Pitch
Minimizing 40 to 60% of a companyâs footprint through better monitoring and control of its upstream supply chain
Description
Summary
Industries work through a network of suppliers that are in charge of delivering key products or components for the operations of what is usually referred to as a focal company which can either be a retailer, a manufacturer or a service organization. Between 40 and 60% of a company’s footprint resides in this upstream portion of the supply chain. How can we help companies to better manage and control the emissions and environmental impact caused at this area?
Various studies have found that within companies sustainable metrics do not usually receive the same attention as quality and cost do. The most common challenges expressed by top managers include the inability to quantify the effect of sustainability factors on financial performance as well as the inability to measure the effect of sustainability initiatives on shareholder value or return on investment.
Although various companies have reported the use of some sort of scientific methodology in the implementation of environmentally conscious purchasing, their focus has mainly been on the low hanging fruit. Comprehensive green procurement models have not yet been developed. A review of academic literature support these findings by showing a lack of quantitative models able to scientifically support decision making for green procurement.
We propose the development of a tool that aids managers in making integral decisions about the environmental efficiency of their upstream supply chain. Integral because we help the manager to better use the buyer´s resources by segmenting suppliers according to the profit impact and supply risk of the products they outsource from them and develop specific quantitative models for each segment. Environmental efficiency is considered by measuring and monitoring supplier environmental metrics (CO2) while leveraging factors as cost, quality and delivery in the models developed for each supplier segment.
What actions do you propose?
Green procurement, environmental supplier selection, green purchasing or environmental (conscious) purchasing are all similar terms referring to the formal introduction of environmental issues and concerns into the purchasing process [1][2] Generally speaking, supplier selection requires a buyer to choose a handful of quantitative and qualitative criteria and use them to select the most suitable suppliers. Supplier segmentation further classifies the selected suppliers in order to allocate resources appropiate to the buyer-supplier relationship [3].
Because environmental initiatives are subject to trade-offs between different solutions to an environmental factor and between an environmental factor and other factors, in particular economic ones, the use of quantitative modeling for integrating environmental issues within the corporate strategy of a supply chain is justified. However, a recent review of the academic literature presented by Seuring [4] found 308 papers which published about green and sustainable supply chain management between 1990 and 2010. Out of these, only 36 used quantitative modeling. In our own literature review we found that only 11% of the articles had paid attention to the sustainable procurement issue with most of the articles rather modeling environmental than social impact. In addition, the literature in environmental supplier selection was mainly strategic in nature with little focus on medium and short term planning and even though several authors have highlighted the practical significance of considering the strategic segmentation of suppliers for building good decision making approaches [5][6][7], we did not find any paper specifically dealing with this. Similarly, the importance of risk in environmental related supplier initiatives has been widely discussed, but the quantification of risk from any of the sustainability dimensions of the sustainable supply chain is nearly non-existent.
Following Kraljic´s [8] purchasing portfolio approach and extensions by Handfield et al. [2], we have segmented the purchasing decision into a matrix where products are classified based on their level of contribution to profit, their supply risk and the impact on sustainability. Based on this classification, we propose the application of specific vendor selection, development and monitoring methodologies for each segment.
In the first step of this study, we have developed an algorithm dealing with products with low supply risk and low impact on profit. Since these are everyday routine items having multiple suppliers, the buyer is not interested on investing much time and effort on them. Therefore, our model simply evaluates various alternatives of purchase volume discounts. We have tested the model with quality and price data obtained from The Consumer Reports [9] and sustainability data obtained from the GoodGuide [10] for ten different comon use products (e.g. cameras, laptops, etc.) and created hypothetical demand for the buyer and capacity values for 10 different vendors. We found that, with the mentioned data, when achieving maximum sustainability, a manager may deviate by about 20% from an ideal cost.
We expect to be able to test this and the other models with actual company data. At this moment we are in conversations with a car and a chemical goods manufacturer from whom we expect to obtain the data needed.
Also,we are aware about the challenge of collecting sustainability data. Because of this, initially we are focused only on the environmental dimension of sustainability and are calculating Carbon Footprint for raw materials, components and products through SimaPro LCA which allows to model products and systems from a Life Cycle Analysis perspective. However, we would like to explore the possibility of adding other criteria which will mainly depend on the data available at the company of study.
Models for products in the three other quadrants of Kraljic´s supplier segmentation matrix (figure below) are currently being developed and we present only an overview of the issues addressed in each of them:
Suppliers of Leverage items have a low supply risk but generate a high impact on profit and sustainability. Our focus here is on improving supplier efficiency measures as well as network design efficiency by integrating traditional and sustainability indicators over a multiple-period model. Since their strategic importance is limited, the main focus is on an umbrella agreement with preferred suppliers. A basic score card is used to collect data on key supplier performance measures.
