Executive Briefings

Assessing and Balancing Trade-offs in Supply Chain Optimization

Optimizing supply chain operations to cost less and be more effective has long been a top priority for businesses. Now, companies must consider new sustainability measures such as carbon. Identifying, tracking and managing supply chain emissions is quickly becoming essential to optimization efforts, with the primary goal of detecting inefficiencies in fuel, electricity and water consumption and then correcting those inefficiencies to help eliminate waste and reduce costs. But improving one benchmark in an optimization effort may adversely impact another. It's rare that everything aligns perfectly.

Consider, for example, a choice to work with a supplier that's offering less expensive goods. End customers likely will be happy, because such a choice saves money that then can be passed on to them. But what if the supplier uses a specific coal, for instance, to power its operations, a measure that impacts the supply chain's overall carbon footprint, as well as the procuring company's footprint? There are even trade-offs that have to be made within carbon indicators. One potential supplier might use oil to heat facilities, while another uses gas. The burning of natural gas produces nitrogen oxides and carbon dioxide, but in lower quantities than burning coal or oil, according to the United States Environmental Protection Agency (EPA).

What's critical is that companies determine the best supply chain measures that meet their requirements and strategic goals, and then analyze and compare those measures to understand if - and where - any trade-offs might occur. Through life cycle assessments that leverage what-if scenarios, modeling and risk/opportunity matrices, companies can strike the right balance as they optimize supply chain operations and reduce their supply chain's carbon footprint.

It is well-documented that supply chains weigh heavily in an organization's overall greenhouse gas emissions. On average, 75 percent of an industry sector's carbon footprint is attributed to the supply chain, according to a 2009 article on enterprise carbon footprinting written by Y. Anny Huang, a postdoctoral fellow at Carnegie Mellon University (CMU) and CMU professors Christopher L. Weber and H. Scott Mathews. The not-for-profit Carbon Disclosure Project (CDP) found, in its 2011 Supply Chain Report that more than 50 percent of an average corporation's carbon emissions comes from the supply chain rather than operations within its own four walls.

The need to optimize supply chains so emissions can be lowered is being driven by a number of factors. Governments are enacting mandates. For example, the United Kingdom this year said it will require all companies to report greenhouse gas emissions. The United States is working through its own federal regulations, which are part of the Environmental Protection Agency's rules on greenhouse gas reporting and are aimed at reducing emissions of six gases from large industrial facilities such as factories and power plants as well as automobile tailpipes.

Industry ecosystems are driving reporting efforts as well. In July 2012, for example, the United Nations-led Food Agriculture Organization (FOA) announced an initiative to study ways for improving how the environmental impacts of the livestock industry are measured and assessed within livestock supply chains. The project includes the establishment of guidelines on how to quantify livestock's carbon footprint and a methodology for measuring other important environmental pressures, such as water consumption.

Industry initiatives like the CDP are providing companies with a platform on which to devise and build their greenhouse gas emissions reporting initiatives. Launched in 2000, the CDP is designed to improve how companies and cities measure, disclose, manage and share climate change and water information, all with the goal of accelerating solutions to stem the impact of climate change. Another non-profit, the Global Reporting Initiative (GRI), is providing companies and organizations with a comprehensive sustainability reporting framework aimed at promoting economic, environmental and social sustainability.

Monitoring and reducing carbon footprints also makes good business sense. Not only does it help eliminate waste and reduce costs internally, it can also help companies choose more efficient business partners and better mitigate risks caused by sudden changes in energy and fuel prices. Lower carbon footprints also can improve corporate brands, and companies can gain an advantage over competitors by providing comprehensive emissions information.

The metrics used to determine the environmental impacts of supply chains include water use, energy use (gas, electricity, etc.), waste that is produced, and emissions. Those metrics need to be examined more closely as well. For example, is any of the energy used renewable? Are the emissions toxic? Is waste recyclable, or is it hazardous? It isn't likely that companies will be able to create a list of all the metrics and then check them all off. What's important is to evaluate the metrics, determine ideal baselines and then optimize those areas that align best with goals and requirements while holding all the others as close to the baselines as possible. The same holds true when evaluating overall supply chain performance goals. Companies need to look holistically at the supply chain to balance any trade-offs that will have to be made.

Companies can rely on internal management controls to assess and document their supply chain optimization efforts and better understand the trade-offs they make. External controls - such as the reporting requirements from government entities and industry - do not yet require companies to delineate the trade-offs made as they work to reduce their carbon footprints and become certified as carbon neutral operations.

It is expected, however that the future of public reporting will have a much greater focus on transparency. The continued push for corporate social responsibility (CSR) reporting is one such indicator. The Dow Jones Sustainability Index defines CSR as a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments. The GRI's sustainability reporting framework, too, looks more broadly at an organization's economic, environmental, social and governance performance and organization's ability to maintain that performance. Establishing a sustainability reporting process, according to the GRI, helps organizations set goals, measure performance, and manage change, and is a key platform for communicating positive and negative sustainability impacts, including trade-offs.

There's no question organizations must assess, evaluate and optimize their supply chain operations and reduce their supply chain's carbon footprint. Government and industry are forcing the issue; today's customers like green business; and, optimized supply chains with smaller carbon footprints are more efficient, less costly and less beholden to sudden changes in energy and fuel prices. But organizations do need to understand that an improvement in one supply chain may adversely impact another. Careful analysis of all trade-offs during optimization is necessary in order to ensure the best possible outcome.

