Category Archives: Sustainability

Don’t Forget the Recovery When Designing For Recovery!

In our recent post on how supplier circles are just loopy, we noted that the only difference between what the McKinsey article on “Manufacturing Resource Productivity” is preaching and what the environmentalists have been preaching for years is that the reduce, reuse, and recycle mantra should pervade the supply chain end to end and influence new business models that improve recovery, create new sources of supply, optimize production, and increase revenues instead of being an afterthought. In essence, as we pointed out, McKinsey is jumping on the Design for Recycle bandwagon that SI and a few other (lonely) thought leaders have been pulling for years (and years and years), but changing the language to make it look like it’s their idea (as all good consultants do — but at least they are not stealing your watch to tell you the time).

Design for Recycle, which is also known as Design for Recovery, is very important as the supply of more and more rare earth minerals become scarcer and scarcer and the most abundant source is in products (going) in (to) the hands of the consumers, who will eventually finish with the product, and without an alternative, toss it in the trash — where it may end up wasted in a landfill! But this isn’t the only reason you want your products back. Even when the initial customer is done with them, most of your products, or at least components thereof, still possess value and can still be refurbished and resold at a profit, even if they are not working. The obvious example is the iPhone 4S still has value when the customer upgrades to the iPhone 5. A less obvious example is that the laptop still has value if only the memory needs to be replaced. If the laptop can be resold for $300 with only $20 for new memory chips and $30 of labour, then recovering it at a cost of $30 of shipping and a trade-in credit of $100 should be a no-brainer as that leaves you with 40% profit — which is probably a heck of a lot more than what you made initially when prices were slashed to be competitive with your most aggressive competitor! And then there’s the fact that many jurisdictions are enacting legislation regarding returns management and proper disposal. If you don’t have a valid recovery mechanism to ensure customers have an option for proper disposal, in some of these jurisdictions, you could be fined if your customer, lacking such an option, decides to throw the product in the trash.

But these aren’t the only reasons to plan for recovery. As pointed out in a recent article on “reclaiming value through reverse logistics”, a retailer’s returns policy is a critical decision making factor in a customer’s purchase. Specifically, 63% of online shoppers look at the policy before making a purchase, and 48% will shop more often with a retailer that offers a lenient, easy-to-understand return policy. And while this is a retailer, and not manufacturer, statistic, it does indicate the significance of returns. Furthermore, the reality is that if you have a good return management process that is headache-and-hassle free for the retailer, then the retailer is likely to offer the customer a headache-and-hassle free policy as it knows it doesn’t have to worry about getting stuck with unwanted or defective products. Putting your customer first helps your customer put the end consumer first, which, according to the UPS commissioned study quoted in the article, increases the chances that they will buy from the retailer who is your customer. Plus, 32% of customers have indicated that they will focus less on price and more on quality of service if given a lenient, easy-to-understand returns policy. That’s how you maximize revenue and profit!

Supplier Circles? That’s Just Loopy!

Don’t know how SI missed this, but apparently McKinsey has been telling everyone to abandon supply chains in favour of supply circles for almost a year now! What? While it’s true you can loop a chain to make a circle, it’s not always the case that you should. And, moreover, it’s not really a circle that you want, but a chain where information, inputs, and values flow up and down. Just like you can walk up and down stairs, you can push value up and down the chain.

But we’re getting ahead here. Stepping back, the article from last spring on “Manufacturing Resource Productivity” stated that manufacturers can generate new value, minimize costs, and increase operational stability by focusing on four broad areas: production, product design, value recovery, and supply-circle management. All true, but none of it requires you to manage a supply circle, or even treat the supply network as a circle.

Digging in, we find the article is building on an inforgraphic released at the same time that takes us “from supply chains to supply circles” and explains how companies can respond [to pressures on profit as a result of higher variable costs] by improving resource productivity. Furthermore, it goes on to say that leaders in the field are exploring circular operating models where value is created by looping products, components, and materials into the value chain after they fulfill their utility over the life of a product.

