These are exciting times. Manufacturers are on the verge of what is surely to be the single largest growth opportunity in history. The global population is projected to grow by 50% in the next 40 years, with three billion more people needing food, clothes and all types of goods.
Yet, the World Wildlife Fund reports that global natural resources consumption exceeds the Earth’s capacity to renew them by 30%. Our production model isn’t sustainable at current demand levels, let alone when the world population reaches almost 10 billion people. Further, this doesn’t reflect the compounding effect of global urbanisation trends and middle class expansion in fast-growing nations such as China and India.
From a manufacturer’s point of view, the net effect is a huge projected growth in demand for goods and food, estimated to double and triple respectively. So, how will companies scale to meet new demand? How will we ensure supply chain reliability?
CEOs around the world are recognising the strategic significance of realigning their businesses in preparation to supply this demand. It’s clear that manufacturing as usual is simply not scalable and that sustainability cannot be achieved with incremental improvement alone. Rather, a step change is required to serve this market and capture the growth.
The alternative of doing nothing is an almost certain recipe for decreasing profitability and relevance, even for the largest brands. In response, progressive multinationals such as Unilever and Procter & Gamble are moving to support sustainability as a strategic priority.
At first, sustainability was about being ‘green’. Almost without exception, sustainability initiatives were linked to highly visible marketing programmes with direct ties to corporate social responsibility and ‘investing to do good’.
Even now, the SCM World Supply Chain Officer Report 2011 states that the primary goal of 75% of sustainability efforts is to create a positive customer image and enhance brand equity. More recently, sustainability initiatives have expanded to include those with more net present value and less overt marketing cachet.
Yet, according to the same survey, only 32% of companies use return on investment through cost savings as a criteria. The bulk of activities remain focused on a handful of areas with green marketing potential, such as renewable energy, sustainable packaging, transportation efficiency and reduced water consumption and waste.
Significantly, manufacturers are now looking beyond their plant walls. Leaders no longer view sustainability as limited to their direct production and distribution activities. It now extends across the entire product life-cycle; reaching upstream to the initial raw materials or farms and downstream to consumer use and final disposal.
The Unilever Sustainable Living Plan states that ‘Our impact goes beyond our factory gates. The sourcing of raw materials and the use of our products by the consumer at home have a far larger footprint. We recognise this and so our plan is designed to reduce our impacts across the whole life-cycle of our products.’
Taking responsibility for the environmental footprint across the entire product life-cycle is far more than simply being ‘green’; it provides a strategic and competitive advantage. This new trend is significant because life-cycle impacts far outweigh those associated with production and distribution alone.
For example, Unilever’s upstream carbon and water life-cycle impact (from farm to distribution centre) is 12 times greater than production; the consumer use portion for carbon is as much as 30-60 times greater. Taking ownership of the full life-cycle raises the importance of getting it right.
Our view here at Terra Technology is that the next level of maturity for sustainability shouldn’t be about ‘green’ per se, but about mitigating risks and capturing rapid growth. Sustainability becomes a true advantage when it shifts from the ancillary role of ‘investing to do good’ to a core business strategy, providing the means to profitably scale by carefully managing limited resources and minimising costs.
It should address core supply chain processes that apply to all products, whether they’re seen as green, traditional or even toxic. Better yet, it should encompass a life-cycle approach that reaches beyond the factory walls and encompasses the end-to-end supply chain to leverage the ‘life-cycle multiplier’ effect.
While outside the scope of traditional ‘green’ programmes, it turns out that reducing unnecessary inventory may well be the single most important initiative to reduce environmental impact and meet your corporate sustainability goals.
Inventory is the lubricant that keeps the supply chain running. Pockets of inventory distributed throughout the supply chain ensure that service levels are met despite inefficiencies or demand uncertainty. Companies turn to inventory control as a means to boost financial performance, increase return on invested capital and increase free cash flow, but largely overlook the sustainability benefits.
These piles of inventory are far more than piles of capital – they’re also piles of carbon and water. Combined, they form your Inventory Footprint, which includes the financial footprint of capital tied up in goods and materials, along with the corresponding carbon and water footprints.
The math is simple. For every 10 days of inventory reduction, manufacturers get a 10/365 (roughly 3%) reduction in their direct manufacturing footprint. Using Unilever’s life-cycle model, this provides a 12-times life-cycle multiplier yielding a one-time 35% reduction of the global carbon and water footprint. It’s the impact equivalent of shutting down global operations for four months.
Moreover, the 10-day inventory reduction mark isn’t only possible, it can be exceeded. Procter & Gamble, whose supply chain organisation is one of the most respected, reduced 17 days of total inventory from operations during the 2008-2010 period. Public filings reported this as a $2bn benefit to their balance sheet, but the true impact of cutting their Inventory Footprint is far richer.
Accounting for the life-cycle multiplier, it includes a substantial contribution towards Procter & Gamble’s sustainability goals – a one-time reduction in carbon and water equivalent to suspending global operations for several months.
More importantly, it’s a step change towards a more efficient supply chain that can scale to meet the impending needs of another three billion people.
So, what’s your Inventory Footprint?
Robert F Byrne is CEO of Terra Technology.
© FoodBev Media Ltd 2024