Supply Chain Trends and Issues : Our Weekly Feature Article on Important Trends and Developments in Supply Chain Strategy, Research, Best Practices, Technology and Other Supply Chain and Logistics Issues  
 
 
  - September 18, 2007 -  

Green Supply Chain News: Sustainability Meets the P and L

 
 

In Rush to go Green, are Companies Fully Looking at the Costs? Opportunities and Challenges in both Buy and Sell; Who Makes the Decision?

 
 

 

SCDigest Editorial Staff

SCDigest Says:
One thing that is clear is that individual companies, and procurement and supply chain professionals as a whole, need to quickly develop new frameworks to guide decision-making in the sustainability era, and how to fully understand all the costs for environmentally friendly alternatives.

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With “green supply chain” and sustainability initiatives increasingly rising to the top of the corporate agenda, what happens when the drive to go green brings opportunities that might be good for the environment – but have a negative impact on the bottom line?

Thus far, most companies, including Wal-Mart, have generally stated they are looking at opportunities that are both environmentally friendly and will save their companies money at the same time.

From a supply chain and logistic perspective, the high price of oil – leading to rising transportation costs – has made it comparatively easy to find areas that can potentially deliver both green benefits and lower operating costs. Wal-Mart’s stated goal of significantly improving the fuel efficiency of its transportation fleet is one such example.

Packaging is another area that seems ripe with opportunity to find green and cost savings opportunities together – many products have been “overpackaged,” and smart redesign can lower packaging materials and total footprint, reducing material costs and transportation expense.

The real test will be when companies may face decisions that pit good environmentalism against pure financial self-interest. The jury is still out, for example, as to whether consumers will really pay more for products touted as environmentally friendly – or at least, how much more they will be willing to spend.

The question becomes even dicier in a business-to-business relationship. If a supplier offers a more environmentally-friendly product that costs more than the standard product, what framework will companies use to make that call? What rules will buyers apply to analyze corporate initiatives to go green that might incur higher costs? Who ultimately decides?

 
 
 
 

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Overlaying that challenge is the fact that a growing number of companies are looking to profit from the sale of more environmentally friendly products themselves. GE, for example, has established some aggressive goals and received many plaudits for reducing its own carbon emissions – but also expects to sell more than $14 billion worth of products in 2007 under its “ecomagination” umbrella, ranging from hybrid train engines to gas turbines. GE CEO Jeffrey Immelt has been lobbying some of its best customers – utility plants – to abandon less clean technologies for ones that reduce carbon emissions – at higher cost, it appears, to the utilities.

The Wall Street Journal last week reported that some customers are telling Immelt to get off the bandwagon and “Just shut up and sell us stuff.”

It appears that what is likely to result is a series of dances – suppliers offering green solutions, positioned as being good for the environment, but also good for the selling company’s bottom line. These new products will almost by definition be earlier in their product and margin lifecycles, and in many cases require a premium price.

In this new situation, it will be absolutely critical for companies to fully understand this “green premium” – and recognize that extra cost may not be in the direct purchase price of the product. For example, a green component or raw material may be priced at the same price as the traditional product, but add manufacturing costs in how it is handled or processed.

One thing that is clear is that individual companies, and procurement and supply chain professionals as a whole, need to quickly develop new frameworks to guide decision-making in the sustainability era, and how to fully understand all the costs for environmentally friendly alternatives.

Do we have good frameworks for understanding how to decide between sustainability and the bottom line? Is there simply ample enough opportunity in the short to mid-term to find initiatives that are green and bottom-line friendly? Let us know your thoughts at the Feedback button below.

 
     
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