Green Supply Chain Management - Advantage over Conventional Methods
Published in Operations & IT Articles category by MBA Skool Team, Published on March 01, 2016
Green supply chain management is the way of the future. With the rapid globalization in the last few decades, the externalities imposed by firms on the environment has also increased significantly. According to a report by Trucost, the environmental damage caused in 2008 by the world’s leading firms is 2.2 Trillion dollars. So firms have been shifting from a linear process flow to the circular economy approach to make their operations eco-friendly.
The frameworks of operations have been modified over the years from assembly line to TPM/TQM to lean and currently Green Supply Chain Management (GSCM) to reduce the climate risk of their products or services.
Why should firms adopt GSCM practices?
• Product Differentiation – In today’s world businesses invest millions in R&D to make their product stand out but in sectors like FMCG it is very difficult to build a radically different product. Hence the only way companies can attract customers is by showing that their products are environment friendly or their processes are green. The biggest success in this regard is the ITC which heavily markets their waste positive, carbon positive methods.
• Governmental Regulations – In the last decade, governments all over the world has come out with a string of regulations in order to minimize the damage that businesses have on the environmental. Hence in order to stay ahead of the competition, supply chain processes of firms should be made green and must include the triple bottom line concept.
• Profitability – If organizations can design their supply chain to make products which are ecofriendly and require low cost, it will generate high demand from customers. By employing proper waste management methods and by using reverse logistics, firms can re-utilize their wastes and subsequently reduce the cost of manufacturing by a large extent.
Conventional SCM VS Green SCM
• Approach – Traditional SCM follows the cradle to grave approach while Green SCM follows cradle to cradle approach by employing reverse logistics.
• Procurement – Conventionally procurement strategies do not take into account environmental factors but green procurement is an important aspect of GSCM.
• ISO – Green Supply Chain Management uses the ISO 14000 certification while the traditional SCM does not do so.
• Manufacturing – Traditional SCM focuses mainly on improving process efficiency and productivity but GSCM in addition to this also focuses on minimizing waste creation.
Components of Green Supply Chain Systems
• Green Procurement – Green procurement is the idea of buying raw materials keeping in mind the environmental effects. Hence the concept of Environmentally Preferable Purchasing (EPP) speaks about choosing products after evaluating the product life cycle of the material. For example, Nikon gives a preference to those vendors whose products and processes are more environment friendly.
• Green Product Design - This philosophy focuses on designing products so that they will have minimum impact on the environment during their Life Cycle. This is because about 30-80% of the mentioned impact is decided during the designing phase of the products. Hence using environmental friendly parts & components which can be easily disassembled should be given priority. Eg: eco-friendly paints instead of Lead based paints.
• Green manufacturing or process designing – The manufacturing process should be so designed so that it is carbon positive, water positive and waste positive. Since the handling of solid wastes require money, hence it is imperative to minimize the creation of wastes at their source. Once the process is green, it can be aggressively marketed to attract customers like it PepsiCo or ITC.
• Green packaging and storage – Packaging materials may mainly consist of wood, plastic or metal which are not eco-friendly. Hence lots of governments all over the world have recommended the minimization of these packaging wastes. Eg: Reusable pallets or reusable milk or soda bottles. Also L or J shaped warehouses reduces the number of internal trips required for pick-pack and put away.
• Green distribution – Corporations should be using the rail route or water route more frequent than airplanes for transportation of goods as the fuel consumption is extremely high in the latter case. Also localization of vendors will help to reduce dead-head travel in trucks, which should employ Full truckload transportation (FTL) rather than less than truckload (LTL) methods.
• Reverse logistics – The main aim of reverse logistics should be resource reduction. Reverse logistics will consist of the SCM capabilities to take care of not only the customer returns but also the waste material generated. A good example of this is the old mobile phones being accepted by Nokia. Also it is common knowledge that the waste product from one industry can be the raw material of another industry. For example the molasses from the sugarcane industry is a raw material for the alcohol manufacturing plants.
PUMA – Leader in Reducing Climate Risk through its Supply Chain
Puma has been a world leader at reducing the climate related impact of its products. With the help of Trucost it has been publishing its Environmental P&L account which gives the details of the monetary impact of its activities on the environment by itself and its suppliers. This helps them to adopt GSCM strategies.
Image below shows Puma’s Environmental Profit and Loss Account.
Truecost of Water in Puma’s Footwear Segment
Growth Drives for Adoption of GSCM
• Government Regulations – An increase in government regulations for environmental protection has forced companies to change their SCM practices to make it more sustainable and green. Also certain tax incentives are also provided by the government to switch over to alternative uses of energy.
• Selling to foreign markets – In European or North American markets, customers are extremely conscious about the brands they buy and having an environmental friendly product goes a long way in capturing their imagination.
• Vendors – Many multinational companies utilize only those vendors who have the necessary eco-friendly certifications in ISO standards. Hence in order to be a part of the globalized market it has become important for suppliers also to revamp their existing processes.
• Competition – When competitors like Coke advertised that their processes were water neutral, PepsiCo in order to outdo them modified their processes to become water positive. In today’s market unless a company innovates to change its SCM process to GSCM, it will be beaten by its competition.
The Conventional SCM method
Using Reverse Logistics to make the Supply Chain Green & Sustainable
Barriers for adopting GSCM
1. Lack of proper sustainability standards and government regulations
2. High initial investment for adopting waste disposal methods – In Sweden the consumers are often unwilling to bear the extra cost of a sustainable solution.
3. Improper alignment of long-term sustainability strategies of the company with its short term goals of profitability – For example in China due to cutthroat competition the providers of transportation cut corners to stay competitive
4. Lack of sufficient motivation on the part of the top management
5. Insufficient training about sustainable practices of Supply Chain
Implementation of Sustainable Strategies for Supply Chains
1. Existing Supply Chain Analysis: Most of the companies do not perform a LCA of their products or Process Cost Assessment to under the impact of their Supply Chain on the environment. They also need to identify their most important suppliers and the challenges they face.
2. Convey targets: The suppliers must be made aware of the expectations and the code of conduct that the firm expects them to abide by in environmental issues. The same can be then conveyed to the customers and the value chain of the company can be then re-organized accordingly.
3. Benchmarking suppliers: A benchmarking exercise can be done to understand the level of compliance of the existing suppliers. Many retailers and major brands collect information from suppliers in the form of surveys or questionnaires. They are then benchmarked on crucial aspects like waste treatment & generation, water usage, recycling of materials etc. After benchmarking is done, feedback can be given to them to focus on the areas on which they need to improve.
4. Training and Skill building – To bridge the gap between existing and target Sustainable practices, companies need to invest in the training programs of the suppliers. In 2006, HP conducted 22 such training programs in 12 countries.
5. Conducting Periodic Audits – After measuring the supplier’s performance initially, periodically evaluations can be conducted. Based on these evaluations, feedback is given to the suppliers. Incentives can also be provided to the suppliers to in order to coerce them to comply more with the green recommendations. There are also certain standard indexes which are used to conduct these audits like Higg Index.
6. Peer Collaboration – Many a times in order to complete the closed loop systems, industries need to collaborate among themselves. For example Power generation and Cement Industries used to work together to handle the problem of waste management of fly ash, thus helping the Power companies implement Sustainable SCM practices.
This article has been authored by Swagato Sarkar & Ashmita Bose from XLRI, IIM RANCHI