Essentially, the article is saying that you should recycle, refurbish, reuse, and repair — the reduce, reuse, recycle that environmentalists have been preaching for years. The only difference is that they are preaching that this thinking should pervade the supply chain and influence new business models that improve recovery, create new sources of supply, optimize production, and increase revenues and products. Isn’t this just the Design for Recycle that SI and other thought leaders have been preaching for over 6 years?!? (SI’s post is back in 2007!) It is! The only difference is that they are confusing you by saying that you have to circle your supply chain to make it work.

Sorry, bub, but this ain’t the case. As long as you build a recovery mechanism that is usable, and attractive, it doesn’t matter if you have a chain, a loop, a circle, or a figure 8. It’s not the physical design of the chain, but the capability. Maybe the consumers return unwanted / end-of-life products to a recovery centre that breaks your product down into component parts, and returns the working ones to your primary manufacturer and sends the broken ones to a base metals extractor that, in turn, sends the extracted metals to the component manufacturers that feed the primary manufacturer and the waste that it can’t process to a waste processor for further recovery efforts. And maybe the consumers return the produts to the retailer that sends them to you and you repair, or send them to a raw material extractor, as needed. The supply network might end up being circular, might loop back in to the manufacturer, or the return (and recovery) paths might be the exact inverse of the supply paths. The design doesn’t matter — it’s the capability to insure raw material supply and keep variable (and unpredictable) costs down that matters!

Risk – The More Things Change, The More They Stay the Same II -Environment

In our last post, we discussed the top societal risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 7th annual Global Risks report. Chronicling dozens of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing the top three risks from an environmental perspective.

According to the report, the two top risks, which are essentially the same as last year, are:

Rising Greenhouse Gas Emissions and the Climate Change that will Result

Climate change may not seem like a big risk, but it can have drastic consequences on your operations. Not only can it increase the likelihood of (tropical) storms, floods, blizzards, and ice storms, which can destroy your factories, wash away your delivery trucks, trap your workers in the factory for a week, and take down entire power grids, but it can wreak havoc on your operations. For example, if you want to drill for oil in the oil sands, you need the ground partially frozen. If six months are required to extract a year’s worth of oil but by the time the ground freezes there will be less than four months of drilling time, problem. And if the risk of flooding is significantly increased, so are the chances of your supply chain being brought to a grinding halt.

Unprecedented Geophysical Destruction

This is likely to take the form of:

Earthquakes & Volcanic Eruptions

The 9.0 magnitude earthquake in Japan in March of 2011 demonstrated the devastation that earthquakes could have on global supply chains. The earthquake and resulting tsunamis not only damaged or destroyed thousands of homes and hundreds of factories, which resulted in almost 20,000 deaths, but also resulted in the immediate declaration of a state of emergency at a nuclear power plant when dangerous levels of radiation escaped the Fukushima No. 1 (Daiichi) plant. In addition, it triggered the immediate shut down of 15 of Japan’s nuclear power stations and a crisis at the Tokai No. 2 Power station was narrowly averted.

However, this earthquake is nothing compared to what a well placed major volcanic eruption can accomplish. Not only can a major eruption near the edge of a tectonic plate trigger an earthquake, but it could launch enough ash into the air to make air travel through a region impossible for months. The recent volcanic explosions in Iceland in 2011 are nothing compared to some of the eruptions that have happened in the last few thousands years. Not even the eruption of Mount St Helens in 1980 was very big. It only erupted 1 cubic km of lava. The largest eruption, in terms of java discharged, in the last 99 years was Pinatubo in the Philippines in 1991. A whole 10 cubic kms of lava was released. The 1912 eruption of Katmai in Alaska released 12 cubic kms. And this is nothing compared to the 1815 eruption of Tambora in Indonesia that released 100 cubic kms of lava. And students of history are aware of how Mount Vesuvius buried Pompei under 4 to 6 m of ash and pumice. The eruption of Krakatoa in 1883, which was heard across the world, released so much ash into the air that it caused a volcanic winter. Temperatures worldwide dropped an average of 1.2° C for the next 5 years as a result of ash that was ejected 20,000 ft high. If this happened today, air travel would be interrupted for at least six months in the region. The interruptions in air travel as a result of the Icelandic explosions would be minor in comparison.

