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IBM Global Business Services

IBM Institute for Business Value


                                   Supply Chain
                                   Management
Mastering carbon
management
Balancing trade-offs to
optimize supply chain
efficiencies
IBM Institute for Business Value
   IBM Global Business Services, through the IBM Institute for Business Value,
 develops fact-based strategic insights for senior executives around critical public
  and private sector issues. This executive brief is based on an in-depth study by
 the Institute’s research team. It is part of an ongoing commitment by IBM Global
 Business Services to provide analysis and viewpoints that help companies realize
business value. You may contact the authors or send an e-mail to iibv@us.ibm.com
                               for more information.
Mastering carbon management
Balancing trade-offs to optimize supply chain efficiencies
By Karen Butner, Dietmar Geuder and Jeffrey Hittner




                           As the planet heats up, so do regulatory mandates to reduce greenhouse gas
                           emissions worldwide. Much of the opportunity to address CO2 emissions rests
                           on the supply chain, compelling companies to look for new approaches to
                           managing carbon effectively – from sourcing and production, to distribution
                           and product afterlife. The trade-offs in the supply chain are no longer just about
                           cost, service and quality – but cost, service, quality and carbon. By incorporating
                           carbon reduction into their overall SCM strategy, companies can help reduce their
                           environmental emissions footprint, strengthen their brand image and develop
                           competitive advantage.
                           Introduction                                              3
                                                                           inevitable. Indeed, under the European Union
                           The volume of global trade has more than        emissions trading scheme (EU ETS), such a
                           doubled in the last decade – reaching six       setup is already in effect for certain industries.
                           times the rate of growth of the world’s gross   Similar schemes are popping up across the
                           domestic product (GDP) during the same          United States in separate groups of states and
                                           1
                           period of time. This phenomenon has been        in other major industrial economies worldwide.
                           facilitated by relatively cheap energy, with
                                                                           Going forward, firms should expect to be
                           low attention given to the impact on climate
                                                                           charged for their CO2 emissions. And most
                           change. Consider that the global fleet of
                                                                           certainly, this charge will force a change in
                           oceangoing ships accounts for more CO2
                                                                           the way companies run their supply chains.
                           emissions than any of all but six countries
                                       2                                   Common practices of the last century – like
                           worldwide. Yet, none of this environmental
                                                                           long-distance airfreight, small batch size,
                           impact is reflected in shipping prices.
                                                                           just-in-time concepts and energy-intensive
                           With estimated economic damage of about         production in countries with low environ-
                           US$85 for each ton of carbon dioxide,           mental standards – will likely go by the
                           capping greenhouse gas (GHG) emissions          economic and political wayside. Reducing the
                           and putting a price tag on them became          supply chain’s carbon footprint will become
                                                                           an inescapable obligation.




                          Mastering carbon management
The choice will be either to delay – or to      The goal will be to optimize supply chain prod-
     embrace – the climate challenge as a            ucts, processes, information and cash flow in
     chance to restructure the supply chain for      the face of four main factors, or “trade-offs”:
     the economic and environmental good. The        cost, service, quality and carbon emissions.
     companies that act now can reap advantages      The supply chain, we must emphasize, will not
     that may be denied to those that wait for the   fundamentally change. But with carbon as an
     regulatory hand. These benefits include the     added criterion, the economics behind tradi-
     mindshare of a growing ethical consumer         tional practices will change, and optimizing the
     market; the attraction and retention of top     supply chain will become more complex.
     talent; and more sustainable growth overall.





   IBM Global Business Services
      IBM Global Business Services
Mastering carbon management
Balancing trade-offs to optimize supply chain efficiencies


                      Trade-offs to reduce carbon output                 In component supply, manufacturing/assembly
                      “Green” supply chain management begins             and distribution, there are a number of options
                      with recognizing the environmental dimen-          for reducing carbon and cost simultaneously
                      sions (such as carbon emissions, demand            (simultaneity being, of course, the hallmark of
                      on energy and other natural resources).            the best solutions). A trade-off model looks at
                      Succeeding at it will ultimately require supply    these areas and considers all of the factors in
                      chain executives and managers to balance           the “wheel” – design, packaging, processes,
                      numerous options and master a new chal-            components, energy, inventory and transporta-
                      lenge: optimizing supply chain products,           tion (see Figure 1).
                      processes, information and cash flows in light
                                                                         These options represent the “levers” avail-
                      of four main factors: cost, service, quality and
                                                                         able to influence cost, quality and service,
                      now, carbon emissions.
                                                                         as well as GHG emissions. The more carbon
                      Options                                            becomes incorporated into these levers, the
                      Different areas of the supply chain present        more “seamlessly green” a business can
                      options for becoming more sustainable and          appear. This can make products more attrac-
                      managing carbon better. Yet all of these           tive to the growing share of ethical consumers
                      areas, as well as various sourcing, produc-        in the marketplace today, and the company
                      tion and distribution processes, are typically     more appealing to the next generation of
                      closely interconnected and dependent on            employees intent on making a positive impact
                      one another. For instance, local SCM opti-         on the world around them. For each of these
                      mization efforts may adversely (and often
                      unforeseeably) affect other areas of the
                                                                         FIGURE 1.
                      supply chain – limiting options for improve-
                                                                         A trade-off model takes into account various
                      ment and stymieing the attainment of an            options and performance factors.
                      overall optimum result.                                                                 Packaging
                                                                                                               options
                      Therefore, carbon management, energy
                                                                                       tio n




                                                                                                                                Pr ption
                                                                                     op esig
                                                                                          ns




                                                                                                                                  oc s
                                                                                                                                  o
                                                                                       D




                                                                                                                                    es
                      consumption and other environmental
                                                                                                       Service            CO2          s
                      concerns should be analyzed and
                                                                                          tion




                      approached from a holistic viewpoint – evalu-                                       Supply chain
                                                                                                                                    Compo
                                                                                    options




                                                                                                                                     option ent
                                                                                Transporta




                                                                                                            trade-off
                      ating overall performance goals (cost, service,
                                                                                                                                           n




                                                                                                       Quality
                                                                                                                                           s




                                                                                                                      Cost
                      quality and carbon) in terms of their relation-
                      ship to one another.                                                       pol Inven               rgy
                                                                                                    icy tor           Enetions
                                                                                                        opt y
                                                                                                           ion         op
                                                                                                              s

                                                                         Source: IBM Research and the IBM Institute for Business Value.




                     Mastering carbon management
levers, there are examples of options in the              Trade-offs in action: Logistics and
     areas that need to be addressed. These                    distribution
     include:                                                  A typical SCM challenge is to strike the right
     • Design: Materials selection; energy effi-               balance of transportation, process and inven-
       ciency; durability; upgradeability; ease of             tory policies. CO2 reduction adds another
       disassembly; recyclability; disposability;              factor to this quest (see Figure 2).
       virtual product development
                                                               Shipment consolidation
     • Packaging: Size; reuse/recycling; materials             Shipment consolidation is one of the major
       (corrugated box, Styrofoam, plastic and the             opportunities to reduce the carbon footprint.
       like); documentation/manuals                            Quantifying the impact of shipment frequency
     • Processes: Order fulfilment; manufacturing;             on cost and carbon can help to establish an
       transportation; quality control; organizational         inventory replenishment policy that addresses
       management; demand/supply planning                      business needs and reduces environmental
                                                               impact. Many current just-in-time and direct
     • Components: Substitutes, sourcing, location,
                                                               customer delivery inventory policies require
       supplier rationalization
                                                               smaller loads to be shipped more frequently
     • Energy: Fossil fuel-based (oil, natural gas);           (see Scenario 1 in Figure 2).
       renewable energy-based (ethanol, solar,
       wind); other (nuclear, geothermal)                      This heightened service level frequently
                                                               reduces the inventory pipeline while
     • Inventory policy: Safety stocks; lot sizes;
                                                               increasing transportation costs and carbon.
       planning frequency; replenishment
                                                               A change in policy – to fewer but larger ship-
       programs (just-in-time, vendor-managed
                                                               ments – may be made at the cost of higher
       inventory, direct store delivery)
                                                               inventory levels and associated storage, and
     • Transportation: Modes, shipment frequency,              could affect service levels (see Scenario 2 in
       load consolidation, routing.                            Figure 2). But increasing energy and carbon
                                                               costs will likely shift the balance of current
                                                               policies in this direction.


