Supply chain for a sustainable future: An urgent imperative
Supply chains are typically built for maximizing operational efficiency and minimizing business risks. However, both of these are narrow and short-term objectives which need to be augmented with a focus on building a sustainable future. Policymakers and leaders have always found it challenging to differentiate between their focus on short- and long-term goals. However, the external situation is changing rapidly where ‘other’ stakeholders like regulators are demanding further disclosure and transparency. Consumers are also increasingly considering the environmental and social impact of supply chains before purchasing,and employees are opting for organisations that are committed to larger environmental and social responsibilities.
The concept of ‘stakeholder capitalism’ and the idea that businesses should deliver profits while operating sustainably and minimizing their environmental and social impact are becoming increasingly important. We need to move away from the long-held and outdated view that sustainability and profitability can’t be achieved together to an entirely fresh perspective that environmental and social challenges present us with the greatest economic opportunity of our time. For example, companies can boost consumer confidence by communicating to them the origin of their products. This might lead to the development of entirely new service offerings and possible updated business models.
Supply chain leaders can no longer ignore the idea of sustainable supply chains. Doing so will result in them missing out on new economic opportunities that others will capitalize on. Eventually, people would be unwilling to work for organisations continuing to operate with unsustainable supply chains,ultimately leading to existential risks for such companies. To ease the shift to sustainable supply chains, leaders should address the sustainability imperative by breaking it into three broad areas, viz. reducing carbon emissions, building a circular business model and increasing the contribution of supply chains to ensure fairness in society.
Reducing carbon emissions
The recently concluded United Nations Climate Change Conference held in Glasgow saw governments committing strongly to the Paris Agreement goal of limiting global warming to below 1.5°C. PwC’s Net Zero Economy Index 2021 report says that a five-fold increase in the global rate of decarbonisation is needed to keep the 1.5°C target within reach. As per a new PwC research conducted in September 2021, 325 investors were surveyed globally and a majority of them identified that the most critical ESG issue, by a wide margin, was reducing Scope 1 (direct emissions from a company’s operations) and Scope 2 emissions (indirect emissions from purchased or acquired electricity). These numbers clearly indicate that reducing the carbon footprint of supply chains is one of the biggest challenges faced by leaders today.
Artificial intelligence (AI) and other advanced analytics techniques (machine learning, deep learning, optimization, simulation and natural language processing [NLP]) can help us in-reducing carbon footprint and building more sustainable supply chains. For example, consider a network design problem where supply chain managers need to find out the number of distribution warehouses to be established and finalize the locations of those warehouses from already identified potential locations. Traditionally, such problems have been solved with the objective of diminishing the total cost (or maximizing profitability)along with meeting desired customer service levels. However, we need to relook at the problem from the aspect of reducing carbon emissions as well. The impact of emissions should also be factored into our optimization equations to arrive at the network design that minimizes cost as well as the environmental impact. In one of the examples we studied, the optimization algorithm recommended four warehouses when cost minimization was the sole objective. However, when carbon emissions were factored in, setting up five warehouses was recommended as the optimal solution to minimize carbon emissions along with a marginal increase in other costs. This primarily happened because of reduction in emissions from outbound transportation.
Another common example is related to building truck loads for delivery of items to customers. We can use advanced analytics techniques to minimize the number of vehicles needed to deliver orders. Significant gains can be realized, especially when the items to be delivered have a considerably different weight-to-volume ratio and it is not intuitively easy to optimally allocate items to vehicles. Minimizing the number of vehicles to be used reduces both cost as well as the supply chain’s carbon footprint. The above examples reinforce our earlier stated point that sustainability initiatives also present a great economic opportunity and will help businesses thrive in the long term.
Building circular business models
An increasing number of companies are building circular business models where they create supply chains that can recover and reuse or recycle used products. Shrinking environmental footprint, reduced operational waste and more efficient utilization of expensive resources are some of the key reasons behind circular business models becoming popular. However, building such business models is challenging because they must align with the organisation’s resources, capabilities and constraints. Companies can use three basic strategies for building circularity. Retaining product ownership – an approach where the producer rents or leases its product to the customer rather than selling it and is ultimately responsible for the product once the consumer is done using it. Product life extension – designing products to last longer and in turn charging a premium price for the durability. Design for recycling –an approach in which products and manufacturing processes are designed to maximize the recover-ability of the materials used.
