Challenges facing the industry
The biggest challenge, and one which not often considered in academic research, is that it’s difficult to get support from the Board for sustainability improvements unless there is a legal requirement or a definitive and clearly defined financial benefit.
In this age, many shareholders do not want to be seen to associate with companies whose response to green issues is weak or, worse still, negative.
This is also true for social issues. Investors may want these desirable characteristics as well as financial returns, but not instead of. This gives some leverage to green and wider sustainability issues where the cost/benefit balance is long-term positive or neutral. This is also true of customers; industry has to make more concessions to win customers.
If firms are seen to be less “green”, less “socially responsible”, either in the design of products or in their operations than their competitors, then customers may choose to go elsewhere.
This ultimately feeds back to shareholders, as these lost orders soon translate to lower returns; hence the pressure will shift towards improving sustainability.
Some investors do have a longer-term view – and these investors are more likely to understand, and to back CEOs who support the idea that long-term success lies in achieving a transparently fair and sustainable balance between rewarding all of the stakeholders in the business, not just the shareholders. These stakeholders include: customers, suppliers, employees and, increasingly, the communities within which the business operates.
Supply chain dynamics and values
“Value” is not simply a financial measure but can have different meanings to different people. “Triangle of Tension” is a simplistic way of representing the inherent trade-offs in supply chain decision-making.
In this view of supply chain dynamics, it is appropriate to consider “delivery” as lead-time, “quality” as “on time in full”, for example, meeting the committed lead time with no losses, damage or sub-standard parts and “cost” as the direct cost of the operation - manufacturing, assembly, and logistic). If one of these parameters is changed, then this change will impact on at least one of the others.
In order to assess the business case for a green initiative, an evaluation of how its implementation affects the delivery, cost, and quality parameters is required to determine if there has been an improvement.
The problem with this simple assessment is that sometimes the value of parameters is non-linear. For example, for a supply chain to work, a specific lead-time must be achieved.
A late lead-time may greatly reduce value, or even eliminate it. Conversely, early delivery may also cause problems for the customer, for example due to issues of storage. Therefore, assessment of sustainability requires complex methodologies.
Logistics and transport
Distribution and delivery requires a balance between lead-time against the combined aspects of cost, energy and carbon. For example, the cheapest transport is usually sea and rail.
These are also perceived to be the “greenest” in terms of energy use and carbon emissions, so from a cost, energy, and environmental perspective, these are the optimum transport medium to use.
However, rail and sea are also slower in comparison to air transport, and less controlled than road transport. The extra costs incurred from building up buffer stocks due to increased likelihood of missed, or delayed deliveries is likely to outweigh the benefits from using the “green” option.
Distribution and transport is linked to storage. Having one large, central warehouse can introduce unnecessary distribution journeys if all goods and services must be shipped through a single large distribution centre.
The opposite end of the spectrum of having lots of smaller warehouses can lead to excess inventory, which ties up cash, uses energy and resources without contributing to value added processes.
Each of these centres require their own managers, finance people, HR people and other indirect costs, as well as increasing the probably of carrying duplicate stocks because of the inherent inefficiency of multiple stores.
In considering the logistics, there is a potential direct clash between reducing the operational cost in total by reducing lead-time and improving On Time In Full (OTIF) against reducing direct shipping cost and improving energy/carbon at the expense of lead-time.
Business needs
To improve the ability for businesses to incorporate supply chain resource sustainability into their operations, there is a need to develop frameworks that enable better ways of visualising, understanding, and calculating the full impacts of green and sustainability (including social) improvements.
This requires taking into account energy use, carbon emissions, resource use, corporate social responsibility, and cost for both the initial investment decision, and the operational aspects.
To do this, industry requires better tools to model and evaluate these interventions to create business cases for change.