CSCMP's Supply Chain Quarterly
October 24, 2018

New green strategies replace old notions

If companies are to generate savings from "green" initiatives, they need to take a total-cost-of-ownership view and throw out old assumptions underpinning common supply chain practices.

Supply chain decisions that were accepted as best practices in recent decades are now frowned upon when viewed through a "green" lens. Searching the globe for the lowest hourly wage rate, leveraging large-volume buys of parts and components, choosing suppliers solely on the basis of product cost and quality, and making decisions in "silos" are just some of the strategies that make less sense nowadays.

Instead, companies whose management wants to be environmentally responsible need to update their old supply chain assumptions. Manufacturing closer to the customer, minimizing purchases of parts and components to reduce waste, upholding social and environmental principles, and shifting to multifunctional collaboration are strategies that better support sustainability agendas. (See Figure 1 for a "then and now" comparison.)

Article Figures
[Figure 1] Old vs. new supply chain tenets
[Figure 1] Old vs. new supply chain tenets Enlarge this image
[Figure 2] Excerpts from a design for environment checklist
[Figure 2] Excerpts from a design for environment checklist Enlarge this image
[Figure 3] Who has responsibility for carbon-footprint reduction in hi-tech companies?
[Figure 3] Who has responsibility for carbon-footprint reduction in hi-tech companies? Enlarge this image

But in business, being green and socially responsible is not an end in itself; the mandate for companies today is to be both green and more profitable. Fortunately, adopting "leaner and greener" strategies will reduce companies' total cost of ownership in surprising ways and to a significant degree. (For the purposes of this article, total cost of ownership is viewed from the manufacturer's perspective. It includes wage rates and component costs, as well as costs and risks associated with logistics, potential environmental or labor infractions, wasted efforts and materials, yield, and other factors. It also encompasses the cost of goods sold plus some sales and administrative expenses, such as troubleshooting at remote suppliers' locations.)

By targeting the four areas mentioned above —choice of manufacturing locations, quantities of components purchased, supplier-selection criteria, and multifunctional decision making —companies can operate in a greener, more sustainable way while simultaneously lowering their total cost of ownership.

Choose the right manufacturing location
Starting in the late 1980s, contract electronics manufacturers such as Flextronics, Solectron (since acquired by Flextronics), and SCI (today Sanmina SCI) —pressured by original equipment manufacturer (OEM) customers that wanted to reduce their cost of goods sold —raced each other to set up facilities in low-cost-labor regions. SCI, for example, built an impressive manufacturing facility in Scotland in order to take advantage of tax incentives there and serve its European customers with "local content." Flextronics established operations in China early on. And in 1991, Solectron chose Malaysia as its first Asian manufacturing site.

But then some forward-thinking electronics-manufacturing services (EMS) executives recognized that they were setting in motion an unsustainable pattern of moving manufacturing facilities to new, developing countries whenever labor rates increased in previously low-cost areas. Their OEM customers grew tired of the huge time and cost commitment required to travel to distant manufacturing sites to resolve production issues (sometimes sparked by language and cultural differences) and conduct quarterly business reviews, which took managers out of the office for weeks at a time, affecting productivity and home life.

That strategy looks even more unsustainable now in light of the ridiculously high carbon emissions it produces. When one Silicon Valley (California, USA) company studied the supply chain for its products, from raw materials through component manufacturing, assembly, configuration, customer use, and end-of-life, it determined that by the time the products reached the end of their useful lives, the materials, components, and finished products had traveled the equivalent of circling the globe twice. Another company has since relocated some of its manufacturing (both at the component-assembly level and the final-configuration level) and is moving more products by train, truck, or ship instead of by air. As a result, it has reduced both transportation costs and carbon emissions by as much as 90 percent (depending on locations of the configuration and/or distribution hubs), and it has reduced risks of delayed shipments owing to more complex transportation routing.

Locating manufacturing closer to customers makes good business sense even in the electronics industry, where labor costs typically represent from 5 percent to 15 percent of the cost of goods sold. The potential savings from low-cost labor are very attractive for electronics manufacturers, yet those savings can easily be offset by higher shipping costs, international supply chain risks, additional packaging, and management time and travel costs. Accordingly, siting manufacturing far from the name-brand product's home market, far from customer locations, and in regions where employee- and environmental-safety laws are lax or lightly enforced offers less advantage than many people believe.

Companies that use contract manufacturers are in the best position to shift production closer to their customers. As more of them choose (or return to) this strategy, the world's manufacturing capabilities will be more balanced, better matching the location of customer populations. They will reduce environmental degradation caused by burning pointless amounts of fuel in transit. Moreover, they will earn the good will and loyalty of customers who care that their purchases create jobs in their home regions and have a lower eco-impact.

