Years ago, when the environmental movement gained momentum, the dictum of reduce, reuse, and recycle became the catchphrase for solving the problems created by consumption. Over the years, while much of the focus has been recycling, this is far from the most important approach. Recycling is the least attractive option of reduce, reuse, recycle due to the level of resources and organization it requires. Thus far, recycling efficiency has proven difficult, and the results of studies looking at its overall impact are conflicting. The most important thing companies can do is to become more efficient initially and avoid consuming the resources up front, rather than figuring out how to dispose of the products afterwards. This is particularly true for carbon emissions, where recycling may actually produce more carbon than putting the waste in a landfill.

Lowering the impact of consumption on the environment requires a much firmer commitment to reduction. In some countries, such as the United States, the commitment to reduction has been minimal, largely due to concerns that quality of life would be compromised. This paradox can be mitigated by using mathematical models that maximize the accuracy of the supply chain cycle so that only those goods that will be purchased are actually produced.

Why is the Manufacturing Supply Chain Important to Going Green?

When thinking about sustainability, manufacturers frequently think about redesigning products to use more environmentally friendly materials, consume less energy or reduce the amount of materials required for packaging. These programs can effectively reduce waste, but predicting demand and managing inventory can do more for a sustainability program. By avoiding unnecessary production, a manufacturer completely eliminates the associated resource and energy consumption. A manufacturer’s supply chain can be the quickest and most effective starting point for a successful sustainability program.

The manufacturing supply chain consists of all of the plants, warehouses, vehicles and people that produce, store and transport goods, from raw materials to finished products. The complexity of the supply chain can be illustrated by considering the fact that a single grocery store may have close to 200,000 unique products on its shelves; an auto parts store may have 500,000. Planning when and where to produce and distribute each item is a multifaceted problem. Poor management of the supply chain can lead to unnecessary production, excess storage and inefficient transportation. Decisions about what goods to manufacture and where to ship them are frequently managed by mathematical models of future production capacity, inventories, sales and shipments. It is essential that the most accurate mathematical models are used for supply chain decisions.

The Cost of Goods Not Sold

There are about $5 - $10 trillion of goods held for sale in the world. This is approximately $1,000 of inventory for every man, woman and child in the world. For the 3 billion people who live on less than $2 per day, this is a year and a half of earnings and a staggering investment by society as a whole. In addition to lowering carbon dioxide production, reducing this inventory has the potential to lower the impact of goods production on the environment in many other ways and allow funds to be invested in more beneficial ways. While holding these goods consumes energy and natural resources, their initial production requires even more energy and natural resources. More than half of this inventory is safety stock, which is inventory that is held because companies do not know what their customers will want on any given day. A second major component of inventory is goods that were supposed to sell but did not because sales were not as high as anticipated.

In the United States in 2006 there was $1.9 trillion of inventory or about $6,000 of inventory for every American. In 2006, there was $1.28 of inventory in existence for every $1.00 sold, so goods sit in the supply chain for about 15 months on average. The table below outlines annual logistics costs in the United States, which totaled $1.3 trillion dollars in 2006. Reducing inventory from 15 months to 9 months (for example) would be environmentally equivalent to shutting down all of the factories, warehouses and trucks for half of a year, but without any impact on consumption or quality of life.

2006 U.S. Logistics Costs

Source: 18th Annual State of Logistics Report

Motor carriers represent 48% of total logistics costs in 2006 and consumed 95 billion liters of diesel fuel that year, creating more than 250 million metric tons of carbon dioxide. According to the EPA, transportation in the US accounts for approximately 33% of total greenhouse gas emissions from fossil-fuel consumption. Reducing transportation of goods to incorrect locations would have an immediate impact on logistics costs and greenhouse emissions.

Why Does Efficiency Matter?

This sounds like a controversial statement, but it is not. In fact, this is one of the major drivers of sustainability. All companies are driven by profits, and most large companies are public, so they also have fiduciary responsibilities to their shareholders. Companies have little incentive to undertake green projects with negative returns on investment. Greater efficiency is also the key to mitigating the impact of going green on the welfare of society. Any manufacturer can reduce their carbon footprint by closing a factory, but there is a concomitant loss of jobs and goods; simultaneously reducing costs while being a good corporate citizen is a more compelling strategy.

Servers Are Not the Problem

The information and communication technology (ICT) industry has been very inwardly focused on sustainability issues. The primary response of the ICT industry has been to lower its impact on the environment by removing hazardous materials from products (RoHAS) and reducing heat generation and electricity consumption. These are good ideas of course, but it is not the servers that are the major problem. ICT companies need to look to other parts of society and ask how they can help them become more efficient and reduce carbon production by using the wealth of data available through computers. Opportunities for greater sustainability range through advanced modeling are almost unlimited, ranging from "smart" buildings to supply chain to monitoring desertification in Africa by satellite.

Some Ways Procter & Gamble Is Helping the Environment

Procter & Gamble's world-wide sales have nearly doubled over the last six years and their inventory investment is close to $7 billion, or about 0.1% of world inventory. P&G is very interested in reducing this investment. There are two fundamental approaches to achieving this. One is to predict sales more accurately and the other is to improve supply by compressing the manufacturing cycle and optimizing inventory. Procter & Gamble is doing both.

A few years ago P&G introduced the Consumer-Driven Supply Network (CDSN), a global initiative to improve P&G's responsiveness to consumer demand. As part of the CDSN, P&G implemented short-term sales forecasting to improve responsiveness to market changes and reduce inventory. By using the most current demand information at the most granular level, P&G has reduced forecasting error by more than 30%, decreasing safety stock by more than 10% and reducing waste. P&G is continuing to invest in improving efficiency, by exploring using POS data to improve forecast accuracy as well as looking at predicting freight movements at a very granular level.

On the supply side they have done some things that are more frequently associated with the electronics and automotive industries. For example, P&G implemented late stage product differentiation with detergents. By producing a batch of detergent, then having the ability to add scent, fabric softener and/or bleach as it is put in bottles, they benefit both from smaller batch sizes, and hence more frequent runs, and have the ability to rapidly align production with sales. They have compressed material lead times and are able to produce any product on any day, eliminating waste by producing specific products only when demand is confirmed.

Read about the success of Demand Sensing at Procter & Gamble.

Read about the success of Demand Sensing at Campbell Soup Company.

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