The importance of going green

Rod Ellsworth

Is green the new ‘black’ of supply chain thinking? Was it only yesterday that the common currency and king of decision-making in supply chain strategy was the dollar?

Leading enterprises have learned to trade off increases in one part of the supply chain in the quest for lower overall supply chain costs, and the consumer has benefited from more choice, greater availability, and better value. But now there is another currency by which to measure and optimise supply chains: CO₂.

As consumer attitudes and governments around the globe combine to put pressure on business, organisations are asking themselves how they can reduce their carbon footprint. Initial concerns that going green would hurt profitability are giving way to growing evidence to the contrary.

The management of property, plant and equipment to meet the operations, economics, and socio-economic needs of today without compromising the ability of future generations to meet their own needs is vital. Supply chain and asset management strategists have been quick to spot the opportunity.

By applying principles of effective supply chain management (SCM), companies are finding they can lower carbon emissions – the single biggest contributor to greenhouse gases – while satisfying customer demands and meeting profitability goals. And businesses are eager to gain the market leadership associated with adopting a green strategy.

There are multiple ways to foster green supply chains. These include optimising the physical supply chain and the storage and transportation of product across it, lowering energy usage in the manufacturing conversion process, and improving product design and packaging to minimise waste and increase the recycle content of each. This executive brief explores supply chain design and optimisation, where the greatest opportunities for simultaneously lowering carbon emissions and supply chain costs can be found.

It also reviews additional areas of high impact, including transportation management, product design, inventory modelling, and production optimisation.

Why go green now?

There are a number of imperatives that are driving ‘green’ to the top of the executive decision-making agenda.

Globally, governments are combining to set direction, make policy, and exert pressure on businesses to take a leading role in lowering carbon emissions.

Examples are everywhere. The Bali Roadmap (issued at the U.N. climate conference held in Bali, Indonesia, in December 2007) outlines a two-year negotiating process to secure a binding deal at the 2009 U.N. summit in Denmark, with developed nations to take on commitments that are “measurable, reportable, and verifiable.“

At the national level, government policies are determining energy strategy, fuel prices, transportation preferences, aviation taxes, waste legislation, and even the date for the humble incandescent light bulb to become obsolete.

While no government has yet decided to levy a direct tax on carbon emissions, plenty of ways exist that produce the same effect through indirect taxation on fuel and energy, which must inevitably be passed on to consumers, thereby negatively influencing demand for high carbon-emitting products.

Shareholders and stakeholders demand that companies demonstrate their green credentials by publishing a sustainability strategy and publicly measuring and reporting their progress, often in their annual reports and via the press.

Perhaps the most compelling reason to adopt greener supply chains is the potential for competitive advantage and increased revenue that flows from meeting consumer preferences for environmentally friendly products. Recent surveys have reported consumers declaring their readiness to pay more for greener products, and although a gap still exists between consumer attitudes and their actions, industry has begun to sense the opportunity offered by claiming market leadership. But creating a green supply chain is easier said than done. The numerous challenges include:

Complex, global, highly interdependent supply chains: Change will be required to create inbound and outbound transportation and distribution networks that minimise carbon emissions by trading off sourcing decisions, transportation mode, and inventory policy.

Physical location of plant, distribution hubs, and secondary distribution: This has a huge bearing on the carbon and cost model. Transitioning to a physical supply chain that is designed to lower emissions is a strategic, long-term commitment, with companies steadily reorganising their resources over multiple years to achieve the end result.

Availability and reliability of carbon data and measurement: While the concepts for carbon supply chain modelling are based on tried and trusted supply chain principles, carbon measurement is still in its relative infancy and subject to scrutiny. Yet organisations cannot wait – they need to work with the information available today and refine later as additional data becomes available.

Ongoing pressure to achieve optimal on-time delivery and fulfilment: These are deemed crucial to customer satisfaction. The above challenges can be overcome, but companies must get started now. And the transition to a more efficient green supply chain is well worth the effort. The payoff includes lower costs, better operating margins, enhanced competitiveness, and improved customer service.

