Greening Supply Chain - Improving supply chain governance with sustainable supply chain model

• By: Ramesh Srinivasan, Manager MetricStream Inc
• Date: December 08, 2009

A recent clipping in an English Daily says,“The pace of global warming is likely to be much faster than recent predictions, because industrial greenhouse gas emissions have increased more quickly than expected and higher temperatures are triggering self-reinforcing feedback mechanisms in global ecosystems.” If the nature had a Dow, with global warming increasing its pace, it would be on an all time low.

“We are looking now at a future climate that’s beyond anything we’ve considered seriously in climate model simulations,” says Christopher Field, director of the Carnegie Institution’s Department of Global Ecology at Stanford University, in the same article1. If the current financial crisis is serious, the future is horrendous.

The world’s best scientists have been warning — that climate change is happening faster and will bring bigger changes quicker than anticipated. Ironically market and the nature hitting the wall at once, is a sign that we need to find better ways to be more sustainable.

Whether the drive is to comply with the government regulations or to meet the costumers’ expec- tations companies are finding motivation to go green. Going green does not just impact company’s thinking and strategy but influences supply chain as well. Righteously the focus is not just to attain cleaner water consumption and alternative energy sources for server farms, but to make supply chains more environmentally friendly.

Yet, despite the potential for significant gains, most supply chain managers are still not focusing on environ- mental concerns. Typical to any supply chain are the following processes and functions that support the complete cycle of material flows. Each of these functions has a profound impact on the environment.

Key components of Supply Chain

Purchasing and Inbound Logistics: The purchasing function involves the acquisition of materials from suppliers to meet the needs of producing the organizational product or service. The purchasing decisions like vendor selection, material selection, outsourcing, etc can have a deep impact on the environment. For example purchasing recycled material from a distant location or selection of the material or vendor that uses toxic materials. Other practices like, just-in-time technique JIT which a lot of companies use to save money on storage raises fuel consumption and traffic congestion. Carrier selection, a part of supplier selection, is an important in-bound logistics decision.Transportation is important to all industries. As an example, the Chemical Manufacturers Association cited Roadway Express, a major carrier, as a responsive care partner in hauling chemicals.

Production: Within this area come issues like designing the product, empowering employees, controlling the quality etc. Most often companies encounter questions like what happens to liability and corporate risk when sensitive and sometimes technically complex issues are part of the environmental decisions? Similar to quality control, which has evolved to include everyone in an organization, can environmental decisions be allowed to permeate? These questions are critical since employee involvement is a practice that companies’ believe are central to pollution control in the production function4. Issues like disassembly, remanufacturing, and material recovery principles also play a major role.

Distribution and Outbound logistics: Whereas, purchasing and in-bound logistics focuses on managing the vendor-organization relationships of the supply chain, the distribution and out-bound logistics function is meant to address the organization-customer relationship issues. Customers’ interest in environmental friendly product plays a very important role in company going green. No matter what the incentive is, companies first look for economic impact than the environmental.

Reverse Logistics: Reverse logistics incorporates the return of materials, components and products back into the “forward logistics” chain. Reverse logistics operations include the following major steps:collection, separation, densification or disassembly, transitional processing, delivery and integration. The operational emphasis is dependent on the type of material or component that flows in the reverse logistics channel. For example, disassembly will be required for copy machines, whereas plastic bottles would require densification. This is an area that makes tremendous impact on the environment. For instance shifting to a supplier that uses plastic packaging will have a negative impact on the environment.

In one form or the other, every corporation as a whole has an impact on the environment. And this impact has a price that every corporation pays in the form of ‘environmental costs’. But the traditional structure of the cost accounting system does not count these costs.

Raw material and labor costs are directly allocated to the appropriate product or process, the other costs are accumulated into overhead accounts, which are allocated at a set proportion (e.g., based on the number of units manufactured) to all products, processes, or facilities but costs such as waste disposal, training expenses, environmental permitting fees, and other environmental costs—go unaccounted5. For instance, if a new production process requires the use of hazardous materials, the expenses that a company might incur to clean up hazardous material spills would be classified as ‘contingent’ costs. However, any future spills might also trigger ‘image/relationship’ costs, such as concern among the company’s employees or neighbors, and ‘external’ costs, such as damage to a nearby aquatic ecosystem.

Environmental Costs