      FIGURE 2.
      Carbon’s impact on shipment scenarios.
                                          Vehicle/ Inventory        Transportation    Carbon in
                                       shipment size cost          Cost     Carbon   warehousing
          Scenario 1
                                                                                                   Shipment size
        High shipment                                                                              Decreased
          frequency                                                                                cost/carbon
                                                                                                   Increased cost/
          Scenario 2                                                                               carbon
        Low shipment
          frequency


      Source: IBM Research.




   IBM Global Business Services
Today, optimizing    Sourcing locations                                   Network optimization
                          Supplier distance can impact component cost,         Network optimization strategies can be revised
      the supply chain
                          carbon emission and inventory – all of which         to address the additional carbon variable and
requires making – and
                          can be quantified to evaluate an organization’s      its impact on facility placement, manufacturing,
 balancing – trade-offs   procurement strategy and determine the need          distribution and transportation operations. This
         in key areas.    for modification to address environmental            can also encompass distribution facilities’ role
                          dimensions. Until now, a typical procurement         and sizing, transportation options, sourcing
                          strategy looked at landed cost – the actual, total   and procurement policies, and inventory
                          cost of importing an item (vendor expenses,          placement. Network optimization models will
                          transportation charges, duties, taxes, broker        thus address carbon-based parameters while
                          fees), plus relevant logistics costs (acquisi-       simultaneously working to meet objectives
                          tion, storage, movement, disposition of goods).      regarding overall costs, inventory pipeline and
                          Taking into account carbon-based risks and           service level achievements (see trade-off in
                          costs, “environmental” landed costs may rebal-       distribution sidebar).
                          ance local and global sourcing strategies
                          – leading to a new “trade-off point.”                 The trade-off in distribution: Service and
                                                                                cost versus emissions
                          Modes of transportation                               Determining ideal warehouse locations for a distri-
                          In addition to reducing transport miles, a            bution infrastructure used to be mainly a question
                          company can factor into the equation a focus          of service level and cost. However, for some, this
                          on low-carbon transport options – train, plane,       decision now takes into account carbon emissions.
                          ship and truck all have different carbon trade-       The following examples describe projects that
                          offs between cost, service level and carbon           effectively balance carbon with other factors.
                          impact. As governments begin to invest in             For a defined service level, an American bath and
                          greener transportation infrastructures and            kitchen products manufacturer was able to reduce
                          discourage those modes with greater envi-             carbon emissions by  percent by relocating its
                          ronmental negative impact, companies can              warehouses. While optimizing for emissions alone
                          evaluate a new spectrum of transportation             could have achieved up to 0 percent of carbon
                          options. Businesses must take a careful look          reduction, that decision would have resulted in a
                          at the inherent fuel economy/emissions levels         disproportionately higher relocation cost.
                          of various alternatives – factoring in load plan-
                                                                                For a European white goods distributor, reductions
                          ning for efficient use of vehicles. They must
                                                                                of  percent of emissions was achieved with an
                          optimize truck and container size, and weigh          optimized distribution network, balanced for all 
                          speed limitations against carbon impact,              criteria and achieving a 98 percent service level. In
                          vehicle maintenance requirements, driving             this case, the trade-off solution is two percentage
                          patterns and even driver training.                    points short of its maximum achievable level of
                                                                                                4
                                                                                CO reduction.




                         Mastering carbon management
Policies relating    Taken as a whole, these factors – modes                                                for organizations to address this issue in a
                           of transportation, warehouse and supplier                                              number of ways – and fast. There are specific
     to transportation,
                           locations, shipment frequency and routing                                              steps companies can take to limit GHG
         processes and
                           – must be re-analyzed against the cost of                                              emissions – from easy-to-implement local
      inventory should     carbon to determine the new optimal trade-off                                          improvements to complex optimizations that
consider both business     point. Including carbon in the mix will require                                        involve an extended supply chain. The further
    and environmental      deep computing, plus mathematical and                                                  these activities extend and integrate across
        repercussions.     analytical capabilities.                                                               the supply chain, the greater leverage and
                                                                                                                  control they will have over carbon emissions
                           As a 2008 IBM Institute for Business Value                                             (see Figure 3).
                           Global Corporate Social Responsibility
                           survey shows, a third of today’s companies                                             While an all-encompassing approach may
                           are required by their business partners to                                             have the highest potential for improvement, it
                           adopt or acquire new carbon management                                                 also introduces more complexity, more coor-
                                      5
                           standards. Businesses well positioned for                                              dination effort and more implementation time.
                           the 21st century are those that can quantify                                           “Low hanging fruit,” such as point solutions
                           cost and carbon, and provide partners and                                              for reducing carbon, may have less overall
                           customers with a level of knowledge and                                                improvement potential, but can show an
                           management that can help differentiate them                                            immediate return on investment. These efforts
                           in the marketplace.                                                                    can even lower certain expenditures to the
                                                                                                                  point of enabling additional, more integrated
                           Five steps to mastering carbon in                                                      carbon-reducing investments. We therefore
                           the supply chain                                                                       recommend a step-wise approach:
                           The fact that carbon trade-offs will compli-
                           cate the supply chain emphasizes the need

                            FIGURE 3.
                            Supply chain carbon mastery model.
                              High

                                                                                                                                          Collaborative end-to-end
                                                                                                                                                optimization
                               Business value by CO2 reduction




                                                                                                                              Internal,
                                                                                                                             horizontal
                                                                                                                            integration
                                                                                                          Functional
                                                                                                         optimization
                                                                                     Carbon asset
                                                                                     management
                                                                      Little focus
                                                                         on CO2
                              Low
                                                                 Internal                       Supply chain penetration                                    End-to-end

                            Source: IBM Institute for Business Value.




                         IBM Global Business Services
1. Diagnose and assess.                             can consume huge amounts of energy.
    2. Implement asset management and realize           Investing in facilities with a low carbon foot-
       point solutions.                                 print and energy-saving equipment offers
                                                        an effective first step with a defined return
    3. Address emissions in supply chain                on investment (see the Catalyst Paper
       functions.                                       Corporation sidebar). Implementing carbon-
    4. Find the optimum solution for integrating        based asset management helps ensure that
       across functions.                                the most direct savings potential concerning
    5. Collaborate with supply chain partners to        emission and cost can be realized.
       realize overall potential.                         Reducing energy consumption in paper
                                                          production
    1. Diagnosis and assessment
                                                          Catalyst Paper Corporation, a Canadian pulp
    Today’s global economy and the interde-
                                                          and paper company, uses its own by-products
    pendencies between a company and its
                                                          (biomass) to power its operations. It also
    partners (suppliers, contract manufacturers,
                                                          regains heat from effluence to warm process
    logistics providers, financial and tax entities,
                                                          water and thereby further reduce its carbon
    and customers ) require businesses to gain a
                                                          emissions. Together with efficiency gains and a
    holistic understanding of the carbon impact of
                                                          switch to natural gas, the company has lowered
    their entire supply chain – from supply strategy,     its GHG emissions by 0 percent and its energy
    to distribution and warehouse management,             use by  percent since 990. In 00 and 00
    to product operations and customer service.           alone, the company saved US$. million through
    Using a carbon diagnostic that evaluates each         a  percent reduction in fuel consumption.
                                                                                                     6

    high-level supply chain component according
    to a simple set of carbon statements and key        3. Functional optimization
    performance indicators, a company can begin         Each supply chain function can make a
    to define its own maturity level, identify gaps     specific contribution to help reduce GHGs.
    and set target levels.                              Generally speaking – and depending on the
                                                        carbon diagnostic results and “green” SCM
    Priority areas for taking action are determined
                                                        strategy – the ability to reduce CO2 emis-
    by combining the results of the assessment,
                                                        sions is typically greater when measures are
    the maturity level, the ease of taking action
                                                        taken early in the process (see Figure 4).
    and the strategic positioning. The higher the
                                                        Considerations in product design, customer
    strategic importance of an activity and the
                                                        fulfillment and even reverse logistics offer a
    bigger its performance gap, the more impor-
                                                        range of functional optimization opportunities.
    tant it is to take action.
                                                        When considering any functional optimiza-
    2. Carbon asset management
                                                        tion, there is always the question of whether
    Much of the potential for directly reducing
                                                        outsourcing could be an option for helping
    carbon emissions lies in a supply chain’s
                                                        to lower carbon emissions. In many parts
    facilities and assets. Warehousing, machinery,
                                                        of the supply chain, outsourcing has led to
    vehicle fleets and data centers, for instance,




