Supply Chain Sustainability: Measuring its Effectiveness

Stephen DeAngelis

June 14, 2012

Andrea Schoen, director of environmental affairs at DB Schenker Logistics, believes that “sustainability will, with time, become a key performance indicator for the supply chain, along with such traditional KPIs as on-time delivery, order accuracy and transit time.” [“Sustainability as a KPI?SupplyChainBrain, 23 November 2011] Not everyone is convinced that sustainability should be a vital part of a company’s strategy; especially if such efforts amount to little more than “greenwashing.” Majush K. Philip writes, “The Critics could always ask, what are the advantages an organization gets by going green? Isn’t it a waste of money and resource? The answer is going green doesn’t necessarily mean going expensive.” [“Going green – a Marketing gimmick, Cost saving tool or Sustainability?” Supply Chain Management, 22 June 2011] He continues:

“A global glass manufacturing giant was able to save a considerable amount by replacing a part of wooden box packs with re-usable iron frames. This is one of the many green success stories I have seen. How to measure the greenness? There is no single metric to capture greenness. It is measured across various indices – carbon footprint, environmental footprint, solid, liquid and gaseous waste generated and % of waste recycled are few of the named measures.”

Measuring “greenness” or “sustainability” is becoming a growing issue. Analysts at CAPS Research note, “The current state of establishing standards and metrics for sustainability efforts is not as defined as other areas of measurement.” [“Measuring Green,” Inside Supply Management, May 2012] The article continues:

“Supply management professionals are uniquely positioned to influence a company’s environmental sustainability efforts as well as the performance of supply base partners in this area. Many supply managers recognize the altruistic and commercial benefits of such a program, but struggle with the details of appropriate expectations, implementation and execution. There are many critical issues facing supply professionals as they strive to implement environmental sustainability standards in their own companies and in the supply base … one area in particular [is] establishing standards and metrics, both internally and with suppliers.”

The CAPS Research analysts ask, “Is it possible to accurately measure total costs and the total impact and benefit of sustainability practices? Can specific standards be developed and accepted so that all supply chain partners speak the same language and measure efforts in concert?” They obviously believe that establishing standards and metrics is possible or they wouldn’t have written the article. Although they do admit that in the area of standards and metrics, there are “more questions than answers.” They continue:

“Supply management executives know that, ideally, there would be key metrics and standards for environmental performance, similar to measures of quality based on defect rate, logistics based on transit time or payment terms based on days and weeks. Unfortunately, the reality is that the complexity of an entire supply chain’s operations and the still-emerging science behind environmental activities, coupled with limited knowledge and resources, often doesn’t readily allow for such specifics. Currently, the focus for most companies trying to do any type of measurement appears to be on whether environmental sustainability programs exist and whether there is any improvement relative to a baseline, rather than measuring specific data points to a target number. In other words, a company may be graded on whether or not it is measuring its carbon emissions, or whether it has reduced its carbon emissions from a previous year, but it’s very difficult to say that the ‘ideal’ carbon emission target is ‘X’ number of tons.”

Measuring a company’s carbon footprint, just one possible sustainability metric, can be trickier than you might think. To learn more about why that is, read my post entitled Counting Carbon. The article continues:

“It’s easy to see how the issue of standard metrics and key performance indicators becomes complex. In terms of energy consumption, should a manufacturing facility or supplier be expected to adhere to the same standards as a nonmanufacturing supplier that operates out of a typical office building? Can a universal standard for carbon emissions be reasonable for both domestic suppliers and offshore suppliers? Who determines which countries are held accountable to which standards? Even within a product category, if the requirement from a supplier is that ‘X’ percentage of materials used be from recycled content, has anyone ensured that the cradle-to-grave process for repurposing that material is less impactful than new raw material? These are all just examples, but they clearly illustrate how quickly the details can become complex.”

