There is one process we know very well after one year of recession, and that's cost reduction. Most companies have scrutinized their costs and tried to take every waste out of the system. Many were quick to point out that, although the sustainability agenda was still on the radar screen, it has been taking a back seat for quite a while now. I cannot judge whether it has or not, but would like to argue it should not have. Becoming greener is an excellent way to reduce cost if you look at it in the right way. In this entry, I want to take a minute to explain you what I mean.
It all started about one year ago, when I heard a radio interview from Jean-Pascal van Ypersele Vice-Chair of the Intergovernmental Panel on Climate Change (IPCC). He pointed out something extremely simple: "The best energy is the energy that is not used". Just think about this. There is a lot of focus on using green energy, and I do not mean that to be wrong at all, but what he says is that before turning to green energy, take a hard look at the energy you consume and see how you can reduce your consumption. Whether green or not, consumed energy costs money, avoiding consuming it helps you reduce cost, isn't it?
Well, that is exactly the point I want to make. Let's now look at our Supply Chain. We consume energy in a variety of forms throughout the ecosystem. Electricity, gas, oil, petrol and you name it. How can we get a consistent view of the energy we consume? All above fuels have one thing in common: they generate CO2. You can argue that electricity may come from non-fossil sources and as such do not generate greenhouse gasses. Let's put that thought aside for a minute.
If I can develop a CO2 emission profile across my supply chain, I get to understand very quickly where energy is consumed. I can now focus on reducing the consumption at that step in the process. Doing this may imply I have to change the design of the product, use a new manufacturing approach or change something somewhere in the supply chain. It may happen that a slight increase in energy consumption in one place may result in large savings somewhere else. It is important to include design and engineering in the process to ensure we go back to the root cause of why so much energy is consumed. Root cause analysis is nothing new; we have been doing this for quite a while.
But how do we gain that CO2 view of our supply chain. Quite a while ago, I wrote an entry focused on two new acronyms, BOC and BOS. BOC, bill of carbon, gives the answer to our question here. What do we need to calculate the BOC? Fundamentally two things, first the complete bill of material of the end product, and second the amount of CO2 generated at each step in the manufacturing process for one unit of product/component/ingredient. The latter is mainly based on the full bill of process. Each partner in the supply chain should calculate all emissions related to the operations under his control. This includes manufacturing, transportation, warehousing etc. Whether those activities are performed by him or by a subcontractor, do not matter.
As stated elsewhere in this blog, gaining such information from suppliers requires the existing of a trust relationship between the partners. Once we have the information, we can start the review, leading to improving the energy consumption. However, to maintain the trust relationship, we should never forget to ensure the partner also benefits from the exercise, otherwise he will not be motivated to continue collaborate in the future.
Now, let me come back on the use of non-fossil energy. From a cost reduction perspective, there is no difference where the energy comes from, but from a sustainability perspective, there obviously is a huge difference. However, I would dare to argue that reducing the consumption all together, leaves the non-fossil energy for other companies, reducing the CO2 emissions in the same way.
Looking at CO2 is a great way to analyse the energy consumption throughout the supply chain, looking for wasted energy and related costs. It is an interesting way to reduce costs, improving the bottom line. What are we waiting for?
Around this time of the year, many companies are looking for the by now famous CDP (Carbon Disclosure Project) report. And the 2009 report is on-line. But that's not the only information available. For the first time CDP has also issued their first Supply Chain Report with as subtitle: "Managing climate change in the supply chain". In that report they are looking at scope 3 emission management amongst others and this is where things really become interesting.
Indeed, scope 1 (direct) and scope 2 (indirect, related to provisioning of energy) reporting is mandatory, but the unclear nature of what is included in scope 3 emissions makes their reporting optional.
However, from a Supply Chain perspective, analyzing the climate implications of outsourcing manufacturing and logistics, of buying components and intermediate products, and of managing the product flow from cradle to grave, is an interesting exercise. Not only should the environmental impact be assessed, but through understanding CO2 emissions, the actual amount of energy used can be assessed. Reducing CO2 emissions may have a direct impact in lowering the energy bill. Many companies forget this in their quest for carbon neutrality and the use of green energy.
Jean-Pascal van Ypersele, the Vice-Chair of the Intergovernmental Panel on Climate Change (IPCC), keeps pointing out the best energy is the one that is not used, not the one that is offset. In their quest of becoming green, companies should first look for energy reduction
To be able to do this, one needs to visualize the emissions across the supply chain, preferably on a product level. And here is where the problem is. Today no companies have the tools to identify the greenhouse gas emissions (GHG) at product level.
