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Every day, companies make decisions on what to produce, where to produce it and who to ship it to. Demand and supply planning and matching is an integral part of all supply chains. Planners balance service level, lead time, costs and inventory to maximize company profitability. But environmental and sustainability considerations are rarely part of the operational planning process. This needs to change.
Customers, investors and company boards are asking what organizations are doing about their sustainability commitments. Governments, especially in Europe, are putting in place legislation to force companies to act in more sustainable ways. Supply chains represent over 80% of global greenhouse gas emission, so the spotlight is on the supply chain. Companies at the corporate level are making sustainability commitments, but that has not trickled down to day-to-day operations yet.
Heightened awareness and increased sustainability KPIs will transform how planners make decisions. The environmental impact must now be considered in matching supply and demand, expedite decisions and allocation rules.
But how will this change day-to-day activities? It may sound easy – surely all we need to do is include some type of CO2 emissions data in our planning model. Actually, it is far from simple, and the details are where implementations fail and where good intentions are forgotten. To successfully transform your process, consider the following:
- Definition: What are the objectives? What are we trying to achieve? What do we want to measure?
- Data: Currently only limited information is available, so it is important to be realistic. Understand and measure the emissions generated by your process, ideally using data that is available. Start with answering questions like these:
- What is the impact of running an extra shift at each factory?
- What emissions are generated per lane per mode of transportation?
- What carbon benchmark price does the company want to use?
- Process: The company needs to not only determine its environmental, sustainability and governance (ESG) targets but also define how to value contradicting forces in decision-making – for example, do I value revenue over carbon emission reductions? Decisions need to be made and scenarios discussed so that when they occur, the decisions that align best with the company’s objectives can be achieved. These scenarios include:
- How late are we willing to deliver to a customer to reduce our emissions standards?
- How important is the vendor’s resiliency and sustainability when sourcing raw materials?
- How deep do we go in our supply chain? Do we evaluate Tier 1 vendors only? Or do we keep going all the way down through our vendor’s vendor’s vendor’s sustainability?
- Is our goal emissions reduction or are there other ESG metrics we want to perform?
- Are ESG KPIs a hard target or a guidance?
- Incentives: Companies need to align employee incentives with their sustainability goals. If we continue to incentivize supply chain employees to achieve cost, inventory and service targets, ESG will never be given a priority. The assignment and achievement of ESG KPIs in planning is essential to successful adoption.
- Technology: The system of engagement and planning tools must be configured to provide all relevant data and information to the supply chain professionals. This configuration not only includes data visualization and dashboarding but also incorporates ESG constraints and targets as part of the heuristics and optimization engines for the recommendations the tools provide.
Operationalizing sustainability in planning will be a revolution that could significantly impact the way we design and operate supply chains; however, the benefits to the environment could be massive. The journey will be disruptive and lead to new but improved ways of making decisions.
For companies to achieve their ESG goals, transformation in supply chain – including planning – is fundamental and non-negotiable. The change is happening at an accelerated pace, and the right partners can ensure accelerated success.