Managing Energy by Working Directly With Suppliers
<p>Although companies are working hard to improve efficiency in their own facilities, the real potential to cut energy comes from leadership among global supply chains.</p>
This article originally appeared on BSR Insight, and is reprinted with permission.
With increasing pressure from investors and growing energy constraints, it's no longer a question for company leaders about whether to address climate change impacts. It's a priority. One of the surest bets for company managers to do so is to identify opportunities to reduce energy waste, whether through an organized sustainability program or as part of quality management and lean efforts.
While the opportunity begins at facilities that companies own and operate, such direct assets are the tip of the iceberg. The real potential is for company managers to work with partners, especially suppliers, to save money, minimize risks, and capitalize on leadership opportunities throughout their global value chains.
For companies that rely on manufacturing suppliers in China, the stakes are high. Last year, the government shut down factories that wasted too much energy and turned off power in order to meet national energy goals, disrupting business globally. Though officials have said those cuts were a mistake, power shortages still loom. At the same time, China is developing carbon markets with pilots planned to be in place by 2012. In this context, company leaders can choose to understand the energy risks and options of suppliers -- and thereby create an efficient network of clean and productive partners who are capitalizing on new incentives -- or they can ignore these developments and risk more unpredictable disruptions.
Effective management of supply chain energy issues requires a two-part approach: a Scope 3 strategy and a program for company managers to work directly with suppliers on their individual needs and opportunities. A Scope 3 strategy, which I'll cover in more detail when the Scope 3 guidance is issued later this year, focuses on establishing a comprehensive, global approach for waste minimization, risk reduction, and opportunity positioning. For company managers, this means identifying the general areas of opportunity across their companies' supply chain to reduce GHG emissions and better manage energy. It also means employing procurement policies that will help shift their companies' energy profile in the desired direction.
The second aspect of effective supply chain energy management is "boots-on-the-ground" supplier engagement. Working with suppliers one on one helps managers understand what is really happening on the factory floor, what it means to the company, and how to influence suppliers to make the desired investments. To do this well, company managers need to do several things: physically bring suppliers together for sharing and training, help connect them with local third-party solutions-providers like energy service companies, and help them define and communicate about their plans and opportunities.
For companies with limited representation at local supplier sites, doing those things is a challenge. It was with that in mind last year that BSR launched the Energy Efficiency Partnership (EEP), a collaboration of 10 companies and 75 suppliers in the heart of China's manufacturing regions. Our work with companies such as HP and Starbucks and their suppliers in the Pearl River Delta and Shanghai provides important lessons on how to create energy-management plans with suppliers.
The first lesson is that energy management is a relatively easy sell to suppliers compared with some sustainability issues for which the benefits are less tangible. More than half of the suppliers in our program are funding their own way because they see energy management as an opportunity to save money. For these factories, the sponsoring companies (the factories' customers) didn't try to make participation a requirement, but rather simply made the factories aware of the resource, which the suppliers gladly took advantage of.
Nearly all of the factories in the EEP attended three separate training events in the Guangdong and Shanghai regions, illustrating a great demand for energy management training, especially considering that the suppliers have a range of experience with this work.
A second lesson is that, even as suppliers develop systematic approaches to managing energy, they still need technical assistance on a project-by-project basis. More than three-quarters of our group of 75 report having designated departments or teams for energy, and nearly two-thirds assign energy goals to departments or individuals. Nonetheless, in appraising specific opportunities like replacing motors or retrofitting boilers, even factories that have teams in place are looking for outside help in understanding and financing the best options.
That's not surprising. In Japan, Germany, and the United States, where energy management has successfully taken hold, third-party energy contracting has played a major role. But in China, this industry is just forming, and few such options are available to all but the greatest users of energy. Indeed, one of the most difficult aspects of the EEP has been deciding how to allocate a limited number of free energy audits administered by CLP, a local power company. Suppliers are clamoring for inexpensive onsite diagnostics, and there is business to be had for companies that can effectively deploy free or cheap energy audits in China as part of a broader service model.
A third lesson is that there's a hard way to gain supplier transparency -- by starting with requests for enterprisewide fuel and electricity information from suppliers -- and there's an easier, smarter way.
On its own, information that describes a factory's total energy or GHG footprint doesn't show suppliers what they should do, and that's why, in our experience, suppliers new to climate change management do not tend to see it as offering much value. Instead, company managers should start by offering these suppliers the tools to help them understand their own energy-savings opportunities. Managers can then encourage suppliers to share what they identify at the project level. In practice, this means training suppliers to create formal energy-management plans, which, ideally, should be based on energy audits and should itemize key ongoing and planned initiatives.
Using this approach with the EEP, virtually all suppliers submitted plans. Within a few months after the EEP launch, suppliers had started more than 100 projects. In addition, another 100 were revealed, informing sponsoring companies about suppliers' baseline profiles and giving more examples to share. The most common project type focused on energy savings with lighting, followed by motors, and then heating and cooling systems. On average, each supplier reported a total of three projects.
As we conclude the pilot year of the EEP this August -- just around the time the Scope 3 guidance comes out -- we'll be launching an expanded program for 2012. We aim to double the number of suppliers involved, which will improve both our firsthand understanding of what's happening in factories, and make it easier to connect with local energy service companies and others that might offer solutions for project diagnostics. We also plan to explore new models for connecting companies with cross-sector partners and other solutions that will increase the scale of supply chain energy management. Finally, we'll be working with suppliers that have foundations for making decisions about energy to understand and communicate better on GHG management using international standards.
Photo CC-licensed by teaksato.