HP did calculate the total GHG emissions of its supply chain, and started reporting in 2008. Despite working closely with our tier one suppliers, the approach is still rather crude. Suppliers allocate HP's share of their energy consumption in proportion of the value of our business in their annual revenue.
This unfortunately does not allow taking key decisions related to which products require loads of energy to manufacture and which ones no. Balancing the portfolio from an environmental perspective is not possible with such approach.
Maybe we should take a completely different tag. For every product manufactured, we have a bill of materials (BOM) and a bill of process (BOP). If each partner in the Supply Chain could calculate the amount of GHG emitted to manufacture one unit of their product (component, sub-assembly, substance...), a "Bill of Carbon" (BOC) would be developed for each. I actually highlighted this concept in a blog entry last year, labeled BOS & BOC, new acronyms to get used to?
The question is obviously how this information could be consolidated to obtain a true picture of the environmental impact of the finished product. And here is where another concept I highlighted, called a community cloud, could help.
Indeed, if all participants would consolidate, using the BOC of all components included in the BOM of their end product, the amount of GHG emitted in the process, we would have a great view of the manufacturing impact. By adding the transportation piece that is found in the BOP, a reasonably complete picture could be established. Obviously, one can argue that averages may be used and, resulting from there, that the number is not absolutely correct. However, it would give a picture that is closer to reality and much more granulate than the current one.
Using a cloud approach, such community could be established without requiring one of the parties to implement a hosting infrastructure. No CAPEX investment would be required, making it easier for the parties to participate. A pay-per-use or subscription fee could be used to finance the service.
To take full advantage of this approach, it should be combined with standard metrics, such as the ones included in SCOR 9.0. Ultimately, this would allow companies not only to publish the carbon footprint of their products, but also to analyze the environmental impact of their product portfolio, allowing them to retire the most polluting ones, while promoting the others. Managing a portfolio from an environmental point of view prepares companies to benefit from upcoming legislation around carbon taxation and others, by understanding their impact at the product level.
About two months ago, I wrote an entry for this blog, labeled "BOS and BOC, two new acronyms to get used to". I was actually far from imagining this was going to be the entry that received most feedback, both through the blog, but also through numerous e-mails, calls etc. This actually demonstrates a couple things, first, that a number of you are reading my entries (thank you for that), and second, that carbon and everything related to the environment is a hot subject. So, let me take a minute to go a little further in my thoughts around the subject.
Yes, I believe many of us agree that something needs to be done, that eating fruit that is imported by plane for example, does no longer makes sense. However, it is often not clear for consumers how much CO2 is actually emitted during the processing or manufacturing of a product. But is it for the manufacturer? I would argue that, in many cases it is not. Carbon labeling is starting in the UK, and that seems to change the perspective of a number of companies already. But what is more important, is that it forces companies to understand their supply chains and manufacturing processes. CO2 is actually a measure of the energy consumed. So, reducing CO2 reduces the use of a scarce resource whose price has been going through the roof lately.
Now, you may argue that the prices have gone down again, so that we should not worry. I wouldn't dare to bet on that. In an initial stage, people have started looking at alternative energies (wind, solar, sea etc.), and although that may help reduce CO2 emissions further, it should not be the only thing people do. The fundamental question is how much energy we really need to manufacture and distribute a product. Starting from that mindset, the fact of looking at how reducing CO2 emissions, helps companies reduce their costs.
The question is obviously, how to do this. And here the understanding of the supply chain comes again. Let me take an example. If I know that a full truckload of products (e.g. 18 pallets) has been shipped from point A to point B and that the truck returned empty, I can calculate reasonably quickly how much CO2 was emitted by unit of product, if I know the distance between A and B, the average consumption of the truck and the number of items per pallet. I can identify the cost of the empty return and review how to address it. It is obviously a little more difficult to find a payload for the returning truck, but now I have a financial and environmental measure of what I could save if this happened. The supply chain visibility we talked about in the last couple blog entries, plays an important role here. Receiving the relevant information from the partners becomes critical. In the example above, it is key to obtain the information from the logistics and transportation partners. From a technology perspective, multiple approaches are possible. Let's discuss those in a next blog entry. Your feedback is, once more, highly appreciated.