Apr 9 2008
Companies are introducing environmental initiatives for myriad reasons, often to comply with customer mandates and new regulations or to boost public opinion. But why shouldn't firms also use the "green" buzz as a means to improve business operations and reduce supply chain costs?
According to a new report from Diamond Management & Technology Consultants, Inc., companies that take a holistic view of their supply chains and incorporate environmentally-friendly principles at key points along the way will create opportunities to increase shareholder value. The report, entitled "The Case for a 'Green' Supply Chain: Turning Mandate into Opportunity," provides a set of recommendations for a Green Supply Chain framework.
"Becoming green is no longer an end in and of itself, but the byproduct of optimizing a supply chain," said Mark Baum, a Partner at Diamond who leads the firm's Consumer Packaged Goods practice and a co-author of the report. "At the same time, transitioning to a Green Supply Chain while also maximizing efficiency is not a clear-cut process.
The "greening" of the corporate world is grounded primarily in necessity—emerging regulations, corporate mandates to suppliers, and a desire to improve public image. Most companies, however, struggle to find ways to use environmental initiatives to also reduce their supply chain costs. "That said, the increasing awareness on this issue, coupled with constantly changing legislation, has created a landscape that is ideal for taking action," added Baum.
To obtain a complete copy of Diamond's report, send an email to [email protected].
"The idea of a Green Supply Chain isn't exclusively about green issues," said Darin Yug, a Diamond Partner who leads the firm's Supply Chain practice and co-author of the report. "It's also about generating efficiencies and cost containment. The process continues to evolve, but by acting now with the proper strategy, companies should have the ability to gain a competitive edge."
Consider the following examples of Green Supply Chains at work:
- Wal-Mart recently set the goal of a 5 percent reduction in packaging by 2013. It has been widely reported that the retail giant expects the cut in packaging will save 667,000 metric tons of carbon dioxide from entering the atmosphere. Moreover, the company anticipates $3.4 billion in direct savings and roughly $11 billion in savings across the supply chain.
- Johnson & Johnson's energy efficiency program resulted in an estimated $30 million in annualized savings over the 10 years prior to 2006. Also, Johnson & Johnson's Green House Gas reduction projects are achieving an average 16 percent internal rate of return, according to the company's 2006 sustainability report.
- Nestle's packaging material savings between 1991 and 2006—part of an ongoing, company-wide sustainability program—resulted in $510 million of savings, worldwide, according to Nestle's corporate Web site.
- Heineken aims to reduce fuel and electricity costs by 15 percent for the period between 2002 and 2010. As of a 2006 sustainability report, Heineken had achieved a savings of 6 percent—even after the acquisition of new breweries.
Achieving a Green Supply Chain
Green initiatives can lead to better supply chain efficiencies, but the key to increasing business value is establishing a long-term green strategy that aligns with the corporate strategy. A company should continually evaluate and prioritize green investments in the supply chain based on their returns—in both financial and non-financial terms.
"When prioritizing potential opportunities, it is important for companies to keep in mind that not every initiative will have a positive return on investment," said Baum. "Therefore, it is essential to think about all green initiatives together as a balanced portfolio, with some initiatives being done on an investment basis.
"A company may have non-financial reasons for wanting to adopt a specific green initiative, one that may have a lower return on investment, such as alternative energy. Using a balanced approach to sustainability involves looking at a green portfolio through two lenses: a company must focus on investment returns as well as the seriousness of the proposals."
A Green Supply Chain requires strong sponsorship from key executives and stakeholders and a robust business case that highlights a prioritized list of targeted opportunities, according to the report. Diamond's report notes that the business case should include specific metrics—not only for measuring success, but also to continuously look for opportunities to improve.
"Part of a long-term strategy is realizing that a full-blown Green Supply Chain implementation may, in some cases, have a short-term negative impact on the company's bottom line," said Yug. "That is precisely why companies are best served tackling it in smaller stages, beginning in areas that have the greatest business and environmental impact. Environmental initiatives need to be integrated with other companywide projects to ensure one doesn't compromise the other."
Putting It All Together
Organizations considering the potential business value of a Green Supply Chain will need to consider several moving parts. Diamond's report poses key questions senior executives should be ask before proceeding:
- Have we aligned our Green Supply Chain goals with business goals?
- Have we evaluated how our supply chain impacts the environment and how we could use this to create value?
- Have we evaluated how collaborating with suppliers and customers could derive shared benefits through a green agenda?
- Have we created a business case to evaluate, justify, and prioritize changes that could result from a Green Supply Chain?
- Have we assessed the full range of our adverse environmental impact, and have we chosen the least burdensome alternative?
The idea of a Green Supply Chain is spreading, and executives can bet their competitors are considering the same questions. Bottom-line benefits and eco-compliance can, in fact, coexist—and exploiting the notion as a competitive advantage will require staying ahead of the pack.
"In some respects, adopting environmentally sustainable business practices that also help the bottom line requires a new way of thinking," said Baum. "More than simply good corporate citizenship, it's 'the right thing to do' while also 'doing the right thing.'"