Analyst Insight

Supply chain sustainability, which includes creating environmentally friendly or "green" supply chains, will gain momentum in 2008. Wal-Mart outlined its supply chain sustainability vision and objectives about two years ago, in a speech presented by Lee Scott titled "Twenty First Century Leadership." Other companies, particularly in Europe and in the high-tech industry, were already making inroads in this area, driven to action by regulations such as Restriction of Hazardous Substances. But Wal-Mart's ambitious goals rippled through the supply chain industry, as well as the mainstream media, due to its massive size and influence. Today, you can't pick up a business or trade publication without at least one article about the benefits of "going green.
-Adrian Gonzalez, director at ARC Advisory Group

Most companies are still in the early stages of launching a "green" initiative, but with the price of oil approaching $100 a barrel and other driving forces (regulations, mandates, investors, etc), "green" will be in fashion again in 2008. ARC's research has identified several key takeaways that companies embarking on this journey should consider, including:

• Companies have to consider sustainability at the design phase, both product design and network design, in order to achieve the greatest benefits. Unfortunately, most consumer products are designed with the assumption that they'll be thrown away someday. Designers would certainly make different decisions and material selections if companies had to take the product back at the end of its useful life, disassemble it, and re-introduce the materials into manufacturing or nature. Similarly, carbon footprint reduction has not been a consideration for most companies when designing their supply chain networks. It's highly unlikely that any company would optimize its network based solely, or primarily, on lowest carbon footprint, but by understanding the trade-offs, companies may reach different decisions and prevent sustainability constraints from being "designed into" the network.

• Being "less bad" is not the same as being good. This is a key message of the influential book "Cradle to Cradle: Remaking the Way We Make Things" by William McDonough and Michael Braungart. Most corporate sustainability reports highlight year-over-year reductions and long-term targets for carbon dioxide emissions, energy consumption, and other metrics. But focusing solely on reductions and recycling, while important and necessary, is not enough. Companies also have to "think different" and address sustainability not within the confines of existing supply chain processes and constraints, but by designing completely new processes and ways of working that are inherently sustainable.

• More work is required on global standards and metrics. There are already standards in this area, such as ISO 14000, but differences still exist between industries and countries, particularly with regards to calculating carbon footprint, a challenging task for companies with a multi-tiered global supply chain. How far back into their supply chains should companies go? Does HP, for example, have to track the carbon emissions involved in converting sand into silicon? And how do you get this data from vendors in places like Vietnam?

The Outlook

In the near term, in addition to complying with mandates and regulations, most companies will focus on the low-hanging fruit: continuous improvement initiatives, driven primarily by cost reduction or productivity improvement objectives, which can also be viewed from a green perspective. For example, the reason most companies implement a transportation management system is to reduce their transportation costs. It just so happens that load consolidation and route optimization translate into fewer trucks on the road, driving fewer miles, consuming less fuel, and emitting less carbon dioxide. Supply chain management software vendors, particularly those with network design solutions, will add "carbon footprint" functionality to their solutions, and logistics service providers will also introduce "green" services. Longer term, progress in supply chain sustainability will depend on governments, the development of globally accepted standards, and consumers. Are we willing to pay more for green products? At the end of the day, consumers vote with their wallets; if we don't change our buying decisions, why should companies change their practices?