By Hitendra Chaturvedi, Supply Chain Management Professor of Practice at Arizona State University’s W.P. Carey School of Business, and Sustainable Earth Contributor

Key takeaways:

  • In legacy business models, the supply chain is thought of as a cost center rather than a value generator, and this has created a lot of unnecessary waste.
  • Looking at the supply chain through the lens of sustainability can increase profit margins, productivity, and efficiency, and improve company culture.
  • According to a report by McKinsey, more than 90% of the damage caused to the environment by consumer packaged goods producers, including 80% of GHG emissions, comes from the supply chain.
  • Not taking action toward building a sustainable supply chain can have negative impacts on the business: cost, revenue, cash flow and brand impacts.

Supply chain management and sustainability have traditionally been thought of as “big company” games, but that is no longer the case. In fact, these are both central to not only meeting customer expectations, but also building a healthy, viable business. And thanks to the proliferation of cloud-based and software-as-a-service (SaaS) technologies, small and mid-sized businesses have a real opportunity to gain a competitive advantage in these two areas.

There’s been a barrier, however, that has stood in the way of businesses pursuing sustainability and looking critically at their supply chains. That barrier is based on a couple of myths. One is that profitability and sustainability cannot coexist and the other is that the supply chain is to be looked at as a cost center rather than a value creator.   

Challenging these old assumptions and old business models, however, will prove even more mission-critical for smaller businesses in this new world of commerce. 

The supply chain as a cost center

The supply chain has traditionally been thought of as the function of the business that buys parts or goods and arranges for deliveries. They’ve represented cost centers for most businesses and often one of the first places that undergo cuts when a company needs to shore up costs. This is particularly apparent in legacy business models in which the supply chain is not thought of as a potential value generator. 

But if the past couple of years has shown us anything, it’s how central the supply chain is to a business’s brand reputation, customer experience, and financial performance. It’s also provided a wake-up call for businesses small and large to examine their end-to-end supply chain, identify inefficiencies and waste, and evaluate whether their current models are effective in solving new-world problems and meeting new demands. In most cases, they’re not and that’s because the supply chain isn’t viewed through the sustainability lens. 

This isn’t just occurring in product-based businesses. Everything businesses do––even service-based businesses––form part of some supply chain. The supply chain involves everything from cash cycle functions (accounts receivable/payable, inventory, etc.) to distribution to profit and loss to the customer, and even employee, experience. It’s essentially the flow of products, money, people and services through the business––and each of these move in both directions. 

Understanding the end-to-end supply chain, including that of your customers and business partners, is key to the sustainability journey. In fact, the supply chain has the opportunity to make the biggest impact on greenhouse gas (GHG) reduction. 

Small changes in the supply chain––in either direction––can have a very large cumulative effect. According to a report by McKinsey, more than 90% of the damage caused to the environment by consumer packaged goods producers, including 80% of GHG emissions, comes from the supply chain.

Take reverse logistics as an example. This has become a major component of the supply chain for many businesses over the years. In fact, in partnership with Ingram Micro, we conducted a study of the end-to-end reverse logistics process of a large omnichannel retailer in the US. Our goal was to examine it through the sustainability lens and evaluate its profit and cost performance. 

We tracked the process of a customer return in which the item (defective or not) traveled from the warehouse to a return processing center where it received a grade (A through F) and was either earmarked for shipment back to the retailer or sent to a liquidator or recycler. Each step in this process generated GHGs and represented additional expenses for the brand (to the tune of hundreds of millions of dollars). 

What was most alarming, however, was 53% of the products that were put on trucks to be sent to the returns processing center had already been given an ‘F’ grade by the retailer. Yet, they made the unnecessary journey through the entire process. Not surprisingly, ‘F’ grade products were responsible for more than half of the GHG emissions. 

RL Process Map

Why did this occur and how can it be avoided?

