Greening the Supply Chain

Firms across the supply chain need to develop better coordination mechanisms and move away from arm's-length to longer-term relationships.

Introducing environmental considerations to a firm's supply chain often can be a source of innovation and competitive advantage. It also can be a huge challenge, since tasks within a supply chain are interlinked. One sustainability initiative may have ripple effects not only within the firm, but also across firm boundaries and geography. In the following Q&A, Ravi Anupindi, program director of the Master of Supply Chain Management Program at the Ross School of Business at the University of Michigan, assesses the risks and benefits of greening a company's supply chain. Anupindi is a Michael R. and Mary Kay Hallman Fellow and associate professor of operations and management science at Ross.

Q: What defines a green supply chain?

Anupindi: The classic model consists of the following phases: plan, buy, make, move, and sell. When you take environmental issues into consideration, not only does it affect how these phases are executed, it also expands the model to add the consumption phase. In general, you wouldn't think how a product is consumed would have anything to do with the other phases. The environmental footprint of consumption is influenced by the design of the product, which in turn affects how the supply chain works in terms of cost, complexity, and efficiency.

Environmental considerations also add a post-consumption phase of return, reuse, and/or recycle. Adding these phases in a supply chain starts a reverse flow, transforming the supply chain into a closed-loop system.

Q: What is leading companies in this direction: altruism or the bottom line?

Anupindi: There are three key drivers: regulation (or fear of it), efficiency, and customer opportunity. The present concern is that being green equates to higher cost. But there's a lot that can be done right now in terms of making supply chains more efficient and reducing the environmental footprint. It doesn't have to be altruism. Go back to the early days of quality. People thought higher quality meant higher cost. The Japanese showed that's not necessarily the case. You can have better quality and sell for a cheaper price. Similarly, in the early days of the environmental movement, being environmentally friendly meant reducing pollution. The mindset was that reducing pollution costs money; therefore, it's not good business. Now we know we can do both -- reduce costs and do better on the environmental side - at least to a certain degree.

The lean revolution in manufacturing, with its singular focus on reducing waste, has obvious environmental benefits. One example is when a firm recovers energy for alternate uses within the plant. We have done several such projects through the Tauber Institute for Global Operations at Ross. Many of these examples are localized in the sense they are within a plant, so not everything ripples across the supply chain. But it need not be localized.

Bringing environmental issues into the mix fundamentally changes some of the trade-offs. This trade-off of altruism -- "I'll do this, even though it might cost me more, because there are other societal benefits" -- is an issue that comes up only if a firm is on the efficient frontier. And as the quality movement showed, most companies were not on the efficient frontier when they started their quality journey. Similarly, a lot of companies are not on the efficient frontier in terms of environment and cost right now. Therefore, we can find lots of sources for improvement without sacrificing on the cost structure.

Q: But going even a little wider seems to have ripple effects. For example, OfficeMax wanted to cut fuel costs and reworked its delivery schedule to make fewer stops at stores. That included overhauling packaging, store staffing, and how the truck is loaded and unloaded. That one decision touched so many parts of the operation.

Anupindi: Most supply chains today are global. Therefore, one needs to take a holistic supply chain perspective. The example of OfficeMax shows the interconnectedness of decisions. In long-distance transportation, some companies are asking, "Do we need to move by road? Maybe we can move by rail, which gives us better fuel efficiency." Consideration for the environment also has brought a new focus on packaging. Packaging is necessary to protect a product during shipping; it also offers a better product appeal to the consumer. But rarely was an analysis done on how much packaging is enough. Why do we need to think about it now? Because if we reduce the amount of packaging we use, maybe we get 20 products on a truck instead of 10 and we can run half as many trucks, reducing cost and emissions. So it's a new thought process that comes in at every stage of the supply chain.

Walmart has launched a big sustainability initiative whereby it aims to reduce its environmental footprint through various initiatives in facilities management, transportation, and sourcing. But green sourcing implies that suppliers need to reduce their environmental footprint. Suppliers' readiness and willingness to undertake such efforts may vary. If suppliers are successful in reducing their energy use, for example, then the buyer may benefit from a reduced environmental footprint and/or reduced cost. So suppliers' efforts benefit the buyer.

Q: Does that tend to create friction through the supply chain if a big customer starts demanding more sustainability practices from its suppliers?

