Why make the effort
Supply Chain professionals will face a challenge in the near future: reduce emissions through the company’s supply chains while managing costs. Reuters reports that about 70 percent of businesses worldwide are exposed to unexpected extreme weather events that will likely impact profitability of the business.
Investing in projects that limit the effects of climate change is therefore a must for businesses and the focus will be on supply chains. Reports indicate that supply chains are responsible for about 80 – 90 percent of an organisation’s reportable greenhouse gas (GHG) emissions.
Getting started towards SCS
As your Supply Chains group gets ready for SCS, some terminology is useful. The first is that actions to reduce the effects of climate change are classified under two approaches:
Mitigation is action to limit additional GHG emissions. Achieved through saving energy, reducing water use, ensuring that packaging is recyclable and other actions that are under the control of your organisation.
Adaptation is driven by known and expected external climate events and the consequences, which your organisation cannot control. We know that climate change exists and its likely scope by region, but the consequences for an individual organisation are not known. For example, how events in one industry or business could affect demand and supply in other industry sectors that supply your business. This requires a risk based analysis to prepare for new conditions.
Emissions are segmented into three Scopes.
- Scope 1 emissions are direct emissions from company-owned and controlled resources, including owned and contracted vehicles
- Scope 2 emissions are indirect emissions from the generation of purchased energy, supplied by a utility provider
- Scope 3 emissions are indirect emissions that occur in the supply chains of a business – both upstream and downstream
Scope 3 emissions cover 15 categories, which include:
- Direct production related purchased items (materials, components and intermediate goods) and indirect non-production related items (e.g, office supplies and IT services)
- Waste generated in operations and sent to landfill and for wastewater treatment
- Transport (all modes) inbound and outbound by 3rd parties (owned and contracted vehicles are in Scope 1)
- Capital goods are items with an extended life (buildings and equipment) used by a business to manufacture a product, provide a service or store, sell and deliver items
- ‘End of life’ treatment to encourage the design of products that limit landfill disposal, identify how products are disposed
Carbon intensity is the measure of metric tonnes of GHG emissions per U$1000 of revenue or per standard unit of output. When gathering Scope 3 emissions data, start with the customers and work back through the supply chains. For immediate value to the business, use the Sales & Operations Planning (S&OP) product family structure, so that emissions through supply chains are identified at each S&OP iteration.
Visibility through supply chains is often stated as a requirement for successful SCS implementation. Although visibility is shown in articles to be a high priority, surveys indicate that few supply chain professionals can demonstrate how visibility has improved through their supply chains past Tier 1 suppliers and customers.
The elements of visibility include the term ‘track and trace’, which has existed in logistics for some time. To ‘track’ is the capability to locate an order or an item’s in-transit location within a supply chain, ideally in close to ‘real-time’. To ‘trace’ an item is to establish its provenance through the supply chain. That is, substantiating and recording claims made about the item concerning aspects such as its origin, material properties and labour used.
Collaboration by supply chain professionals with suppliers, customers and possibly competitors is required to potentially change the supply chains network in which they operate. Collaboration requires an ability and processes to align goals and resources, which is often difficult to do internally, let alone with external organisations.
Materiality requires a business to understand the most critical factors for its business – issues that have ‘a real and measurable impact on the business’, associated with ESG – environment, social and governance.
The Global Reporting Initiative (GRI) states that Materiality is topics that have direct or indirect impact on an organisation’s ability to create, preserve, or erode economic, environmental, and social value for itself, its stakeholders, and society at large.
Double Materiality defines that companies must consider both how vulnerable they are to climate change and the extent to which they are contributing to it.
A risk-based approach is used to determine the extent of Materiality. Vulnerabilities in supply chains are identified and explained by stakeholders, including the likely consequences if the risk event occurred. A business needs to know which Sustainability factors are most likely to materially impact the financial situation. operations performance, product portfolios, stakeholders and society. So, the critical ESG issues to the business are identified and monitored.
Internal implementation process
Depending on the organisation and its complexities, it may take up to three years to implement environmental reporting. As time is important to start a supply chains sustainability program, an EY report recommends:
- Expand the business case. Include drivers beyond cost savings, e.g., increased revenues, market share, reduced risk, customer loyalty, attracting talent
- Improve visibility, especially traceability. Map the supply chains. Improve processes for data sharing with suppliers.
- Broaden focus on and prioritize key functions in realizing sustainability targets. For sustainability, look beyond Procurement to the other functions in the supply chains group – Operations Planning and Logistics. Also, customer service, product design and manufacturing.
- Estimate the gap with goals. Understand current sustainability performance and examine how the current supply chain design supports (or does not support) organisation-wide sustainability goals.
- Leverage incentives: Leverage available incentives and grants to fund sustainability initiatives.
When the Supply Chains Sustainability program is approved and funded, the process is:
- To segment items, use the Procurement Category Management process
- Establish Risk identification using Spend-Risk analysis for purchased items. Identify Strategic Critical and Strategic Security items. Calculate the Risk to Revenue
- Develop the Supply Chains Network Design Map. It holds the supplier risk data by location
- Calculate the Total Cost of Ownership (TCO) for critical inputs to the business
- Test ESG scenarios for financial implications of critical risk events. Examples: item availability and cost; logistics service provider item movements and storage; infrastructure requirements; changing value perceptions; knowledge sharing; technology selection; supply chains organisation. Use the supply chain map (even if partly developed) to build a scenario based model that uses an analyses of facts and assumptions about your organisation’s demand and supply chains, together with policies and regulations by governments.
A report by MIT notes that “Sustainable supply chains (SCS) mean different things to different people – suppliers and customers in other regions have different priorities and investment criteria concerning sustainability than do Supply Chain professionals in the US and Europe”. For working with external parties on ESG matters, the report suggests an approach of:
- The SCS ‘base camp’: Supply Chains Mapping, Supplier audit and a Code of conduct for suppliers and company, are the most popular starting points.
- Next steps for a company at ‘base camp’: Standards or Supplier Certification, Collaboration with suppliers, Information technologies co-operation.
This blogpost provides a brief overview of steps to take when implementing SCS. Rather than a compliance approach, it is a preferable to take the initiative and commence the journey to improve your organisation’s Supply Chains Sustainability (SCS). It is the right thing to do for everyone and the results can reduce costs and provide growth in revenue. Why not start now?