How can technology help?

Businesses can substantially reduce transportation, inventory, and production costs by using SCM to plan the most efficient logistics network possible – and be greener for the effort. Indeed, most companies have ample opportunities to reduce costs and improve customer service through SCM.

To help implement green strategies, enterprises need SCM solutions that support the following capabilities.

Supply chain design

Companies can get almost immediate improvement by modelling carbon emissions with strategic network design. They can determine the most effective number of locations, sizes, and capacities of facilities to meet customer service goals while modelling and reducing their carbon footprint. They can also benefit from dynamic planning of where and when to make, buy, store, and move product given changing fuel costs and constraints. With these supply chain models, companies can quantify the cost, service, and carbon implications of each scenario and prepare themselves for the impact of change.

Transportation management

By analysing ‘carbon miles’ or the travel impact of goods on the environment, enterprises can capture big savings. These savings result from more efficient transport which, in turn, means lower fuel expenditures and logistics operating costs.

Product design

Enterprises can implement green initiatives by designing more environmentally friendly packaging. Most companies can go a step further and radically re-engineer the methods used to manufacture and deliver their product. Examples include downloadable music, e-books or news broadcasts, concentrated detergents, and digital picture technologies. By leveraging product lifecycle management in addition to SCM, enterprises can carefully integrate product design and engineering with sourcing, compliance, and supply chains to reduce carbon output.

Inventory modelling

Companies can gain from more environmentally friendly distribution plans. Using inventory analysis and stocking calculations helps create the optimal balance between service levels, inventory investment, and the carbon associated with different transportation modes and replenishment frequency.

Production optimisation

Green enterprises can use production scheduling to minimise waste and level production. By optimising product assets, they can reduce energy consumption associated with ramping up or shutting down between production runs.

In general, demand-driven supply chains tend also to be green supply chains. Forecasting tools, web-based collaboration, and sales and operations reporting all help to predict and plan for customer demand with greater accuracy. And by being better prepared to meet demand, costly last-minute scrambling can be avoided.

Each of the capabilities outlined above can help deliver leaner, greener supply chains. However, companies can make even greater strides toward sustainability by combining these practices.

Asset management for the future

Critical factors that a business can control in an environmentally responsible way include waste management, infrastructure management (buildings, facilities, and their energy efficiency), emissions management, and asset management.

Asset management? Unfortunately, asset management is often forgotten as a key contributor to energy use. Assets are purchased and expected to perform satisfactorily until their estimated end-of-life. However, assets represent a significant portion of a business’s operating expense, impacting environmental as well as financial performance.

Since careful management of assets will affect a company’s overall environmental efficiency, it is important to integrate energy management into a company’s Enterprise Asset Management (EAM) program – both to support CSR goals and to continue improvements in the company’s overall financial performance. The best and most well-rounded EAM programs include:

• Maintenance Program Management: factoring asset operating performance (energy consumption) into maintenance strategy and activities.

• Event Management: alerting of an existing asset condition or trend outside of optimum operating parameters for evaluation or remediation.

• Planning: assessing existing asset configuration (design basis) and performance (energy consumption) for optimisation.

This means carefully monitoring assets’ energy usage, implementing a comprehensive preventive maintenance program that takes into consideration energy usage, and factoring energy consumption into any plans that include asset acquisition, allocation, or replacement.

Note the emphasis on monitoring and preventive maintenance. Energy efficiency cannot be estimated without having accurate data as a basis for that estimation. And preventive maintenance, as has been proven over decades of operation, is the single greatest contributor to asset useful life and optimum equipment productivity.

Let’s look at the financial impact of motor efficiency replacement. Assume that the 100 hp motor (approximately $10k list price) in this example runs 24 hours per day, seven days per week.

Typical lifespan for such a motor is 40,000 hours, or roughly five years of continuous operation. For this exercise, assume that electric costs are $0.07 per kW-hour (kWh). Further assume that the motor is running at full load, and is 93 per cent efficient at full load.

