Finding ROI in Sustainability
With COVID-19 easing and volatility receding, supply chains are shifting their planning focus back from defensive resiliency to proactive longer-term growth and competitiveness. Sustainability is also creeping up the priority list, and guess what? It’s starting to look profitable.
In July, the Earth’s temperature for the first time reached and held an average 2.7oF (1.5oC) above pre-industrial levels recorded at the beginning of the 20th Century — the hottest monthly temperature on record and the global target limit scientists and governments agree should not be exceeded. Not a pretty picture for the future, and it’s an average: Temperatures in the southwestern U.S. ranged above 110oF for 31 days; in the Persian Gulf they briefly touched 152oF, considered an upper limit for human survival.
The previous record month was in 2019, and a new record high is expected within five years. An initial global target for achieving carbon neutrality to hold temperatures at or below the 2.7o level by 2030 (defined as “net-zero”) has been delayed to 2050.
Apart from the toll on human health, extreme heat also has business consequences. Direct damage from sudden storms, flooding or wildfires is easily understood, but extreme temperatures quietly erode productivity: Farms, factories and construction sites shorten hours; crop yields fall; and water levels essential to inland transport and industrial cooling drop; power outages and equipment failures produce shortages and higher prices; steel and concrete structures warp or crack; facilities maintenance, repair and insurance costs rise.
A 2022 Dartmouth University study estimates business costs worldwide from rising temperatures over the period from 1992-2013 at $16 trillion — a loss of 1.5% of GDP per capita in developed economies, and 6.7% in emerging markets. The U.S. National Oceanic and Atmospheric Administration (NOAA) estimates damage from $1 billion-plus climate events of all kinds since 2000 — storms, fires, freezes, floods, droughts — at more than $2 trillion.
Little surprise then that sustainability, focused mainly on emissions reduction, is a growing priority among corporate management teams and boards. Companies are looking for ways to drive efficiency and squeeze costs from their logistics networks, which already operate on thin margins. Customers, investors and regulators are demanding greater transparency about end-to-end carbon emissions in making their purchasing and lending decisions and in setting policy. Tougher regulation is coming, as supply chains account for an estimated 80% of greenhouse gas emissions.
The good news is that layering sustainability principles in with broader commercial objectives is increasingly seen as good business. A smaller carbon footprint achieved through better visibility and operating efficiency adds reputational value for brands as it helps them manage costs. That doesn’t, however, mean it will be easy.
Data and the Organization Chart
Supply chain executives face two main hurdles as they attempt to integrate sustainability into their supply chain planning. First, the volume of data and degree of information sharing among supply, channel logistics and other partners extends well beyond demands like on-time, in-full (OTIF) order fulfillment. Secondly, the upfront and ongoing investment in technology, skilled staff and training to collect, interpret and manage external carbon consumption and emissions data from supply, channel and logistics partners must pay for itself through return on investment (ROI) to retain C-suite buy-in and advocacy over time.
Consumers, investors and lenders are driving the push for sustainable supply chains, explains Graham Wallace, director of product marketing for Netherlands-based location data and mapping platform HERE Technologies. “It’s not just about PR,” he says. “It’s about retaining customer loyalty and making sure that the brands they’re creating live the values rather than just greenwashing.” Up to now, many companies have resisted, in the absence of clear regulation and reporting standards. Nor is there typically a strong senior management advocate in place to assert the need and the potential efficiency and ROI benefits — something Wallace says is vital.
An Elephant in the Room? Where?
Companies are proceeding slowly with sustainability, knowing that the data management complexity and eventual costs for serious emissions reduction will involve difficult tradeoffs. Wallace cautions against expectations that emissions assessment and monitoring can be outsourced to consultants or third-party logistics and data providers, or that companies can focus exclusively on internal assessment and improvements until forced to bring suppliers and vendors into the conversation by regulators.
“It’s not going to work in the long run,” he insists. “Ultimately people are going to have to do the carbon counting, they are going to have to be accountable for the entire supply chain and they’re going to have to disclose the complete carbon footprint that they’re generating from both in-house and external activities.”
The good news: Much of the foundational technology presently in place for order fulfillment — data structuring and standardization, partner onboarding, real-time shipment visibility — is now relatively affordable and accessible in the cloud. The less good news: The workflow and skill set required to manage risk, exception management and compliance around sustainability will be daunting.