   Mastering carbon management
Targeted, step-by-step      FIGURE 4.
                            Environmental optimization potential in supply chain functions.
 efforts to reduce GHG
                                                                                                Strategy
 emissions can have a                                       Setting goals, integrating with business strategy, focus areas, policies, funding
  big impact, and offer                                                                                                                                           Service and
                               Product design                 Planning                  Sourcing                  Production               Logistics
  an immediate return                                                                                                                                             end-of-life

        on investment.        • How can product           • How can the            • How can we               • What operations       • What distribution      • How can field
                                design make                 total network            best measure a             strategy (facility      network strategy         service operations
                                better trade-offs           be optimized,            supplier’s carbon          location, operating     (facility locations,     reduce carbon
                                between design              considering service,     impact (product,           model) provides         sizes, transport         footprint with better
                                requirements,               cost, “green” trade-     packaging,                 the best trade-off      modes) provides          routing and parts
                                including carbon            offs?                    upstream logistics)        between cost,           the best trade-off       inventory tracking?
                                footprint?                • What is the CO          and ultimately             service, carbon?        of cost, service and   • Is there a
                              • What tools and              impact from              comply with              • Is there a role         carbon?                  mechanism to drive
                                practices should            various inventory        carbon reduction           for sustainable       • How can packaging        continuous design
                                be employed by              concepts                 requirements?              factory/facility        be reduced and           improvement from
                                companies wanting           and planning           • What sourcing              management?             recycled?                service back to
                                to establish                methodologies?           strategies will result   • Can lean              • What is the impact       product design and
                                leadership?               • Are there                in a better trade-off      manufacturing           of increased load        engineering?
                              • What are the                opportunities to         of cost, service           and Six Sigma           consolidation, and     • Are all strategies
                                carbon impacts              reduce cost and          level, quality,            approaches be used      is this practical?       employed to reduce
                                throughout the              carbon emission at       carbon emission?           to manage carbon?                                landfilled materials:
                                                                                                                                      • What role can
                                product’s lifecycle,        the same time?         • How should we            • Is there a role for     alternative fuel or      reuse, refurbishing,
                                and how can they                                     evaluate carbon            manufacturing           power sources            recycling,
                                be minimized                                         offsets?                   execution software      play?                    secondary
                                upfront through                                                                 in the management                                markets?
                                smart design?                                                                   of carbon?

                                                                                    Asset management
                                    Sustainable facilities management; green building and energy carbon footprint asset management; asset utilization
                                                                 (Realtime data on energy usage, i.e., carbon dashboard)
                                                                                              Finance
                                                       Paperwork reduction; environmental cost management
                                                                                        Asset accounting; environmental tax benefits tracking

                            Source: IBM Global Business Services.


                           more specialization and efficiency (contract                                         4. Internal horizontal integration
                           manufacturing is one example). However,                                              Depending on the type of supply chain, the
                           these activities are often more geographically                                       most pertinent areas for carbon reduction vary,
                           dispersed – increasing transportation needs. A                                       as does their complexity. With today’s glob-
                           service provider is typically better positioned                                      ally distributed supply chains and customized
                           in terms of scale (and consequently reducing                                         products, that complexity has often increased
                           more greenhouse gases). This is especially                                           to the point where specific functional improve-
                           true for third-party logistics providers, who can                                    ments have a very limited reach. In contrast, a
                           offer carbon-optimized bundling for transpor-                                        horizontally integrated approach across func-
                           tation needs. Although it always needs to be                                         tions permits much greater leverage.
                           evaluated closely – outsourcing of specific
                                                                                                                Similar to the “design for manufacturability” or
                           supply chain functions may indeed lead to
                                                                                                                “design for serviceability” concepts, design
                           reduction in the overall carbon output.
                                                                                                                for environment takes emissions into account.
                                                                                                                This includes carbon’s impact on sourcing,
                                                                                                                manufacturing and distribution. Modified




                      8   IBM Global Business Services
packaging for reducing transportation efforts          5. Collaborative, end-to-end optimization
    is another commonly practiced approach                 While internal horizontal integration may
    for various supply chain areas. The dairy              increase leverage, the full potential for
    foods case (see the Friesland Coberco Dairy            reducing emissions can be attained only if all
    Foods sidebar) is an example that spans all            players in the supply chain pull at the same
    functions, from product design to transporta-          string and collaborate on end-to-end optimiza-
    tion. Late customization, as in this case, can         tion (see the Tesco sidebar).
    mitigate the effect of dispersed operations,
    but it requires businesses to address carbon            Integrated packaging design at Tesco
    management in an integrated manner across               Glass is the biggest single contributor to the
    supply chain functions. Also, as this example           packaging weight that UK retailer Tesco passes
    shows, integrating carbon management can                on to its customers. By prodding the industry
    strengthen an organization’s brand image.               to produce lighter-weight wine bottles, Tesco
                                                            reduced its annual glass usage from one single
    Reducing CO2 emissions in this way often                supplier by ,00 tons – a  percent saving.
    means balancing the consequences in                     An estimated ,00 tons of carbon emissions
    different areas. For example, as discussed in           were avoided by importing “new world” wines in
    the section on trade-offs, one of the possible          bulk and bottling them in lightweight glass in the
    compromises is between production batch                 UK. Improving product design not only produced
    sizes and energy-saving transportation                  savings for the glass manufacturer, it also reduced
    batches, or inventory levels.                           the carbon emissions through the entire lifecycle
                                                                              8
                                                            of a glass bottle.
     An integrated view of a dairy supply chain:
     Friesland Coberco Dairy Foods
                                                           Ideally, a lifecycle carbon assessment serves
     Baby food has lately become a highly diversified
                                                           to determine a comprehensive approach
     product. In the past, only three product lines
                                                           for reducing carbon along the supply chain.
     existed – one for each age group. Today, a
     multitude of product varieties is available,          In practice, however, end-to-end lifecycle
     including those for increasing resistance or          assessments are often lengthy and costly
     treating allergies. Netherlands-based Friesland       undertakings. Pragmatic approaches that
     Coberco Dairy Foods produces, packs, ships            focus on a few key collaborative steps among
     and maintains inventory of baby food – all from       partners in the supply chain can lead to
     different locations. To reduce transportation         tangible results comparatively fast, and with a
     efforts, the company is now adjusting its recipes     potentially higher return on investment than a
     and its production processes to create variants       single player can achieve.
     of a basic product. Specific ingredients are added
     at a late stage in the supply chain. This has the     Coordinating inventory and transportation
     potential to cut needed inventory – and thereby       among supply chain partners to reduce
     transportation – by an estimated ,000 miles        carbon impact can dramatically reduce
     per year, with corresponding carbon reductions.
                                                       7   mileage. Combining these efforts with low-
                                                           emitting transportation options can further




