Profit and Planet: Two Sides of the Same Supply Chain Coin
A recent Gartner survey found that more than two-thirds of Chief Supply Chain Officers (CSCOs) are still recovering from the last major disruption when the next one comes along – a continuous barrage of challenges that proves that responsive supply chains are going to struggle in a state of constant volatility. Businesses must respond by implementing processes and technologies that enable them to not only spot risks of disruption much earlier, but also to act upon them in the most efficient and sustainable way possible.
This current complexity represents the culmination of decades of supply chain evolution, aligning with new innovations, changing customer expectations and a growing understanding of environmental concerns. At the turn of the century, this process started with the establishment of long, low-cost supply chains that remain the foundation of most manufacturing and retail business operations to this day.
Fast-forward to the global financial crisis, and while businesses got their first taste of what was to come, the model didn’t really change. There wasn’t an air of anticipation that these inherently inflexible supply chains would become operationally, financially and environmentally unsustainable.
However, all three pressures materialized during the COVID-19 pandemic, which exposed vulnerabilities and led to the realization that organizations needed to adapt their supply chains to become more financially and environmentally resilient.
That magic word “resilience” has been joined by another aspiration “agility” to guide business strategy in the pandemic’s aftermath. The need to balance investment into operational cost efficiency, service improvement, product profitability and growth, and environmental sustainability, while simultaneously making supply chains more resilient to disruption, is the new holy grail.
Profit and Planet
Building a sustainable and resilient supply chain means laying down strategies for predicting and responding to disruption efficiently, with an acceptable impact on both profit and planet.
So far, this has largely involved organizations building knowledge of financial and environmental impacts into their decision-making tools. For example, calculating carbon output and fuel cost savings of transport options, including not just the route but also the vehicle itself. Given that road transportation from trucks and vans accounts for 65% of the total emissions from transportation, according to the OECD, the potential for optimization is enormous.
Waste reduction is another route to addressing both profit and planet. For example, in a highly reactive sector such as short shelf-life foods, predictive artificial intelligence (AI) is being used to forecast models based on external variables like weather, seasons, competitor behavior, and advertising. This granular level of forecasting improves accuracy, which allows the supply chain to meet demand without creating excess inventory. Forecast accuracy offers the added benefit of maintaining product margin by not having to reduce prices to ensure item clearance. A study by McKinsey, The Ellen MacArthur Foundation and Google identified that AI can unlock $127 billion per year through food waste reduction.
Finally, enabling the inclusion of CO2 emissions in mid-term planning processes allows a similar optimization of supply chain activities for both environmental and financial advantage. By using optimization capabilities that consider multiple objectives concurrently, companies are able to achieve balance in their decision making, where financial performance has traditionally been at the expense of environmental impact.
Visibility, Connectivity, Resistance
This all sounds like healthy progress, and it is. However, the implementation of these technologies and new processes does require a mindset shift. It also means overcoming existing challenges that many organizations have entrenched after decades of the same supply chain model.
The first challenge is an inherent lack of visibility of the environmental impacts across a company’s supply chains. A lack of reliable data around indirect carbon emissions known as Scope 3 emissions makes it difficult to forecast future impacts based on new investments or operational pivots. The answer here is to work with what can be seen and measured, and then allow AI to do what it does best – leverage relevant datasets to develop diagnostics and optimized networks that eliminate waste and carbon emissions.
The second challenge relates directly to the lack of connectivity between commercial and sustainability strategies, causing conflict between environmental aims and functional profit targets. To overcome this, businesses must start aligning and analyzing sustainability metrics alongside traditional supply chain metrics within company goal setting and technology strategies. There, the relationship between environmental decisions and financial impacts will become clearer.
The biggest standalone challenge may be organizational mindset. A resistance to change is no longer an option. Customers have far more choices than they used to and aren’t afraid to make a stand when it comes to sustainability. There is also no hiding place anymore with regulations forcing both transparency and action. By seeing the relationship between profit and planet more clearly, decision makers are seeing increasing value across the company for making sustainability investments.
Consider the Commercial
Supply chain sustainability really must be seen as a commercial decision, a profit enabler and a business enhancer. By looking at the relationship between sustainability and supply chain performance, you can unearth the best roadmap for your company.
This more integrated approach is likely to lead you to more diverse manufacturing networks with alternative sources, make-and-buy optionality, or nearshoring possibilities. You’ll be able to more accurately balance service, sustainability and costs.
Optimizing for both cost and more sustainable outcomes might lead you to explore a new distribution network with local warehousing and transport alternatives or sourcing networks of alternative local and global suppliers. With a clear context of expected costs and environmental impacts, you can consider product portfolio rationalization and mass configuration, inventory and capacity buffers, and new collaborations across the partner ecosystem more clearly.
Once profit and planet are intertwined into the same business strategy, the opportunities for optimization become much more diverse and informed.
AI and Cloud Computing: Game Changing Filters
Technology’s role in unifying sustainability and supply chain objectives is paramount, specifically AI and digital twins which can accelerate progress towards your sustainability goals.
More than improving forecasting and optimization around availability and waste, businesses will also be able to build accurate digital twins of their entire supply chain to align with this improved planning and forecasting, while breaking down the siloes where waste and cost usually lurk in the gaps between. An EY study quantified that digital twins can reduce carbon emissions from an existing building by up to 50% and reduce costs by up to 35%.
Using these accurate digital twins in conjunction with the power of AI and cloud, optimizations can be much more detailed and concerted, evaluating many more variable characteristics across their full supply chain. This includes lead times, demand, supply reliability, product quality, and yield. Cloud-based cognitive solutions are now able to generate hundreds of scenarios automatically before optimizing them around multiple business objectives – including sustainability – and using AI to pick the ones that will deliver the most desired business outcomes. All of this takes minutes, while enriching the workforce and their roles in the process.
Future supply chains will be more resilient and agile when they integrate sustainability decisioning alongside traditional supply chain objectives. By harnessing AI and cloud computing, the future begins now. After years of disruption, the connection between profit and planet can finally be made.