How Sustainability Became an Integral Part of Supply Chain Management

Note: This article originally appeared in the UCLA Anderson Review.

For years, business viewed the threat of climate change with skepticism and often outright hostility. So it’s a remarkable turnaround to see more and more companies — even some in the fossil fuel industry — acknowledging and taking action to address the risks posed by global warming.

Credit for the change goes in part to mounting pressure from governments, activists, customers and investors, all demanding that companies reduce their impact on the environment. Businesses also are finding that there are clear benefits of making their operations more sustainable, both to their reputations and to their bottom lines.

Still, taking action on climate change isn’t a simple matter of putting scrubbers on a few smokestacks. For many companies, it can mean a thorough transformation of all aspects of their business, from acquiring raw materials to disposing of products once customers are finished with them.

It turns out there’s a growing body of research that can help in tackling these challenges: the science of operations management. Chiefly concerned with making business procedures more efficient, the field has also in the last few decades looked for ways to make them less damaging to the environment. As concerns about climate risks spread, and as managers realize they can’t address the threat without involving suppliers and customers, the study of sustainable supply chain management has grown in importance.

Businesses also increasingly recognize that prompt, aggressive action can pay dividends in higher market values and a more positive brand image. “This combination of managing risks and pursuing opportunities has led many managers to try to better understand supply chain management in conjunction with climate change,” write Harvard Business School’s Chonnikarn Jira and Michael W. Toffel in “ Engaging Supply Chains in Climate Change,” published in 2013 in Manufacturing & Service Operations Management, a leading journal in the field.

Sustainable supply chain management, which studies how supply chains contribute to a company’s total environmental impact, has been an important stream in that research. A company’s supply chain takes in a firm’s activities as well as its suppliers (and, at times, customers), from the mining of raw materials to fashioning of components, transit and the ultimate manufacturing, shipping and use of the products. Supply chains play an outsized role in firms’ overall climate impacts, accounting for more than five times the greenhouse gas emissions as its internal operations, according to the CDP, an independent, not-for-profit organization formerly known as the Climate Disclosure Project. A company can’t begin to measure, much less reduce, its greenhouse gas emissions without understanding what’s going on in its supply chain.

The roots of operations and supply chain management go back to the early 1900s and Frederick Taylor’s work applying scientific principles to improve production efficiency. Environmental sustainability, and its links to financial performance, began drawing serious research attention in the 1990s, as studies began to consider the “triple bottom line” — profits, people and the planet.

Over the past 20 years, Manufacturing & Service Operations Management, most recently edited by UCLA Anderson’s Christopher Tang, has published more than 50 papers on sustainable operations management, according to a survey for the journal’s 20th anniversary by Georgia Tech’s Atalay Atasu, UCLA Anderson’s Charles Corbett, University of Minnesota’s Ximin (Natalie) Huang and Georgia Tech’s L. Beril Toktay.

The journal’s pages, viewed over those 20 years, much like activities in the field it reports on, show the slow but steady melding of supply chain management and considerations of sustainability.

“Supply chain management research has made several important contributions to sustainability over the last two decades,” Tang said in an email exchange. “At the same time, sustainability has spawned new research challenges and opportunities for managing global supply chains. Ultimately, sustainability is a critical supply chain issue that the world must address.”

The journal has published discussion and research papers on: “closed-loop” supply chains (in which manufacturers take back and reuse all or parts of used products); innovations in product design and business models (such as ride-sharing and novel forms of leasing); the use of advanced technologies, such as electric vehicles; and the low-carbon economy.

Research focusing on energy, emissions, climate change and other aspects of the low-carbon economy has covered cap-and-trade systems, carbon tariffs and how to design products, services and systems that require less energy.

One subject of study is a central problem in sustainable supply chain management: getting suppliers to disclose their greenhouse gas emissions. Collecting the information isn’t easy; disclosures are up to the discretion of the supplier, and providing it is expensive. A 2016 paper by Ohio State University’s Christian Blanco and UCLA Anderson’s Felipe Caro and Charles Corbett found that in 2013, companies reported only about 22% of their supply chain emissions to the CDP.

But the information is essential in helping companies to identify the most cost-effective ways to squeeze emissions from their supply chains and to mitigate the risks from possible CO2 regulations. It’s also useful when measuring a product’s carbon “footprint” — the total greenhouse gas emissions associated with the item.

In their “Engaging Supply Chains” paper, published in M&SOM’s special issue on the environment, Jira and Toffel examined the problem. It isn’t a new problem to operations research. Previous studies of Total Quality Management and just-in-time inventory programs have considered ways to get suppliers to share data about inventory levels or provide guidance for demand forecasts. Other research examined the risks to a company’s reputation based on working conditions or industrial accidents at its suppliers, such as the backlash that fashion sellers faced after the 2013 collapse of the Rana Plaza factory in Bangladesh.

