Sustainability Initiatives Can Lead to Closer Supply Chain Relationships

consumers and governmental agencies have been pushing organizations to pay closer attention to the environmental impact of their practices.

In response, many organizations now are adopting sustainability strategies in their supply chains.

One primary area of focus for these environmental initiatives is carbon management.

As part of its Open Standards Benchmarking in supply chain planning, APQC asks responding organizations to indicate whether their supplier selection criteria and contracting take into account the carbon management capabilities of suppliers.

Almost half (46 percent) have not adopted a strategy for making their supply chains more environmentally friendly through their selection criteria and contracting (see Exhibit 1).

And those organizations that have adopted this strategy have done so to varying degrees, with few reporting “to a very great extent.”

APQC asks respondents to its Open Standards Benchmarking in logistics to indicate whether they evaluate transportation companies for carbon emissions, energy consumption, and strategy for carbon management.

Many of these organizations do evaluate how their transportation providers manage carbon emissions and energy use.

However, the majority of respondents are doing so to either a little or moderate extent. Only 17 percent are evaluating these environmental factors to a very great extent. (See Exhibit 2.)

Organizations are well aware of the potential benefits of being perceived by customers as a good steward of the environment—whether the sustainability initiatives are self-generated or imposed on them by government regulations. But what effects do practices such as those described above have on supply chain performance and the bottom line?

To answer this question, APQC compared performance on selected supply chain measures between organizations that have adopted these practices and those that have not. The results indicate that organizations adopting sustainability strategies see both benefits and disadvantages in their supply chains. The disadvantages, however, may be at least partially offset by the potential for closer relationships with their suppliers and transportation providers.

Suppliers’ Carbon Management Capabilities
APQC’s data indicate that organizations that consider suppliers’ carbon management capabilities when establishing supplier selection criteria and contracts need relatively more full-time equivalent employees (FTEs) for supply chain planning and strategy development per $1 billion in revenue (see Exhibit 3).

These results could be related to extra resources that may be required when establishing criteria and setting targets for suppliers to meet.

When evaluating suppliers’ carbon capabilities, companies need to determine which specific capabilities are most desirable. This requires research and an understanding of any customer or regulatory influences. The companies must also determine how to handle suppliers that have less-than-optimal carbon management capabilities, especially when those suppliers provide materials of strategic importance to the organization. All of these additional tasks could create the need for more FTEs involved in supply chain planning.

However, as Exhibit 3 also shows, organizations that consider the carbon management capabilities of suppliers spend less on supply chain management overall than those that have not adopted this strategy—despite the need for the former to dedicate more FTEs to supply chain planning tasks. At the median, organizations engaging in this practice spend $9.81 less per $1,000 in revenue on supply chain management activities than the non-adopters of this practice. For an organization with $5 billion in annual revenue, this translates to a difference of $49.5 million in supply chain management costs.

The lower costs could be related to a stronger focus on supplier capabilities. In addition to supplier criteria related to carbon management capabilities, organizations considering the carbon management factor may set criteria for reliability and performance that ultimately reduce the cost of running the supply chain.

It may also be that the suppliers meeting criteria on carbon management capabilities have streamlined their processes, which allows them to operate with less oversight from purchasing organizations. This independence would reduce the amount contracting organizations spend on managing their supply chains.

Energy Use and Carbon Emissions of Transportation Providers
APQC also looked at the logistics performance of organizations that evaluate the carbon emissions, energy consumption, and approach to carbon management of their transportation provider companies. The data reveal that organizations that have adopted this sustainability strategy to any degree obtain better logistics performance from their transportation providers than the non-adopters. However, they also spend more to manage logistics and warehousing.

Organizations that evaluate their transportation companies’ carbon emissions, carbon strategies, and energy consumption enjoy superior customer shipment delivery time in days. At the median, they need one day less to deliver orders to customers than organizations that have not adopted this sustainability strategy. The adopters also have a higher rate of full trailer-load or full container-load capacity utilization; their rate is 5 percent higher at the median than the other group.

The superior logistics performance may result from closer relationships developed between the organizations and their service providers. Being able to obtain information on a transportation company’s sustainability practices requires a level of trust between both parties.

Closer relationships such as these also enable an organization to work closely with its transportation providers to optimize services, which could lead to shorter delivery times and increased full trailer-load shipments. Contracting organizations may also grant transportation companies greater visibility into their inventory and sales information, which can enable the service providers to better plan shipments so as to minimize delivery time and increase the rate of full-trailer shipments.

As Exhibit 4 illustrates, despite their superior performance in customer deliveries, organizations that evaluate their transportation providers’ sustainability efforts spend more to manage logistics and warehousing than those that have not adopted this strategy.

At the median, adopters spend $12.66 more per $1,000 in revenue to manage logistics and warehousing than the non-adopters of this strategy. For an organization with $5 billion in annual revenue, this would mean a difference of $63.3 million in logistics costs associated with evaluating the carbon emissions initiatives and energy consumption of transportation providers.

Organizations that are interested in the sustainability practices of their transportation companies may spend more to manage logistics because of additional staff or systems needed to monitor and evaluate the providers. Supply chain staff may need additional time to communicate and work with providers to obtain information on emissions, energy use, and carbon strategies. Finally, these organizations may also spend more on managing logistics because transportation providers willing to provide information on their sustainability efforts may charge more for their services.

The Benefit of Visibility
With customers and government regulators focusing on the industry’s impact on the environment, organizations must consider how adopting sustainability initiatives can affect supply chain performance. For initiatives regarding carbon emissions, there is the potential to develop closer relationships with both suppliers and transportation providers that can benefit all involved.

Organizations can create close relationships during the contracting process by identifying carbon management capabilities of suppliers. Gaining visibility into suppliers’ efforts from the start can lead to greater visibility in other areas of performance, which can lead to service improvements and lower supply chain management costs.

Similarly, organizations that seek to monitor the carbon emissions, energy use, and carbon-reduction strategies of transportation providers create close relationships by establishing visibility.

This can result in improvements to the transportation services provided, which can lead to more efficient use of full-load shipments and improved delivery times to customers. However, monitoring transportation companies involves more time and resources than would usually be the case in the outsourcing process. And this can increase logistics costs.

Sustainability initiatives offer an opportunity for organizations to differentiate themselves from the competition—particularly among customers that are keenly interested in conducting business with companies that care about their environmental impact.

Organizations influenced by governmental regulations may not have an option to choose which sustainability initiatives to adopt, but they can be aware of the potential effects of these initiatives on the bottom line and on supply chain performance.

Although the adoption of focused sustainability practices may lead to increased costs and more supply chain staff, this may balance out with the possibility of improved relationships with suppliers and transportation providers as well as the benefit of being seen by customers as a good environmental steward.

About APQC: A member-based nonprofit founded in 1977, APQC is the leading resource for performance analytics, best practices, process improvement, and knowledge management. For more information, visit www.apqc.org or call 713-681-4020.

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