Flooding in Germany and Belgium claims at least 70 lives and a ‘heat dome’ sitting over Northwest America proves even deadlier. These may be only some of the most recent headlines, but most would accept that the increased incidence of such extreme weather events reflects the impact of climate change.
With an estimated 80 percent of global trade passing through supply chains, this is one of the most critical areas for businesses to make a positive impact. Our awareness of global supply chains has never been greater. Images of a stricken container ship in the Suez Canal, almost daily reports of semiconductor shortages, concerns around supplies of food and other essentials, issues with customs administration at UK borders; the list seems to keep growing.
We are now starting to recognize that many modern supply chains are:
- long, often involving extended lead times and great distances
- multi-layered, with complex networks of suppliers
- opaque, despite ever-greater data capture, with provenance uncertain and stock consignments difficult to track without benign conditions
The decades-long pursuit of cost efficiencies has seen the development of supply chains that stretch across geographic, industry, cultural and regulatory boundaries. Whilst it is not always clear that the true trade-offs between service, cost, and capital have been quantified, in many instances the scale of cost savings has contributed handsomely to profits. As wage aspirations increase however, some unwinding of cost advantages is already underway.
Many businesses have made environmental, social and governance (ESG) policy statements; the real challenge is to turn words into action whilst delivering to profit and growth expectations. For any business designing, making, or selling goods, the supply chain is by far the biggest opportunity for making a difference. Outsourcing operations does not translate to outsourcing responsibilities or risks. Here we discuss how developing sustainable supply chains can not only support ESG commitments but also drive profitable growth.
Re-thinking the supply chain
Many of the resources we rely on are either finite or are constrained by the speed of renewal. Actions taken to reduce the consumption of raw materials and the resources used in production and distribution activities are fundamental.
Concepts such as design for manufacturing and logistics have focussed on cost efficiencies. Applying an adapted mindset of design for sustainability can, for example:
- introduce and develop the use of recycled materials
- enhance operating efficiencies in production and logistics processes
- convert waste to by-products
- support end of life recovery of components and materials to drive circular flows
Product stewardship, either driven by government regulation or voluntary codes, is extending the frame of reference for designers and the development of effective and efficient networks for the recovery and processing of products and materials can turn an obligation into an opportunity. We are seeing business models adapt from ownership to access in sectors such as automotive and medical equipment as well as established examples in music and entertainment.
Design thinking applied to the supply chain is essential, with continuous developments and adaptations building on platforms that foster growing sustainability. More fully exploring the situation can raise new perspectives and opportunities; the actual ‘problem’ is often broader, more nuanced, or different from that originally assumed.
Assessing the footprint of products or services, using techniques such as Lifecycle Assessments, can help to build understanding and trigger more diverse thinking. At the very least, this approach will highlight knowledge gaps about the supply chains running through your business. There are several respected certification schemes that can provide frameworks for action, for example, B Corp and sector-specific schemes such as the Higg Index for apparel.
Certification could infer an audit approach to suppliers. In many instances, seeking out opportunities to collaborate in new ways can yield significant mutual benefits. Improved asset utilization, including through shared use, and improved information flow, allowing inventory reductions, are common tangible benefits.
A supply chain re-design could take collaboration a stage further with symbiotic relationships. Industrial symbiosis is defined as ‘the process by which wastes, or by-products of an industry or industrial process, become the raw materials for another’1. This could be an important dimension when considering the location of operations and looking for potential clusters in new geographies.
We are already experiencing some defining trends:
- growing demand and competition for key materials, leading to scarcity that drives innovation
- businesses (and countries) needing to innovate at pace
- human capital as the critical resource
There are many compelling reasons to address the social and environmental impact from supply chains, not least that it is simply the right thing to do and can further invigorate the purpose of the business. Building a strong business case can drive commitment and define priorities.
