Company presidents and marketing chiefs may be demanding more environmentally responsible operations, but analysts say those in charge of supply chains are having trouble figuring out how to make their operations greener.
In a recent Forrester Research report, analyst Patrick Connaughton notes that “tightening regulatory pressure and pervasive media attention are moving supply chain sustainability issues up the corporate agenda.” But, he continues, “surprisingly, very few companies are measuring the environmental impact of their supply chains today.”
Then there’s the nagging question of just how much consumers care. “Consumers have expressed in surveys that they are interested in this,” says Edgar Blanco, a research associate at MIT’s Center for Transportation and Logistics. “But in the key moment of purchase, it’s unclear how much more they are willing to pay. And that’s what companies are struggling with.”
The problem, say researchers, lies in the intricate nature of supply chains. These webs of suppliers interact with multiple partners (and their partners, and their partners). How does a company figure out which emissions are its responsibility? And how much will it cost to reduce them? Blanco says companies have a long way to go in order to fully comprehend the size and scope of their carbon footprints.
Complex carbon calculations
When it comes to how much green initiatives actually cost companies, estimates can vary widely. For example, an August 2007 survey of 1,400 “key players” in the real estate and construction industry found that they misjudged the costs and benefits of green buildings.
The survey by the World Business Council for Sustainable Development (WBCSD), found that respondents had estimated the additional cost of building green at 17 per cent above conventional construction, which the WBCSD contends is more than triple the true cost difference of about 5 percent. Survey respondents also estimated greenhouse gas emissions by buildings at 19 per cent of the world’s total, though the WBCSD claims that the actual number is 40 per cent.
For the supply chain, Blanco says, there are no reliable benchmarks that can offer companies a ballpark figure of just how much they’ll have to spend to green their supply chains.
Here’s why. According to Blanco, a representative from an electronics manufacturer described to him the complexity relative to the carbon footprint of its printer products: 10,000 parts from 5,000 suppliers who in turn have 3,000 partners. “Companies have information on their immediate suppliers, buy beyond that they don’t really know,” Blanco says.
Supply chains are also dynamic. Changing routes and modes of transportation affect the overall carbon emitted to deliver the product to the shelf. A banana picked in Costa Rica will take many different routes (by ship, truck or automobile) and use various sources of energy (diesel for transportation, electricity for refrigeration and warehousing) before it winds up in the supermarket, corner convenience store or Starbucks. Blanco says it isn’t clear how companies should account for such variation in the life cycle of a product.
In his research, which is the design of energy- and carbon-efficient supply chains, Blanco has two goals: to figure out an independent and verifiable way to measure the carbon output in the complex industrial network; and to identify a commercially viable and consumer-friendly carbon labeling system. Right now, unlike, say, Energy-Star labels on appliances or food nutrition labels, there is no standard for what data should be on a carbon label or how the information should be conveyed to consumers.
But as Blanco envisions the project, labels would help consumers differentiate the carbon output from producing that banana and be able to purchase the most environmentally-efficient fruit. “Each banana will have a different label, depending on if it goes to a supermarket or a Wal-Mart,” he proposes. “The last person in the supply chain would be the only one who could put the label on.”
Just recently, many public companies have begun releasing data about their carbon emissions. Blanco says the “carbon inventory” reports typically cover the number of employees at the company, along with buildings and vehicles and the carbon-related impact of all three. “That’s a good step,” he says.
But Blanco says companies need to go beyond “their four walls.” For instance, while he applauds recent efforts by Wal-Mart to become greener, he says that the company and others need to think not just about their own assets but those of their suppliers. Wal-Mart’s true carbon footprint is not just its assets and buildings, but all of its suppliers that are “under Wal-Mart’s influence,” he says. “Wal-Mart is not thinking about that. And most companies are not going there yet.”
Wal-Mart has announced plans to assess the environmental impact of its suppliers. The company is rolling out a scorecard and benchmarking program that measures the eco-friendliness of its suppliers’ packaging. “The expectation is that once formalized, the results of the assessments will also be used as an input to Wal-Mart’s sourcing decisions,” writes Connaughton. (A recent commentary on Wal-Mart, suggests, however, that no matter what Wal-Mart does, making itself green is inherently impossible.)
Blanco notes four forces that will push companies to make their supply chains more carbon-efficient: government regulation, societal pressure, market forces and a lack of natural resources. “These four forces are aligning together to make companies aware of the problem” and a need for a solution, Blanco says. But “not all corporations want to do this.”
Will customers buy from “green” supply chains?
The strategic question confronting companies right now is: If we take the time to determine our supply chain’s entire carbon footprint, reduce it and then scheme a way to impart that information to the world, will consumers pay a premium for our products (which will offset the increased expenses of the aforementioned labor)?
Blanco says companies are aggressively reaching out to customers to find out what they want. “When they talk with most of their customers about green products, they say I want it, but I want it for free,” he says. “So companies are in the ‘chicken and the egg’ stage right now.”
If the growth in organic food sales is any indication, then green products with green labels should do well, Blanco says. Meanwhile, according to Forrester, 12 percent of U.S. adults say that they will pay a 10 percent premium for environmentally-responsible consumer electronics products.
Blanco is certain that technology will facilitate the green revolution in consumer goods. Companies will need IT tools to record and analyze accurate environmental measurements. In addition, IT will help companies trace the path of a product from factory to market.
“You’ll be able to see the who, why and how it got here,” he says. He describes a “dynamic label” that will be able to update carbon emissions and add more data about a product as it moves through the supply chain. Though he says the technology isn’t quite ready, RFID tags, could in theory provide that capability.
He predicts that better informatio