The following Supply Chain Matters guest posting has been provided by Guy Courtin. I have known Guy from his contributions within the industry analyst world as well as his marketing leadership within supply chain technology companies.
World leaders are spending the next 2 weeks attempting to find common ground on what can be done to control climate change and reduce carbon emissions. Regardless of what emerges from Denmark, the need for sustainable business practices are here to stay.
Recently companies have looked to their transportation management to better control their carbon emissions. This push to be more efficient with a companies’ usage of fuel to transport their goods from cradle to consumer and finally to grave, coincided nicely with oil prices touching the $100 a barrel mark.
While this is a wise move for many reasons, is it really where many companies are going to enjoy greater efficiencies?
What about the factories and other carbon emitting culprits?
Does it make sense to look into setting targets for how much carbon can be produced?
How about instituting either cap and trade systems or allowing for carbon offsetting?
Again these all make sense and should be explored.
Rather than look to put scrubbers on smoke stacks or plant forests to offset their carbon production, shouldn’t companies look at what is causing the creation of pollutants…the act of producing goods (aka inventory)? What if companies could produce fewer goods but still maintain a high service level for their client? The ability add efficiency to their supply chain would reduce costs since they will not need to source, produce, store, transport and potentially take back at end of life. Companies that are tackling this problem via inventory optimization, demand management and network optimization are not only saving themselves green in terms of dollars but could also be green in terms of being more environmentally friendly.
Let us take an example of a large Midwestern heavy equipment manufacturer. Based on their traditional approach they would fund their dealers and allow them to carry a large sum of expensive finished goods inventory. Since the dealers would not want to miss a sale to a consumer, the manufacturer was a prisoner to this inventory deployment model and therefore was forced to produce and carry excessive inventory. This type of inventory was also resource heavy – rubber, steel, glass, and other resources. The manufacturing was energy intensive and transportation costs high.
Recognizing that this model was a large drag on their working capital, the manufacturer went out and looked for a solution to better manage their inventory. After partnering with a best of breed software vendor the manufacturer was able to recognize $1billion worth of savings from inventory reduction. For the manufacturer that $1billion is pure cash flow back to their balance sheet, but it also brings more green back to the environment. That $1billion translates into less power used to produce this inventory, less strain on resources, decreased waste, reduction in energy usage for transportation of the materials as well as finished goods and reduction in energy usage for storage.
Companies that rely heavily on an aftermarket business will benefit as well – an AMR Research report on the benefits gained from using Service Parts Planning solutions can yield up to 30% savings in overall spare parts inventory – this translates to cash savings but also environmental savings.
Rather than simply focusing on how to reduce our transportation costs, supply chains need to focus on how to reduce their overall production of goods – aka inventory. This will not only bring you more green in terms of working capital, but being more green as well.