‘Greening’ the Supply Chain

Just as procurement officers across South Africa are starting to get to grips with BEE with its scorecards, criteria and nuances, along comes GEE (the green version). Much like in BEE, where companies are starting to be measured on the basis of whom they do business with, the green version is starting to develop in a similar format, Kevin James, CEO of Global Carbon Exchange, tells SmartProcurement.

News that emerged from the latest Carbon Disclosure Project (CDP2010) , was that over and above the top 100 SA companies that are normally asked to submit information relating to climate change, many more small companies are now requesting permission to make voluntary disclosures of their emissions. It was noted that the main concern among most of these companies was that “they may in the future be implicated in the supply chain and may land up not being first choice anymore.”

CDP recently launched a supply chain management category with the overriding objective of motivating the concept of supply chain greening. In many sectors such as retail, information technology and fast moving consumer goods, supply chain emissions from activities such as processing, packaging and transportation often exceed those arising from an individual company’s own operations. Another major objective of this initiative is to raise awareness of an organization’s carbon footprint beyond the measurement of its direct emissions as well as to identify climate change risks and opportunities across the supply chain. The CDP notes a primary aim of the supply chain programme is “to drive action on climate change amongst both purchasing companies and their suppliers.”

So, why is this all happening?

To begin with, companies are responding to stakeholder (customer, investor, employee) demands for greater awareness regarding the real impact a company has on the environment. Furthermore, certain forward thinking companies have realised that strategies to increase efficiencies and reduce waste in the supply chain can add up to lots of money and make for smart business. Green procurement ticks all the boxes in that companies are not only saving lots of money through efficiencies, but are also creating opportunities and accessing new markets by sourcing and offering environmentally friendly products. In addition to this they are also seeing this as risk management and a brand enhancement exercise.

Many companies do have an eye on supply chain efficiency in the normal course of their business but this is generally motivated by financial factors to keep costs down. By including an environmental agenda into a procurement policy companies can potentially unlock the many benefits touched on above.

Add to this, the fact that compliance around greenhouse gas reporting is both imminent and inevitable with large emitters now having to disclose reliable emissions inventories of their operation by 2013. Supportive to this is the fact that the Greenhouse Gas (GHG) Protocol accounting and reporting platform is specifically designed to ensure that companies across the value chain start to play an educational, advocacy and even an influential role in their engagement with suppliers.

The GHG Protocol is therefore designed to create a ripple effect across the supply chain. It achieves this by classifying CO2 emissions from a company’s activities into scope 1 and 2 (direct company emissions and emissions from electricity, respectively), and then reporting on scope 3 (indirect emissions) resulting from the rest of the value chain in which a company operates. The protocol stipulates that while a company should take responsibility for and manage their own direct emissions, it is critical that they also start gaining an understanding of the impact of, and influencing, their suppliers and customers.

Probably one of the best examples of a company successfully integrating “environmental consciousness” into their supply chain management strategy is Wal-mart: Its distribution system has always been regarded as one of the most efficient and it has an approach to supply chain management that creates total visibility through the collaboration and sharing of information with its suppliers.

Besides driving supply chain efficiency in order to be able to source the products at the lowest cost, Wal-mart has now integrated a clear environmental agenda into its procurement policy. In fact, Wal-Mart CEO Lee Scott has committed the company to three ambitious goals: To be supplied 100 % by renewable energy; to create zero waste; and to sell products that sustain Wal-Mart’s resources as well as the environment.

Just one example of how it has responded to the above goals its campaign begun in 2008 to reduce the energy consumption of its top 200 Chinese suppliers by 20% by 2012. Wal-mart realised that most of its suppliers were less efficient and their source of energy more polluting than other potential trading partners and that if Wal-mart continued to do business with China, then its Chinese suppliers would need to comply with strict and measurable environmental performance criteria to ensure that the upstream and downstream impact of Wal-Mart on the environment is kept in check.

“Being a good steward of the environment and being profitable are not mutually exclusive. They are one and the same,” said Scott. “We recognised early on that we had to look at the entire value chain. If we had focused on just our own operations, we would have limited ourselves to 10 percent of our effect on the environment and eliminated 90 percent of the opportunities that are out there.”

Wal-mart looked at all their logistics and supply chain processes and did the maths. For example, improving fuel mileage efficiency in the trucking fleet by one mile per gallon would save the company more than $52-million a year. Add to this the many other examples just like that and the total savings have started making material contributions to the financial bottom line of the company.

