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Carbon: The Supply Chain's Fourth Dimension

Companies used to measure supply chain efficiency by cost, service and quality. Concerns about climate change introduced a fourth element to the equation: carbon emissions.

In today's global economy, companies often work with literally thousands of suppliers, partners and service providers throughout the world to create and provide their products and services. They rely on these relationships to do everything from procuring raw materials to delivering finished goods.

Companies used to measure the efficiency of such a complex network of interconnected relationships -- its global supply chain -- in three areas: cost, service and quality.

But concerns about climate change, ranging from increasing regulation to rising consumer awareness, introduced a fourth element to the equation: carbon emissions.

Driven by cheap energy, worldwide trade has more than doubled in the past decade and global GDP has grown six times, all with little regard to the impact on climate change. Virtually none of the cost of the damage caused by carbon emissions -- estimated at roughly $85 per ton of carbon dioxide (CO2) generated -- is reflected in supply chain costs.

The free ride is coming to an end for companies. Reducing their carbon output, or attaching a price tag to it, will become an inescapable obligation. And with energy costs rising at phenomenal rates, companies have an additional incentive to lower energy usage, and consequently reduce carbon emissions.

Companies that begin addressing this issue now will reap the benefits, and not only in near- term lower energy costs. They also will enjoy an increased mindshare and marketshare among savvy, socially conscious customers, better retention of ethically motivated top talent, fewer government restrictions, and more overall sustainable growth.

The goal is to optimize the supply chain equation – striking a balance between cost, service, quality and carbon emissions – by taking into account various options and performance factors: design, packaging, processes, components, energy, inventory and transportation.

Where to Focus

Key areas that can have a major impact on reducing carbon emissions are:
-- Shipping consolidation: While many just-in-time and direct customer delivery policies now require more frequent shipments of smaller loads, they also increase energy costs and carbon emissions.

-- Sourcing locations: In the past, procurement primarily looked at cost when sourcing components, but distance between supplier and customer can have a major impact on carbon emissions and energy costs.

-- Modes of transportation: Trains, planes, ships and trucks all have different carbon tradeoffs. With newer, greener transportation infrastructure coming online, companies can make tradeoffs when selecting mode of transportation for moving products.

-- Network optimization: Facility location, manufacturing, distribution and transportation operations all have varying impacts on carbon, and analyzing those factors can help strike the right balance.

Benefits

Finding the right balance when adding carbon management and energy use reduction to the supply chain metrics can lead to significant benefits, improving overall operational efficiency and substantially reducing costs.

A few examples:
-- An American bath and kitchen products manufacturer reduced carbon emissions 34 percent by relocating its warehouses without incurring additional costs.

-- Canadian pulp and paper company Catalyst Paper Corporation reduced greenhouse gas emission 70 percent and saved $4.4 million by reusing waste products and heat from its manufacturing processes and switching to natural gas.

-- The United States Postal Service reduced carbon emissions by 14 million pounds, lowered fuel consumption by 615,000 gallons and saved $5 million annually by optimizing its transportation model.

-- Dutch food maker Friesland Coberico Dairy Foods reduced its transportation needs by 127,000 miles per year by adjusting recipes and production processes.

-- U.K. retailer Tesco asked suppliers to provide lighter-weight wine bottles, reducing its annual glass usage by 2,600 tons per year and lowering carbon emissions from transportation by 4,100 tons.

Key Steps

Key steps to managing carbon throughout a supply chain are:
-- Diagnosis and assessment: Evaluate high-level supply chain components according to a simple set of carbon statements and key performance indicators to begin identifying gaps, quick fixes and set target levels.

-- Carbon asset management: Facilities and assets such as warehouses, machinery, vehicle fleets and data centers can consume huge amounts of energy. Explore making changes such as introducing new energy-savings equipment and technologies can effectively help lower both carbon emissions and costs.

-- Functional optimization: Determine where and how each supply chain function is performed and, in some cases, even outsource activities or procedures to gain economies of scale both in cost and carbon emissions reduction.

-- Internal horizontal integration: Just as a company can look across its design process to make a product easy to manufacture and service, it can do the same to make it environmentally friendly.

-- Collaborative, end-to-end optimization: The full potential of reducing emissions can only be attained by looking across all players in a company's supply chain, both internally and externally to reduce carbon emissions and cost.

In an era of growing concern about carbon emissions and rising energy costs, companies that address the carbon issue in their supply chains stand to gain major benefits. By adding carbon management to the traditional concerns about cost, quality and service, companies can develop new sustainable growth opportunities, differentiate themselves from competitors, and burnish their brands.

Jeff Hittner is the corporate social responsibility leader for IBM Global Business Services. Karen Butner is supply chain management leader for the IBM Institute for Business Value and an associate partner in the IBM Supply Chain Management practice. They are co-authors of the white paper "Mastering Carbon Management: Balancing Tradeoffs To Optimize Supply Chain Efficiencies."

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