Minimize component waste
In addition to reconsidering manufacturing locations, companies that want to be greener will benefit from re-examining their purchasing programs. In the purchasing arena, supply chain objectives and corporate objectives often conflict —a situation that can undermine sustainability initiatives and increase the total cost of ownership.

One reason for that disconnect is that purchasing and supply chain professionals have different objectives and incentives. The chief executive officer (CEO) expects supply chain executives to ensure continuous supply of quality product to customers, at the lowest total cost of ownership. Buyers, on the other hand, typically are rewarded for negotiating lower piece prices, which tempts them to buy larger quantities of components and materials than may actually be needed. The solution is to train buyers in "lean and green" purchasing practices and reward them for such practices as:

  • Ordering right instead of cheap, and in the needed quantities. Buyers are always on the lookout for bargains, including quantity discounts, and suppliers have been happy to provide incentives for them to buy more of their products. But buyers also need to consider storage costs, the risk of being laden with excess and obsolete parts, and end-of-life costs. By doing so, buyers support their companies' aim toward lower total cost of ownership.
  • Finding other uses for excess and obsolete inventory. One way companies can reduce excess and obsolete inventory is to rethink their purchases of parts for repairing items under warranty. Instead of procuring large quantities of spare parts, they could collect unused products from customers (at no cost or by buying them back, depending on the industry). They then could convert those products to tested, functional units for use as replacements, or they could mine them for expensive or hard-to-find components for use in refurbishments. Any leftover items could be recycled. For a company in an industry like electronics, the cost savings from adopting this waste-reduction strategy could potentially climb into the millions of dollars per quarter.
  • Minimizing purchases of restricted materials to avoid hazardous waste. Regulations that restrict substances that are hazardous to human and environmental health can compromise recycling. Moreover, buying parts that contain restricted substances can render inventory unusable. Buyers who want to minimize or eliminate purchases of such products need to know not only what is prohibited now but also what may be banned in the future. A good way to anticipate new regulations and corporate bans is to look at the lists of substances already restricted by forward-thinking companies, including Sony, Nokia, Motorola, Philips, and HP. Nokia, for example, will not allow 200 substances in its products, even though the European Union's RoHS (restriction of the use of certain hazardous substances) Directive restricts only six. To avoid unknowingly including restricted substances in their companies' products, buyers should work with suppliers that are willing to disclose the substances they use in manufacturing.

Change supplier-selection criteria
Scrutinizing suppliers for adherence to social and environmental guidelines can help keep costs down. After all, the corporate balance sheet will be affected if a supplier engages in irresponsible labor practices (for example, violations of safety, working hours, or minimum-age rules) or environmental practices (such as releasing illegal levels of pollutants or failing to ensure that products are properly recycled). The suppliers' actions may engender negative publicity, which can erode brand value and cause a sudden and costly interruption of supply, not to mention a mad scramble for an emergency replacement so orders can continue to ship on time. This is an increasingly common occurrence as the public, customers, reporters, regulators, and nongovernmental organizations become more aware and fearful of companies' role in degrading human health and the environment.

A simple and effective way to prevent these problems from occurring is to change how companies choose suppliers. For years buyers have been screening suppliers for product cost, quality, availability, and other product-focused criteria. Now they need to add social and environmental responsibility to their supplier- selection process. Managers who must evaluate suppliers can use one of several existing questionnaires that elicit information about compliance with labor and environmental laws as well as document what suppliers are doing to move toward exemplary sustainability leadership. Suggested sources include:

Suppliers' adherence to environmentally friendly practices offers other cost benefits for buyers. Suppliers that apply "design for environment" (DfE) principles, such as reducing their products' weight and power consumption, tend to have lower shipping, storage, and operating costs. DfE has other costavoidance advantages: an analysis by an experienced electronics designer determined that 80 percent of the elements in the design-for-environment checklist used by our company's electronics industry clients also increase product reliability and/or decrease the chance of supply chain interruptions. Figure 2 includes examples of designs that reduce manufacturing and disassembly time and costs; foster easier upgrades and refurbishment as well as higher-value recycling; and tend to increase product reliability and reduce the risk of supply chain interruption.

Collaborate across multiple functions
In the mid-1990s, design engineers began to get purchasing professionals involved during the product design phase. Their aim was to take into account costly issues that might arise further along the supply chain, such as single sourcing, long lead times, and proliferating numbers of suppliers. Today —prompted by corporate pressure to reduce costs and environmental footprint —collaboration is necessary not only between engineering and purchasing but also between functions as diverse as marketing, sales, environmental or sustainability management, logistics, warranty management, legal, human resources, information technology, facilities, and more.

