Green Supply Chains: Focus Turns to ROI

Stephen DeAngelis

June 1, 2012

The editorial staff at The Green Supply Chain reported, “The annual Sustainability in logistics report from American Shipper magazine, co-sponsored by eyefortransport, CSCMP and NRF … found that support for Sustainability actual dropped a bit year over year.” [“Annual Study on Green Supply Chain Practices on Logistics Finds Some Progress, but Increasing Focus on ROI,” 10 May 2012] While that trend may be distressing, the article also reported “that companies are getting more focused on Green programs that are very clearly defined and which have a solid financial payback while improving Sustainability.” In other words, the sustainability programs getting the most attention are likely to endure because they are providing a solid return on investment. That’s good news for both the companies involved and the environment. The article continues:

“That view is supported by a later comment later in the report, which observed that ‘A cost neutral approach to environmental Sustainability appears to be under fire in 2012 as more supply chain practitioners suggest their programs must have an ROI.’ But to us, a surprisingly large percentage of companies are willing to invest in Green with no ROI. … In 2011 a combined 67% of respondents said they would pursue Green efforts that would be just cost neutral at best or actually deliver some hit to the bottom line. That combined number fell to 60%, however, in 2012.”

The article concluded by noting that among “the barriers to adoption of Sustainability initiatives … lack of ROI not surprisingly was cited as the largest obstacle.” To critics who claim that sustainability efforts cost too much, Paul E. Teague replies, “Charges that sustainability costs too much are bunk.” [Procurement Leaders, 14 May 2012] He explains:

“The state of California is a trend setter in many ways, not the least of which is in its approach to environmental regulations. It’s aggressive in setting pollution-abatement standards that, because of the state’s size, sometimes become de facto national standards. The California Air Resources Board (CARB) is notoriously tough, and both widely praised and widely criticized for its policies. Last week, a trade association said that CARB’s latest regulatory move on diesel fuel was an attack on blue-collar jobs. I’m not qualified to comment on that charge or any of the other complaints about the Board’s rulings. Costs may well rise, but logistics costs have been rising anyway. The Council of Supply Chain Management professionals says they did in 2010 due, in part, to trucking-company mergers, safety regulations, and reductions in driving hours. The 2011 report will be out next month. But insofar as CARB’s rulings reflect broader efforts in sustainability and have an impact on procurement, it’s fair to point out that charges about environmentalism costing too much money and wrecking the economy are bunk. The opposite is true.”

To demonstrate his point, Teague discusses how Walmart “has turned waste into a revenue stream.” He reports that Walmart “has been able to reduce some of its waste by 12 million pounds a month and sell it on the open market.” He also reports that IBM “has found ways to turn sustainability into a revenue generator.” He continues:

“Among other things, the company recently opened a server remanufacturing center in China where it will refurbish PCs and some servers, extending their life, reducing e-waste, and selling into a new market. In the services industry, global real estate company CB Richard Ellis realised added revenue from its sustainability programs.”

Although anecdotal evidence is nice, I’m sure that a rigorous study will be required to convince some critics. Fortunately, Teague notes that a weak global economy has not slowed sustainability efforts. That conclusion, he reports, comes from “a recent report from the MIT Sloan Review and the Boston Consulting Group.” He continues:

“The report says that more companies than ever believe sustainability is a necessary business strategy, and many claim to be profiting from their sustainability activities. In fact, the report says, Kimberly-Clark has added a net sales goal of 25% of 2015 net sales from environmentally innovative products. Cynthia Dautrich, global procurement officer at Kimberly-Clark, told attendees at the recent Procurement Leaders Forum in Chicago that embedding sustainability is one of the four key drivers for procurement to define and deliver value. She is right. There doesn’t have to be a conflict between sustainability and profits. So, forget the naysayers on environmental activities. They don’t have a case.”

The big takeaways from the two articles cited above are: First, a business case needs to be made for sustainability efforts; and, second, finding a business case isn’t as difficult as many companies might believe. Gene Bodenheimer, senior vice president for damage research at Genco ATC, told the editorial staff at SupplyChainBrain that some companies do take their “green” efforts too far. [“Can You Be Too Green?” 3 May 2011] Bodenheimer had the bottom line in mind when he made that assertion. Specifically, he was thinking about packaging. He believes that “cutting back on product packaging is one area where companies can go too far with sustainability initiatives.” The article continued:

“‘If packaging is reduced too much, then the secondary packaging, which has the job of protecting consumer products from the rigors of normal supply chain handling, may not be able to do its job, and the products become damaged before they ever make it to shelf,’ he says. If heavily damaged, products have to be discarded and their value is lost. Even if the damage is minor or cosmetic, the result still may be lost sales because blemished products have a lower appeal to shoppers.”

