Raising awareness: the first step to managing climate change in the supply chain
Perspectives from Frances Way, Head of Supply Chain at the Carbon Disclosure Project
As appeared in the July 2009 issue of Inside Supply Management
As climate change rises rapidly up the business agenda, companies are beginning to realize that if they are to adequately understand their carbon footprint or the risks that they face from climate change, they must extend their focus into their supply chain.
In fact, up to 80% of a retailer’s carbon footprint and between 40-60% for consumer goods makers, high-tech players and other manufacturers is found upstream in the supply chain through activities such as processing, packaging and transportation (McKinsey Quarterly, July 2008). PepsiCo UK and Ireland has discovered that only 30% of the carbon footprint of its Walkers products come from their own manufacturing processes.
The evidence is clear. But why should companies be concerned about GHG emissions beyond their operational control? There are significant business risks and opportunities associated with climate change which, if left unmanaged, could ripple down to their customers. The following are just a few:
• Increased Costs
The price of oil reached a staggering $150 then plummeted to below $40 during 2008. This unforeseen volatility has a dramatic effect on operating costs for businesses. For many, the opportunity to address energy efficiency can also result in cost savings.
International negotiations to progress a successor to the Kyoto Protocol which expires in 2012 are likely to result in increased taxation and regulation for GHG emissions globally. The United States is one country that could increase regulation for business in order to meet country-level reduction targets.
• Disruption to supply
Changes in weather patterns may affect growing seasons for crops that form the key ingredients for some products. Increased flooding could affect location choices and one only has to look at Australia to understand the implications of droughts on global supply chains.
• New markets
The consumer is becoming increasingly informed on climate-change issues, which is resulting in a shift in attitude and demand. Businesses need to anticipate these shifts which will require a collaborative approach to Research and Development to ensure that products have less embedded carbon and consume less energy.
The need to keep score
You can’t manage what you don’t measure. This has been the premise for the Carbon Disclosure Project since it began. By going through the process of measuring their greenhouse gas emissions and the risks and opportunities from climate change, organizations frequently find that their operations are not as streamlined or free of waste as previously thought. From Wal-Mart to the smallest SME, significant efficiencies are often the result of taking this step.
Through CDP’s standardized reporting mechanism organizations can ask suppliers to disclose information on their GHG emissions data and climate change risks and opportunities. This prevents duplication of effort and minimizes the burden on suppliers.
In 2008, 634 suppliers responded to the CDP Supply Chain questionnaire, 71% of these were disclosing information to CDP for the first time. Surprisingly and potentially a cause for concern, a large number of suppliers do not identify risk to their business operations as a result of climate change. As few businesses will escape any impact from climate change, this demonstrates a potential lack of understanding on the issue of climate change.
Conversely a large proportion of suppliers did identify opportunities from addressing climate change, with 71% identifying regulatory opportunities, 53% identifying opportunities from the physical effects of climate change and 71% identifying general opportunities.
2008 was the first year for CDP Supply Chain and for our member companies one of the key reasons for participation was to raise awareness amongst their suppliers of the importance of carbon and climate change issues. Raising awareness is the critical first step for suppliers to better understand and take steps towards managing this issue; it is equally critical to CDP’s member organizations to begin to understand the impact of climate change in their supply chain so that they can begin to see progress going forward.
Taking action: from measurement to management
So, what were some of the key learnings from CDP’s member companies? Taking into account their experiences and the processes that have and haven’t worked, a number of key actions have been identified by report writer PricewaterhouseCoopers, for companies wishing to begin to take action in managing carbon and climate change in their supply chain.
1. Understand the market: many businesses believe that they are behind the curve on managing climate change with their suppliers. This is not the case and it is important for companies to realize that the most effective way to increase their understanding is to get started and to ask their suppliers to consider these issues. Companies need to understand what regulation both they and their suppliers are exposed to and the financial and business implications these may pose. They should also investigate the long-term risks posed to their sources of supply by climate change.
2. Priorities categories of spend: a key initial step for any business seeking to manage its climate change risks is to determine the priority impacts they need to manage. The greatest sources of carbon in the supply chain are frequently in unexpected areas. A company needs to understand the impacts of each of the main procurement categories so that a plan can be established. It is also important to identify suppliers to approach for possible collaboration on joint emissions reduction projects.
• Heinz prefers a two-way street with suppliers in sharing ideas to reduce waste, reduce emissions and reduce costs through process / product improvements. This approach helps suppliers to reduce the risk of incidents that can interrupt supply and allows Heinz to improve its holistic sustainability performance.
3. Prepare internally: board level ownership and management buy-in are vital if a company is to make real progress. Objectives should be adjusted across the supply chain (not merely focused on short-term costs) with sustainability and procurement teams working together, sharing information and addressing challenges.
4. Engage suppliers: in order to build trust and encourage transparent responses from suppliers, companies need to clearly communicate what level of data is required, why they want it and how they plan to use it in both the short-term and long-term.
• A key area of focus for PepsiCo UK and Ireland’s supplier engagement has been the Walkers supply chain. At the end of 2007 and 2008, Walkers brought together key suppliers of raw materials and packaging at Supply Chain Summits. The first summit was to raise awareness and ask suppliers for help in collecting data. The second summit was designed as a workshop where suppliers had the opportunity to report back on data collected, setting the stage for future ideas on how to reduce the overall carbon footprint of the product.
5. Plan practically for projects: providing training, information or support to suppliers to educate them on GHG emissions measurement and reporting is valuable groundwork. Mapping and evaluating risk and building suppliers’ risk awareness enables companies to determine what to prioritize. Developing Key Performance Indicators and data metrics means that progress can be monitored and reported both internally and externally.
• Johnson Controls expects processes to track relevant metrics to be in place before additional questionnaires are mailed out. Dependent on the business unit, improvements in the supply chain management process have included training of some suppliers, adding specific social and environmental language to contracts and associated global supply manual and discussions with numerous suppliers about environmental and social expectations.
Frances Way is head of supply chain at CDP, a not-for-profit organization that enables global corporations to measure beyond their own carbon footprint to their suppliers’ carbon emissions and climate change strategies, in order to maintain a resilient and sustainable supply chain.
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