9   Mastering carbon management
Integrating carbon      lower carbon output. Following this approach,     The ideal solution is to strike the optimal
                               Unilever, together with first- and second-tier    trade-off between the desired states of cost,
   management into SCM
                               suppliers and supermarkets, for instance, iden-   service, quality and carbon – a classic opti-
strategies and processes
                               tified possible avoidance of 2.7 million miles    mization challenge that a combination of
    can be a best-of-both      per year.
                                         9
                                                                                 mathematical analytics, deep computing
      worlds situation for                                                       and industry expertise can help resolve.
                               Another example of collaboration among
  businesses, consumers                                                          For companies that are not yet equipped
                               supply chain partners is returnable pack-         to tackle every hurdle, we recommend the
  – and the environment.       aging, which (unlike disposable packaging)        intermediate steps discussed above to help
                               is intended for repeated use and can signifi-     achieve specific GHG reductions.
                               cantly reduce the impact of packaging-related
                               carbon. This has proven effective for mate-       As you begin to tackle the issue of carbon
                               rial supply in automotive and fresh-produce       management in your supply chain, there are
                               retailing supply chains.                          several key questions to think about:

                               Based on a defined environmental strategy,        • What is the model, or “heat map,” of your
                               common ground should be cultivated with             current carbon footprint? What processes
                               partners – especially in the areas of product       within the enterprise and the extended
                               design, packaging and logistics. Once the           enterprise are carbon-intensive? Figure 5
                               opportunities for improvements in carbon            depicts a possible carbon heat map based
                               management are clear, collaboration and             on the “deconstruction” of a company’s
                               end-to-end supply chain optimization – based        business model into discrete processes and
                               on balancing the desired outcomes in cost,          functions.
                               service, quality and environment – can create     • What are the key green indicators that you
                               a winning situation for all parties.                should be measuring? What are the current
                                                                                   targets and thresholds for improving and/or
                               Conclusion                                          meeting regulatory requirements?
                               Future regulations will no doubt prescribe ways
                                                                                 • What are the critical trade-offs, and the
                               to reduce carbon emissions. By then, the cost
                                                                                   constraints and considerations, regarding
                               of compliance – in every way – may be much
                                                                                   the reduction of carbon in your supply chain
                               greater. The time to tackle carbon emissions
                                                                                   – all while maintaining service and quality,
                               in the supply chain is now, when more options
                                                                                   and easing the cost impact? Remember,
                               are still available to gain true and lasting
                                                                                   the goal is not to reduce carbon at the cost
                               advantages. This is one of those rare occa-
                                                                                   of your traditional supply chain objectives;
                               sions when doing the financially smart thing,
                                                                                   it is to make carbon reduction a means for
                               and doing the right thing for consumers and
                                                                                   achieving those objectives.
                               the environment are one and the same.
                                                                                 • If pursuing a collaborative approach for
                                                                                   carbon management, how do you get
                                                                                   partners on board, and how will you share
                                                                                   risk, responsibility and value?




                         0   IBM Global Business Services
FIGURE 5.
      A sample carbon heat map.

                                  Consumer              Customer                                            Inventory and              Business
                                                                                Manufacturing
                                 relationship          relationship                                          distribution            administration

                                                                                                                                   Corporate strategy
                              Category/brand        Customer relationship      Manufacturing strategy     Supply chain strategy
                              strategy              strategy                                                                       Corporate planning
                                                                               Supplier relationship      Inventory planning
            Directing                                                          management                                          Alliance management
                              Category/brand        Customer relationship
                              planning                                                                    Network and asset
                                                    planning                                                                       Corporate governance
                                                                                                          configuration
                                                                               Production/materials
                                                                               development and
                              Brand PL             Assessing customer         planning                                            Business performance
                                                                                                          Distribution oversight   management
                              management            satisfaction
                              Matching supply and                                                                                  External market analysis
                                                    Customer insights          Manufacturing
            Controlling       demand                                           oversight
                              Marketing                                                                                            Organization and
                                                                                                          Inbound      Outbound    process design
                              development and
                              effectiveness                                                               transpor-    transpor-
                                                                               Supplier control           tation       tation      Legal, tax and
                                                    Account management                                                             regulatory compliance
                              Product ideation
                                                                               Product/component                                   Treasury and risk
                              Concept/product                                  manufacturing                                       management
                              testing               Value-added services                                                           Financial accounting
                                                                               Assemble/packaging                                  and reporting
                              Product development                                                         Distribution center
                                                    Customer account           products                                            Indirect procurement
                                                                                                          operations
                                                    service
                              Product management                                                                                   Facilities and equipment
            Executing                               Retail marketing           Plant inventory                                     management
                              Marketing execution   execution                  management                 Transportation
                                                                                                          resources                Resource development
                                                    In-store inventory
                              Consumer service      management                 Manufacturing                                       HR administration
                                                                                                          En-route inventory
                                                                               procurement
                              Product directory     Customer directory                                    management               IT systems and
                                                                                                                                   operations

                                                                         No carbon impact               Moderate carbon impact
      Source: IBM Institute for Business Value.                          Some carbon impact             Major carbon impact




     As companies move from a reactive to a                                          differentiation, and strengthen their brand
     proactive stance in managing carbon, they                                       image. In an age of heightened corporate
     can convert a cost issue into a growth oppor-                                   scrutiny and social responsibility, the compa-
     tunity. Taking into account traditional concerns                                nies that turn the tables on the carbon
     about quality, service and cost, a compre-                                      challenge could well be the leaders in the 21st
     hensive carbon-management strategy can                                          century global economy.
     help organizations develop more sustainable
     growth opportunities, maintain competitive




   Mastering carbon management
About the authors                                 Contributors
      Karen Butner is the Supply Chain                  Jorg van Geest is a Senior Managing
      Management Leader for the IBM Institute for       Consultant in IBM Global Business Services
      Business Value and an Associate Partner in        and the service line leader for Integrated
      the IBM Supply Chain Management practice,         Supply Chain Planning in the BeNeLux. Jorg
      with a focus on strategy and transformation       can be reached at jorg.van.geest@nl.ibm.com.
      competencies. Karen has over 25 years of          Jad Oseyran is a Supply Chain Management
      experience in supply chain management busi-       Senior Consultant in IBM Global Business
      ness practices and strategies. She assists        Services in the Netherlands. Jad can be
      clients in the high-tech, retail and consumer     reached at jad.oseyran@nl.ibm.com.
      products, electronics and transportation
                                                        Andrew Jackson is the Supply Chain
      logistics industries – helping them to develop
                                                        Management Leader in IBM Global Business
      strategies for transforming their global supply
                                                        Services, responsible for Northeastern Europe.
      chain performance. Karen can be reached at
                                                        Andrew can be reached at andrew.d.jackson@
      kbutner@us.ibm.com.
                                                        uk.ibm.com.
      Dietmar Geuder is a member of the IBM
                                                        Peter Williams is Chief Technology Officer for
      Institute for Business Value Supply Chain
                                                        Big Green Innovations at the IBM Systems and
      Management Team and a Managing
                                                        Technology Group. Peter can be reached at
      Consultant in IBM Global Business Services
                                                        peter.r.williams@us.ibm.com.
      in Germany. He has extensive experience
      in supply chain optimization, planning and        Edan Dionne is Director for Corporate
      procurement, with a focus on high-tech and        Environmental Affairs at IBM. She can be
      industrial clients. Dietmar can be reached at     reached at dionne@us.ibm.com.
      geuder@de.ibm.com.                                Kaan Katircioglu is Research Relationship
      Jeffrey Hittner is the Corporate Social           Manager at IBM Research. Kaan can be
      Responsibility Leader for the IBM Institute       reached at kaan@us.ibm.com.
      for Business Value. He works with a range of
      industries and clients to address the emerging
                                                        About IBM Global Business Services
                                                        With business experts in more than 160
      role of corporate social responsibility in core
                                                        countries, IBM Global Business Services
      business strategies. He can be reached at
                                                        provides clients with deep business process
      jhittner@us.ibm.com.
                                                        and industry expertise across 17 industries,
                                                        using innovation to identify, create and deliver
                                                        value faster. We draw on the full breadth of IBM
                                                        capabilities, standing behind our advice to
                                                        help clients implement solutions designed to
                                                        deliver business outcomes with far-reaching
                                                        impact and sustainable results.




