In the media

Going green strengthens security of supply and reduces supply chain costs

31 July 2020

Not only do most consumers prefer sustainable goods, but the effectiveness and security of supply can also be increased through the use of circular principles in the value chain. A green transformation of your supply chain can also make the difference between success and failure in a time of crisis and even secure the company's long term future.

Global supply chains have proved fragile during the worldwide pandemic. The availability of everything from materials, to production capacity and transport has, in many sectors, been marked by large fluctuations and clearly shows how dependent companies are on today’s global production and supply networks. Back in 2009, global exports of components and semi-finished goodsexceeded the volume of finished goods. Now, in retail and some parts of the manufacturing sector, supply chain costs account for up to 80 percent of the company's cost base. In other words, an extraordinarily large proportion of the make up of many companies relies on external inputs.

Therefore it’s no wonder that so many companies get into difficulties when they suddenly either cannot get the inputs they need or see unit costs rise to a loss-making level as a result of scarcity. So how can supply chain managers secure their company's supplies and continue to grow and keep to an acceptable level of costs in a crisis? Going green is a part of the solution.

From linear to circular

In the aftermath of the crisis, many climate activists expressed concern that the momentum created in the battle to reduce climate change would run out of steam to make room for other more pressing priorities, such as health and the economy.

There were also some who took the more positive view that e.g. the experience of cleaner air in cities as a result of lockdown would make more people realise the importance of a greener economy. However, it is doubtful that just because Beijing's residents could suddenly see the blue sky again, that the largest CO2 emitters in the country would switch to green production. More is needed to bring that about.

But what if it does not have to be a question of either or, but rather both and?

A central concept in the green transition is the so-called circular economy. In short, this is the principle of replacing a linear "produce – use - throw away"-mindset with a circular “produce – use – re-use” mentality.

In addition to the principle of recyclability, the circular economy also reflects a number of other related ideas about reduced consumption and less waste in various forms. Common to all the ideas, however, is that the usefulness of a given asset can increase.

Usefulness is a key concept of economics and is therefore fundamentally compatible with a drive to a green transition. It is important to create a broad understanding about this point.

The French company Renault provides a good example of this in their efforts on re-manufacturing. By creating a way to return components from end-of-life machinery, primarily their own cars, such as engines and gearboxes, they can repair and resell parts at a reduced price to the spare parts market.

While it takes more manual work to remake than it does to produce new parts, it can still make a net profit because it does not need to make the same capital investment in machinery and needs much less cutting and machining of the components.

Renault has achieved reductions of 80 per cent in energy use, 88 per cent in water consumption and 77 per cent in material waste from remanufacturing compared with producing new components.

The Ellen MacArthur Foundation has assessed the potential for remanufacturing in the Danish mechanical engineering industry, which includes, for example, pumps and wind turbines. It is estimated that approximately 65 per cent of the value of components can be remanufactured and total savings of 150-250 million Euro achieved in 2035.

In addition to reducing the costs of material and energy consumption, a circular model also promotes security of supply, as recycling and remanufacturing are more of a closed loop, reducing dependence on external inputs.

The shorter the loop, the less value is needed to be added before an item can be reintroduced to customers. That is, if an item can be easily maintained by the end user, then you have a circuit that is ultra-short - which can justify a higher price.

Similarly, if an item can be easily remanufactured/repaired at the warehouse instead of being broken into a raw material and returned to a component supplier, the value chain is shortened by one link, reducing the required value input.

In addition, if the loop is in a smaller geographical area, security of supply will be further increased, as the risks of transport will be reduced.

But the value of the circular supply chain runs deeper than just cost reduction and security of supply. Consumers now prefer sustainable products. Surveys of 2,000 individuals across the US, Australia, the UK and China concluded that 90 per cent of consumers believe businesses have a responsibility to increase sustainability and 83 per cent would prefer a sustainable product over one that isn't.

Investors also have preferences that point in the same direction. Increased innovation, new partnerships and the ability to attract employees have also emerged as positive benefits of companies' focus on sustainability.

Transition requires thought

Although the conversion to a circular value chain is so intuitive and obviously beneficial, there can be many challenges. Remanufacturing often requires a complex system for the return of components that involves both end users and logistics partners.

It requires specialised employees trained in the remanufacturing process from B to A, and it requires customer training and supplier care to switch to a different value chain.

Therefore, it is particularly important that you as a supply chain- or purchasing organisation prioritise and select initiatives that provide the most value for the particular industry and the market in which you operate. Supply chain managers should therefore do the following five things to ensure they get best possible value:

1. Align your sustainable supply chain strategy with the business's overall mission

What do our customers want from us? What are the current and future problems and what drives them?

2. Map the categories and links in your supply chain that pose the greatest risk and potential for improvement

What do our cost, environmental and social footprints look like today and which parts of the value chain have the main impact?

3. Prioritise initiatives in relation to value and feasibility
What solutions can we realistically implement and what value do we predict they can have? Make a preliminary business case.

4. Start small and test your process

Make sure you test and validate results of particularly suitable categories to gain experience and support from stakeholders.

5. Roll out widely only after learning lessons

A wider roll-out of a range of initiatives should take place once the first lessons have been learned.

There is great potential for the sustainable transformation of supply chains, but the challenge is to demonstrate the value it can bring, as sustainability is still associated, in a broad sense, with higher costs and regulatory compliance.

Supply chain organisations can help to change this perception while having a positive influence on the company's bottom line and growth.

Lars Holck is an expert in procurement, transformation and sustainability at PA Consulting.

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