The right circular business model for any company will involve a combination of one or more of the three basic strategies mentioned above. The correct strategy can be determined by how easily manufacturers recover value from the materials used in their products. A classic example of this would be a soft drink manufacturer setting up a reverse supply chain to recover empty glass bottles. This is a strategy of retaining product ownership and is the right approach because firstly, a reverse supply chain can be easily set up and secondly, the reusable nature of recovered glass bottles extends the value of the materials and energy put in the manufacturing process.Another example would be that of a washing machine manufacturer. In such a case, retaining product ownership will not be a good strategy because setting up a reverse supply chain and transporting a washing machine will be more difficult and expensive than moving glass bottles. Product life extension seems to be a more plausible strategy in this case as washing machines can last long when maintained carefully.
End-to-end supply chain transparency is one of the key capabilities required to build such circular business models.Supply chain transparency isn’t a new concept, but advanced technology capabilities are providing organisations with possibilities of new breakthroughs. Supply chain ecosystems are generating a huge amount of data and companies can benefit when they effectively take advantage of these diverse data sets.
Let us consider the above-mentioned example of a soft drink manufacturer. There is an enterprise data lake that not only stores the manufacturer’s internal data but is also integrated with data gathered from other supply chain partners. Data related to the inventory position of empty glass bottles flows from the retailers’ system to the enterprise data lake along with data on vehicle availability and capacity from different logistics service providers. An optimization algorithm recommends not just the right mix of vehicles that minimizes the cost of transporting the empty bottles back to the manufacturing site but also suggests the time of the transfer and which logistics service provider should be opted for. The logistics service provider with the most efficient carbon footprint is recommended. An automated workflow is triggered and the order is placed with the logistics service provider, and details about the estimated time of arrival (ETA) are intimated to the retailer. Hence, instead of following a pre-fixed periodic dispatch plan which might neither be cost effective nor environmentally friendly, an end-to-end transparency framework enabled by emerging technologies and advanced analytics can help in dynamic allocation. This fulfills the promise of circular business models.
Increasing the contribution of supply chain to ensure fairness in society
For long, many supply chains have operated with little regard to the social consequences of their actions, especially those that are beyond their direct control. Roles and responsibilities have been outsourced without adequately understanding their larger impact on society. Supply chains become opaque beyond a point, resulting in bigger problems. For example, organisations decide to hire low-cost labor to work in supply chains across the world. As per the PwC research mentioned earlier, ‘Ensuring worker health and safety’, ‘Improving workforce diversity, equity and inclusion’ and ‘Addressing human rights in supply chain’ are three of the most-cited ESG issues. It is time for supply chains to take full ownership of their impact on society and no longer treat such issues as problems to be addressed by others.
Lack of visibility is one of the biggest challenges faced by supply chains. Organisations are unable to track supply-chain activities beyond tier 2 or 3 supplier levels and hence cannot proactively address any risks that might emerge. This challenge becomes even more complex in an increasingly global and interconnected supply chain. While there is no single solution that can help deal with the problem, we can rely on AI and advanced analytics techniques to minimize the impact to the best possible extent.
AI techniques such as NLP can scan a wide set of both publicly available and subscribed datasets to find out if there are any instances that need attention. For example, a trigger word such as ‘human rights’ can be searched for autonomously across news articles, social media posts and other relevant data sources from the country where a manufacturer has the largest supplier base. If such a trigger word comes up in any of these predefined data sources, an automated alert is sent to the set of stakeholders to review the situation and take appropriate steps. Such early warning signals can help executives to take corrective actions and minimize the impact of these risks.
The road ahead
Based on the examples discussed above, building sustainable supply chains will not lead to a negative impact on the bottom line. On the contrary, a sustainable supply chain will give organisations competitive advantage and result in significant long-term financial gains. There could be short-term trade-offs needed in the pursuit of a larger goal to serve all stakeholders and not just shareholders. Building sustainable supply chains will be a long and arduous journey, and supply chain leaders will need to identify the initiatives required to be undertaken.
Leaders should also assess each initiative, how easy or difficult it will be to implement and its subsequent impact to avoid ending up with a long list of disjointed efforts. ‘High-impact and easy-to-implement’ initiatives should generally be prioritized, followed by others. For example, base-lining carbon emissions is one of the biggest challenges that organisations face today. They are unable to move confidently towards their net zero journey without base-lining as accurate measurement is necessary for effective management.Building a supply chain’s digital twin can be an excellent way for organisations to estimate their as-is state in terms of carbon footprint. This is an initiative which is not very complicated to implement but has a significant impact on a company’s decarbonisation journey.
