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Sustainability initiatives are gaining traction with manufacturers. Driven by anticipated regulations, consumer demand and brand image pressures, companies of all sizes are extolling their environmental and corporate social responsibility (CSR) programs. On the flip side, the consequences of not being socially responsible or not environmentally friendly can be harsh. Tony Hayward, BP's recently expelled CEO, can attest to that.
Most sustainability efforts today are focused around environmental and social initiatives, such as recycling, reducing resource usage, controlling emissions and contributing to the community - with limited emphasis on the economic aspects of these initiatives. However, even the most well-intentioned social initiatives have associated costs and can only be feasible in the long term if they are economically viable.
Challenged by current economic pressures and operating under razor-thin margins, manufacturers are struggling to balance the market demand for social responsibility with the crucial business goal of profitability. In many ways, the answers can be found within the supply chain data in your transactional and operational systems.
By harnessing this data and applying advanced analytic techniques such as statistical analysis, forecasting, predictive modeling and optimization, industry leaders can not only improve the efficacy of supply chains but also make huge strides in the pursuit to be green.
The real challenge lies in where to start. Faced with many opportunities to improve supply chain operations and limited by budget constraints, first steps can be daunting for supply chain professionals. Following is a list of 10 key initiatives that can put you on the path to becoming a leaner and greener organization.
Demand-driven forecasting. The revenue- and margin-related perils of overstocking and understocking merchandise are well known, including inventory carrying costs, excess material costs, obsolete stock, lost sales and customer dissatisfaction. But the impact on the environment is rarely discussed. Overstocks or understocks have huge implications for sustainability. Overstocks result in unnecessary resource use, higher energy consumption in production and storage of excess units, and recycling or disposal costs for obsolete stock. Understocking, on the other hand, can result in expediting and airfreighting merchandise from suppliers, ultimately increasing your carbon footprint. By accessing and understanding consumer demand signals and analyzing how sales and marketing strategies affect demand, companies can more accurately forecast demand to produce what is required. The results? Higher profitability, improved customer satisfaction and reduced carbon footprint and waste.
Integrated planning across divisions. Collaboration among sales, marketing, finance, operations and demand-planning divisions of the organization is crucial for delivering the right product mix in the right quantity at the right location. Lack of integrated planning can not only result in lost sales but can have a huge "green" impact. Take the example of a large consumer packaged goods manufacturer whose marketing department decided to run a promotion on the West Coast without realizing that the West Coast production plant was shut down for maintenance. To fulfill demand, the company ended up shipping products from its East Coast facility, resulting in complete erosion of profits as well as increasing its carbon footprint.
Optimized inventory. Once demand is forecasted and goods are produced, ensuring that these goods are placed at the right location, in right quantities, within your distribution network can be a challenge, with implications for both bottom line as well as sustainability. By optimizing inventory across multiple echelons in the distribution network, you can reduce safety stocks, stock only what is necessary, and reduce waste due to spoilage, obsolescence and shrinkage. Recycling excess materials is not required as they are just not consumed.
Network planning. Distribution network optimization - which involves shipping and delivery - is a primary area of focus for industry leaders due to its huge impact on both distribution costs and sustainability. By optimizing the distribution network, companies such as MillerCoors have reportedly cut 45 million truck miles traveled in a year, reducing carbon emissions by 75,000 metric tons.
Quality Improvement. Quality improvement initiatives, which address product quality as well as the quality of manufacturing processes, can help reduce scrap, improve yield and improve the consistency of the manufacturing process. Results include lower inventory levels, reduced or eliminated product recalls, reduced energy and material consumption, and all the associated benefits of improved profitability and sustainability. Imagine the impact on energy consumption and carbon emissions when POSCO, the world's largest steel manufacturer, uses quality improvement to reduce its inventory by 60 percent from 1 million tons to 400,000 tons.
Supply base optimization. Suppliers are an integral part of your value chain. Partnering with good and weeding out bad suppliers is essential for survival. Analyzing spending and evaluating suppliers to understand who your top suppliers are and what their environmental and CSR policy is, in addition to traditional financial and performance-based measures, can help mitigate supply chain risk. Industry leaders, such as Procter & Gamble, IBM, BASF and most notably Wal-Mart, have made supplier sustainability integral to their sourcing processes.
Supply chain visibility. Supply chains are riddled with disruptions. Weather, supply shortages, quality issues, supplier delays and transportation issues all can ruin your well-laid plans. Visibility to raw materials, Work in Progress inventory and finished goods, as they move from suppliers, to production, to distribution centers, and finally to customers, can help you plan for those disruptions. Improving efficiency of the supply chain leads to huge cost and green benefits. Imagine if you could improve on-time delivery from 85 percent to 95 percent like Klune Industries, minimize reordering of duplicates and eliminate transshipments and expedited orders.
Predictive vs. preventive maintenance. Asset-intensive industries spend huge amounts of money in maintaining those assets to get optimal performance. Any unexpected breakdown or suboptimal performance can cost millions of dollars in terms of lost uptime, poor fuel efficiency and even increased emissions, in addition to the costs associated with emergency fixes. The ability to access and analyze diagnostics data from remote sensing devices can enable companies to detect emerging issues earlier and determine root cause to reduce and even plan for such events. The result: Reduced breakdowns, optimal fuel consumption and energy efficiency, reduced instances of expedited parts for break-fix, and in general reduced scrap from optimal asset performance.
Harmonized processes and systems. Supply chains are complex, global and interconnected at times with very inefficient processes. Compounding the problem are archaic legacy systems that don't talk to each other, organizational silos and turf battles that make information sharing difficult - causing ineffective decision making, waste and energy inefficiencies. Imagine the savings and waste reduction if product failure data from the field can be used to determine root causes early enough to make changes in the design and production phase.
Global infrastructure and production network. Manufacturing companies have done a good job of establishing production facilities and sourcing centers in some of the emerging markets, but as they enter these markets as a new source of revenue, they still have a long way to go in terms of establishing distribution and service infrastructure. Consider the carbon footprint of a North American manufacturer of consumer electronics that serves its Asian and European customers out of its home base. While building facilities closer to these new markets has upfront costs, it can go a long way in improving customer satisfaction and sustainability.
Green and sustainability initiatives adopted by most companies today veer toward more popular approaches, such as recycling, packaging for the environment and alternative energy sources, rather than focusing on operational efficiency. Companies need to realize that the real opportunity for profitability, as well as environmental guardianship, lies in increasing the efficiency of supply chain operations. Avoiding material consumption at the front end is more effective than trying to efficiently dispose of the product afterward.
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