These internal organizations share both opportunities and responsibility for reducing their use of resources to cut costs and progress toward companywide sustainability goals. A paper-reduction initiative, for example, can span engineering (replacing paper manuals with Web links); marketing (Webbased marketing instead of printed collateral); human resources (electronic personnel notices and files instead of paper); training (using computers instead of paper manuals in plastic notebooks); finance (electronically submitted expense and other reports); legal (determining which documents must legally be on paper); and administration (achieving a specified paper-reduction goal in offices and buildings). As this example makes clear, cross-functional collaboration maximizes cost savings and the likelihood of achieving resource-reduction goals. Similar cost and environmental benefits can be achieved when these and other functions collaborate on reducing electricity and water use, air travel and commutes, corporate purchases, and product design.

Figure 3 illustrates the typical distribution of responsibility for carbon-footprint reduction at electronics companies. Supply chain executives often are the prime initiators of companywide programs, in part because European Union environmental regulations have restricted hazardous substances and required reuse and recycling since early in the decade. Supply chain, manufacturing, and other operations management were on the front line addressing these requirements; they see the benefit of strategic preparation for environmental requirements imposed by regulators and customers, not only in operations but also throughout the company.

To initiate companywide sustainability programs, these managers must collaborate with nearly every other function in the company. It can be challenging to work with so many different functional areas, but the reward is seeing programs that reduce environmental and financial costs reach every corner of the company. In some cases, leading a successful green initiative brings personal rewards, too. In fact, linking variable compensation to environmental practices makes it clear to employees that the company considers those practices to be essential. It's hard to argue with a reward system that benefits not only profits and the planet but also employees' paychecks.

The adoption of lifecycle assessments, which estimate a product's carbon footprint, or greenhouse gas (GHG) emissions, is leading companies to include a wider range of functions in their environmental programs. These assessments measure GHG emissions at every stage of a product's life, from raw materials through manufacturing, assembly, transportation, end use, and disposal. Moreover, businesses that report their GHG emissions to the Carbon Disclosure Project (an independent, not-forprofit organization that holds corporate climatechange information) increasingly are including emissions estimates provided by their suppliers and contract manufacturers for manufacturing the product, in addition to estimates for transportation, use (and reuse), and recycling.

One argument in favor of cross-functional collaboration is that cost savings fall short when companies apply environmental criteria to some areas but not to other, related areas. For example, companies will miss opportunities for savings if buyers consider environmental factors when selecting direct materials but not indirect materials; buying hardware products but not accompanying product manuals; or outsourcing manufacturing but not outsourcing other functions.

Consider the experience of managers at one hightech company, who were thinking about replacing paper product manuals with an online version or a thumb (flash) drive. The potential savings from eliminating printing, binding, and shipping costs for the manuals would amount to tens of thousands of dollars annually, but decision makers worried that customers would be unhappy with the paperless alternatives. The managers soon learned that another division of the company had already replaced its own paper manuals with Web links to an online version, and that there been no customer complaints. This was a reminder that when different functional areas share information about reducing financial and environmental costs, the entire company benefits.

Publicizing best practices remains one of the best ways to instill a culture of collaboration, not just across functions and divisions but also across geographic regions. At Intel Corporation, for instance, employees at the chip maker's Costa Rica operation found creative ways to save energy, while employees in Israel came up with new ways to save water. By sharing these best practices with the rest of the company, other locations were able to adopt them, and all company locations benefited from the resulting environmental and financial rewards.

Reduce carbon, gain rewards
The need to reduce their companies' environmental impact is prompting supply chain executives to rethink their old assumptions and develop new strategies that are good for both the environment and for business. Fortunately, adopting new supply chain practices that reduce waste and maximize environmental benefit also reduces the total cost of ownership for smarter, greener companies.

In addition to financial rewards and the desire to be a good corporate citizen, there is another, compelling reason for companies to go green. Today measuring the environmental impact of supply chain decisions is a voluntary effort by forward-thinking companies that understand the connection between profit and planet. Tomorrow they will be mandated to do so by regulators, customers, and retailers.

For now, though, gaining executive approval to adopt more "lean and green" supply chain strategies will require substantiating the connection between carbon-footprint reduction and financial rewards. Recently developed software that automates measurements of carbon emissions, progress along sustainability goals, environmental features of products and services, and suppliers' environmental attributes can assist in systematically measuring, improving, and correlating them.

Once that relationship has been demonstrated, it should not be difficult to get top management on board, as most companies can expect substantive monetary gains from greener supply chain decisions. The savings may be modest at first, but acting on the four strategies in Figure 1 should, for a mid-sized corporation, produce nothing less than millions of dollars in savings each year.

Pamela J. Gordon is president of the consulting firm Technology Forecasters Inc. and TFI Environment.

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