Reverse logistics through the sustainability lens

As mentioned above, one key reason this “leakage” occurred was because the supply chain was viewed as a cost center rather than a potential value generator. Because of this, inefficiencies were overlooked. Transportation optimization (frequency of trucks, route efficiency, wait times, fuel consumption, carbon emissions, etc.) was not examined because costs were contained within “allowable” limits. 

The other key contributor was the myopic focus on cost minimization which led to a lack of cross-departmental collaboration and oversight of a potential new value generator. Since the target cost reduction, the goal was to move defective units out of the warehouse as quickly as possible. Repairing and refurbishing these items was seen as an additional cost. 

Applying the new model, in which sustainability is a priority, other stakeholder groups––such as marketing, operations, customer service, etc.––could’ve been brought into the equation to evaluate the downstream impact of refurbishing and reselling these products rather than landfilling them. Or manufacturing and supply chain partners could be brought in to reevaluate quality controls to reduce the number of ‘F’ grade products to begin with. In this case, looking at reverse logistics as a potential value generator had the potential to:

  • Increase customer satisfaction and retention
  • Reduce customer acquisition costs from the sale of refurbished products
  • Reduce GHGs
  • Improve the company image 
  • Deepen the relationship with partners who value sustainability
  • Improve company culture 

This leakage also could’ve been avoided through the use of technology and a data-driven approach to supply chain management. With visibility, through real-time data, key inefficiencies can be identified and addressed early on. Digital solutions will allow companies to assess where breakdowns are occurring and take action to eliminate waste and unnecessary expenses. 

Looking at the supply chain as a value generator it’s easy to see how sustainability and profitability go hand-in-hand. 

Steps to a more sustainable supply chain

Understanding the sustainability leaks in your supply chain is step one. These leaks commonly occur in the following areas:

  • Materials used in products
  • Manufacturing machines and maintenance
  • Transportation of goods
  • Services (repeat repair or maintenance visits, etc.)
  • Reverse logistics and recycling

With that insight, you can begin to make the journey to a more sustainable supply chain and overall operation. In many cases, this will require change management and a cultural shift. Luckily, small and mid-sized companies tend to have the strategic advantage of being more nimble than their enterprise counterparts. The following steps, however, will work for companies small and large.

7 Steps to begin the journey:

  1. Create a culture of sustainability –– mission, vision, values
  2. Build a business case for sustainability in the supply chain
  3. Engage key customers and stakeholders to understand what drives their sustainable purchasing decisions
  4. Develop KPIs that recognize sustainability and embed these across the entire organization and in all decision making. Reassess potentially competing KPIs (i.e. cost) and if they contradict the new KPIs.
  5. Build a plan of action starting with “low hanging fruit” first. This will be different for every company, but an example is
  6. Start with small wins, validate the business case and continue building on this foundation
  7. Repeat steps 1 through 6

Finally, look at ways to digitize the supply chain to achieve greater efficiency and reduce waste. Data will help you make decisions about what to do with defective products, as an example, and also give that data to manufacturers so they can start to improve the quality of that product. It will help you make the right decisions at the right time rather than wait until you’ve emitted enough GHGs. 

Keep in mind, there will be risks associated with not adopting more sustainable supply chain practices and this will only grow more apparent as time goes on. These include: 

Cost impacts:

  • Higher energy, gas and water costs
  • Higher production and maintenance costs, downtime and waste
  • People costs –– decreased productivity and morale. Numerous studies have found employees in “green” companies have higher morale and higher levels of productivity.

Revenue impacts:

  • Consumers, particularly millennials, are willing to pay more for environmentally friendly goods and services. A study by Nielsen found 66% of all global consumers and 73% of millennials are willing to pay more for a sustainable brand. 
  • Cash flow and balance sheet impacts:
  • Many of the larger corporations are giving SMB partners in their supply chain incentives for adopting more sustainable practices. 

Brand impacts:

  • Lower perceived value if you don’t have sustainability initiatives. 
  • Not taking action will have clear negative impacts on not just the environment but the business’s profitability and long-term viability. Those that recognize this sooner and begin to take action will gain the competitive advantage.