Making the business case
Taking a systematic, structured approach that aligns key operational performance measures to return on investment (ROI) is fundamental. It can show how the day-to-day operations of your business determine financial results, help identify the best opportunities to improve, and support targeted development efforts.
We will now explore some of the key dimensions of supply chain management that influence financial results. Any review should start with the customer, before considering cost and capital efficiencies.
It is difficult to grow revenue if stock is not in the right place at the right time. Building a supply chain that balances efficiency with resilience is founded on a clear understanding of demand and the expectations and values of customers. ‘One size does not fit all’; high volume, stable demand lends itself to a lean operating model whilst more volatile demand is best served by agile operations and a responsive supply chain. Options for adapting supply chains include postponing final product configuration until actual demand is better known and locating these activities close to the customer or, at the very least, balancing the supply chain with base volumes supplied to a stable plan and a flexible approach used at short lead times as total demand crystallizes.
Re-configuring operating models in this manner supports the inclusion and progressive development of circular flows and the integration of recycled materials. Depending on the specific sectors and nature of the materials involved, this may inherently require more local operations.
Creating transparency in the supply chain and giving confidence to the provenance of both products and manufacturing processes is increasingly important to corporate reputation and customer loyalty. Taking steps that foster sustainability have the potential to both enhance service and customer relationships.
Turning apparent waste into by-products or reusable resources can also bring additional revenue streams.
Product costs are vulnerable when finite or constrained supply materials are part of the mix. Actions that reduce such dependencies, using recycled materials or recovering materials at end of life, can help to mitigate cost developments. Product designs and specifications that improve the management of waste can have significant impact, not least from reducing disposal costs.
The process-related costs of planning, sourcing and logistics operations are often overlooked. In many instances, simply identifying and analyzing these ‘indirect’ costs will reveal significant opportunities for improvement. Reducing energy consumption, switching to renewables, reducing emissions, and eliminating waste, can be important ways of improving cost performance.
A clearly defined strategy and program to improve sustainability can play a key role in attracting and retaining talent. Reducing staff turnover and the associated costs should not be an underestimated benefit.
How inventories are planned and managed plays a critical role in determining working capital requirements. Re-thinking supply chain configurations impacts inventory across several forms: finished product ready for sale, sub-assemblies requiring final configuration or components requiring processing to end state and assembly. A shift to more distributed, local operations may on the one hand reduce lead times whilst increasing the number of stockholding locations. Combined with managing stocks of recycled materials, a detailed evaluation is needed to fully assess the impact on inventory of operating on a more sustainable footing.
The concept of ‘postponement’ has been applied in many sectors; that is, gearing the supply chain to prepare finished items when true demand (actual customer orders) is known and thus reducing or eliminating the need to estimate or forecast demand for finished products. Forecasts by their nature are wrong and safety stocks must be held to account for this and to maintain service to customers; any steps that reduce reliance on forecasts provide a route to reducing inventories, particularly when a reasonable proportion of components can be shared across a range of possible finished items.
The level and utilization of assets employed in the supply chain plays a critical role in capital funding requirements. Time wasted on the production of excess safety stock, or consumed by frequent plan changes and expediting, are the red warning lights of disjointed supply chain management and may tie up capital unnecessarily in assets. Understanding asset utilization and exploring opportunities for shared use form a good starting point to assess sustainability. Clearly defining the interplay between asset efficiency and inventory deployment can also help to highlight the scale of the trade-offs involved in decision making and support the specification of a revised supply chain set up.
In some ways perhaps a less tangible, but nonetheless pivotal, benefit of pursuing sustainability in supply chains is the mindset change this can release in the business. In evermore demanding markets, combining creativity and data analysis can drive innovation and set in play culture of constructive challenge and continuous improvement.
No aspect of a supply chain operation acts in isolation. Taking a systematic, structured approach to understanding how supply chain sustainability can drive financial results will allow your business to manage trade-offs, identify opportunities and prioritize actions.
Calum Lewis, Founder and Principal Consultant, OP2MA