By Pranav Padgaonkar
Traditionally, organizational objectives for the supply chain were clear. Supply chain leaders had to keep the lights on at the minimum cost: that’s what all cost centers do.
However, the past few years have upended this notion.
In the new one-disruption-per-quarter world, organizations initially pivoted to maintaining supply continuity at any cost. Now, with high inflation and concerns over a recession, organizations need to return to cost minimization without compromising on supply assurance. Add to this mix the increasing pressure of meeting aggressive environmental, social, and governance (ESG) targets, and taken together the challenges may feel difficult to balance.
How can organizations build supply chain resilience amid these seemingly diverse goals? By recognizing that while these may be competing goals, they are not conflicting ones.
Achieving Resilience Without Inflating Costs
Resilience comes from the ability to use optionality—the range of solutions to a supply chain challenge that mitigates risk—and comprises three distinct elements:
- Availability of redundant paths or options in the supply chain
- Ability to determine when these options are needed, in the case of impending disruption
- Ability to use these options in near-real time
The obvious ways to create optionality are to invest in setting up parallel supply chains or to lock up working capital for higher inventory levels. But those are expensive ways for supply chains to operate.
Practitioners need to widen their horizons and examine the entire extended supply chain—from raw-material origins to finished product delivery. This extended ecosystem of raw-material suppliers, logistics partners, and distributors will invariably have optionality built in.
A more efficient way to build resilience is to use the full inherent optionality of the extended supply chain.
To execute this, an organization must view the available options and then adapt in near-real time by collaborating with external partners. This view-adapt-collaborate—or visibility-agility-collaboration—strategy is the fundamental trio of enablers. A fourth hidden but crucial enabler of resilience is alignment—of people, processes, and technology.
Once the organization is aligned, it must create visibility into the extended supply chain. Visibility can provide early warnings of impending disruptions. In these situations, agility is paramount. Access to near-real-time data feeds can enable a true sense-and-respond system.
If an organization’s supply of raw materials were disrupted, a sense-and-respond system could direct the supplier to fulfill the order from another location in the short term. In the longer term, it might be fruitful for this organization to collaborate with key suppliers to extend their distribution centers across multiple strategic locations. Or, if that would add significant costs, it may make more sense to develop a secondary supplier instead.
Having this optionality and the ability to act on it quickly is key to building resilience without adding costs.
Balancing Sustainability and Cost
Going green is still often perceived to be cost-prohibitive. But aggressive environmental goals need not conflict with minimizing costs and building resilience.
How To Cut Emissions Without Inflating Costs
The Greenhouse Gas Protocol standards define three types of emissions: Scope 1, direct emissions from sources the business owns and operates; Scope 2, indirect emissions produced by energy generation; and Scope 3, all emissions from activities a business does not control but indirectly accounts for up and down its value chain. Across scopes 1, 2, and 3, there are attainable strategies to reduce emissions without inflating costs.
| Category | Opportunity | Description |
|---|---|---|
|
Category Scope 1 Emissions |
Opportunity Electrification of Owned Fleets |
Description The media is focused on passenger car electrification, but electric vehicles (EVs) are becoming mainstream in many areas of the industrial supply chain. The economics firmly favors EVs in three specific applications:
More than three products are available in each of these segments, and while adopting EV fleets requires managing the constraints, the low operating costs may be worth the effort: a typical electric semi has a far lower running cost than that of the average pickup truck running on an internal combustion engine. |
|
Category Scope 2 Emissions |
Opportunity Green Electricity |
Description Building and operating new solar- or wind-power plants in the U.S. is now cheaper than running an existing coal plant, according to Bloomberg. Two options to reduce Scope 2 emissions have become economically viable:
|
|
Category Scope 3 Emissions |
Opportunity Small-Supplier Education |
Description The first step is to identify the suppliers with the highest carbon emissions. Analytics based on spend data can calculate this more efficiently than any manual survey. Then an impact analysis can determine which suppliers—usually smaller, less sophisticated ones—have the biggest opportunities to reduce emissions. Enterprises can then:
These initiatives can help suppliers reduce costs and emissions while strengthening the partnership. |
If organizations identify and prioritize these opportunities strategically, they can minimize any conflict between sustainability goals and operational costs.
The Overlapping Paths of Sustainability and Resilience
The paths to build resilience and achieve ESG goals overlap significantly:
- Electrification of some parts of the supply chain adds optionality to logistics, which your organization can use to trade off cost and speed. Similarly, captive green-energy generation can add significant resilience to your manufacturing sites.
- Visibility into Scope 3 emissions can easily piggyback on visibility into upstream supply chains that are built for resilience.
- Suppliers that your teams educate on emissions may be more amenable to long-term strategic relationships and collaboration to build resilience.
The key is to ensure that your ESG and supply chain teams are working closely together and not in silos. Once they are aligned, opportunities to achieve both outcomes together will emerge organically. In fact, supply chain teams can use this synergy to build more compelling business cases for supply chain technology and other investments.
Reducing Conflict
Supply chain resilience, cost management, and sustainability are all crucial goals that may seem conflicting on the surface. But meeting these goals is necessary for survival in a competitive market, and an organization that does not do so will be left behind quickly.
Supply chain leaders can take several measures to mitigate any conflict and achieve positive outcomes. Practitioners must prioritize the opportunities that lie at the intersection of two or more outcomes and execute them efficiently to pave the way for the clean, lean, resilient supply chains of the future.
Pranav Padgaonkar is a vice president at GEP for supply chain consulting.
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