green and supply chain strategies in a volatile world

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Green and Supply Chain Strategies in

a Volatile World

David Simchi-Levi

E-mail: [email protected]

Professor, Massachusetts

Institute of TechnologyChief Science Officer

ILOG

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What We’ll Cover …

• Logistics Costs and Carbon Emission

• Environmental Scorecard

• Case Studies

• Network Planning

• Flexibility and the Green Supply Chain

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0

200

400

600

800

1000

1200

1400

1600

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total US Logistics Costs in $MMs

Inv Carrying Transportation Admin Total

Total US Logistics Costs 1984 to 2007 ($ Billions)

Source: 19th Annual Logistics Report49

52%

Transportation

Admin

47%

62%

Total Cost

Inventory

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The Green Supply Chain: Why

• Supply chain Efficiency

High transportation costs

• Financial Incentives in Europe

Kyoto agreement established carbon emission limits

European Emission Trading Scheme

• Regulatory pressure is likely to increase

Various proposals in US senate similar to EUIn 2007, CEOs of 10 of the largest corporation in the US (Alcoa, Caterpillar, DuPont,GE…) urged congress to pass legislation that will motivate the growth of greentechnologies and create a “cap and trade program” to limit carbon emission levels

• Growing pressure on companies

Consumers, B2B customers, Employees, Banks, Insurance companies

• Competitive pressure

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The freight sector is a large and growing emitter of carbon dioxide…

Carbon Footprint

of Logistics

~ 2,684 mt CO2e

Anthropogenic Footprint

~ 50,000 mt CO2e

Source: OECD 2006 / WEF Estimates

Total transport emissionscalculated from OECD data.Calculations from varioussources used to estimatefreight – passenger split ineach mode

Source: IPCC 2004

mt of CO2e

WEF analysis, from OECD Transport and Environment Data 2006

Logistics emissions are estimated

to be around 2.7 billion t CO2e1

This is approximately 5% of total

anthropogenic emissions

About 89% is estimated to come

from transportation, 11% from

buildings1

Transport as a whole is the fastest

growing end-user emitter of

carbon

For logistics, growth in the volume

of road and air freight are the

primary drivers

1. WEF analysis, based on OECD (2004) data

Source: The World Economic Forum

60%

19%

6%

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0.132

0.021

0.008

Truck Rail Ocean

Emission (kg/ton-km)

Transportation Mode: Emission Efficiency

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x6

x75

0.606

1.607

Air Internationa Air Domestic

Emission (kg/ton-km)

•Truck generates six times

higher carbon emission than rail

•Long-haul air transportation generates

75 times higher carbon emission than ocean

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5454

WW Market in Carbon Emission Permits

0

5

10

15

20

25

30

35

40

45

In Billion of Euro

2005 2006 2007

Volume Value

• A carbon permit allows a company to omit one metric tone of carbon dioxide into air

• Companies that can reduce their carbon emissions earn credits that can be sold or traded

Source: WSJ, January, 18-20, 2008

0

500

1000

1500

2000

2500

3000

In million of Metric Ton

2005 2006 2007

5555












56Source: Accenture End-Consumer Survey on Climate Change, 2007. 56

Demanding Customers and Competitive Pressure

People in emerging countries

are the most concerned and

ready to act

In their decision to choose a

provider individuals value actions

taken to address Climate Change

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… and retailers are responding

• Environmental innovation through store design,

transportation, and supplier arrangements to reduce

energy consumption, carbon emissions and general waste

output.

•Customers encouraged to recycle plastic shopping bags

and sturdy, low-density polypropylene bags available for

purchase.

• Carbon labelling system introduced on products

• Sustainable Consumption Institute funding

• Smart building initiatives

• Carbon reduction targets, through an environmental

scorecard

Retailer ResponseRetailer

Environmental Scorecard

Consumer labelling introduced by

The Japanese Government

Carbon Trust

World Resource Institute

Retailers

Include end-to-end carbon emission from production to

delivery

Expected to have direct impact on carbon emission

Source: The World Economic Forum

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• Need for an environmental scorecard

Carbon footprint

Cube utilization

Deadhead distance

Product-miles or food-miles

Fuel consumption and energy cost

Waste disposal cost

• Best practice through supply chain planning

Direct: Trade-off between cost, service and carbon footprint

Indirect: Impact of flexibility on transportation costs

Direct: Reduce waste

Environmental Scorecard and Best Practice

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Wal-Mart Green’s Campaign….

• In October 2005, Wal-Mart’s CEO Lee Scott presented anenvironmental plan to reduce energy use, waste, and greenhousegas emissions

• Wal-Mart is focusing not only on its own operations, but itssuppliers' operations as well.