Not only are profits affected by damaged products, but everything from procurement to disposal becomes much less “green” as a result. The article continued:

“Companies often are persuaded by the promised savings of reduced packaging, which can be robust, says Bodenheimer. However, these savings often are more than offset by the detrimental impact of damages, with costs running 10 to 20 times the savings achieved, he says. As an example, Bodenheimer cites a food manufacturer with which Genco worked. This company reduced the packaging used to ship glass jars containing food. Originally, these glass jars were shipped in corrugated cases that had corrugated dividers between the jars. This was changed to tray packs with shrink wrap in case configurations. ‘At first, the savings looked great, but damage claims went up four times and the end cost was about 20 times the original savings,’ he says.”

I find it hard to believe that even the most zealous environmentalist would criticize a return to more robust packaging if it reduced damage (and, as a result, ultimately reduced lifecycle waste). The article continued:

“One way to avoid such outcomes is to broaden the group of stakeholders involved in the decision-making process, Bodenheimer says. It is especially important to include the group that manages returns and unsellables, because this group typically tracks and measures how packaging performs in the real-world supply chain. They are able to balance the lab test results for new package designs with real-world supply chain handling, which often is far less than the ideal conditions typically measured in a lab. ‘If this group is brought to the table early on, they can help avoid mistakes,’ says Bodenheimer.”

Bodenheimer’s arguments only strengthen my conviction that the better the business case for a sustainability effort the better the ultimate solution. In the case of packaging, a look at potential lifecycle costs and potential waste leads to a much better (and ultimately sustainable) solution. The article concluded by looking at another aspect of sustainability activity — recycling or repurposing.

“Even with the best packaging and handling, damage will sometimes occur, which is why companies also need to have a cost-effective process in place to quickly re-market products with residual value, or to salvage and recycle materials, Bodenheimer says. Making an investment in such a system can quickly pay for itself, with every dollar spent resulting in $5 to $10 earned, he says. ‘That’s an ROI that anyone would be proud to have.'”

Packaging is perhaps the most visible part of a sustainable supply chain. Rocco Papalia, Senior Vice President of PepsiCo Advanced Research at PepsiCo, indicates that research needs to continue on more environmentally friendly packaging materials in order to bring costs down so that a business case for using them can be made. [“Turning Plants into Plastics: Challenges and Opportunities in Bioplastics for Consumer Goods Companies,” Environment Leader, 7 June 2011]. Papalia wrote:

“In 1934, Henry Ford, the ‘industrial genius of modern times,’ declared to Modern Mechanix magazine that in the future we will be able to grow annually ‘most of the substances needed in manufacturing … When that day comes … [c]hemistry will reunite agriculture and industry.’ While it is too soon to suggest that Mr. Ford’s prophecy has been fulfilled, a combination of changing consumer demands, concerns of climate change, and a desire to reduce our reliance on fossil fuels are pushing us ever closer to the day he envisioned.”

Papalia noted that the relatively cheap price of petroleum still made the use of petroleum-based products more cost effective than more environmentally-friendly alternatives. To reduce the cost gap, he indicated that research must continue in order to: “Create better and better materials; simplify their synthesis; [and] maximize the pool of potential starting bio-materials.” If that happens, he claims, “These developments will make future bioplastics more valuable and less expensive.” He concluded:

“As many of us know, there are huge opportunities in industrial biotechnology but we have work to do before we can proudly reduce – and at some point, replace – our reliance on petroleum. I am hopeful that if large companies and entrepreneurs continue to develop, adopt and commercialize bioplastics, we will create the technology needed to synthesize them and the economics needed for scale up. Someday soon these materials will be available broadly to consumers around the world. We are on our way.”

Sustainability is not going to go away as a significant area of concern for supply chain professionals. It is important, however, to make a business case for such efforts since those are the only efforts that are likely to survive and have both real and lasting impact.