Recent Carbon Trust Business Advice research found that multi-national organisations will significantly increase their focus on supply chain carbon in the next 2-3 years, but what's driving this trend?
Our experience of working with companies to help them reduce their carbon emissions has shown that the majority of an organisation's footprint frequently lies outside its direct control. To better understand this, companies can take a 'carbon lens' to their supply chain, scrutinising for example those areas which rely on commodities, and are therefore particularly susceptible to risks such as climate change, extreme weather events, high oil and energy prices, localised water scarcity or even changing consumer preferences.
Cutting carbon in the supply chain - Impact on suppliers
Often there are resource commodities, inflationary pressures and supply/demand issues that a business may not perceive as a risk, hidden in tier two or three suppliers, which must be taken into account when analysing carbon in the entire value chain. A restaurant chain, for instance, may manage its exposure to food inflationary pressures but it is unlikely to consider the amount of cotton that is consumed in manufacturing uniforms, furniture, soft furnishings or the cement, steel or aluminium in its building refurbishments and kitchen fittings.
To understand and realise the opportunities in reducing carbon and cutting the associated costs in the supply chain, consider the following steps:
1. Before working on the supply chain footprint, a company must understand its own footprint. This will help develop an increasingly accurate understanding of exactly what quantity of raw materials and key commodities a business is consuming in the development of its product or services. Coca-Cola found that packaging is the largest contributor to its products' carbon footprint - accounting for between 30-70% of the total emissions. Working with packaging suppliers to use less carbon-intensive resources in Coca-Cola bottles was therefore a major priority for carbon reduction.
2. Identify whether upstream carbon emissions are a major factor in the organisation's overall carbon footprint. Every business has a unique carbon footprint and different factors will affect its indirect emissions.
- Companies where downstream emissions tend to be higher relative to upstream emissions tend to include manufacturers of energy-consuming durable goods or products that require energy as part of their use or consumption.
- Companies where upstream emissions tend to be higher than downstream emissions are those that produce goods requiring energy in their manufacture, but little or no energy in their downstream use or consumption.
3. If upstream carbon looks like a major focus, model the supply chain of products and product groups, providing a breakdown of the carbon impact of a range of resources including energy, waste, transport and the production of raw materials. Understand the carbon and resource-intensity of procured materials and services, by conducting a high-level assessment.
4. Rank these by materiality and overlay them with key areas of procurement spend to identify cost reduction opportunities. Conducting 'deep dive' assessments of high-impact items will help you to better understand the breakdown of their value chain (to assess opportunity for reduction).
5. Engage with selected suppliers and include carbon and resource impacts within procurement criteria and processes. Marshalls Paving Stones, for instance, committed to working with suppliers who offered lower carbon cement in its paving stone production. Also, BT worked with the Carbon Trust Business Advice team to implement a Climate Change Procurement Standard with training for its suppliers, and by March 2010, 50% of suppliers were measuring their carbon footprint and 52% had set their own reduction targets.
Taking these steps will not only help a business reduce its carbon emissions, it will help develop an accurate understanding of the quantities of raw materials and key commodities that different product/service mixes adopted by the business would consume. Since every pound of inflation in a business' supply chain is a pound less of profit, the best way to outperform one's competitors is to uncover where these inflationary risks are highest and start mitigating them now.