   IBM Global Business Services
References                                         6
                                                            Catalyst Paper Corporation. “Environmental
     1
         World Trade Organization. “International           Manufacturing Principles.” Richmont,
         trade and tariff data.” Geneva, Switzerland.       Canada. December, 2007 http://www.
                                                                                      .
         http://www.wto.org/english/res_e/statis_e/         catalystpaper.com/socialresponsibility/
         statis_e.htm. Accessed on November                 socialresponsibility_environment_manufac-
         2007; Development Data Group. “2007                turingprinciples.xml
         World Development Indicators Online.”          7
                                                            Duurzame Logistiek. “Basisrecept voor
         Washington, DC: The World Bank. http://            Babyvoeding.” Delft, Netherlands, December,
         go.worldbank.org/3JU2HA60D0. Accessed              2007 http://www.duurzamelogistiek.nl/www/
                                                                 .
         in November, 2007  .                               scripts/case.php?pageID=5caseid=60
     2
         Eying, Veronika, and Jim Corbett.              8
                                                            Tesco PLC. “Tesco Corporate Responsibility
         “Comparing Fuel Consumption, Carbon                Review 2007 Cheshunt, UK. May, 2007
                                                                         .”                         .
         Dioxide and Other Emissions from                   http://www.tescocorporate.com/
         International Shipping and Aircraft: A             crreport07/06_wastepackre/packaging.
         Summary of Recent Research Findings.”              htm; TalkingRetail. “WRAP Morrisons and
                                                                                      ,
         DLR-Institute of Atmospheric Physics. 2007.        Tesco all working to use lighter weight
         http://www.pa.op.dlr.de/SeaKLIM/Fuel_              wine bottles.” Swanley, UK. August,
         Emissions_International_Shipping.html              2007 http://www.talkingretail.com/
                                                                 .
     3
         Stern, Sir Nicolas. “Stern Review on the           industry_announcements/6347/WRAP-
         Economics of Climate Change.” HM                   teams-up-with-Morrisons-a.ehtml
         Treasury, London, UK. October, 2006.           9
                                                            Duurzame Logistiek. “Voorraden op
         http://www.sternreview.org.uk/                     en logische plek.” Delft, Netherlands,
     4
         Results from recent client projects carried        November, 2007 http://www.duur-
                                                                            .
         out with the IBM Warehouse Site Planner.           zamelogistiek.nl/www/scripts/case.
     5                                                      php?pageID=5caseid=181. Accessed in
         IBM Institute for Business Value 2008 Global
                                                            November, 2007  .
         CSR survey.




   Mastering carbon management
© Copyright IBM Corporation 2008

  IBM Global Services
  Route 100
  Somers, NY 10589
  U.S.A.

  Produced in the United States of America
  02-08
  All Rights Reserved

  IBM and the IBM logo are trademarks or
  registered trademarks of International Business
  Machines Corporation in the United States,
  other countries, or both.

  Other company, product and service names
  may be trademarks or service marks of others.

  References in this publication to IBM products
  and services do not imply that IBM intends to
  make them available in all countries in which
  IBM operates.




  GBE03011-USEN-00

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Supply Chain Management - Master Carbon Management