• Wal-Mart’s target is to cut greenhouse gas emissions by 20percent by 2012

• Starting at the beginning of 2008, the retail giant is rating itsproviders' performance on an environmental scorecard thatincludes

Greenhouse gas emission

Cube utilization

Recycled content

Renewable energy

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Wal-Mart Green’s Campaign pays off

• Wal- Mart's 3PL provider in Canada, has

Changed the way it ships products to 10 stores in Nova Scotia and Prince

Edward Island from road to rail which led to reduction of carbon emissions

by 2,600 tons.

In addition, the 3PL provider converted 20 truck generators to electric

power, saving about 10,000 gallons of fuel.

These two measures combined are expected to yield more than $2 million

in annual cost savings.

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Dell’s Green Campaign

• Change transportation mode from air to ground

Air transportation generates seven time higher carbon

emission level than rail transportation

Use of network optimization tool

• Increase success of first time delivery

Reduce transportation cost (the need for a re-visit) and carbon

emission

• Use modern packaging technology

Reduce damaged shipments and therefore returns

Maximize space utilization in every shipment

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Carbon Footprint Analysis -- Data Input

Supply ChainActivity

Data Required

Transportation By carrier in the model, the user either enters the Fuel Efficiency (e.g. milesper gallon) and Carbon Conversion factor (kg CO2 per gallon) or CO2 perFreight (kg CO2 per ton-mile)

Warehouses By warehouse location, the user enters the Energy Consumption (e.g. kWhper sq. ft.), the Carbon Conversion Factor (kg CO2 per kWh) and the Area toApply (entire size of whse, or avg. inventory volume)

Plants By plant location, the user enters the Energy Consumption per Space (e.g.kWh per sq. ft.), the Energy Consumption per Capacity (e.g. kWh perproduction hr) and a Carbon Conversion Factor (kg CO2 per kWh).

Production By product, the user enters the Energy Consumptions associated with theproduction of that product, as well as any materials used in that product (kWhper unit) and a Carbon Conversion Factor (kg CO2 per kWh).

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Example of Data Required

• To aid the user, example data is provided

US Government sources and the World Resources Institute.

• Data includes:

Carbon emissions by fuel type

Average fuel efficiency values

Carbon-Freight factors for waterborne and rail

Electricity emissions factors by US State, and country

Electricity consumption by building characteristics

Building size; Geographic region; number of workers;principal activity; year constructed…..

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©Copyright 2008 ILOG

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Case Study: Supply Chain Design including Carbon Footprint

• Men’s and Women’s Apparel Manufacturer

Casual wear, sportswear, underwear

• US based manufacturing & distribution network

Manufacturing located in Los Angeles and Greenville, SC.

Distribution currently from NY Metro and Las Vegas.

• Objectives:

Consider the impact of moving some manufacturing to lower cost factory inMexico

Consider the addition of DC’s to reduce cost and distance to customer

Understand carbon footprint to align with corporate goals as well as hedgeagainst possible financial incentives

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Apparel Manufacturer: Baseline

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Description of Network

• Manufacturing

Due to lower labor rates, the Greenville plant has ~15% lower

production costs than the California plant.

Production in Mexico is expected to be 20% less expensive

than Greenville based on lower labor rates (although also

lower productivity)

• Transportation

Inbound Transportation is a mix of Rail and TL based on the

destination warehouse

Outbound Transportation is a mix of Commercial TL and

Private Fleet depending on customer priority

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Scenario 1: Minimize Cost

•All CA Mfg is

moved to Mexico.

•Additional DCs are

added in Mobile and

Pittsburgh.

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Additional Scenarios

• Focusing on cost resulted in the following:

16% Cost Reduction

5% Reduction in CO2 emissions

• Additional Scenarios were run to address thefollowing questions:

What would be the network strategy & cost if the goal wasto reduce CO2 emissions a further 10% below the Min Costnetwork?

What if the goal was 25%?

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Emissions considerations

• Facilities:

Potential distribution centers in different states havedifferent emissions factors based on local powergeneration

The factory in CA, although the most expensive, has thelowest emissions. The Mexico factory, although thecheapest, has the highest emission rate.

• Transportation:

Inbound transportation can often use Rail, with much loweremissions.

Outbound transportation has much higher emissions perton-mile

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CO2 Reduction Changes Production Strategy

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CO2 Reduction Changes Distribution Strategy

Base

Case

Optimal

Cost

CO2 Reduce 10% CO2 reduce 25%

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Comparison of Results

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The Impact of Flexibility

• Introduction to Flexibility

• Flexibility and the Green Supply Chain

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Supply Chain Flexibility: Introduction

• The ability to respond, or to react, to change:

Demand volume and mix

Commodity prices

• The objective is to

Reduce cost

Reduce the amount of unsatisfied demand

Improve capacity utilization

• With no, or little, penalty on response time

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Achieving Flexibility through….