Source: FirstCarbon Solutions


Keywords: supply chain management IT, logistics & supply chain, green supply chains, sustainable supply chains, Carbon Disclosure Project, sustainable logistics operations

Consider, for example, a choice to work with a supplier that's offering less expensive goods. End customers likely will be happy, because such a choice saves money that then can be passed on to them. But what if the supplier uses a specific coal, for instance, to power its operations, a measure that impacts the supply chain's overall carbon footprint, as well as the procuring company's footprint? There are even trade-offs that have to be made within carbon indicators. One potential supplier might use oil to heat facilities, while another uses gas. The burning of natural gas produces nitrogen oxides and carbon dioxide, but in lower quantities than burning coal or oil, according to the United States Environmental Protection Agency (EPA).

What's critical is that companies determine the best supply chain measures that meet their requirements and strategic goals, and then analyze and compare those measures to understand if - and where - any trade-offs might occur. Through life cycle assessments that leverage what-if scenarios, modeling and risk/opportunity matrices, companies can strike the right balance as they optimize supply chain operations and reduce their supply chain's carbon footprint.

It is well-documented that supply chains weigh heavily in an organization's overall greenhouse gas emissions. On average, 75 percent of an industry sector's carbon footprint is attributed to the supply chain, according to a 2009 article on enterprise carbon footprinting written by Y. Anny Huang, a postdoctoral fellow at Carnegie Mellon University (CMU) and CMU professors Christopher L. Weber and H. Scott Mathews. The not-for-profit Carbon Disclosure Project (CDP) found, in its 2011 Supply Chain Report that more than 50 percent of an average corporation's carbon emissions comes from the supply chain rather than operations within its own four walls.

The need to optimize supply chains so emissions can be lowered is being driven by a number of factors. Governments are enacting mandates. For example, the United Kingdom this year said it will require all companies to report greenhouse gas emissions. The United States is working through its own federal regulations, which are part of the Environmental Protection Agency's rules on greenhouse gas reporting and are aimed at reducing emissions of six gases from large industrial facilities such as factories and power plants as well as automobile tailpipes.

Industry ecosystems are driving reporting efforts as well. In July 2012, for example, the United Nations-led Food Agriculture Organization (FOA) announced an initiative to study ways for improving how the environmental impacts of the livestock industry are measured and assessed within livestock supply chains. The project includes the establishment of guidelines on how to quantify livestock's carbon footprint and a methodology for measuring other important environmental pressures, such as water consumption.

Industry initiatives like the CDP are providing companies with a platform on which to devise and build their greenhouse gas emissions reporting initiatives. Launched in 2000, the CDP is designed to improve how companies and cities measure, disclose, manage and share climate change and water information, all with the goal of accelerating solutions to stem the impact of climate change. Another non-profit, the Global Reporting Initiative (GRI), is providing companies and organizations with a comprehensive sustainability reporting framework aimed at promoting economic, environmental and social sustainability.

Monitoring and reducing carbon footprints also makes good business sense. Not only does it help eliminate waste and reduce costs internally, it can also help companies choose more efficient business partners and better mitigate risks caused by sudden changes in energy and fuel prices. Lower carbon footprints also can improve corporate brands, and companies can gain an advantage over competitors by providing comprehensive emissions information.

The metrics used to determine the environmental impacts of supply chains include water use, energy use (gas, electricity, etc.), waste that is produced, and emissions. Those metrics need to be examined more closely as well. For example, is any of the energy used renewable? Are the emissions toxic? Is waste recyclable, or is it hazardous? It isn't likely that companies will be able to create a list of all the metrics and then check them all off. What's important is to evaluate the metrics, determine ideal baselines and then optimize those areas that align best with goals and requirements while holding all the others as close to the baselines as possible. The same holds true when evaluating overall supply chain performance goals. Companies need to look holistically at the supply chain to balance any trade-offs that will have to be made.

Companies can rely on internal management controls to assess and document their supply chain optimization efforts and better understand the trade-offs they make. External controls - such as the reporting requirements from government entities and industry - do not yet require companies to delineate the trade-offs made as they work to reduce their carbon footprints and become certified as carbon neutral operations.

It is expected, however that the future of public reporting will have a much greater focus on transparency. The continued push for corporate social responsibility (CSR) reporting is one such indicator. The Dow Jones Sustainability Index defines CSR as a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments. The GRI's sustainability reporting framework, too, looks more broadly at an organization's economic, environmental, social and governance performance and organization's ability to maintain that performance. Establishing a sustainability reporting process, according to the GRI, helps organizations set goals, measure performance, and manage change, and is a key platform for communicating positive and negative sustainability impacts, including trade-offs.

There's no question organizations must assess, evaluate and optimize their supply chain operations and reduce their supply chain's carbon footprint. Government and industry are forcing the issue; today's customers like green business; and, optimized supply chains with smaller carbon footprints are more efficient, less costly and less beholden to sudden changes in energy and fuel prices. But organizations do need to understand that an improvement in one supply chain may adversely impact another. Careful analysis of all trade-offs during optimization is necessary in order to ensure the best possible outcome.

Source: FirstCarbon Solutions


Keywords: supply chain management IT, logistics & supply chain, green supply chains, sustainable supply chains, Carbon Disclosure Project, sustainable logistics operations