  • 1. IBM Global Business Services IBM Institute for Business Value Supply Chain Management Mastering carbon management Balancing trade-offs to optimize supply chain efficiencies
  • 2. IBM Institute for Business Value IBM Global Business Services, through the IBM Institute for Business Value, develops fact-based strategic insights for senior executives around critical public and private sector issues. This executive brief is based on an in-depth study by the Institute’s research team. It is part of an ongoing commitment by IBM Global Business Services to provide analysis and viewpoints that help companies realize business value. You may contact the authors or send an e-mail to iibv@us.ibm.com for more information.
  • 3. Mastering carbon management Balancing trade-offs to optimize supply chain efficiencies By Karen Butner, Dietmar Geuder and Jeffrey Hittner As the planet heats up, so do regulatory mandates to reduce greenhouse gas emissions worldwide. Much of the opportunity to address CO2 emissions rests on the supply chain, compelling companies to look for new approaches to managing carbon effectively – from sourcing and production, to distribution and product afterlife. The trade-offs in the supply chain are no longer just about cost, service and quality – but cost, service, quality and carbon. By incorporating carbon reduction into their overall SCM strategy, companies can help reduce their environmental emissions footprint, strengthen their brand image and develop competitive advantage. Introduction 3 inevitable. Indeed, under the European Union The volume of global trade has more than emissions trading scheme (EU ETS), such a doubled in the last decade – reaching six setup is already in effect for certain industries. times the rate of growth of the world’s gross Similar schemes are popping up across the domestic product (GDP) during the same United States in separate groups of states and 1 period of time. This phenomenon has been in other major industrial economies worldwide. facilitated by relatively cheap energy, with Going forward, firms should expect to be low attention given to the impact on climate charged for their CO2 emissions. And most change. Consider that the global fleet of certainly, this charge will force a change in oceangoing ships accounts for more CO2 the way companies run their supply chains. emissions than any of all but six countries 2 Common practices of the last century – like worldwide. Yet, none of this environmental long-distance airfreight, small batch size, impact is reflected in shipping prices. just-in-time concepts and energy-intensive With estimated economic damage of about production in countries with low environ- US$85 for each ton of carbon dioxide, mental standards – will likely go by the capping greenhouse gas (GHG) emissions economic and political wayside. Reducing the and putting a price tag on them became supply chain’s carbon footprint will become an inescapable obligation. Mastering carbon management
  • 4. The choice will be either to delay – or to The goal will be to optimize supply chain prod- embrace – the climate challenge as a ucts, processes, information and cash flow in chance to restructure the supply chain for the face of four main factors, or “trade-offs”: the economic and environmental good. The cost, service, quality and carbon emissions. companies that act now can reap advantages The supply chain, we must emphasize, will not that may be denied to those that wait for the fundamentally change. But with carbon as an regulatory hand. These benefits include the added criterion, the economics behind tradi- mindshare of a growing ethical consumer tional practices will change, and optimizing the market; the attraction and retention of top supply chain will become more complex. talent; and more sustainable growth overall. IBM Global Business Services IBM Global Business Services
  • 5. Mastering carbon management Balancing trade-offs to optimize supply chain efficiencies Trade-offs to reduce carbon output In component supply, manufacturing/assembly “Green” supply chain management begins and distribution, there are a number of options with recognizing the environmental dimen- for reducing carbon and cost simultaneously sions (such as carbon emissions, demand (simultaneity being, of course, the hallmark of on energy and other natural resources). the best solutions). A trade-off model looks at Succeeding at it will ultimately require supply these areas and considers all of the factors in chain executives and managers to balance the “wheel” – design, packaging, processes, numerous options and master a new chal- components, energy, inventory and transporta- lenge: optimizing supply chain products, tion (see Figure 1). processes, information and cash flows in light These options represent the “levers” avail- of four main factors: cost, service, quality and able to influence cost, quality and service, now, carbon emissions. as well as GHG emissions. The more carbon Options becomes incorporated into these levers, the Different areas of the supply chain present more “seamlessly green” a business can options for becoming more sustainable and appear. This can make products more attrac- managing carbon better. Yet all of these tive to the growing share of ethical consumers areas, as well as various sourcing, produc- in the marketplace today, and the company tion and distribution processes, are typically more appealing to the next generation of closely interconnected and dependent on employees intent on making a positive impact one another. For instance, local SCM opti- on the world around them. For each of these mization efforts may adversely (and often unforeseeably) affect other areas of the FIGURE 1. supply chain – limiting options for improve- A trade-off model takes into account various ment and stymieing the attainment of an options and performance factors. overall optimum result. Packaging options Therefore, carbon management, energy tio n Pr ption op esig ns oc s o D es consumption and other environmental Service CO2 s concerns should be analyzed and tion approached from a holistic viewpoint – evalu- Supply chain Compo options option ent Transporta trade-off ating overall performance goals (cost, service, n Quality s Cost quality and carbon) in terms of their relation- ship to one another. pol Inven rgy icy tor Enetions opt y ion op s Source: IBM Research and the IBM Institute for Business Value. Mastering carbon management
  • 6. levers, there are examples of options in the Trade-offs in action: Logistics and areas that need to be addressed. These distribution include: A typical SCM challenge is to strike the right • Design: Materials selection; energy effi- balance of transportation, process and inven- ciency; durability; upgradeability; ease of tory policies. CO2 reduction adds another disassembly; recyclability; disposability; factor to this quest (see Figure 2). virtual product development Shipment consolidation • Packaging: Size; reuse/recycling; materials Shipment consolidation is one of the major (corrugated box, Styrofoam, plastic and the opportunities to reduce the carbon footprint. like); documentation/manuals Quantifying the impact of shipment frequency • Processes: Order fulfilment; manufacturing; on cost and carbon can help to establish an transportation; quality control; organizational inventory replenishment policy that addresses management; demand/supply planning business needs and reduces environmental impact. Many current just-in-time and direct • Components: Substitutes, sourcing, location, customer delivery inventory policies require supplier rationalization smaller loads to be shipped more frequently • Energy: Fossil fuel-based (oil, natural gas); (see Scenario 1 in Figure 2). renewable energy-based (ethanol, solar, wind); other (nuclear, geothermal) This heightened service level frequently reduces the inventory pipeline while • Inventory policy: Safety stocks; lot sizes; increasing transportation costs and carbon. planning frequency; replenishment A change in policy – to fewer but larger ship- programs (just-in-time, vendor-managed ments – may be made at the cost of higher inventory, direct store delivery) inventory levels and associated storage, and • Transportation: Modes, shipment frequency, could affect service levels (see Scenario 2 in load consolidation, routing. Figure 2). But increasing energy and carbon costs will likely shift the balance of current policies in this direction. FIGURE 2. Carbon’s impact on shipment scenarios. Vehicle/ Inventory Transportation Carbon in shipment size cost Cost Carbon warehousing Scenario 1 Shipment size High shipment Decreased frequency cost/carbon Increased cost/ Scenario 2 carbon Low shipment frequency Source: IBM Research. IBM Global Business Services
  • 7. Today, optimizing Sourcing locations Network optimization Supplier distance can impact component cost, Network optimization strategies can be revised the supply chain carbon emission and inventory – all of which to address the additional carbon variable and requires making – and can be quantified to evaluate an organization’s its impact on facility placement, manufacturing, balancing – trade-offs procurement strategy and determine the need distribution and transportation operations. This in key areas. for modification to address environmental can also encompass distribution facilities’ role dimensions. Until now, a typical procurement and sizing, transportation options, sourcing strategy looked at landed cost – the actual, total and procurement policies, and inventory cost of importing an item (vendor expenses, placement. Network optimization models will transportation charges, duties, taxes, broker thus address carbon-based parameters while fees), plus relevant logistics costs (acquisi- simultaneously working to meet objectives tion, storage, movement, disposition of goods). regarding overall costs, inventory pipeline and Taking into account carbon-based risks and service level achievements (see trade-off in costs, “environmental” landed costs may rebal- distribution sidebar). ance local and global sourcing strategies – leading to a new “trade-off point.” The trade-off in distribution: Service and cost versus emissions Modes of transportation Determining ideal warehouse locations for a distri- In addition to reducing transport miles, a bution infrastructure used to be mainly a question company can factor into the equation a focus of service level and cost. However, for some, this on low-carbon transport options – train, plane, decision now takes into account carbon emissions. ship and truck all have different carbon trade- The following examples describe projects that offs between cost, service level and carbon effectively balance carbon with other factors. impact. As governments begin to invest in For a defined service level, an American bath and greener transportation infrastructures and kitchen products manufacturer was able to reduce discourage those modes with greater envi- carbon emissions by percent by relocating its ronmental negative impact, companies can warehouses. While optimizing for emissions alone evaluate a new spectrum of transportation could have achieved up to 0 percent of carbon options. Businesses must take a careful look reduction, that decision would have resulted in a at the inherent fuel economy/emissions levels disproportionately higher relocation cost. of various alternatives – factoring in load plan- For a European white goods distributor, reductions ning for efficient use of vehicles. They must of percent of emissions was achieved with an optimize truck and container size, and weigh optimized distribution network, balanced for all speed limitations against carbon impact, criteria and achieving a 98 percent service level. In vehicle maintenance requirements, driving this case, the trade-off solution is two percentage patterns and even driver training. points short of its maximum achievable level of 4 CO reduction. Mastering carbon management
