Green Supply Chain Growth a Catalyst for Change

Earlier this year, IFS North America conducted a study among manufacturing executives to find out how many of them are currently a part of a green supply chain. It turns out that about 77 percent of them were. Most of the rest expect to be a part of a green supply chain in the next few years.

So what is a green supply chain, and why are so many manufacturers finding themselves part of one? A green supply chain takes into consideration not just financial cost of goods purchased from supply chain partners, but also the environmental footprint of the traditional supply chain with raw material supply, manufacturing and distribution -- directly to a customer or through channels of distribution. Also taken into account are hazardous goods, consumption of natural resources like water, discharges to the atmosphere and other environmental impacts not only during product manufacture but over the product lifecycle through disposal and recycling.

The growth of green supply chains brings real challenges to manufacturing and other industry. But I think this is tremendously good news, and I'll tell you why.

Every day in the news, we can see dramatic pictures and statistics about new weather conditions and environmental challenges. And each of us, in our first-hand experience, notice new temperature extremes and other severe weather patterns. We all find ourselves wondering; "What is happening in the world, and how will it affect me and my family."

That is why these survey results are so positive. Respondents included executives at more than 200 manufacturing companies with revenues of more than 100 million dollars. Overwhelmingly, they say environmental considerations are becoming more important in sourcing and purchasing decisions. They claim to either report environmental data to their customers or ask their vendors to share environmental data with them.

Another cause for optimism has to do with the drivers or reasons these companies cite for their green initiatives. The study shows regulations are not the primary reason for manufacturers to green their supply chain or document their environmental footprint. The two most frequently reported reasons for green initiatives involved a sense of social responsibility and internal management directives. Customer demand was a close third, and regulatory pressure lagged far behind. I think it is a very positive development that private sector demand from the customers and manufacturers' own good intentions are a much more important factor than government regulations.

The Role of Technology

This focus on the green supply chain, like all sea changes and major economic shifts, brings with it real and documentable challenges. Suddenly, accounting, IT, sales and other departments are responsible for handling a new type of data … environmental impact data. The easiest way to describe the impact this has on the technology and software that underpins a modern enterprise is to share the vision we have for our own offering. We feel it is necessary to enable businesses to monitor and manage environmental aspects as an integrated perspective in their decision making and communication at all levels.

What do you need to measure and manage from an environmental perspective within your business? That may depend on your particular company, your industry, and the priorities you and your customers set. Obviously, in an automotive industry, lifecycle environmental impact of the product, including fuel consumption, emissions and end of life impacts, may be important. In electronics power consumption, reliance of the supply chain on environmentally troublesome heavy metals and other factors could be priorities.

As we work with IFS customers, we see the need for an embedded Eco-Footprint Management module in the enterprise resource planning (ERP) products manufacturers and other companies use to run their businesses. There are a number of reasons for this;

• Embedding environmental measurement and management in ERP is most cost-effective and efficient since most of the data needed already exist and can be re-used;
• An integrated, enterprise-wide approach handles environmental impact across the entire product lifecycle and the entire supply chain;
• Harnessing the power of ERP allocates environmental impact on the product level and allows aggregation to higher levels in a product structure;
• Using ERP ensures that all transactional and environmental data can then easily and confidently be used for compliance, disclosure and decision support.

The Role of ERP

It quickly becomes clear that the depth and breadth of information required to track an environmental footprint is substantial. To simply ensure compliance with environmental regulations like Reduction of Hazardous Substances (RoHS) and customer-driven reporting requirements requires deep integration between supply chain management, contract management, bills of materials and routings, multi-site/intercompany transactions and other enterprise functionality. This data resides within ERP, so ERP is the natural place to handle environmental management functionality.

Moreover, the responsibility for overseeing and managing the environmental footprint must be not on administrative staff but on line managers. Only the executive responsible for managing profit and loss can use this data to balance environmental and financial advantage. Environmental key performance indicators (KPIs) must be analyzed alongside KPIs having to do with business performance. This is one more reason environmental footprint management needs to be embedded in ERP, which is the platform used by senior executives to manage the broad spectrum of metrics that assure business success.

While manufacturers might look at third-party products that purport to offer some degree of environmental management functionality on specific data points such as carbon production or energy consumption, these point solutions are not capable of managing the entirety of the environmental footprint nor flexible enough to adjust to changing customer and market demands. Moreover, the broad number of integration points will make it very messy if not impractical to get these "bolt on" applications to integrate well with ERP. Moreover, these integrations are subject to the drawbacks of all integration projects. The integration is not stable because the ERP product and the third-party environmental package are not on the same release schedule. This adds increased cost each time either product is upgraded to a new version.

Instead, it probably makes sense for a manufacturer to look at whether their central ERP package carries enough information about each of the components that they buy or manufacture to help them towards their initial environmental reporting or decision support goals. A next level of sophistication is an ERP product with environmental footprint tracking tool already embedded in the package. This delivers a level of futureproofing and simplicity that will become more and more in demand in the market as manufacturers continue to document their impact on the environment.

The green supply chain trend is good for the environment. It will also be good for manufacturers who embrace it and leverage the right technology to document their environmental footprints for customers and the market.