• Product design

Modular product architecture, Standardization, Postponement,Substitution

• Process design

Flexible work force, Lean, Organization & Managementstructure, Flexible contracts, Dual sourcing, Outsourcing

• System design

Capacity redundancy, Manufacturing strategy, Distributionstrategy

©Copyright 2008 D. Simchi-Levi

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Flexibility through System Design

• Balance transportation and manufacturing costs

• Cope with high forecast error

• Reduce transportation carbon emission

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1 A

ProductPlant

2 B

3 C

4 D

5 E

No Flexibility

1 A

ProductPlant

2 B

3 C

4 D

5 E

2 Flexibility1 A

ProductPlant

2 B

3 C

4 D

5 E

Total Flexibility

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Case Study 2: Flexibility and the Manufacturing Network

• Manufacturer in the Food & Beverage industry.

• Currently each product family is manufactured in oneof five domestic plants.

• Manufacturing capacity is in place to target 90% lineefficiency for projected demand.

• Objectives:

Determine the cost benefits of manufacturing flexibility tothe network.

Determine the benefit that flexibility provides if demanddiffers from forecast;

Determine the appropriate level of flexibility

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Summary of Network

• Manufacturing is possible five locations with the followingaverage labor cost:

Pittsburgh, PA $12.33/hrDayton, OH $10.64/hrAmarillo, TX $10.80/hrOmaha, NE $12.41/hrModesto, CA $16.27/hr

• 8 DC locations: Baltimore, Chattanooga, Chicago, Dallas, DesMoines, Los Angeles, Sacramento, Tampa

• Customers aggregated to 363 Metropolitan Statistical Areas &576 Micropolitan Statistical Areas

Consumer product- Demand is very closely proportional to population

• Transportation

Inbound transportation Full TL

Outbound transportation LTL and Private Fleet

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Network Visualization- Customer Demand

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Baseline Summary

Plant Labor Rate

Pittsburgh, PA $12.33/hr

Dayton, OH $10.64/hr

Amarillo, TX $10.80/hr

Omaha, NE $12.41/hr

Modesto, CA $16.27/hr

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Introducing Manufacturing Flexibility

• To analyze the benefits of adding manufacturing flexibility to thenetwork, the following scenarios were analyzed:

1. Base Case: Each plant focuses on a single product family

2. Minimal Flexibility: Each plant can manufacture up to twoproduct families

3. Average Flexibility: Each plant can manufacture up to threeproduct families

4. Advanced Flexibility: Each plant can manufacture up tofour product families

5. Full Flexibility: Each plant can manufacture all five productfamilies

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Plant to Warehouse Shipping Comparison

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Plant to Warehouse Shipping Comparison

Sourcing Product 5 from Omaha rather than

Modesto offers large transportation savings

for Baltimore warehouse

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Total Cost Comparison

• The maximum variable cost savings

with full flexibility is 13%

• 80% of the benefits of full flexibility is

captured by adding minimal flexibility

•Significant reduction in transportation

cost

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Sensitivity analysis to changes above and below the forecast:

1.Growth for leading products (1 & 2) by 25% and slight decrease

in demand for other products (5%).

2.Growth for the lower volume products (4 & 5) by 35% and slight

decrease in demand for other products (5%).

3.Growth of demand for the high potential product (3) by 100%

and slight decrease in demand for other products (10%).

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Impact of Changes in Demand Volume

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Impact of Changes in Demand Volume

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Scenario Demand Satisfied Shortfall Cost/ Unit Avg Plant Utilization

DemandScenario 1

Baseline 25,520,991 1,505,542 $ 2.94 91%

Min Flexibility 27,026,533 0 $ 2.75 97%

DemandScenario 2

Baseline 25,019,486 1,957,403 $ 2.99 91%

Min Flexibility 26,976,889 0 $ 2.75 96%

DemandScenario 3

Baseline 23,440,773 4,380,684 $ 2.93 84%

Min Flexibility 27,777,777 43,680 $ 2.79 100%

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• Supply Chain efficiencies and Green Initiativescomplement each other

The environment: green makes business sense

Flexibility: generates real value

Emerging technologies: on-board GPS with centralizedinformation; aerodynamic tractor-trailers, kite-assisted oceanfreight, automatic tire inflation systems, or single-wide tires

Marks & Spencers UK Transport

Introduction of New trailer fleet

140 ordered by M&S

10% improvement in fuel economy

10% increase in cubic volume

20% reduction in CO2 emissions

Key Points to Take Home

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Your Turn!

How to contact me:

David Simchi-Levi

[email protected]

green and supply chain strategies in a volatile world

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