  • 8. Policies relating Taken as a whole, these factors – modes for organizations to address this issue in a of transportation, warehouse and supplier number of ways – and fast. There are specific to transportation, locations, shipment frequency and routing steps companies can take to limit GHG processes and – must be re-analyzed against the cost of emissions – from easy-to-implement local inventory should carbon to determine the new optimal trade-off improvements to complex optimizations that consider both business point. Including carbon in the mix will require involve an extended supply chain. The further and environmental deep computing, plus mathematical and these activities extend and integrate across repercussions. analytical capabilities. the supply chain, the greater leverage and control they will have over carbon emissions As a 2008 IBM Institute for Business Value (see Figure 3). Global Corporate Social Responsibility survey shows, a third of today’s companies While an all-encompassing approach may are required by their business partners to have the highest potential for improvement, it adopt or acquire new carbon management also introduces more complexity, more coor- 5 standards. Businesses well positioned for dination effort and more implementation time. the 21st century are those that can quantify “Low hanging fruit,” such as point solutions cost and carbon, and provide partners and for reducing carbon, may have less overall customers with a level of knowledge and improvement potential, but can show an management that can help differentiate them immediate return on investment. These efforts in the marketplace. can even lower certain expenditures to the point of enabling additional, more integrated Five steps to mastering carbon in carbon-reducing investments. We therefore the supply chain recommend a step-wise approach: The fact that carbon trade-offs will compli- cate the supply chain emphasizes the need FIGURE 3. Supply chain carbon mastery model. High Collaborative end-to-end optimization Business value by CO2 reduction Internal, horizontal integration Functional optimization Carbon asset management Little focus on CO2 Low Internal Supply chain penetration End-to-end Source: IBM Institute for Business Value. IBM Global Business Services
  • 9. 1. Diagnose and assess. can consume huge amounts of energy. 2. Implement asset management and realize Investing in facilities with a low carbon foot- point solutions. print and energy-saving equipment offers an effective first step with a defined return 3. Address emissions in supply chain on investment (see the Catalyst Paper functions. Corporation sidebar). Implementing carbon- 4. Find the optimum solution for integrating based asset management helps ensure that across functions. the most direct savings potential concerning 5. Collaborate with supply chain partners to emission and cost can be realized. realize overall potential. Reducing energy consumption in paper production 1. Diagnosis and assessment Catalyst Paper Corporation, a Canadian pulp Today’s global economy and the interde- and paper company, uses its own by-products pendencies between a company and its (biomass) to power its operations. It also partners (suppliers, contract manufacturers, regains heat from effluence to warm process logistics providers, financial and tax entities, water and thereby further reduce its carbon and customers ) require businesses to gain a emissions. Together with efficiency gains and a holistic understanding of the carbon impact of switch to natural gas, the company has lowered their entire supply chain – from supply strategy, its GHG emissions by 0 percent and its energy to distribution and warehouse management, use by percent since 990. In 00 and 00 to product operations and customer service. alone, the company saved US$. million through Using a carbon diagnostic that evaluates each a percent reduction in fuel consumption. 6 high-level supply chain component according to a simple set of carbon statements and key 3. Functional optimization performance indicators, a company can begin Each supply chain function can make a to define its own maturity level, identify gaps specific contribution to help reduce GHGs. and set target levels. Generally speaking – and depending on the carbon diagnostic results and “green” SCM Priority areas for taking action are determined strategy – the ability to reduce CO2 emis- by combining the results of the assessment, sions is typically greater when measures are the maturity level, the ease of taking action taken early in the process (see Figure 4). and the strategic positioning. The higher the Considerations in product design, customer strategic importance of an activity and the fulfillment and even reverse logistics offer a bigger its performance gap, the more impor- range of functional optimization opportunities. tant it is to take action. When considering any functional optimiza- 2. Carbon asset management tion, there is always the question of whether Much of the potential for directly reducing outsourcing could be an option for helping carbon emissions lies in a supply chain’s to lower carbon emissions. In many parts facilities and assets. Warehousing, machinery, of the supply chain, outsourcing has led to vehicle fleets and data centers, for instance, Mastering carbon management
  • 10. Targeted, step-by-step FIGURE 4. Environmental optimization potential in supply chain functions. efforts to reduce GHG Strategy emissions can have a Setting goals, integrating with business strategy, focus areas, policies, funding big impact, and offer Service and Product design Planning Sourcing Production Logistics an immediate return end-of-life on investment. • How can product • How can the • How can we • What operations • What distribution • How can field design make total network best measure a strategy (facility network strategy service operations better trade-offs be optimized, supplier’s carbon location, operating (facility locations, reduce carbon between design considering service, impact (product, model) provides sizes, transport footprint with better requirements, cost, “green” trade- packaging, the best trade-off modes) provides routing and parts including carbon offs? upstream logistics) between cost, the best trade-off inventory tracking? footprint? • What is the CO and ultimately service, carbon? of cost, service and • Is there a • What tools and impact from comply with • Is there a role carbon? mechanism to drive practices should various inventory carbon reduction for sustainable • How can packaging continuous design be employed by concepts requirements? factory/facility be reduced and improvement from companies wanting and planning • What sourcing management? recycled? service back to to establish methodologies? strategies will result • Can lean • What is the impact product design and leadership? • Are there in a better trade-off manufacturing of increased load engineering? • What are the opportunities to of cost, service and Six Sigma consolidation, and • Are all strategies carbon impacts reduce cost and level, quality, approaches be used is this practical? employed to reduce throughout the carbon emission at carbon emission? to manage carbon? landfilled materials: • What role can product’s lifecycle, the same time? • How should we • Is there a role for alternative fuel or reuse, refurbishing, and how can they evaluate carbon manufacturing power sources recycling, be minimized offsets? execution software play? secondary upfront through in the management markets? smart design? of carbon? Asset management Sustainable facilities management; green building and energy carbon footprint asset management; asset utilization (Realtime data on energy usage, i.e., carbon dashboard) Finance Paperwork reduction; environmental cost management Asset accounting; environmental tax benefits tracking Source: IBM Global Business Services. more specialization and efficiency (contract 4. Internal horizontal integration manufacturing is one example). However, Depending on the type of supply chain, the these activities are often more geographically most pertinent areas for carbon reduction vary, dispersed – increasing transportation needs. A as does their complexity. With today’s glob- service provider is typically better positioned ally distributed supply chains and customized in terms of scale (and consequently reducing products, that complexity has often increased more greenhouse gases). This is especially to the point where specific functional improve- true for third-party logistics providers, who can ments have a very limited reach. In contrast, a offer carbon-optimized bundling for transpor- horizontally integrated approach across func- tation needs. Although it always needs to be tions permits much greater leverage. evaluated closely – outsourcing of specific Similar to the “design for manufacturability” or supply chain functions may indeed lead to “design for serviceability” concepts, design reduction in the overall carbon output. for environment takes emissions into account. This includes carbon’s impact on sourcing, manufacturing and distribution. Modified 8 IBM Global Business Services
  • 11. packaging for reducing transportation efforts 5. Collaborative, end-to-end optimization is another commonly practiced approach While internal horizontal integration may for various supply chain areas. The dairy increase leverage, the full potential for foods case (see the Friesland Coberco Dairy reducing emissions can be attained only if all Foods sidebar) is an example that spans all players in the supply chain pull at the same functions, from product design to transporta- string and collaborate on end-to-end optimiza- tion. Late customization, as in this case, can tion (see the Tesco sidebar). mitigate the effect of dispersed operations, but it requires businesses to address carbon Integrated packaging design at Tesco management in an integrated manner across Glass is the biggest single contributor to the supply chain functions. Also, as this example packaging weight that UK retailer Tesco passes shows, integrating carbon management can on to its customers. By prodding the industry strengthen an organization’s brand image. to produce lighter-weight wine bottles, Tesco reduced its annual glass usage from one single Reducing CO2 emissions in this way often supplier by ,00 tons – a percent saving. means balancing the consequences in An estimated ,00 tons of carbon emissions different areas. For example, as discussed in were avoided by importing “new world” wines in the section on trade-offs, one of the possible bulk and bottling them in lightweight glass in the compromises is between production batch UK. Improving product design not only produced sizes and energy-saving transportation savings for the glass manufacturer, it also reduced batches, or inventory levels. the carbon emissions through the entire lifecycle 8 of a glass bottle. An integrated view of a dairy supply chain: Friesland Coberco Dairy Foods Ideally, a lifecycle carbon assessment serves Baby food has lately become a highly diversified to determine a comprehensive approach product. In the past, only three product lines for reducing carbon along the supply chain. existed – one for each age group. Today, a multitude of product varieties is available, In practice, however, end-to-end lifecycle including those for increasing resistance or assessments are often lengthy and costly treating allergies. Netherlands-based Friesland undertakings. Pragmatic approaches that Coberco Dairy Foods produces, packs, ships focus on a few key collaborative steps among and maintains inventory of baby food – all from partners in the supply chain can lead to different locations. To reduce transportation tangible results comparatively fast, and with a efforts, the company is now adjusting its recipes potentially higher return on investment than a and its production processes to create variants single player can achieve. of a basic product. Specific ingredients are added at a late stage in the supply chain. This has the Coordinating inventory and transportation potential to cut needed inventory – and thereby among supply chain partners to reduce transportation – by an estimated ,000 miles carbon impact can dramatically reduce per year, with corresponding carbon reductions. 7 mileage. Combining these efforts with low- emitting transportation options can further 9 Mastering carbon management
