Supply chain sustainability means accepting new strategic compromises

In this article, we will explore the complexities and compromises that are needed when working with sustainability in the supply chain.

We’ll examine how supply chain planning professionals can acquire sufficient operational emission data, how to handle that data in day-to-day operations, and how to evaluate and adjust initiatives to deliver on both sustainability, profitability, and service level targets – all at once.

While profitability and service levels have traditionally been the focus of supply chain planning, sustainability targets add a new dimension that requires additional attention. With sustainability as a new focus, planners must now take into account the emissions of the products and processes they manage. This means revisiting old strategic compromises, such as service level agreements (SLAs) and product strategies, to align with sustainability targets.

It also means that supply chain planning professionals must have access to operational emission data to create effective sustainability strategies. Benjamin Obling, COO and partner in Perito Consulting explains: 

“We were taught in business schools that we need to maximize the profit. And in with in mind, we would do the scenario planning simulations. We would look at cost and working capital impact, and then balance the two. Now we need to look at sustainability as well, and the new trade-off will be implementing initiatives that basically do the most good at the lowest cost.”

In the following sections, we’ll explore how to handle emission data in day-to-day operations, and how to create new default supply chain decisions that align with sustainability targets.

One of the biggest challenges in implementing sustainability measures in supply chain planning is acquiring accurate and sufficient operational emission data. Supply chain planners need to collect the lowest emission data at the lowest possible level to enable accurate and efficient evaluation of sustainability measures in the supply chain.

A good starting point is to identify the sources of emission data in the organization’s Enterprise Resource Planning (ERP) system. Live data from the ERP system can provide valuable insights and act as a starting point for sustainability analysis. However, planners should not rely solely on ERP data and should also collect data from external sources to gain a comprehensive view of the supply chain’s environmental impact.

Doing so, it is essential to use standardized and accurate data collection methods. Data collection should be automated as much as possible to reduce the potential for human error and ensure consistency across data sources.

“In order to operationalize sustainability targets – and make sure that we do it in the cleverest way – we need detailed information and transparency to make sure that we execute the CO2 reductions where it hurts us the least. Maybe even places where we can profit from it,” Obling says.

Once collected, the data should be analyzed and communicated in a clear and concise manner, allowing stakeholders to understand the impact of sustainability decisions on supply chain via i.e., diligent scenario planning.

With the abundance of data available in the supply chain, it is important to determine how to handle the emission data in day-to-day operations.

It is unrealistic to expect planners to go through every single item in the supply chain and assess its environmental impact. Instead, it is necessary to create new default supply chain decisions based on sustainability targets.

“One example could be to decide that the default route will be sea instead of air. Or when we have a container going from Asia to Europe, then making sure that we fill it up by at least 80% instead of the 50% we used to. That will impact your working capital because you are going to move some goods in advance that you didn’t want to move right now. This is not a good thing on the working capital part, but you must do that to meet sustainability targets,” Obling says.

As supply chain professionals, we must acknowledge that environmentally friendly changes in supply chain planning, such as changes in transportation mode or fill-rates, will impact inventory levels. To handle emission data in day-to-day operations, supply chain planners need to have access to reliable, real-time data. They need to be able to see the impact of their decisions on carbon emissions, and also on costs and service levels. This requires integration of sustainability metrics into the planning and execution systems.

Supply chain planners must also establish guidelines for when exceptions to sustainability targets can be made.

For example, if air freight is necessary to prevent stockouts and maintain high service levels, supply chain planners must decide what the threshold is for when exceptions can be made. These decisions should be based on the company’s overall sustainability strategy and must be communicated throughout the organization.

In other words, supply chain planners must find a balance between achieving sustainability targets and maintaining profitability and service levels. A balance that will need testing and evaluating time and time again.

Once your sustainability targets are set and the planning changes are made, one could think that it’s a job well done. Unfortunately, this is not true (not that any S&OP professional was ever fooled).

With the transformation afoot, it is time to monitor and evaluate the success of your initiatives. By doing so, you can identify which changes have been successful and which ones have not, allowing you to adjust your approach and target accordingly.

To monitor the performance of your initiatives, you need to ensure that you have sufficient data. It is important to measure emissions at the lowest possible level to ensure accuracy, such as at the product level, transportation mode, or supplier level. You can use this data to create a baseline and set targets for improvement, and then track progress over time.

If you find that you are not meeting your targets, it is important to evaluate why. Perhaps there were unforeseen complications or challenges that impacted the success of the initiative. Alternatively, the target may have been too ambitious, or not ambitious enough.

“We need to know, why we didn’t hit the emission reduction target. Because if the reason is that we’ve increased our revenue – we’re selling more – we might actually still be doing a better job than before. Even though the overall emissions rose, we are emitting less CO2 per unit, which would then be a success story,” Obling explains.

Ask yourself, why you did not meet your target and adjust your approach for future initiatives. While reducing emissions is important, your job is also to ensure that initiatives are cost-effective. By evaluating the cost of each initiative and comparing it to the emissions reductions achieved, you can identify which initiatives are the most efficient, and adjust your strategy accordingly.

While the idea of sustainability in supply chain planning might be (relatively) new, the tools to handle it are not.

Supply chain professionals have long used tools such as scenario planning, inventory management, logistics handling, working capital control, and data analysis to optimize their supply chain. The difference now is that these tools must be applied with the added sustainability dimension in mind.

For example, scenario planning can be used to model the impact of different sustainability initiatives on the supply chain, allowing companies to make informed decisions about which measures to prioritize. Similarly, logistics and inventory management can be used to optimize transportation routes and reduce emissions, while working capital control can be used to finance sustainability initiatives.

By leveraging these existing tools and expertise, companies can effectively navigate the complexities of sustainability in their supply chain. While the added sustainability dimension may increase the complexity of supply chain planning, it also presents new opportunities for companies to optimize operations and achieve a competitive advantage.

Ultimately, companies that can effectively incorporate sustainability into their supply chain planning will be better positioned for success in the long term.

Incorporating sustainability measures into supply chain planning is a necessary step for companies to take in order to remain competitive in an increasingly environmentally conscious world. Supply chain planning professionals must embrace the shift in mindset towards a more holistic approach, where not only profitability and service levels are in focus, but also product emissions.

Ambitious sustainability targets require a willingness to make strategic compromises and accepting that environmentally friendly changes may impact inventory levels and working capital.

Sustainability introduces a new strategic dimension to your business. This must be acknowledged throughout the organization if your company is to utilize sustainability as a means of gaining a competitive advantage in the market.