With the approaching threat of damaging climate change, and a growing understanding of the need to develop resilience and sustainability, traditional supply chains must evolve to meet the needs of a low-carbon economy, writes Felicia Jackson
Development of global supply chains has been about enhancing productivity, eliminating waste, removing duplication and driving cost improvements. But the very fact of driving operational efficiencies and keeping supply chains lean has meant exposure to a new range of risks, such as the use of single suppliers.
In 2011, for example, Dell was forced to issue a profit warning after the Thai floods, as the region was a key production hub for much of the global computer industry.
Sandeep Kumar, vice president and head of business consulting at ITC Infotech, warns: “The slowing down of economies, natural disasters in the Far East and emerging environmental regulations in different parts of the world have all contributed to corporates having another look at their supply chain risk mitigation strategies.”
Gary Hanifan, managing director of strategy at Accenture, adds: “Supply chain risks generally fall into three categories: physical, such as earthquakes, floods and so on; regulatory, which varies from country to country; and other risks that can stem from changing consumer behaviour and fluctuating socio-economic conditions.”
FOUR RISK EXPOSURES
What’s important to understand is where these risks lie within a particular supply chain. There are four main areas where companies need to explore their risk exposure: sourcing and raw materials; manufacturing and production; distribution; and, increasingly, lifetime product impact.
For many companies, risk and potential exposure lie outside their direct control. Luxury brand PUMA, in the development of its environmental profit and loss accounts, learnt that the bulk of the company’s ecological impact was within its supply chain with only a small percentage of overall impact being under direct control. BT has similarly estimated that 90 per cent of its impact lies within its supply chain.
Carbon emissions are becoming a strategic issue and more institutionalised, including linking them to remuneration
Dexter Galvin, head of supply chain at CDP, says: “The complexity of the supply chain means companies must have a handle on the suppliers who are managing the process on their behalf.” Increasingly, this is resulting in closer co-operation across the supply chain, and many leading companies are rewarding compliant suppliers with longer contracts and better terms. This shared-value model is increasingly being taken up by companies such as Marks & Spencer, Unilever, Nestle, Diageo and Reckit, to name a few.
Increasingly, there are issues around sourcing and raw materials. Recent research by Asda, for example, has shown that 95 per cent of its fresh produce is at risk from the impacts of climate change, with a third at high risk. And access to resources is going to have a growing impact on a range of industries. According to Janez Potočnik, European Commissioner for the Environment, demand for food, feed and fibre is set to grow by 70 per cent up to 2050.
Transparency is another concern, especially in manufacturing and production. Disturbingly, the Rana Plaza collapse in Bangladesh occurred despite reports that at least two factories within the building had passed international labour and safety standards. The European Union’s horsemeat scandal showed how lack of accountability can result in disaster. Between an animal’s birth and it ending up in food, there are hundreds of critical control points, including abattoir, processing plant and point of packaging, and problems can occur at each of them.
Traditionally, one of the easier areas of carbon impact to assess is the logistics and freight industry where there are major efficiencies to be achieved. Ian Baxter, managing director of Baxter Freight, says: “There is huge scope for cutting empty space.” Switching fuels, changing packaging, and increased efficiencies in loading and scheduling, as well as modal shifts from air to sea and rail, all contribute.
Chris Kingshott, managing director for manufacturing at supply chain specialists Wincanton, says that they’re even seeing an increasing interest in competitors sharing footprint and finding synergies.
Razat Gaurav, international senior vice president at supply chain management company JDA, adds: “What we’re finding across our customers is that the topic of carbon emissions is becoming a strategic issue and more institutionalised, including linking emissions to remuneration. And that’s where the rubber hits the road, literally and metaphorically.”
It’s necessary to understand where the greatest carbon impact for a product might lie. Distribution and delivery is often considered a significant contributor to emissions, but can often be responsible for no more than 5-10 per cent of lifetime emissions.
Guy Battle, founder of the Sustainable Business Partnership, believes that we need to see a shift from thinking solely about supply chains to a lifetime assessment model, especially as that should encourage further work on lifetime impact and end-of-life management. He believes organisations need to think in more detail about the closed-loop economy and how to integrate the concept into our supply.
Jim York, vice president for Go Green at DHL, the world’s largest logistics company, says: “The onus is on manufacturers and suppliers to recycle, but logistics could be the DNA of the circular economy.”
Changing demographics and population growth will impact supply chains, yet carbon plays a critical role as an indicator. Mr Battle adds: “Sustainability is important from a cost perspective: reduce carbon – reduce cost – reduce risk.”
The CDP Global Supply Chain Report 2014 found that climate change tends to be viewed as a current or future risk by 72 per cent of the 2,415 respondents. It also found physical climate risks were a greater driver of investment than policy, with 73 per cent of 678 companies reporting they had invested in emissions-reduction initiatives, but only 18 per cent seeing regulation as a risk for which they needed to prepare.
Respondents may not yet be concerned about regulation, but that could be about to change. One of the challenges many face is that, having outsourced their emissions to the developing world, many countries are implementing their own emissions regulation. China, for example, which was shown to account for one third of the UK’s emissions in 2008, has already started to manage its emissions profile and this is likely to have a swift impact on the global market.
Mr Battle points out: “Carbon is one lens, but it shouldn’t be the only one.” Cost and reputation management are the principal concerns of corporates, and ensuring an in-depth understanding of carbon hotspots can help companies to understand their vulnerabilities.
But issues around water and materials, as well as wider economic and social impacts, are equally important. Myles McCarthy, director of implementation at the Carbon Trust, says that working with suppliers can be a good way to bring like-minded people together and explore common goals. “We’re seeing that evolution happen in the private sector,” he says.
Effective analysis of the supply chain can provide a strategic tool for understanding the risks and opportunities a company faces – and may prove to be a key to long-term competitiveness.