Green Supply Chains Need Strategy -- Not Hype

June 10, 2008
There are many operational and 'green' advantages to manufacturing locally in the U.S. rather than outsourcing to Asia.

Everywhere you look, companies are taking on "green" initiatives to try to improve their sustainability, environmental performance and financial gains. This involves re-evaluating a company's supply chain -- from purchasing, planning, and managing the use of materials to shipping and distributing final products -- with an emphasis on environmental performance leads to savings.

However, evaluating your supply chain for cost savings is not new. Many companies have been giving a rigorous approach to designing their supply chain networks. The only difference is now there is a change in the questions within the strategic supply chain plan, such as minimal energy usage, alternative fuels and sources, and the length of the supply chain, which comes into question when considering outsourcing. Balancing minimal cost, green objectives, and customer delivery expectations can produce contrary results.

Financial markets expect manufacturers to move operations abroad for low-cost labor but this may not be the best answer because greener supply chains are available domestically. There are many operational and 'green' advantages to manufacturing locally in the U.S. rather than outsourcing to Asia.

Outsourcing to Asia is intuitively not green. It creates a 12,000 mile supply chain, which adds other issues, such as risk of manufacturing interruption, poor product quality, and higher transport costs, such as from two sets of docking fees and higher inventory levels to accommodate transit time.

Also, the recent, and continuing, increases in oil prices demonstrate the critical need for firms to regularly evaluate their supply chain strategies. In particular, strategic sourcing (including outsourcing) decisions must be carefully re-examined, especially with respect to international supply chains. It is also important to recognize that energy price increases affect every level and activity of the supply chain: procurement, manufacturing, ports, distribution centers, transportation, inventory, and so on. Furthermore, these activities and levels are not necessarily affected equally; therefore, it is imperative to reassess strategy in the context of the entire chain, not myopically with respect to only one component such as transportation costs.

For many years, companies have used software tools to optimize their supply chains using a variety of criteria: cost, time, energy consumption, etc., or a weighted combination of these measures. These same companies started looking at energy consumption issues in the context of network design during the 1970s. Therefore, the concept of optimizing a supply chain design with respect to "green" criteria such as energy consumption is not really a new idea. Companies have been able to handle such issues for years and quantitatively respond to the energy cost and availability challenges facing every supply chain manager today.

Typically, corporations have continuous improvement efforts, which should include supply chain and logistics. For the greatest "green" result, supply chain management and staff must influence the organization's long-term approach to raw material sourcing, engineering design, and transport alternatives. Green alternatives are best implemented with far-sighted initiatives, rather that as a reaction to market factors.

Consider all forms of low-cost and green transportation options from pipeline, ship, barge, rail, truck, and air, including mixed modes. In addition, routinely analyze your on-time delivery, assessing safety stock, in-transit stock, lead time, and economic order quantity (EOQ). Ecological transportation still must meet customer expectations for on-time delivery.

Dr. Jeffrey (Jeff) Karrenbauer is President of INSIGHT, Inc. which provides supply chain solutions and consulting services.

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