Finding the Right Partners
“Retailers like Amazon are keenly aware of the cost impacts around fuel consumption and materials waste at scale and the importance of data in addressing those costs” says Dr. Manish Govil, supply chain global segment leader for AWS. “Better supply chain planning and execution for large retail operations can have tremendous impact in reducing the carbon footprint by optimizing the movement of materials, whether it’s in transportation, distribution, fulfillment, or inventory.”
Meanwhile, key innovations for transportation data-mapping and planning leaders like HERE Technologies lie in establishing a platform that maps and analyzes real-time operational and contextual data from a connected supply base of vehicles, original equipment manufacturers, satellite mapping and a worldwide fleet of mapping vehicles. In addition, business sites can also be mapped by route to measure fleet performance and reduce dwell time.
Govil explains that AWS and HERE Technologies’ collaboration on fleet management, route planning and last-mile delivery solutions logically leads to extending that collaboration to sustainability, leveraging vehicle data and fleet management optimization capabilities with data processing and analytics capability.
A Strategy in Small Steps
A key supply chain differentiator going forward, Wallace says, will be the capability for real-time, dynamic spatial mapping and visualization of the end-to-end supply chain in any given moment at any given point. That would effectively plug gaps in conventional electronic data interchange (EDI) shipment tracking based on the last order-to-pay transaction completed, to dynamically provide the precise real-time location and status of a shipment in transit or a SKU in inventory. It would enable shippers to continuously update ETAs and issue customer notifications, avoid stockouts, and offer customers delivery options.
Wallace applies a real-world Formula One racing analogy, tracking a car over repetitive circuits of a defined course. In each circuit the car’s weight, road conditions, and the positions of other cars all vary slightly. Eventually, however, a predictive “map” of the track emerges and reveals optimal places and times in a race to accelerate, brake, shift gears or refuel.
“What you’ve got is a lot of data for fine-tuning a business,’ he explains. “That same process can be applied to supply chain. Once you’ve got real-time visibility, you’re picking up the spatial data and can manipulate things very finely to improve overall performance. It’s an added dimension that then shows you the next set of things you can unlock.”
It can be too much information, he adds, without a deep understanding of the data, a precise calibration of exception management and tolerances for error. “It’s a real skill to be able to calibrate a supply chain, to understand how to get things to work, on-time, in-full, no errors, at the 98% level companies aspire to. You need to pick the right partners and develop the right ecosystem of specialists to achieve that.”
Sustainability optimization will not only require more granular end-to-end data but also a new set of key performance indicators (KPIs) and service-level commitments that supply chains previously haven’t dealt with. Partners will need to continuously share information and collaborate on carbon reduction solutions, for competitive reasons and for compliance. Carrier and supplier selection will become more fluid as business objectives evolve.
Cost and complexity of implementation make it imperative for companies to develop clear strategic roadmaps for a five- to seven-year timeframe. Toward that end, a playbook of best practices is emerging among leading companies that includes:
Materiality. “Sustainability” means different things to different people, with widely varying standards for assessment and measurement. Leading companies begin by identifying and focusing on core operational areas where sustainability programs can have the most impact, and where the business has particular risk exposure.
Carbon emissions reduction affects all companies; widely accepted measuring and reporting standards are mostly in place. Materials waste and circularity is similarly straightforward to measure area and will likely see increased regulatory scrutiny.
Phased progress. Many companies are opting to break sustainability strategy down into smaller projects by budget year, making sure that risk, resiliency and financial parameters are properly calibrated and then building on data generated at each stage to plan and secure organizational for next steps. Some are bypassing time-consuming evaluation and testing processes for projects viewed as inevitable, preferring to begin building the real-world data needed to prioritize and plan follow-up initiatives.
Greening the IT stack. Data centers are major consumers of electricity, especially those with operations routinely processing, storing and managing massive data volumes on behalf of clients. Power consumption, translated into potential emissions, will factor into required supply chain scoring in coming years; less efficient data centers also risk supply chain slowing or downtime depending on grid capacity, and can add costs.
Each supply chain’s operating characteristics and underlying business objectives vary by products, markets and partner networks. Companies are wise to proceed cautiously as they integrate sustainability, resilience and commercial objectives, particularly in the current environment of weak global demand and high costs. At the same time, the urgency of climate change and its business impacts is growing daily.
Many of the same cost reduction benefits accrue in fewer empty or half-full trips, less vehicle and equipment wear and tear, less fuel consumed, less money spent unnecessarily on parts and materials. In aggregate these can translate into significant contributions to ROI. The right data offers a clear understanding of what is achievable based on business characteristics and objectives. Even small steps over time can represent major progress.
Resource Link: www.here.com, www.aws.amazon.com