Over the lifetime of the motor, it will incur substantial costs for electric use: (100 hp x .746 kW/hp x 40,000 hrs x $.07/kWh)/.93 eff.= $ 224,602.

However, if the motor is just 2 per cent more efficient, it will cost significantly less: (100 hp x .746 kW/hp x 40,000 hrs x $.07/kwh)/.95 eff. = $ 219,873.

Therefore, a company buying a motor such as the one in this example motor for this application could ‘afford’ to pay up to $224,602 – $219,873, or $4,728 more for the motor with higher efficiency, and still realise savings on electricity use. Couple this with the very real probability of replacing an asset operating below designed energy efficiency and its on-going maintenance expense, and you can quickly see how energy consumption needs to be factored into the decision process of determining not only what to buy but when to buy it.

Green-centric asset management application

Efficient assets, then, minimise energy use and improve productivity. A business can be both environmentally responsible and economically competitive.

Implementing and sustaining a quality CSR-oriented asset management program requires the ability to gather, store, and process large quantities of information related to energy consumption, asset condition, asset productivity, and the like. Executing such a program manually would be an impossible task – because of the volume of data to be gathered and processed.

Green investment projections

Forward-looking companies are investing in software applications that greatly simplify and streamline the information aspects of environmentally responsible asset management.

With so much of a business’s precious IT budget oriented toward CSR goals, and with so much riding on the success of environmentally responsible operations, a business must be very careful in selecting software applications. There are many excellent applications on the market. Very few of them offer features that are genuinely oriented toward CSR opportunities.

Features that promote green

The following features are recommended to support green CSR goals with respect to environmental sustainability and optimum energy conservation. Many of the following features also improve a business’s position with respect to overall asset management. The two goals are mutual supportive. Additional features may be added, but at minimum, the following are essential:

• Provide the ability to track commodity (electric, water, gas) consumption and rate details associated at the meter level with value roll-up within the organisational asset hierarchy.

• Provide the ability to track electric sub-meter interval data, via integration with an Enterprise Energy Management (EEM) application, at the operational asset or system level.

• Provide existing and pre-existing asset performance monitoring and measurement via Key Performance Indicators (KPIs) that can be displayed on a dashboard configuration page.

• Provide asset condition monitoring through alert set-ups. Unacceptable asset condition should be easily observable.

• Provide a comprehensive Preventive Maintenance program that can be triggered by set dates, by metered usage, or by selected time intervals.

• Provide a thorough inspection capability that allows users to enter inspection results as subjective values (good, poor, fail) or as quantitative values.

• Provide comprehensive data gathering capability for asset performance and maintenance history.

• Provide library of preformatted reports covering best-practices business processes – including reporting on energy usage and comparison.

• Support WAGES (water, air, gas, electricity, steam) usage logging and reporting.

It is critical for businesses to select a software application that gathers all disparate facility asset information – HVAC units, chillers, boilers, lighting – anything that consumes energy – into one place and provides operations staff with the critical knowledge of how and when to maintain, replace or alter those assets based upon how much energy they consume, not what date it is on the calendar. The net effect is that total energy spend can be reduced while increasing the performance and uptime of assets.

Is the urgency to curb greenhouse gas emissions a fad or at a critical turning point in our history? As businesses and governments begin taking action to reduce greenhouse gases, what type of approach makes the best financial sense for your business?

Only your company can decide. As your business continues to respond to consumers and regulatory agencies who demand a more environmentally conscious approach, it makes good business sense to include asset management as part of your CSR and green strategy.

Any green strategy must rely on the wise collection of pertinent data and the processing of that data to determine program success and the direction of efforts required to expand success and remedy areas of weakness. A comprehensive, green-oriented asset performance management solution will enable you to achieve compliance, efficiency, and consumer appeal.

Rod Ellsworth is the vice president, solutions management, at Infor Global Solutions.