Why You Should ‘Green’ Your Supply Chain

May 14, 2008 7:39 PM  By

Recent years have seen an explosion in environmental awareness among U.S. businesses. Companies everywhere are jumping on the “green bandwagon” and are undertaking a wide range of initiatives to protect the environment – from reducing energy consumption to using environmentally friendly materials in their products to promoting homeshoring. They’re increasingly using green technology, operating in green buildings, and selling green products – and, perhaps most important, consumers are gravitating to businesses that they perceive as being committed to the green movement.

There is, however, one area of business operations that has so far proven resistant to greening: The supply chain. That’s because, for many businesses, the supply chain represents a precarious balance, one that seems all too easy to topple if upset. Companies are often reluctant to try to bring green initiatives to the supply chain because of the risk of over-complicating things — and consequently losing money.

But some logistics professionals have already made impressive strides to reduce the environmental impact of managing supply chains. For example, more than 10 years ago the U.S. Postal Service started working with direct mail vendors to help them implement plans to reduce waste. In a 2007 report, the USPS estimated that these plans had resulted in savings of as much as $500 million. You can imagine what the savings could be if these initiatives were implemented today.

Studies show that companies which make the effort to be green enjoy both higher customer satisfaction and higher per employee revenue. A 2008 survey from Brockmann & Co., for example, shows that employees at green firms generate more than 170% (or 1.7 times) the amount of revenue per employ than similar employees at non-green firms. Such firms also enjoy an employee satisfaction rate that is 4.7 times greater than non-green firms.

Furthermore, a recent survey by the audit firm KPMG found that a majority of consumers were willing to pay more in order to “go green.” The survey, released at the end of the 2007 holiday shopping season, found that 88% of consumers described themselves as “very concerned about the environment.” The survey further found that 74% indicated that they purchase “environmentally friendly products” while a majority reported that they’re willing to spend more for environmentally-friendly items, and that they make a special effort to support retailers with a green reputation.

An April 2008 study by Diamond Management & Technology Consultants points out that heavyweight companies in a variety of sectors – from Heineken to Nestle to Johnson & Johnson – have recently taken steps to integrate a greener supply chain as a part of their company’s overall environmental strategy. Diamond’s report identifies five questions to ask when considering greening your supply chain:

1.) Have we aligned our green supply chain goals with business goals?
2.) Have we evaluated how our supply chain impacts the environment and how we could use this to create value?
3.) Have we determined how collaborating with suppliers and customers could derive shared benefits through a green agenda?
4.) Have we created a business case to evaluate, justify, and prioritize changes that could result from a green supply chain?
5.) Have we assessed the full range of our adverse environmental impact, and have we chosen the least burdensome alternative?

So why go green?

Greening your supply chain means understanding your logistics operations’ environmental footprint. Your supply chain demands energy, consumes resources, produces waste products, and causes the release of emissions – all factors that affect our shared environment. A sophisticated third-party logistics provider (3PL) will have in place a network to monitor all levels of your logistics operations and can likely use their existing infrastructure to measure these impacts. Getting a clear look into these impacts is the first step in greening your supply chain.

Julie Paquette of the Massachusetts Institute of Technology’s Engineering Systems Division lays out many of the reasons for building a greener supply chain. These include responding to pressures from regulations, increased costs of resources, the importance of ethical (in this case green) business practices, and the growing expectation among customers that companies will work to reduce their environmental impact.

In her 2005 paper, “The Supply Chain Response to Environmental Pressure,” Paquette rightly points out that, as environmental pressures promise to grow ever-more comprehensive, a “company’s supply chain response may confer significant competitive advantage” over companies who are less quick to respond to regulatory pressures, increased energy costs, and growing public expectations.

Too many companies, however, have been slow to focus on the potential gains that green supply chains can cause. One reason for this, identified in the EPA’s report “The Lean and Green Supply Chain,” is that cost accounting systems often hide the size of the environmental costs companies incur. Just because they are often difficult to see on a conventional spreadsheet, does not mean that these costs are not real or measurable.

Paquette cites a study by Michael Porter and Claas van der Linde that describes categories of cost that companies incur from environmental factors. These include the value gained by the substitution, reuse, or recycling of production inputs; more effective utilization of waste and by-products through conversion to usable forms; lower energy consumption; cuts in material storage and handling costs; savings from safer conditions, and cost reductions for waste disposal and discharge activities.

Going green by outsourcing your supply chain

For many businesses, turning away from core competencies and towards something as foreign as building a green supply chain can be a scary proposition. To avoid unnecessary and costly mistakes, many companies choose to outsource their green needs to a 3PL. An experienced 3PL can pinpoint where the opportunities are for greener practices within a supply chain, while identifying the best way to implement those practices for the lowest cost.

Collaborating closely with supply chain partners like 3PLs can bring greater flexibility and, according the U.S. Environmental Protection Agency, “enable a company to reduce inventory, decrease product obsolescence, lower transaction costs, react more quickly to changes in the market, and respond more promptly to customer requests.”

The future looks green and businesses that ignore their environmental impact do so at considerable risk. A company’s supply chain is no different, and their logistics should align with a comprehensive corporate environmental strategy.

Ron Cain is president/CEO of TMSi Logistics (www.tmsilog.com). He is also author of “Green Logistics: Should Your Supply Chain Turn ‘Green?’”