Anupindi: Yes, and here's where the tension might come up. I teach a case on Walmart's sustainability work in my class. Their effort is quite comprehensive, and one of the things they are doing is trying to get all the major suppliers on board and move toward what they call a sustainability index. It's still unclear where the index is going to go, but as a first shot they have asked their suppliers about their sustainability efforts. Some suppliers may be fearful about the purpose of that inquiry because they don't know how the information they provide is going to be used. It's a big issue, so the idea that the company needs buy-in is important. Part of the buy-in partially depends on what its relationship with the supplier has been so far.

Suppliers in an arm's-length relationship with their buyers may get suspicious of sustainability reporting initiatives undertaken by a buyer. So that is a legitimate concern. Another concern: How is the firm going to measure a footprint? Currently there is no universal standard on measuring Scope 3 emissions. If it's left to the suppliers, Company One might use Protocol A, Company Two might use Protocol B, so what is the comparison? Finally, some buyers are asking suppliers to report their footprint at a component or product level, an onerous task for a supplier to estimate.

But having said that, the forward-looking suppliers already are doing what they can to reduce their environmental footprint. The issue that comes up is reporting that to the buyer, and at what level.

Q: Would one solution be to get the industry groups or trade associations to set standards, as long as there's no collusion under the law?

Anupindi: It has to come from that level. Otherwise it's not going to move. Getting consensus is not going to be easy.

Q: What companies have been leaders in promoting a green supply chain, and what can we learn from them?

Anupindi: REI, Starbucks, HP, Cisco, Walmart, and Dow are some names that come to mind. There are many others -- large and small. In terms of lessons learned so far: First, there has to be a clear internal alignment between economic and sustainability concerns; this has to come from the top. Sustainability should not be the sole responsibility of a sustainability group. Sustainability thinking should permeate the entire organization. We learned from the quality movement that quality is not solely the responsibility of the quality control group; it is every employee's responsibility. Second, since sustainability is impacted by the entire supply chain, firms across the supply chain need to develop better coordination mechanisms and move away from arm's-length to longer-term relationships. Third, firms need to develop the capability to work with different types of organizations, including nonprofits, environmental action groups, academia, etc. Finally, sustainability could be a source of innovation -- in both process and product -- and hence a source of competitive advantage.

Q: What kinds of issues are being researched in the field along those lines?

Anupindi: Within the supply chain field this is new and old. There has been a lot of work in the last decade on the reuse and recycle process. How does a firm structure this? How does it even think about collecting the products from the consumer and recycling? What is the best way to collect and move them through the system? What is the reuse potential? Now companies have to think about product returns: Does it affect how they design their forward distribution to get products to consumers?

That is one area of research: the shift toward recyclable conveyances to move a product across the supply chain, e.g., moving products in cardboard boxes versus moving them in recyclable plastic containers. Consider watermelons, which move in these big, cardboard containers. The box is bought by the farmer. It is sent to the retailer, and it is up to the retailer to dispose of that cardboard. But if the company uses a recycled plastic container, the container has to go back to the beginning of the supply chain from the retailer. What was an open-loop supply chain has become a closed-loop supply chain. Instead of the product being recycled, an asset is recycled. That opens up new questions: Who owns the asset? How should the asset be deployed? Is it ownership transfer or is it a lease model? If so, who's going to lease it? Who owns it -- the manufacturer, the retailer, or the farmer? How many assets need to be deployed, and who's going to track them? Who is responsible if the asset gets damaged? These are issues people never thought about. There are solutions and models out there, but it's a big challenge to get everyone on board to agree to a solution.

Measuring an environmental footprint accurately is a big issue. It is relatively easier to measure a footprint at a firm/facility level. But most buyers are requesting that footprint information be provided at a components or product level. Estimating this is not a trivial task. It has parallels in accounting. In accounting the challenge is, "I have this big overhead cost. How do I allocate it?" Maybe there are different allocation systems that have better or worse efficiencies. We can follow a similar approach; however, this is an open area of research. Then there is the issue of how regulation impacts operations. Product take-back regulations have been passed in Europe. How does it affect the design of the product? If there is product reuse or remanufacturing, there are going to be two versions of a product, new and remanufactured. How does a company price these? How much capacity should be allocated between those two? All those issues are coming to the forefront of research.

This article, written by Terry Kosrosky, was originally was published by Ross Thought in Action , hosted by the Ross School of Business at the University of Michigan. Learn more about the Master of Supply Chain Management Program at Ross.

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