Sustainability – A new dimension in supply chain management

Supply chain management that leads to improvements in the environment is called Green Supply Chain Management (GSCM). Green supply Chain Management is an approach to improve performance of the processes and products, ensuring that environmental damages are minimized. GSCM has emerged in the last few years and covers all phases of product’s life cycle from design, production and distribution phases to the use of products by the end users and its disposal at the end of product’s life cycle.

A large number of multinational corporations are investing in research and development of green products, establishing standards on cutting down the use of environmentally hazardous substances and requiring supply chain partners to provide inputs that are free from hazardous materials at all levels of the supply chain system. GSCM has been adopted by some of the largest companies in the world like Texas Instruments, Dell, HP, IBM, Pepsi, Unilever and Toshiba. Texas Instruments saves about $8 million each year by reducing its transit packaging budget for its semiconductor business through source reduction, recycling, and use of reusable packaging systems (20% annual savings). General Motors saved more than $30 million in six years through their resource productivity programme, they also reduced waste volume by 40%. Pepsi Co. saved $44 million by switching from corrugated to reusable plastic shipping containers for one liter and 20-ounce bottles, conserving 196 million pounds of corrugated material. Pepsi also invested ahead of the time to manage sustainability risks associated with speculated water scarcity.  As a business critical raw material, water impacts input costs, competitiveness, and the ability to maintain production. Other than mitigating the production risk due to water scarcity, any move unto conservation would lead to community social welfare, and consequently improved brand perception. The firm aims to reduce water usage intensity by 20% between 2006 and 2015 across all manufacturing operations.  Apart from the leading companies, the list of modern age companies adopting green supply chain practices is constantly growing. This is a clear indication that corporations are now beginning to realize that integrating environmental considerations with business decisions can be a source of competitive advantage.

The prime reason why GSCM approach is gaining fast popularity is because it can promote efficiency and synergy among various entities (supplier-supplier, supplier-buyer), help in enhancing environmental performance and reduce waste to achieve cost savings. All these lead to only one thing that a company cares about – profit in the foreseeable future. Ever since the industrial revolution, corporations kept on consuming natural resources exploitatively and polluting the environment, even though they might have had the sense that their own action may have ill-consequences on the business at some point in the distant future. However, because companies’ decision making has increasingly been based on time horizon that is shortened, they did not pay any heed to incorporating green principles in the business. For them to care about it enough, they must know the measurable benefits of changing their traditional framework soon. Green supply chain offers strategies that lead to economic value addition (EVA) that can be experienced in the form of increased profit margins and higher revenue in short to medium run.

Companies should identify where they lack and set the right GSCM strategy to generate greater benefits vis-à-vis working with the traditional SCM approach alone.

• Rationalization – This strategy directly focuses on managing the operational costs through SCM in order to achieve price competitiveness in the market, leading to greater sales and increased margin. Environmental consideration at every stage integrated with cost reduction pursuits need to have programmes such as waste reduction, energy efficiency and resource optimization in place.
• Synchronization – This focuses on achieving reliable and efficient supply chain execution to ensure that right product reaches the right destination at the right time, which depends upon how well every component within the chain (suppliers one or more tier, manufacturer, distributors, retailers) is co-ordinated meeting the just-in-time (JIT) schedule. To achieve better synchronization with regard to green supply chain management, it is essential that Environmental Management Systems (EMS) tools are developed and then integrated with the existing Enterprize Resource Planning (ERP) framework. The key element of synchronization strategy is that it leads to better planning with regard to existing assets and production schedule. What is achieved eventually is the overall optimization of the supply chain that leads to increased productivity with less wastage, thus greater competence.
• Customization – This strategy focuses on achieving excellence in building unique products aligned with the need of customers. Offering products aligned to the consumers’ needs raises customers’ ‘willingness to pay’, thus boosting gross margins. Many studies have suggested that greener products lead to greater sales. Philips’ Green Products sales reached $15 billion in 2012, which was 45% of total sales.
• Innovation – The focus of this strategy is to increase the presence of the brand by means of introducing rapid, frequent and effective new product. The climate change and other ecological concerns have got the market dynamics changing more than ever before. Green innovation is not limited just to new products but also developing new resource efficient techniques of production.

Let’s see adopting which of the above GSCM strategy leads to what outcomes in terms of product uniqueness or differentiation, specialised products targeting specific markets and net profit margin and gross revenue.

Laying solid foundations of the GSCM framework for a company, it is particularly critical:

• to have the right set of metrics determined in order that robust data management framework helps in better analysis and planning
• to identify partners specializing in green services that fills in the green gap in the company’s existing supply chain framework
• to optimize the operation achieving both rationalization as well as synchronization, and
• to formulate strategies to mitigate future sustainability risk appearing in terms of government compliance, for example.

In the age where markets are extremely dynamic and staying ahead of the competitors has become more challenging than ever. What adds to the existing complexities is the ever rising threat of climate change and fast depleting natural resources leading various kinds of sustainability risks in the form of price distortion or government compliance. Given such a scenario, adopting Green Supply Chain Management practices will not only help companies mitigate risk but also enable them to transform risks into opportunities. GSCM will provide resilience to stand the test of the changing market dynamics by improving company’s adaptability to the changing times where much of the market and policy uncertainties are rooted to environmental issues.