Flooding

The floods in Thailand last year and the floods in Bangladesh and the Philippines this year are a perfect example of the significant impact that floods can have on global supply chains. Economic losses in 2011 due to the Thailand floods reached 46 Billion by the end of 2011 (Aon Benfield), more than doubling the insurance losses that were expected to reach 20 Billion (Insurance Insight). The reality is that a single flood can cause so much damage that it could literally bankrupt an operation. The automotive sectors and electronic sectors were impacted the hardest by the Thailand floods — more than 400 Japanese companies in these sectors suspended operations or lowered output as a result of the floods.

And with global warming, which is causing many of the ice flows in the arctic to break up, the risk of flooding is greatly increasing. Many of the worst floods in history were ice-jam floods resulting from “breakup jams” which force ponding upstream and a rapid release of water when the ice dams breach. This is what happened in (April) 1952 on the Missouri River in (Bismarck) North Dakota where an eroding ice dam resulted in flow increasing from about 2,100 m3/s to more than 14,000 m3/s in less than 24 hours. The river rose 5 feet in less than 2 hours and submerged nearly everything south of US Highway 10. Fortunately, this was not a densely populated area, otherwise, instead of 200 houses being destroyed, there would have been 20,000 houses destroyed and likely thousands of deaths. If this happened near your factory, it would be wiped out almost instantaneously.

Risk – The More Things Change, The More They Stay the Same I – Society

The World Economic Forum‘s 7th annual Global Risks report was recently. Again chronicling dozens of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. What’s interesting about this report is how the biggest risks in many of the categories haven’t changed at all since last year. Take Society for instance. While it chronicled seven major risks in this category, the top two dwarf the other five and they are the exact same as last year.

02: Food Security

People need to eat. As a result, they need access to safe, secure sources of staple foods at an affordable price point. If they don’t have access to safe, secure sources of staple foods at an affordable price point, they riot — as we have seen in Tunisia, Algeria, Bangladesh, Mogadishu, India, China, and even the UK and Canada this year. When people riot, property gets destroyed — property that could include your delivery trucks, your goods in your warehouses, and even your production plants. Try ensuring supply with no distribution mechanisms for raw materials, no working production lines, and no warehouses to store anything.

01: Water Security

Not only do people need water, but supply chains need water. First of all, supply chains need energy. Energy production requires water (as per the Water Energy Nexus). For example, in the USA, about 2 US gallons of water evaporates to create one kilowatt hour of energy. Steel, which is a component of many goods, requires 62,000 gallons of water for the production of a single ton. Semi-conductor fabrication plants often require up to 2,000 gallons of water per minute. No water, no goods, no components, and no energy. And if water gets too scarce, so is food. And a vicious downward societal cycle will begin.

It should be obvious by now that while the risks of pandemic, chronic disease, religious fanaticism, migration, and age aren’t going away, they aren’t going to matter much if we don’t have the food and water to sustain ourselves.

Can Beer Build a Better Business?

And now that I’ve got your attention, yes SI is serious!

As per a recent article over on Inside Supply Management (ISM) on “Brewing a Better Future”, Heineken plans to Improve, Empower, and Make an Impact! As part of its three-part strategic initiative, Heineken plans to increase partnerships, source local, and, most importantly, reduce CO2 emissions and water consumption.

With respect to CO2 emissions and water consumption, Heineken plans to:

  • reduce emissions by 40% in its breweries,
  • reduce and track emissions throughout the value chain,
  • implement the concept of a CO2 neutral brewery in at least three sites (by 2015), and
  • reduce water usage by 20%.

That’s one heck of a sustainability initiative, especially for a brewery where water consumption can be as much as 8 cubic meters per cubic meter of beer produced and where CO2 production can be as much as 10 kg per hecto-liter. If it succeeds, the improvements will be very significant, with over a liter of water being saved per liter of beer (as consumption will be reduced from 5.1 to 3.7) and kgs of CO2 emissions disappearing per hecto-liter (as output will decrease from 10.4 kg/hl in 2008 to 6.4 kg/hl in 2020).

If Heineken succeeds, the innovations that it will introduce could revolutionize not only the brewing industry, but the food and beverage industry as a whole. Let’s all hope that they manage to brew a better business (without sacrificing the quality of the beer, of course).