To those of a certain age, the subjects of conservation and the environment will probably always conjure up images of tree-huggers, flower children, and protest demonstrations. But we've all come a long way since those days. It's not just politicians and consumers who have responded to the eco-imperative. Even C-level executives are coming over to the environmental side. And their message is clear: The business world is getting serious about getting green.
The Saudis made us do it
As for what's behind the drive to go green, some would say the cost of energy is forcing us to pay more attention to energy efficiency than we otherwise would. Maybe so. The price of oil and the cost of fuel—and excitement about future availability—can indeed change the economic equation of some critical supply chain elements.
To see how fuel changes the calculus, you need look no further than just-in-time or offshore-production strategies. Both are premised on low-cost, freely available oil. In the case of just-in-time manufacturing and distribution, the trade-off has traditionally been somewhat higher transportation costs in exchange for significant savings in inventory costs, a huge net gain when done well. With offshoring manufacture to Asia (or anywhere, actually), the trade-off has been higher transportation costs vs. enormous savings in labor costs, another gigantic net gain when the conditions are right.
In recent years, rising wages and growing affluence in the producing countries have eroded some of the savings from offshoring production to Asia. But the real game-changer may be fuel and freight costs. The offshoring model relies heavily on long-distance transport. As fuel costs rise and stay relatively high, the total landed cost piece of the offshoring equation changes decision points. And contemplating energy costs of, say, twice current levels could change the outcome altogether.
Adding uncertainty of supply to the equation, which adds more potential variability to supply chain performance, only makes the idea shakier.
So, here's where we seem to be. Inventories must necessarily increase to reflect realities in product delivery variability as well as the length (in time, as well as in miles) of supply chains. Production of higher levels of inventory will also, by the way, consume more energy. Meanwhile, transportation costs are at permanently higher levels.
Not only is there more inventory—in transit, as well as in storage—but maintaining customer service performance may be driving the need for more distribution facilities, to deploy inventories further forward in the chain. And more resources are being consumed to build and run those facilities.
Watching and waiting
Admittedly, not everyone is making wholesale changes to their supply chains—at least not yet. But more and more companies are watching developments carefully and looking at alternatives. It is conceivable that the day may come—and it may not be far off—when offshoring to China no longer makes economic sense.
In fact, it looked for a time that oil at $150 a barrel might be the tipping point. Oil prices have tumbled since their July peak, of course, but we cannot take comfort in the recent reductions. For one, prices can shoot up again—for no particular reason—and might not stop at $150 this time. For another, uncertainty and variability in fuel and transport costs is a more difficult planning and management problem than permanently high, but stable, costs.
It is no wonder that tactical forces alone are driving hard looks at energy conservation of many kinds. But there are also organizations that are looking beyond knee-jerk reactions and beginning to think in strategic terms about supply chain construct and operation.
We may look to Europe for a preview of coming attractions; sooner or later, the core concepts will make their way here. For multinational companies, European regulation is already influencing how green their behavior must become. Such initiatives as the WEEE (Waste Electrical and Electronic Equipment) and RoHS (Restriction of Hazardous Substances) directives are forcing manufacturers to take environmental and health considerations into account in both product design and material selection. All this, plus mandated recyclable content in products of all degrees of size and complexity.
What are people doing?
As for the paths businesses are taking to green up their operations, the first step most always involves energy efficiency. Maybe it's restructuring transportation to reduce fuel consumption. Maybe it's electricity usage management, through more efficient lighting, more efficient HVAC systems, and/or flexible management of heating and cooling. Maybe it's a reduction in materials that are major energy consumers in their own production.
Maybe it's a return to the days of fewer, larger orders to optimize transportation usage and cost. In all cases, long-lasting improvement begins with a clear and complete understanding of processes and decision points, and gets legs through the attention of consistent and continuing measurement.
We think the term "environmental sustainability" really indicates a direction, more than an in-hand accomplishment, but some major players are getting into the act with far-reaching commitments. Wal- Mart has announced objectives of complete use of renewable energy, zero waste, and merchandise that sustains resources and the environment. Clearly, this initiative will require a long series of incremental improvements in facilities, fleets, operations, packaging, and sourcing.
UPS, a truly global services provider, has undertaken a number of programs designed to reduce its fleet's greenhouse gas emissions—worldwide. Dell is pioneering a recycling program to improve and enlarge asset recovery. FedEx is rolling out hybrid trucks, with an ambitious goal for particulate emission reduction.
Hewlett-Packard, with immense global sourcing and global sales, has developed a Supply Chain Social and Environmental Responsibility Policy, along with a supplier code that includes environmental considerations. SC Johnson has for years worked to reduce toxic substances in its products and encourage recycling.
Sun Microsystems is revamping product design, recycling, and end-of-life disposal processes. Timberland has developed a sustainability agenda that covers the use of energy, materials, chemicals, and systems. It has introduced water-based adhesives into shoe production and is recycling PVC as it moves toward zero PVC waste.
And DHL—and Deutsche Post—are looking at biofuels and natural gas alternatives, as well as working on reducing greenhouse gas emissions and offering low-carbon (or carbon-neutral) shipping products. Even port authorities (notably Long Beach) are involved, with programs to persuade tenants to adopt greener technologies and help reduce diesel pollution.
Start of a journey
Is it easy being green? Of course not. But it's not as hard as it used to be. And the economic equation is definitely tilting toward the green side.
Look, this is no longer about the "thou shalt nots" of the regulators: Thou shalt not build a facility on wetlands. Thou shalt not leak nasty substances into the groundwater. Thou shalt not emit particulates into the air. It is about redefining and reconstructing the supply chains of the future.
The keys are to plan ahead of the wave, all the while realizing that this green thing is a journey, not a destination. And being realistic about how long it might take to get where we need to go.
Gartner, Inc.
