3 Lessons for Better Supply Chain Management

This post originally appeared on Forbes.com and subsequently on Insights. Authored by Manish Bapna and Cynthia Cummis

What do three leading chemical, automobile, and software companies have in common? All three – Honda, BASF, and SAP – are looking to curb risks and take advantage of opportunities across their global supply chains. They’re doing so by measuring their greenhouse gas emissions—not just in their operations, but up and down their value chains.

Many other multinationals are heading in the same direction. The Carbon Disclosure Project’s (CDP) annual survey of the Global 500, released last month, reveals that seven in ten respondents measured some value chain emissions in 2011, up from about half in 2010. (Note this figure is based on WRI’s analysis of the 405 companies that submitted data to the CDP 2012 survey data.)

What’s driving the world’s biggest corporations down this path? In a nutshell: reputation, risk, and opportunity. First, business leaders are recognizing that companies’ global value chains are increasingly under scrutiny by consumers, the media, and most importantly, investors. A case in point is the unwelcome attention Apple has received for its association with its Chinese supplier, Foxconn. Retailers and corporate customers, too, are increasingly asking suppliers how they apply sustainability principles to the products they produce. Given the attention, corporations ignore supply chain risks—at their peril.

Second, companies are increasingly aware of their exposure to environmental risks—such as climate change and water scarcity—through impacts on their suppliers. In particular, recent extreme weather events have put corporate leaders on alert. This summer’s record-breaking U.S. droughts have ripple effects well beyond agriculture, including on the food and drink industry. Likewise, the 2011 floods in Thailand that shut down electronic components hit many Fortune 500 technology companies.

Reflecting such real world threats, 81 percent of companies responding to the CDP survey said they faced physical risks from climate change. Thirty-seven percent went so far as to describe them as “a real and present danger.”

Turning Risk into Reward

On the flip side, measuring value chain emissions can unearth hidden treasure in terms of efficiency and cost savings. Gaining an understanding of greenhouse gas hotspots in the value chain also help to focus efforts for product design improvements and reveal additional opportunities for innovation.

Raw material suppliers often account for a large percentage of a company’s environmental footprint, especially in sectors such as retail and food and beverages. For example, Kraft Foods found that 70 percent of its greenhouse gas impact comes from its raw materials. Companies can deploy emission inventories to identify actions that help their suppliers save on energy and fuel use, leading to bottom-line benefits.

This is the goal for first movers like BASF, SAP, and Honda. And it’s where the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Standard comes in. Launched a year ago by the World Resources Institute and the World Business Council for Sustainable Development (WBCSD), the pioneering standard provides a step-by-step guide to measure and report value chain emissions.

Lessons from Three Companies

1. After applying the Scope 3 Standard, SAP is pursuing a three-point plan to cut emissions generated after it sells products to customers. The company is looking to design software that runs on fewer servers and requires less energy, work with hardware providers to increase equipment efficiency, and encourage customers to run data centers more efficiently. To this end, SAP has created new software products that run 60 percent more efficiently.
2. BASF is taking a different tack . The chemical giant’s value chain assessment identified as an emissions hotspot the raw materials it purchases– responsible for more than double the volume of greenhouse gases than BASF’s own operations. The company is now collaborating with key raw material suppliers to identify emission-reduction solutions.
3. Honda, meanwhile, announced in August that it had calculated the life-cycle emissions of the company’s operations and products, totaling 225 million tons of greenhouse gases in fiscal year 2012. The company learned that an eye-opening 87 percent of its emissions are generated by customer use of its motorcycles, cars, and power products, which will help inform its greenhouse gas reduction initiatives.

Too Many Laggards

Such examples of corporate leadership are heartening, but unfortunately, far too few companies have taken this step. Returning to the CDP survey, only eight of 405 companies measured most of their indirect emissions, such as purchasing raw materials and customer use and disposal of products. And the most common measure was business travel, which generally represents a very small portion of a company’s footprint.

Bridging this gap between first movers and the rest of the Global 500 is critical to reduce the scope of business-related emissions that exacerbate climate change. We hope and expect that in the coming months, more companies will start to measure their full emissions picture—and reap the benefits of improved value chain measurement and management.