Closer to home, Woolworths is actively involved in similar strategies. One example of the many initiatives to reduce its own impact and especially its carbon footprint is Woolworths’ trials to test nitrogen refrigeration technology on its truck fleet, in an effort to further reduce its carbon footprint and improve the transport of temperature-sensitive products. According to Woolworths, the units can eliminate between 24 – 30 tons of carbon dioxide per year, per truck.

This is just one of the many initiatives outlined in its “Good Business Journey”, which focuses on four priorities: being proactive in fighting climate change; a stronger focus on the environment; social development; and transformation.

The company’s national general manager for transport, supply chain and IT, Johan Schafer, said that customer feedback on its delivery trucks, obtained by Woolworths’ customer services team, was also a factor in the decision to pilot the technology.

While much “green” legislation is proposed and anticipated, much of it is yet to be implemented and enforced. The green paper on climate change, that has just been released for public response, for the first time provides actual dates by when large emitters will have to comply with mandatory reporting. While this is all well and good, right now most climate change response activities are voluntary and are driven by the corporate sector. Through green procurement, the supply chain is going to effectively become the mechanism through which influential companies will ultimately become “the regulators” and drive change through efficiency and heightened environmental awareness.

It is now clear that the big emitters will all need to report their direct emissions by 2013 and, just as in mandatory carbon schemes in Europe and other developed environments, it is inevitable that once the larger emitters are identified and forced to comply with certain disclosure and performance guidelines as a start, the net will soon widen to include smaller emitters and their supply chains. So it is almost inevitable that all companies will have to start reporting and disclosing their carbon emissions in the not too distant future, so why be reactive when you can be proactive and plan this properly to derive maximum commercial benefit.

If I were to select six golden rules
to follow when developing a supply chain greening strategy to engage with and influence the behaviour of suppliers and consumers, I would include the following (in no particular order):

1. Get your own house in order before you do anything. There is nothing worse than being told to lose weight by a fat person. If you are going to be scrutinising your supply chain, ensure that you know your own impact and have committed to doing something about it in a meaningful and transparent way.

2. Just be nice! (To start off with at least). You don’t want to create a situation where you become too demanding, too soon and end up alienating your supplier base. This could have an adverse effect on your business. Initially your company should play more of a support role and mentor role, demonstrating business value along the way.

3. Raise awareness and educate: Companies currently behave in a certain way because they don’t know any different. By embarking on a strategy to green the supply chain, you take on the responsibility for educating and advising your suppliers as to what best practise is in relation to environmental reporting and performance.

4. Measure everything: Apologies for the old cliché but “if you can’t measure it, you can’t manage it” or benchmark your suppliers in an effective and reliable way. Always be sure that the measurement methodology used for this purpose is consistently applied.

5. Collaborate and share: Develop a supplier and customer engagement strategy that encourages collaboration to ensure the sharing of information and mutually beneficial co-operation to achieve maximum efficiency.

6. Develop an eco-brand: Just like the development of private label brands of the 1980’s, create an eco-brand to which all your suppliers and customers want to be associated. This would encourage and motivate companies producing eco-friendly products.

While conducting carbon footprint assessments of the activities of a company is becoming acceptable practise, what is becoming even more prevalent is product carbon footprint assessments where companies are now quantifying the total impact of their products on the environment. Conducting a life cycle assessment is much broader than a carbon footprint of the activities of a single company. These assessments typically include extraction of raw materials through processing, raw material by-product, transportation, retail, consumption and disposal of the product.

The objective of such a study is three-fold:

1. To differentiate a product from that of its competitors by offering transparent and accurate carbon product labelling. This sends out the message to customers that the company is aware and concerned about its footprint and feels it its responsibility to disclose the extent of this impact.

2. To be able to provide quantitative proof that using this said product versus a more conventional (and damaging) product is less harmful to the environment and in so doing acquire new customers and gain a competitive edge in the market place.

3. To provide accurate data so that customers can easily quantify and report on their emissions as a result of their use of the product.

A good example of a local company that has used this strategy to their advantage is Afrisam who introduced a CO2 rating system where the carbon footprint of each of their products is printed on the packaging and benchmarked against the world average. Their EcoBuilding Cement has a carbon footprint of less than half the world’s average for cement and they have managed to achieve this without compromising quality. The construction and property industry contributes significantly to global emissions so Afrisam saw this strategy as a way of differentiating their product in what seemed to be a generic product category.

So things are starting to get interesting and Chief Procurement Officers, through their new mandate to address environmental, social and governance issues in their supply chain, and to continue driving efficiencies and cost cutting, seem likely to become major purveyors of change and environmental awareness where it counts most, up and down the supply chain.

For more information on how to develop appropriate strategies to address your supply chain, please contact Kevin James at kevinj@globalcarbonexchange.com. Subject: Greening the Supply Chain