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Yes, the chain of all goods and services leads to the consumer at the very end. But a chain is linear and has links above and below it. Modern structures of supply chains are more like a dynamic and connected web, or network, of organizations operating between raw material supply, manufacture, distribution, retail and customer.
Supply chains go way beyond manufacturing, for example, and include functions such as demand forecasting, purchasing, customer relationship management and logistics (which is not only about the transportation and storage of goods and services, but also inventory management and packaging). The supply network of a winery, for example, includes not only the vineyard, warehouse, distributor, retailer and consumer, but also features a number of inter-dependent partnerships, including bottle-makers, tasting rooms, restaurants and third-party logistics companies.
The larger and more international in scope the supply chain, the more complex this network of organizations becomes.
The demand for a number of different models of procurement adds an extra layer of complexity too, with multinationals often combining direct-sourcing models (direct contractual relationships with core suppliers) with indirect sourcing (working with agents placing orders with preferred suppliers) and local market production (to seize short-term opportunities in their local markets – to either satisfy niche market trends or react to local trade regulations). The globalization of supply chains has created a range of different types of suppliers – from main suppliers with contracts, and subcontractors, to material and other service providers, licensees and agents acting as intermediaries to source product manufacturing, manage manufacturing processes, and sell finished goods, for example.
These networks are often hugely complex, presenting significant risk to companies that rely on a large number of suppliers. It is only by understanding this bigger picture that companies are able to drive sustainability improvements across their value chains.
A recent study by Oxford University’s Said Business School found that the European grocery industry could save up to $38.3bn by normalizing best practice in energy, waste and water management – essentially doing simple, low-cost things that have been proven to work within the sector.
That figure is around 3 percent of the sales value of the sector in Europe – or close to the pre-tax profits of most large food retailers.
Working in Silos
It concluded that the waste and inefficiency of the sector was a result of companies operating in silos – and failing to take advantage of the fact that they form part of a network of organizations. The study pointed to the example of a loose, fresh potato buyer operating within the supply chain of one of the UK’s biggest supermarket retailers. Typically, the buyer would purchase high-quality potatoes that met a certain standard for shape and size. However, its definition of “quality” meant leaving up to 30 percent of any crop to rot in the field.
In the same building – on the same floor, in fact – another company was buying ready meals that often contained mashed potatoes.
You can see where this is going. The company in question made the decision to switch to buying the loose potato farmer’s entire crop – and now sells all the small, ugly and odd-shaped potatoes to the ready meal manufacturer. The result: one third less waste.
“We have become organizations of specialists that are very efficient at specific tasks, but the byproduct of specialization is that we have become siloed and we lack real visibility within our supply chains, so we often miss the big picture,” says Martin Chilcott, CEO of 2degrees, which commissioned the study.
Access to data and the use of software tools that can give this broader perspective and deeper insight into expanding supply webs will be crucial. According to Deloitte’s 2015 supply chain survey, just 46k percent of respondents rated their analytics competencies as currently very good, while 67 percent expected them to become more important in the next five years.
Supply chain software can offer companies a centralized way to collate and manage data, and report on the sustainability performance of suppliers.
Users can invite their suppliers to answer a series of questions and log their environmental impact reduction efforts – and the software can automatically analyze the responses and identify areas where improvements and savings can be made. Plus, intuitive drill-down tools offer the chance to explore the detail behind top-line numbers and compare performance across different countries, divisions or sectors. And specialist charts help you to visualize what your supply chain really looks like, where supplier relationships cross over and highlight “hot spots” in the network where you might need to work more closely with suppliers to resolve any issues – or, crucially, encourage suppliers to work together and share best practice.
Companies making use of this technology are enabling connections to be made across complex groups of suppliers – and helping to shift from a siloed supply chain to a connected value web of organizations. Here, operational managers are able to make resource efficiency improvements by learning from one another about the latest energy or waste-saving processes and technologies. They can increasingly feel more comfortable about sharing assets like recycling plants or distribution centers – and getting economies of scale for their efforts.
And, as the aforementioned potato buyer’s predicament attests, there is real value in suppliers sharing wastes and resources where appropriate. After all, one company’s waste is another’s treasure (or raw material of choice).
With more and more carbon emissions and other environmental impacts lying outside of the direct control of most large businesses (less than 10 percent, in many cases), the need to understand and influence the network of organizations that make up your supply base is more pertinent than ever. With more than $38bn in efficiencies savings on offer in the European food supply base alone, just imagine what other savings could be made in sectors and geographies less renowned for driving down costs – savings that could be unlocked by companies having a true understanding of what their supply network looks like, and enabling it to work together to improve the sustainability of companies at scale.
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