Suppliers of Critical items. In order to ameliorate the high supply risk of these items, it is common to integrate a supplier portfolio that includes local and international suppliers. Given the importance of these suppliers, we propose a model which pre-qualifies supplier involvement by evaluating willingness and capacity to meet specific goals (i.e. cost, quality, delivery and environmental goals)[3]. Then, we implement a more detailed mathematical model that evaluates inventory and multi-modal transportation for the final choice of suppliers.
Suppliers of Strategic items. Because these are items having a high impact on profits and facing high supply risk, we propose a long term decision framework that accounts for the operational costs of sourcing and also incorporates a risk sharing strategy. Moreover, we incorporate an incentive framework to motivate cooperation among the stakeholders with the goal of reaching economic and environmental objectives.
Who will take these actions?
The tool is to be used by purchase managers at major companies.
The purchasing function gained recognition, especially after the 70’s, in response to intensive worldwide competition making it critical to the growth and development of the sourcing function and to supply chain management. As most firms find themselves in precarious conditions to satisfy an accelerated demand for products with high energy and resource content, the role of purchasing is at a new point of transition. It is transforming into a key business function essential to manage not only the 60% of total product cost usually spent in the purchase of raw materials, parts, subassemblies and components but also, the 40 to 60% of a company’s carbon footprint (measure of total amount of carbon dioxide emissions caused by an organization, considering all relevant sources, sinks and storage within the spatial and temporal boundary of the activity of interest [11]), which resides upstream in its supply chain [12]. The new trend implies that purchasing managers will be given greater autonomy and responsibility in the identification of external environmental and social issues as well as in the alignment between the purchasing and corporate strategy.
Where will these actions be taken?
The models developed as part of the proposed solution are to be tested first with actual data of major consumer goods manufacturers. We are currently in conversations with a couple of them.
How much will emissions be reduced or sequestered vs. business as usual levels?
Industry contributes with about 14% to all U.S. GHG emissions[13] while freight transportation represents about 6.4% and one quarter of U.S. GHG emissions from transportation[14]. Much of of it is generated upstream of the supply chain. Through better measuring and monitoring we should be able to address an important portion of that impact.
What are other key benefits?
While the tool intends to address key issues faced by manufacturing companies, various aspects of it could be replicated by different sectors and organizations.
What are the proposal’s costs?
For now the project is part of my doctorate research. Main costs are related to research and deployment of the tool.
Time line
December 2013 conclude major research.
January-December2014 deployment phase.
Related proposals
References
[1]Carter, C. R., Kale, R., & Grimm, C. M. (2000). Environmental purchasing and ® rm performanceâ¯: an empirical investigation. Environmental Management, 36, 219-228.
[2]Handfield, R., Sroufe, R., & Walton, S. (2005). Integrating environmental management and supply chain strategies. Business Strategy and the Environment, 14(1), 1-19.
[3] Rezaei and Ortt , 2012. Amultivariate approach to supplier segmentation. International Journal of Production Research, 50(16)
[4] Seuring (2013) A review of modeling approaches for sustainable supply chain management. Decision Support Systems. 54(2013), 1513-1520
[5] Seuring, S., & Muller, M. (2008). From a literature review to a conceptual framework for sustainable supply chain management. Journal of Cleaner Production, 16(15), 1699-1710.
[6]Monczka R., Trent, R., & Handfield, R. (1997). Purchasing & Supply Chain Management. Mason, OH: Thomson.
[7]Sroufe, R. (2006). A framework for strategic environmental sourcing. Greening the supply chain (pp. 3-23). Springer.
[8] Kraljic, P. (1983). Purchasing must become Supply Chain Management. Harvard Business Review, 61(5), 109-117. Boston, MA.
[9] Consumers Union of U.S., I., 2012. The Consumer Reports. Available at:http://www.consumerreports.org/cro/index.htm[Accessed July 5, 1BC].
[10] GoodGuide, I., 2012. GoodGuide. Good Guide Ratings. Available at:http://www.goodguide.com/about/ratings
[11]Wright, L. A., Kemp, S., & Williams, I. (2011). “Carbon footprinting”: towards a universally accepted definition. Carbon Management, 2(1), 61-72.
[12] Brickman, C., & Ungerman, D. (2008, July). Climate change and supply chain management. The Mckinsey Quarterly, 3.
[13]Environmental Protection Agency. Overview of greenhouse gases. http://www.epa.gov/climatechange/ghgemissions/gases/co2.html
[14]U.S. Department of Transportation (2011). Assessing the Effects of Freight Movement on Air Quality at the National and Regional Level. http://www.fhwa.dot.gov/environment/air_quality/publications/effects_of_freight_movement/chapter02.cfm
Other sources:
Accenture. (2009). Optimizing Sustainability Performance Management: A review of findings from Accenture’s 2009 Sustainability Performance Management Survey. Sustainable Development (p. 16) and . The sustainable Supply Chain Project, University of Nevada, Reno. 2011.
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