Moving to more environmentally and socially responsible supply chains is now a business imperative and the transition must begin today for organisations to be able to build trust and deliver sustained outcomes for all stakeholders.
The concept of ‘stakeholder capitalism’ and the idea that businesses should deliver profits while operating sustainably and minimizing their environmental and social impact are becoming increasingly important. We need to move away from the long-held and outdated view that sustainability and profitability can’t be achieved together to an entirely fresh perspective that environmental and social challenges present us with the greatest economic opportunity of our time. For example, companies can boost consumer confidence by communicating to them the origin of their products. This might lead to the development of entirely new service offerings and possible updated business models.
Supply chain leaders can no longer ignore the idea of sustainable supply chains. Doing so will result in them missing out on new economic opportunities that others will capitalize on. Eventually, people would be unwilling to work for organisations continuing to operate with unsustainable supply chains,ultimately leading to existential risks for such companies. To ease the shift to sustainable supply chains, leaders should address the sustainability imperative by breaking it into three broad areas, viz. reducing carbon emissions, building a circular business model and increasing the contribution of supply chains to ensure fairness in society.
Reducing carbon emissions
The recently concluded United Nations Climate Change Conference held in Glasgow saw governments committing strongly to the Paris Agreement goal of limiting global warming to below 1.5°C. PwC’s Net Zero Economy Index 2021 report says that a five-fold increase in the global rate of decarbonisation is needed to keep the 1.5°C target within reach. As per a new PwC research conducted in September 2021, 325 investors were surveyed globally and a majority of them identified that the most critical ESG issue, by a wide margin, was reducing Scope 1 (direct emissions from a company’s operations) and Scope 2 emissions (indirect emissions from purchased or acquired electricity). These numbers clearly indicate that reducing the carbon footprint of supply chains is one of the biggest challenges faced by leaders today.
Artificial intelligence (AI) and other advanced analytics techniques (machine learning, deep learning, optimization, simulation and natural language processing [NLP]) can help us in-reducing carbon footprint and building more sustainable supply chains. For example, consider a network design problem where supply chain managers need to find out the number of distribution warehouses to be established and finalize the locations of those warehouses from already identified potential locations. Traditionally, such problems have been solved with the objective of diminishing the total cost (or maximizing profitability)along with meeting desired customer service levels. However, we need to relook at the problem from the aspect of reducing carbon emissions as well. The impact of emissions should also be factored into our optimization equations to arrive at the network design that minimizes cost as well as the environmental impact. In one of the examples we studied, the optimization algorithm recommended four warehouses when cost minimization was the sole objective. However, when carbon emissions were factored in, setting up five warehouses was recommended as the optimal solution to minimize carbon emissions along with a marginal increase in other costs. This primarily happened because of reduction in emissions from outbound transportation.
Another common example is related to building truck loads for delivery of items to customers. We can use advanced analytics techniques to minimize the number of vehicles needed to deliver orders. Significant gains can be realized, especially when the items to be delivered have a considerably different weight-to-volume ratio and it is not intuitively easy to optimally allocate items to vehicles. Minimizing the number of vehicles to be used reduces both cost as well as the supply chain’s carbon footprint. The above examples reinforce our earlier stated point that sustainability initiatives also present a great economic opportunity and will help businesses thrive in the long term.
Building circular business models
An increasing number of companies are building circular business models where they create supply chains that can recover and reuse or recycle used products. Shrinking environmental footprint, reduced operational waste and more efficient utilization of expensive resources are some of the key reasons behind circular business models becoming popular. However, building such business models is challenging because they must align with the organisation’s resources, capabilities and constraints. Companies can use three basic strategies for building circularity. Retaining product ownership – an approach where the producer rents or leases its product to the customer rather than selling it and is ultimately responsible for the product once the consumer is done using it. Product life extension – designing products to last longer and in turn charging a premium price for the durability. Design for recycling –an approach in which products and manufacturing processes are designed to maximize the recover-ability of the materials used.
