GETTING GREEN RIGHT

Logistics Insight Asia, 1/7/2008

While the call for green logistics has never been louder, there are a still a number of challenges that need to be overcome before good intentions translate to less carbon.

DAVID SIMCHI-LEVI.

In recent years, four main market trends have come to the fore within the supply chain management industry: end-to-end supply chain optimization; rising energy costs; implementing stronger risk management policies; and green logistics.

The latter of these, which concerns the need to reduce the "carbon footprint" from logistics operations, has infused its way onto the market's agenda and arguably become one of the main priorities for supply chain executives. They see green as an important consideration for longterm competitive strategy - because of competitive pressures, tax breaks, the rising costs of power generation and usage, and the fact that future green legislation is not likely to be too far off and so planning now for anticipated market developments constitutes a solid risk management approach.

When developing a green strategy, the ability to appreciate the carbon footprint of the entire supply chain and to make strategic decisions based not only on cost are important considerations given the current environment which either penalizes or does not tolerate the environmental damage infl icted by the production and transportation of goods.

TOWARDS REALITY

There are a number of challenges that the industry still needs to overcome for green supply chain management to become a reality.

The first of these is the lack of technology to support companies in their efforts to become green; there is a dearth of standardized, comprehensive and up-to-date data against which companies can benchmark themselves. Secondly, companies typically lack the business processes required to enable the supply chain to use the data and technology effectively. Finally, there is the trade-off between "green" requirements and "lean" practices which have perpetrated the industry in recent times, including in the Asia Pacific where resources and time are sometimes scavenged in order to achieve manufacturing throughput and customer demands.

Lean provides the ability to work in small batches, thereby making manufacturing and the supply chain more efficient. At the same time, however, such an approach may result in more frequent transportation shipments or product line switchovers, which will lead to higher carbon emissions. A similar argument could be used for outsourcing which can see parts of the manufacturing process transferred to plants on the other side of the world, only for the products to then have to be transported back for the next part of the process.

In order to overcome these challenges, companies are increasingly looking at network design and planning systems that incorporate a carbon footprint element.

Typically, such solutions provide the ability to incorporate standard (default) data on carbon emissions in plants, warehouses and various modes of transportation, helping companies to assess carbon emission levels of different supply chain configurations. Users can also optimize their logistics network by incorporating caps on carbon dioxide, imposed by government regulations, such as the Kyoto Agreement, or through supply chain partners' scorecards.

An interesting characteristic of network optimization is that there are many solutions around the optimal that are very close in total cost. This provides an opportunity to look at solutions that satisfy other criteria such as providing redundancy for risk management or enabling a lower carbon emission footprint. As a result, decision makers can truly understand the cost impact of the various options when analyzing their supply chain.

CHANGE CATALYST

Wal-Mart has become an important catalyst for change in the US through its policy of requiring supply chain service providers to reduce their carbon footprint. The strategy was first put in place in October 2007, when the retailer started to rate its providers' performance on an environmental scorecard that includes fuel use, facilities and equipment.

A recently reported success story from this strategy is Wal-Mart's 3PL provider in Canada, which has changed the way it ships products to ten stores in Nova Scotia and Prince Edward Island from road to rail. As a result, carbon emissions were reduced by 2,600 tons. In addition, the 3PL provider converted 20 truck generators to electric power, saving about 10,000 gallons of fuel. These two measures combined are expected to yield more than US$2 million in annual cost savings.

It is clear that the industry has reached a turning point - green logistics has become a crucial key performance indicator within business. In response, companies will need to invest in the right solutions but also review traditional supply chain strategies such as lean and offshoring which are not fully sustainable in the new green environment.