loss (EP&L) account is a vital enabler of a sustainable business model. Kering wishes to share with peers in the luxury and fashion industry and other sectors.
Another example is in the Automotive sector across Europe; the?Catena-X Automotive Network ?is an open, scalable ecosystem data exchange within a secure?digital platform?in which all network partners from large corporate to small and medium-sized enterprises, dealers, equipment suppliers, and application providers can participate to address industry-wide challenges through cloud-based standardized data infrastructure?Gaia-X .
How to enable a sustainable supply chain design model?
I have talked earlier about the challenges and trends in the supply chain.
Please see below the diagram, where I have summarized the framework for a sustainable supply chain design model to achieve the sustainable performance of supply chain in an integrated way.
There is an urgent need to integrate the supply chain with financial planning to move towards
· Eco-design and carbon pricing linked investment scenarios to operate within ESG thresholds.
·?Enable more market data for varying demand in synchronized planning.
·?Unified data model across end-to-end supply chain across ecosystem partners from source to delivery.
·?Cash flow management for proven technologies to enable supply chain transparency, risk event management, carbon footprint and enterprise sustainability management. ?
·?Infrastructure and digital platform set-up for circular economy principles.
·?Prioritize investments in digitalization to increase the level and intensity of connections with partners.
Make a balance between supply chain resilience and sustainability
Another interesting aspect is to align resiliency with sustainability for decision making.?
In many cases, resilient strategies could negatively affect the sustainability dimensions. For example, when the disruption risks grow, you tend to build redundancies in the supply chain. These redundancies can also increase geographically dispersed suppliers, resource consumption, and inventory use. But on a positive effect, it can generate local employment and help local communities. So, it is possible to minimize the impact of potential disruptions by maintaining a sustainable social, environmental, and economic dimension throughout the whole supply chain.
Resilience would require diversification of manufacturing, suppliers, multiple facilities in different locations geographically. That would consume many resources and energy, both setting up and managing it. If you are considering re-shoring, moving out from a low-cost country could be expensive.
Supply chain specialists ?are researching a single potential framework to integrate all these resilience and sustainability principles into the standard supply chain practices.
Importance of digitization in the supply chain
The journey to a sustainable supply chain will be through digitization of the supply chain. Companies should embed environmental, societal, and governance (ESG) principles at every step of the way to make their supply chain operations future-ready.
Increased digitalization powered by the Internet of Things (IoT), digital twins, and blockchain to digitally inter-connect the supply chain ecosystem will result in a more resilient and agile supply chain.?
Some examples of digitization in supply chain:
How can ERP support in the sustainability journey?
Please refer to my previous?blog , where I have covered how ERP can support the sustainability journey.?
Can we scale up the solutions quickly??
To address sustainability, organizations need transition plans. That means road-mapping on where you are now, where you need to go, and how you will get there.
Transition plans outlining how an organization will decarbonize and address sustainability across ESG by standardizing the transition planning process.?
Invest in sustainability capabilities
There is a clear need to increase investment in own sustainability capabilities from design re-manufacturing, refurbishment, and recycling principles into products, developing the product as a service model, exclusively using sustainable materials for Packaging, developing capabilities to proactively take back used products, develop collaborative transportation models and transition to Packaging less delivery.?
A more robust?trade-off framework?must be developed where both carbon footprint and performance metrics should be given weightage to maintain efficiency and responsiveness across the entire supply chain during decision making. I have covered this theme in more detail in my?previous work .?
Scale up – The timescales to achieve a sustainable future are sinking.?To re-cap some areas to scale-up:
·?Enable sustainable supply chain design model with integration with financial planning
·?Redistribution of suppliers, ports, logistic routes and reinstalling the supply chain and apply ESG during the process
·?Adopt the carbon pricing as per the company’s maturity for comprehensive decision-making
·?Design sustainable strategies and improve digital process maturity and sustainability KPIs
·?Ecosystem partnerships to share end-to-end information in real-time to enable faster responses to unexpected changes, risks in supply or demand
·?Increase collaboration on sharing innovative tools across industry sectors
·?Eco-design and carbon pricing linked investment scenarios to operate within ESG thresholds
·?Infrastructure and digital platform set-up for circular economy principles
·?Start deciding new business rules on sustainability dimensions checkpoints to take conscious decisions?in real-time to embed environmental, societal, and governance (ESG) at every step
·??Use ERP digital platform simulation capabilities to shape new behaviors and decision-making capabilities?
Conclusion
New guidelines, global standards, common targets, and collaborations are required to assess the entire supply chain performance within societal and environmental limits.
Establishing protocols for boundary setting, data collection, and analysis is complicated, as is determining whether the chain operates within environmental and social thresholds. Until those thresholds are established and employed, it will be difficult to tell if a supply chain is sustainable or not.
Every company can build a more sustainable supply chain by referring to the solutions, described in this blog as a guiding reference. The most complex challenge associated with any significant transformation is figuring out the right ways to balance profitability with the new goals the business is trying to achieve.?
In the interim, sustainable supply chain management requires setting up science-based targets, Internal carbon pricing, developing sustainability metrics, and building relationships with ecosystem players across the chain. Ecosystem partnerships, digitalization, and building common platforms across alliances will provide a strong foundation for setting and staying within key environmental and social thresholds.
The cross-industries collaboration will have to manage how they are spending the remaining carbon budget collectively. That's challenging, but advances in scientific understanding, new data streams and cloud computing allow us to connect dots to accelerate it.
These are my personal opinions and thoughts. Please connect with?me ?to discuss meaningful conversation and your challenges to address in more detail and support your journey to embed sustainability during the digital transformation.
EXL | IIM Mumbai '23 | DBATU '18
2 年Great thoughts on sustainable supply chain. Can you also share your insights on Smart and Sustainable Warehousing, what are various challenges associated, digital enablers to support sustainable warehousing etc. Thank you
Just what I have been looking for??
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2 年An impressive series of blogs on sustainability. I like your thought on balancing profitablity with sustainability. It would certainly help to achieve a sustainable supply chain if there is a cost saving or revenue effect associated with it.
Author,Motivational Speaker,Leadership Coach,Independent Director,Media & Communications Advisor
2 年Brilliant thoughts Avanish, I liked how you’ve juxtaposed the approach for attaining a sustainable supply chain by balancing short-term imperatives with long-term goals. Excellent deep dive! Many congratulations #sustainabilitystrategy
Assistant Director, Strategic Deals at EY
2 年Very interesting! Thanks for sharing.