The right circular business model for any company will involve a combination of one or more of the three basic strategies mentioned above. The correct strategy can be determined by how easily manufacturers recover value from the materials used in their products. A classic example of this would be a soft drink manufacturer setting up a reverse supply chain to recover empty glass bottles. This is a strategy of retaining product ownership and is the right approach because firstly, a reverse supply chain can be easily set up and secondly, the reusable nature of recovered glass bottles extends the value of the materials and energy put in the manufacturing process.Another example would be that of a washing machine manufacturer. In such a case, retaining product ownership will not be a good strategy because setting up a reverse supply chain and transporting a washing machine will be more difficult and expensive than moving glass bottles. Product life extension seems to be a more plausible strategy in this case as washing machines can last long when maintained carefully.
End-to-end supply chain transparency is one of the key capabilities required to build such circular business models.Supply chain transparency isn’t a new concept, but advanced technology capabilities are providing organisations with possibilities of new breakthroughs. Supply chain ecosystems are generating a huge amount of data and companies can benefit when they effectively take advantage of these diverse data sets.
Let us consider the above-mentioned example of a soft drink manufacturer. There is an enterprise data lake that not only stores the manufacturer’s internal data but is also integrated with data gathered from other supply chain partners. Data related to the inventory position of empty glass bottles flows from the retailers’ system to the enterprise data lake along with data on vehicle availability and capacity from different logistics service providers. An optimization algorithm recommends not just the right mix of vehicles that minimizes the cost of transporting the empty bottles back to the manufacturing site but also suggests the time of the transfer and which logistics service provider should be opted for. The logistics service provider with the most efficient carbon footprint is recommended. An automated workflow is triggered and the order is placed with the logistics service provider, and details about the estimated time of arrival (ETA) are intimated to the retailer. Hence, instead of following a pre-fixed periodic dispatch plan which might neither be cost effective nor environmentally friendly, an end-to-end transparency framework enabled by emerging technologies and advanced analytics can help in dynamic allocation. This fulfills the promise of circular business models.
Increasing the contribution of supply chain to ensure fairness in society
For long, many supply chains have operated with little regard to the social consequences of their actions, especially those that are beyond their direct control. Roles and responsibilities have been outsourced without adequately understanding their larger impact on society. Supply chains become opaque beyond a point, resulting in bigger problems. For example, organisations decide to hire low-cost labor to work in supply chains across the world. As per the PwC research mentioned earlier, ‘Ensuring worker health and safety’, ‘Improving workforce diversity, equity and inclusion’ and ‘Addressing human rights in supply chain’ are three of the most-cited ESG issues. It is time for supply chains to take full ownership of their impact on society and no longer treat such issues as problems to be addressed by others.
Lack of visibility is one of the biggest challenges faced by supply chains. Organisations are unable to track supply-chain activities beyond tier 2 or 3 supplier levels and hence cannot proactively address any risks that might emerge. This challenge becomes even more complex in an increasingly global and interconnected supply chain. While there is no single solution that can help deal with the problem, we can rely on AI and advanced analytics techniques to minimize the impact to the best possible extent.
AI techniques such as NLP can scan a wide set of both publicly available and subscribed datasets to find out if there are any instances that need attention. For example, a trigger word such as ‘human rights’ can be searched for autonomously across news articles, social media posts and other relevant data sources from the country where a manufacturer has the largest supplier base. If such a trigger word comes up in any of these predefined data sources, an automated alert is sent to the set of stakeholders to review the situation and take appropriate steps. Such early warning signals can help executives to take corrective actions and minimize the impact of these risks.
The road ahead
Based on the examples discussed above, building sustainable supply chains will not lead to a negative impact on the bottom line. On the contrary, a sustainable supply chain will give organisations competitive advantage and result in significant long-term financial gains. There could be short-term trade-offs needed in the pursuit of a larger goal to serve all stakeholders and not just shareholders. Building sustainable supply chains will be a long and arduous journey, and supply chain leaders will need to identify the initiatives required to be undertaken.
Leaders should also assess each initiative, how easy or difficult it will be to implement and its subsequent impact to avoid ending up with a long list of disjointed efforts. ‘High-impact and easy-to-implement’ initiatives should generally be prioritized, followed by others. For example, base-lining carbon emissions is one of the biggest challenges that organisations face today. They are unable to move confidently towards their net zero journey without base-lining as accurate measurement is necessary for effective management.Building a supply chain’s digital twin can be an excellent way for organisations to estimate their as-is state in terms of carbon footprint. This is an initiative which is not very complicated to implement but has a significant impact on a company’s decarbonisation journey.
Moving to more environmentally and socially responsible supply chains is now a business imperative and the transition must begin today for organisations to be able to build trust and deliver sustained outcomes for all stakeholders.
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