  • 12. Integrating carbon lower carbon output. Following this approach, The ideal solution is to strike the optimal Unilever, together with first- and second-tier trade-off between the desired states of cost, management into SCM suppliers and supermarkets, for instance, iden- service, quality and carbon – a classic opti- strategies and processes tified possible avoidance of 2.7 million miles mization challenge that a combination of can be a best-of-both per year. 9 mathematical analytics, deep computing worlds situation for and industry expertise can help resolve. Another example of collaboration among businesses, consumers For companies that are not yet equipped supply chain partners is returnable pack- to tackle every hurdle, we recommend the – and the environment. aging, which (unlike disposable packaging) intermediate steps discussed above to help is intended for repeated use and can signifi- achieve specific GHG reductions. cantly reduce the impact of packaging-related carbon. This has proven effective for mate- As you begin to tackle the issue of carbon rial supply in automotive and fresh-produce management in your supply chain, there are retailing supply chains. several key questions to think about: Based on a defined environmental strategy, • What is the model, or “heat map,” of your common ground should be cultivated with current carbon footprint? What processes partners – especially in the areas of product within the enterprise and the extended design, packaging and logistics. Once the enterprise are carbon-intensive? Figure 5 opportunities for improvements in carbon depicts a possible carbon heat map based management are clear, collaboration and on the “deconstruction” of a company’s end-to-end supply chain optimization – based business model into discrete processes and on balancing the desired outcomes in cost, functions. service, quality and environment – can create • What are the key green indicators that you a winning situation for all parties. should be measuring? What are the current targets and thresholds for improving and/or Conclusion meeting regulatory requirements? Future regulations will no doubt prescribe ways • What are the critical trade-offs, and the to reduce carbon emissions. By then, the cost constraints and considerations, regarding of compliance – in every way – may be much the reduction of carbon in your supply chain greater. The time to tackle carbon emissions – all while maintaining service and quality, in the supply chain is now, when more options and easing the cost impact? Remember, are still available to gain true and lasting the goal is not to reduce carbon at the cost advantages. This is one of those rare occa- of your traditional supply chain objectives; sions when doing the financially smart thing, it is to make carbon reduction a means for and doing the right thing for consumers and achieving those objectives. the environment are one and the same. • If pursuing a collaborative approach for carbon management, how do you get partners on board, and how will you share risk, responsibility and value? 0 IBM Global Business Services
  • 13. FIGURE 5. A sample carbon heat map. Consumer Customer Inventory and Business Manufacturing relationship relationship distribution administration Corporate strategy Category/brand Customer relationship Manufacturing strategy Supply chain strategy strategy strategy Corporate planning Supplier relationship Inventory planning Directing management Alliance management Category/brand Customer relationship planning Network and asset planning Corporate governance configuration Production/materials development and Brand PL Assessing customer planning Business performance Distribution oversight management management satisfaction Matching supply and External market analysis Customer insights Manufacturing Controlling demand oversight Marketing Organization and Inbound Outbound process design development and effectiveness transpor- transpor- Supplier control tation tation Legal, tax and Account management regulatory compliance Product ideation Product/component Treasury and risk Concept/product manufacturing management testing Value-added services Financial accounting Assemble/packaging and reporting Product development Distribution center Customer account products Indirect procurement operations service Product management Facilities and equipment Executing Retail marketing Plant inventory management Marketing execution execution management Transportation resources Resource development In-store inventory Consumer service management Manufacturing HR administration En-route inventory procurement Product directory Customer directory management IT systems and operations No carbon impact Moderate carbon impact Source: IBM Institute for Business Value. Some carbon impact Major carbon impact As companies move from a reactive to a differentiation, and strengthen their brand proactive stance in managing carbon, they image. In an age of heightened corporate can convert a cost issue into a growth oppor- scrutiny and social responsibility, the compa- tunity. Taking into account traditional concerns nies that turn the tables on the carbon about quality, service and cost, a compre- challenge could well be the leaders in the 21st hensive carbon-management strategy can century global economy. help organizations develop more sustainable growth opportunities, maintain competitive Mastering carbon management
  • 14. About the authors Contributors Karen Butner is the Supply Chain Jorg van Geest is a Senior Managing Management Leader for the IBM Institute for Consultant in IBM Global Business Services Business Value and an Associate Partner in and the service line leader for Integrated the IBM Supply Chain Management practice, Supply Chain Planning in the BeNeLux. Jorg with a focus on strategy and transformation can be reached at jorg.van.geest@nl.ibm.com. competencies. Karen has over 25 years of Jad Oseyran is a Supply Chain Management experience in supply chain management busi- Senior Consultant in IBM Global Business ness practices and strategies. She assists Services in the Netherlands. Jad can be clients in the high-tech, retail and consumer reached at jad.oseyran@nl.ibm.com. products, electronics and transportation Andrew Jackson is the Supply Chain logistics industries – helping them to develop Management Leader in IBM Global Business strategies for transforming their global supply Services, responsible for Northeastern Europe. chain performance. Karen can be reached at Andrew can be reached at andrew.d.jackson@ kbutner@us.ibm.com. uk.ibm.com. Dietmar Geuder is a member of the IBM Peter Williams is Chief Technology Officer for Institute for Business Value Supply Chain Big Green Innovations at the IBM Systems and Management Team and a Managing Technology Group. Peter can be reached at Consultant in IBM Global Business Services peter.r.williams@us.ibm.com. in Germany. He has extensive experience in supply chain optimization, planning and Edan Dionne is Director for Corporate procurement, with a focus on high-tech and Environmental Affairs at IBM. She can be industrial clients. Dietmar can be reached at reached at dionne@us.ibm.com. geuder@de.ibm.com. Kaan Katircioglu is Research Relationship Jeffrey Hittner is the Corporate Social Manager at IBM Research. Kaan can be Responsibility Leader for the IBM Institute reached at kaan@us.ibm.com. for Business Value. He works with a range of industries and clients to address the emerging About IBM Global Business Services With business experts in more than 160 role of corporate social responsibility in core countries, IBM Global Business Services business strategies. He can be reached at provides clients with deep business process jhittner@us.ibm.com. and industry expertise across 17 industries, using innovation to identify, create and deliver value faster. We draw on the full breadth of IBM capabilities, standing behind our advice to help clients implement solutions designed to deliver business outcomes with far-reaching impact and sustainable results. IBM Global Business Services
  • 15. References 6 Catalyst Paper Corporation. “Environmental 1 World Trade Organization. “International Manufacturing Principles.” Richmont, trade and tariff data.” Geneva, Switzerland. Canada. December, 2007 http://www. . http://www.wto.org/english/res_e/statis_e/ catalystpaper.com/socialresponsibility/ statis_e.htm. Accessed on November socialresponsibility_environment_manufac- 2007; Development Data Group. “2007 turingprinciples.xml World Development Indicators Online.” 7 Duurzame Logistiek. “Basisrecept voor Washington, DC: The World Bank. http:// Babyvoeding.” Delft, Netherlands, December, go.worldbank.org/3JU2HA60D0. Accessed 2007 http://www.duurzamelogistiek.nl/www/ . in November, 2007 . scripts/case.php?pageID=5caseid=60 2 Eying, Veronika, and Jim Corbett. 8 Tesco PLC. “Tesco Corporate Responsibility “Comparing Fuel Consumption, Carbon Review 2007 Cheshunt, UK. May, 2007 .” . Dioxide and Other Emissions from http://www.tescocorporate.com/ International Shipping and Aircraft: A crreport07/06_wastepackre/packaging. Summary of Recent Research Findings.” htm; TalkingRetail. “WRAP Morrisons and , DLR-Institute of Atmospheric Physics. 2007. Tesco all working to use lighter weight http://www.pa.op.dlr.de/SeaKLIM/Fuel_ wine bottles.” Swanley, UK. August, Emissions_International_Shipping.html 2007 http://www.talkingretail.com/ . 3 Stern, Sir Nicolas. “Stern Review on the industry_announcements/6347/WRAP- Economics of Climate Change.” HM teams-up-with-Morrisons-a.ehtml Treasury, London, UK. October, 2006. 9 Duurzame Logistiek. “Voorraden op http://www.sternreview.org.uk/ en logische plek.” Delft, Netherlands, 4 Results from recent client projects carried November, 2007 http://www.duur- . out with the IBM Warehouse Site Planner. zamelogistiek.nl/www/scripts/case. 5 php?pageID=5caseid=181. Accessed in IBM Institute for Business Value 2008 Global November, 2007 . CSR survey. Mastering carbon management
  • 16. © Copyright IBM Corporation 2008 IBM Global Services Route 100 Somers, NY 10589 U.S.A. Produced in the United States of America 02-08 All Rights Reserved IBM and the IBM logo are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. Other company, product and service names may be trademarks or service marks of others. References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates. GBE03011-USEN-00