Green Supply Chains

Stephen DeAngelis

September 20, 2012

Jason Mathers, project director for the Environmental Defense Fund, told the editorial staff at SupplyChainBrain that “there are four driving forces in efforts to build sustainability into logistics operations today. … They are cost reduction, the expectations of investors, consumer demands, and acceding to what a company’s employees want.” [“Everyone Has a Stake in Greening the World of Logistics,” 14 December 2011] Despite all of the talk about green or sustainable supply chains, a great deal of skepticism still exists as to whether sustainability represents the future or simply a passing fad. Of the four driving forces identified by Mathers, only cost reductions are really compelling. Most investors are only interested in MAKING money; most consumers are interested only in SAVING money; and, most employees are only interested in EARNING money.

That may sound cynical, but most decisions that people make have an economic foundation. If environmentalists are counting on future generations being more enlightened than past generations, they are likely to be disappointed. According to Martha Irvine, “[Young people] have a reputation for being environmentally minded do-gooders. But an academic analysis of surveys spanning more than 40 years has found that today’s young Americans are less interested in the environment and in conserving resources — and often less civic-minded overall — than their elders were when they were young.” [“Study: Young People Not So ‘Green’ After All,” Manufacturing.Net, 15 March 2012] For some people, this result came as both a surprise and a disappointment. It means that environmentalists shouldn’t expect public pressure to be the primary motivating factor for companies to implement sustainable practices.

I have insisted for some time that the only sustainability practices that will have legs will be those for which a business case can be made. In fact, a good business case is necessary if the concerns of stakeholders in all of Mathers’ four driving forces are to be addressed. Although Mathers is an environmentalist (the kind of person that critics like to refer to as an eco-freak), he is also a pragmatist. He told the SCB staff that “it’s never been more important … to get costs out of the supply chain.” He also reiterated the fact that “every bit of electricity or fuel that goes into making or moving or delivering a product” that is not necessary “is ‘wasted’ money. … And it leads to more emissions than we need.” His point is that business and environmental goals can be aligned.

The problem, of course, is that making a business case for sustainability activities is not always straight forward. John Wilkerson told Dustin Mattison, “Social responsibility, competitive pressures, as well as [a] lot of others issues out there are hard to measure. Business case development is one of those things that organizations are fighting through.” [“5 Challenges With Green Supply Chains,” Dustin Mattison’s Blog, 12 December 2011] Mathers insists that there are activist investors (especially institutional investors) that “have a lot of clout,” but even they want to make a profit on their investments. He also insists that “consumers themselves are much more interested in sustainable products.” If Irvine’s article is correct, however, Mathers is mistaken (i.e., they are not more interested in sustainable products than they have been in the past). Richard Niesenbaum, a biology professor at Muhlenberg, told Irvine that on his campus “85 to 90 percent” of the studentbody is] “open to protecting the environment and natural resources”; but, they are “not leaders and [are] not interested in being seriously inconvenienced or paying a cost to do so.”

If one casts sustainability efforts in the light of driving waste out of operations, both environmentalists and profiteers can agree that such efforts are valuable. The poster child for environmentalism is probably former Vice President Al Gore. He continues to speak out on the subject of environmentalism; but, in today’s divisive political environment, his views are too closely linked to liberal politics for his opinions to carry much weight conservative skeptics. Still he tries. He believes that business and environmental interests can move forward with a concept he calls “sustainable capitalism: a framework that seeks to maximize long-term economic value by reforming markets to address real needs while integrating environmental, social and governance (ESG) metrics throughout the decision-making process.” [“A Manifesto for Sustainable Capitalism,” by Al Gore and David Blood, Wall Street Journal, 14 December 2011] Gore and Blood wrote:

“Sustainable capitalism applies to the entire investment value chain—from entrepreneurial ventures to large public companies, seed-capital providers to institutional investors, employees to CEOs, activists to policy makers. It transcends borders, industries, asset classes and stakeholders. … Moreover, companies and investors that integrate sustainability into their business practices are finding that it enhances profitability over the longer term. Experience and research show that embracing sustainable capitalism yields four kinds of important benefits for companies:

“• Developing sustainable products and services can increase a company’s profits, enhance its brand, and improve its competitive positioning, as the market increasingly rewards this behavior.

“• Sustainable capitalism can also help companies save money by reducing waste and increasing energy efficiency in the supply chain, and by improving human-capital practices so that retention rates rise and the costs of training new employees decline.

“• Third, focusing on ESG metrics allows companies to achieve higher compliance standards and better manage risk since they have a more holistic understanding of the material issues affecting their business.

“• Researchers (including Rob Bauer and Daniel Hann of Maastricht University, and Beiting Cheng, Ioannis Ioannou and George Serafeim of Harvard) have found that sustainable businesses realize financial benefits such as lower cost of debt and lower capital constraints.”

The former Vice President has apparently come to the conclusion that his environmental agenda can only be achieved if he can make a business case for sustainability. His arguments are clearly not aimed at so-called “tree huggers” but at hard-nosed business people. Still, making a case for sustainability is not easy. Wade McDaniel, VP Solutions Architecture, Avnet Velocity, Avnet Inc., writes that “‘green’ … means different things to different people.” [“It’s Not Easy Being Green,” EBN, 15 August 2012] He argues that companies aren’t as green as they could be because consumers won’t allow it. We live in a world where some consumers want instant gratification. As a result, getting a product to market in the fastest possible way has become important. Speed almost always equals increased costs and resources. He came to this conclusion “after reading a paper from David Hummels and Georg Schaur on the impact of transportation modes on a macroeconomic scale.” McDaniel indicates that he “was faced with some interesting facts.” He continues:

“The use of airfreight has grown 2.6 times faster than the use of ocean freight, is on average 6.6 times more expensive than ocean freight, and every day the product is in transit adds 0.6 to 2 percent to the value of the goods, potentially making them more expensive. Add to that the fact that airfreight is over 60 times more carbon intensive than ocean freight, according to a paper published by TATA Consultancy Services, and you can clearly see both the cost and environmental advantages of ocean freight. If a consumer believes that the use of ocean freight is more fuel efficient and produces a lower carbon footprint than air, I could be led to the conclusion that green-conscience consumers would be willing to wait for their products.”

Business decisions are obviously being made to get hot products to market the fastest way possible. The iPhone 5 is a good example. Analysts anticipate that orders for the phone will fill air freight capacity as Apple rushes its newest device to consumers. [“iPhone 5 expected to soak up air freight capacity,” American Shipper, 13 September 2012] McDaniel concludes:

“When a new, hot electronic gadget is available, the consumer wants it now, with little regard to the carbon footprint. However, there is a concern as to how it was made, and where the materials and labor come from. On the other hand, when things are less time or emotionally sensitive, consumers will give more consideration to the overall green quotient of the product. Each of these results has an impact on our supply chains, and on how we design them.”

Robert L. Lattimer, a Senior Fellow at Rutgers’ Edward J. Bloustein School of Planning and Public Policy, is pushing a concept he calls Universal Sustainability. He believes “Universal Sustainability may hold the key to unlocking the next wave of business innovation and growth.” [“Sustainability, The Economy and Competitiveness 2012,” Dustin Mattison’s Blog, 29 February 2012] The reason that Lattimer sees Universal Sustainability as something new is because its “primary focus [is] on the economy” as well as “on education, science and technology, political systems, … preservation, the environment and conservation.” The bottom line is that sustainability isn’t a passing fad. It will remain an important business issue because it holds the potential of making companies more profitable as well as better stewards of the environment. In the long run, the business case for sustainability will be the most important factor keeping it on executive agendas.