In their paper, Jira and Toffel suggest suppliers are likelier to share emissions information when requests for data come from multiple buyers, making it clear that the request is part of a broader industry practice and not just a one-off. They will also be more willing to reveal emissions data when the buyer makes disclosure a condition of future purchases. And, not surprisingly, disclosure is likelier among suppliers in more profitable industries or in countries with strict greenhouse gas regulations.

That last point can be important in guiding policymakers to craft disclosure regulations and direct enforcement efforts. Governments can rely on “market-driven” requests for supply chain information in profitable industries, but “mandatory information disclosure regulations might be needed to compel disclosure by firms in less profitable industries,” the authors write.

Another paper in the 2013 special issue considers a different supply chain challenge: accurately measuring the carbon footprints of a company’s products and services, and then dividing up the cost of those emissions among the various parts of the supply chain.

Carbon footprinting, an increasingly important metric for consumers who want to compare the climate impacts of different companies and products, involves estimating the total greenhouse gas emissions for a product, a company or a supply chain. For instance, Coca-Cola European Partners reported in 2018 that the carbon footprint of its direct activities was about 232 metric tons of CO2 equivalent, and average emissions for a liter of beverage was almost 19 grams.

Accounting for the carbon footprint across a supply chain is tricky. If a company gets charged for its greenhouse gas emissions, either through a carbon tax or part of a cap-and-trade system, it’s going to want to make sure that it pays for only the emissions it contributed, not those of other parts of the supply chain. And if a company invests in systems or new business processes to reduce emissions, it expects to be fully credited for the improvements.

In the paper “Double Counting in Supply Chain Carbon Footprinting,” UCLA Anderson’s Caro and Corbett, along with Eindhoven University’s Tarkan Tan and Rotterdam School of Management’s Rob Zuidwijk, consider how best to allocate responsibility of emissions in a way that will lead to the greatest reduction. Contrary to established practice, they find that in order to get the biggest cut in greenhouse gas emissions, it may be necessary to credit two or more supply chain partners for the same cuts.

Groups like the Environmental Defense Fund consider “double counting” detrimental to carbon trading programs, arguing that they can lead to an increase in emissions. If a supplier and a manufacturer collaborate on changes that reduce the carbon footprint of a product by 10%, and can get $30 per ton to offset those emissions in a carbon trading system, the argument goes, they have to share the payment for the 10% and not each get credit for the full amount.

Using a simple model that breaks down a carbon footprint into its underlying processes, the authors suggest that allowing at least some double counting gives each company greater incentive to come up with ways to get the most carbon reductions. While they concede that if a company has to buy carbon credits (to offset the environmental impact of CO2 emissions) then double counting doesn’t make sense; they write that “without at least allowing double counting in a pro forma fashion, many valuable opportunities for joint improvement will go unexploited.”

As sustainability and climate change become more and more important to supply chain management, researchers are turning to other disciplines for analytical instruments to complement their existing tool kit.

The practice of carbon footprinting, for instance, is a kind of life cycle assessment (LCA), a method of adding up all the inputs of materials, energy and environmental impacts associated with a product or service throughout its entire life. It started in the field of industrial ecology and was later adopted by supply chain researchers to help understand the climate impacts of products and services. Industrial ecology, in general, is based in physical sciences and engineering, while supply chain management draws on operations management and economics, so each takes different approaches to modeling processes.

A 2017 forum paper from Tel Aviv University’s Vered Blass and UCLA Anderson’s Corbett aims to bridge the disciplines of LCA and sustainable supply chain management. The paper considers seven key differences between the two approaches, along with how they can complement and inform each other. “These two perspectives do not conflict with each other, but they do cast a different light on the same issues,” the authors write.

LCA’s chief objective is measuring the effect on sustainability of a broad range of industrial processes, with the goal of coming up with a complete accounting of all the impacts. Sustainable supply chain management, in contrast, is mainly interested in measurements to support business decisions, such as making a distribution network more efficient or setting inventory levels. Where LCA would seek to measure all the environmental effects on a single company or product, supply chain studies might aim to account for a single factor like CO2 emissions, but would attempt to track it through the multiple players in a supply chain.

In general, supply chain management research (abbreviated “SCM” in the literature) can provide a valuable business perspective on life cycle research, but in other instances LCA offers a useful alternative. Supply chain management research for instance, studies the best ways to operate closed-loop supply chain, based on the view that remanufacturing and reuse are desirable alternatives to disposal of post-consumer products. However, researchers incorporating a life cycle approach have found that take-back programs might be more equitable for products like computers and mobile phones (through which most of the environmental effects come from manufacturers), but are less desirable for automobiles, refrigerators and televisions, (whose energy consumption in the life cycle occurs when people use them).

This and other examples in the paper, the authors write, “illustrate how adding the economic perspective to questions raised in the LCA literature, while still recognizing the breakdown of environmental impacts in a manner consistent with LCA, can lead to richer insights for both the LCA and SCM literatures.”


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