Rather than throw their arms up in submission, the CAPS Research analysts become very pragmatic and state that “something is better than nothing.” They write:

“In lieu of navigating (and needing to agree on) every thorny aspect, many companies are choosing to measure awareness and any measurable improvement. One executive described it as articulating a combination of guidance and process, rather than KPIs. Granted, when companies try to determine measurements of internal operations, they may have more success agreeing on some standards. For example, if multiple facilities are similar in size and operational nature, they can be measured against one another in terms of waste, water use or other areas. However, it may be difficult to measure even the most efficient facility against a standard norm outside of company operations. One executive readily admitted that the company’s goal to reduce greenhouse gas emissions by 25 percent was chosen because it learned a competitor had set a goal of 20 percent. In other words, some say it is OK to just start somewhere.”

The only problem I have with establishing arbitrary goals is that doing so really does smack of greenwashing. I’ve have consistently written that the only sustainability programs worth pursuing are those for which a business case can be made. Although decreased costs and increased profits may not be the kind of standards that environmentalists would like to see, the fact of the matter is that programs that positively affect the bottom line have the greatest chance of succeeding over the long run. The CAPS Research analysts, however, are interested in learning how an environmentally-conscious company can impact the actions of its suppliers. They note that companies often focus on the sustainability activities of their largest suppliers but ignore smaller suppliers that could be using abysmal operating practices. They continue:

“It’s obvious that the topic of environmental sustainability, as it relates to standards and metrics, is not straightforward and is yet to be defined. While many companies haven’t begun a strong green initiative to date, they are likely part of a larger supply chain that will mandate action. Even with a lack of specific universal metrics existing, each enterprise will probably and eventually feel the need to determine its own definition of success.”

In other words, the analysts at CAPS Research agree with Andrea Schoen that sustainability could one day be a key performance indicator for companies. Majush Philip asks, “Is measuring greenness … enough?” He continues:

“I feel, Greenness is only the effect, but the emphasis should be on what caused that increased greenness or less greenness. One promising method to study/understand the causes is Environmental accounting. Environmental accounting is that type of accounting where environmental interactions are captured and accounted to the process. Here the costs like costs for water treatment, electrostatic precipitator, pollution treatment etc. which generally go as overheads in standard accounting practices are captured and accounted for. Just to elaborate – suppose there are two processes (Process1 and Process2) for producing a product A. Process 1 generates more waste water than Process 2. Everything else remains same. If the standard accounting principles are applied – Process 2 appears to be more costly than it actually is, because it has to bear some part of the overhead cost due to increased water treatment for Process1. Similarly going forward, I see an increased need for the SCM/ERP applications to enable environmental accounting principles for capturing environment data in similar lines with time and cost, to support a sustainable supply-chain or an enterprise.”

One way that almost any company can get involved in sustainability activities is by reducing waste. Waste reduction not only helps the planet it helps a company’s bottom line. Paraphrasing an article published in Inside Supply Management, the staff at SupplyChainBrain wrote:

“When Walmart CEO Lee Scott announced Walmart’s green emphasis in a 2006 Fortune magazine article, he stated proudly, ‘There need not be any conflict between the environment and the economy,’ and he made a commitment that Walmart’s green efforts would be either cost-saving or cost-neutral. More recently, authors L. Hunter Lovins and Boyd Cohen reminded us in their book, Climate Capitalism, ‘Cutting waste saves money, whether you are a business leader or a head of household.’ In short, more organizations than ever now realize that being green can be good for the bottom line. While this is not always the case (different organizations have different needs and capabilities), companies of all sizes are increasingly interested in finding financial benefit in their corporate social responsibility and sustainability efforts. The first thing supply management should do is look for ways to reduce waste. Reducing waste nearly always benefits the environment, while also reducing cost and increasing efficiency.”

Although it may be difficult for a company to measure many of the environmental factors associated with its operations, measuring savings from reduced waste is fairly straight forward. It would appear to be a good place to start a sustainability program.