Net-zero greenhouse gas (GHG) emissions in your supply chain in 1’000 days
As a boomer (*1963), I recently was stunned reading a scientific article: As our supply chains have expanded over the past centuries, from local in the 18th century, to continental in the 20th century and to global, in the 21st century the use of fossil fuels has grown exponentially: Half (!) of the 1.6 trillion tons of greenhouse gases (GHG) emitted into the atmosphere since the industrial revolution in 1750 occurred from 1990 to now (Ritchie et al., 2020).
Whether you agree that GHG triggers climate change or just see the need to comply with national and international regulations, the direction stays the same: mitigate the GHG emissions for your company to net zero as soon as possible. In 2016, McKinsey estimated that a remarkable 80 (!) per cent of emissions of consumer product companies come from their supply chains. Another study by the CDP, a global charity that helps companies manage their impact on the environment, suggests that supply chain emissions are, on average, 5.5 times greater than a company’s direct emissions.
Pareto suggests that we start with the supply chain to achieve net zero GHG emission objectives, wouldn’t you agree?
Great, but how?
Whenever we open LinkedIn, Twitter, or newspapers, there is a lot of well-meaning people that tell us what we should do, or at least how to marvel at the problem. And yes, first, we have to accept the existence of a problem before we can start solving it. So, many companies engage with current non-profit initiatives that define how to go about GHG emission reporting. Clearly, this is a good first step. It increases awareness about the status quo/the problem and the gap we have to close in our institutions.
Yet, regarding supply chains, just counting GHG emissions and reporting them is only the start. For the next steps, we need a structured model. A model that has proven results over many years. I suggest using the six sigma solution methodology, D-M-A-I-C (define-measure-analyse-improve-control). Counting and reporting address the two first steps of six sigma: D-efine and M-easure. Now, what to do with ‘A-I-C’? We can already build on the crude analysis mentioned above: supply chains have the largest potential for reducing GHG emissions. We could go much further in the analysis, and every six sigma black belt will now tell me that I make this all way too simple. But, if we assume we might not have too much time, let’s stay with this high level of analysis. The next question is: How do we do the next step of DMAIC, the I-mprove?
Now, from all my 35+ years of background in five industries, I learned that supply chains work best with actionable thresholds and widely agreed global standards. Looking at my experience with revolutionary supply chain change, the fast implementation of ISO standards such as ISO 9001 (Quality Management System) across most industries was the most impressive. A whole bunch of academic literature about this mirrors my perception. What was so remarkable? Firstly, we knew we had a problem: the quality of cars, toys, white goods etc., was often just miserable in the 80s and 90s of the last century. Secondly, the ISO standards were widely accepted in most industries. Thirdly, there was little competition between standards, ISO ruled. It was pretty simple: If you wanted to continue to sell your products in the future, you had to comply in a short amount of time with the respective ISO requirements. So, the engineering & procurement of companies wrote it into the statement of works and contracts as an order qualifier, and they established departments in each supply chain that monitored supplier compliance (this was later outsourced to experts in this field, most people that did it before inside the companies). The result? Quality improved at an impressive speed, making products safer, more reliable, and often less costly. Quickly, ISO-compliant competitors replaced firms that did not obtain the certification - competitive pressure worked at its best (thank you, Mr Porter).
Today, ISO 14060 family and the soon-to-be-released ISO 14083 GHG emission reporting standards offer the same opportunity for revolutionary change again. With these standards and time-based thresholds for compliance of your suppliers, reaching net zero is neither tricky nor a matter of decades. It becomes a function of competition. We must rely again on companies' ingenuity to find solutions to get into the ISO standards and thresholds set. Markets and their forces are the most effective tool for change; let’s use them for something useful again, as we did in the quality revolution in the last century.
Net zero GHG emissions in the supply chain can be achieved in most companies in 1’000 days. It only needs
adopting ISO standards with compliance deadlines for your supply base (max three years)
determined supply chain leadership in your company
relentless sponsorship from the companies board, including the words:
Let’s go!
Measure the Gap
Every journey starts with the first step or understanding the gap/problem. Find below ten questions which will help to assess whether your company is on a good path in managing its supply chain with a focus on GHG emission reduction (part of the D-efine stage of six sigma):
Do we have actionable plans to achieve net-zero greenhouse gas (GHG) emissions (scope 3) by 2030 or shortly after?
Do we have an updated code of conduct for our suppliers that aligns with our net-zero GHG emission ambitions?
Is our procurement organization sourcing from suppliers aligned with our net-zero GHG emission ambitions?
Does our supply chain organization actively address GHG emission reduction through changes or shortening of transportation modes (e.g. from air to sea, sea to train, and from far- to near-shoring)?
Can our supply IT systems produce GHG emission reporting for at least 80% of our supply chain (by value) in an automated manner?
If we are in the manufacturing/food & beverage industry: Is our supply chain, which represents up to 70% of the GHG emissions of our full value chain, prominently featured in our sustainability reporting? And if we are in the professional / service industry: Is our procurement organization managing GHG emissions reduction in our supply chain, rather than an ESG department or real estate?
Do we or plan to request our suppliers' compliance with ISO 1406X family including the new ISO 14083 (GHG-related ISO standard)? (This can be in addition to signing up for one of the more reporting-focused initiatives, such as the Science Based Target initiative (SBTi).)
Beyond GHG emissions: Have we calibrated our environmental, social, and governance (ESG) objectives against the 17 UN Global Goals set in 2015?
Are full-time resources and board-approved projects linked to these goals?
Is the incentive structure for our leadership team based on triple-bottom-line targets, considering Profit, People, and the Planet?
If you answered "yes "to most questions, great: You are set up to achieve your GHG net zero goals, and your company will continue to do business, even thrive.
Do not read any further. Better to focus on other topics.
If you answered “no” to most questions or did not know, you have a gap. But starting the journey will require that you want what is on the other side. So, let’s measure the size of the prize at the end of the journey:
Size of the prize
Short-term benefits include reducing costs in your supply chain through suppliers, transportation mode changes, and more regional sourcing. Supply chain re-design along agile and digital principles can trigger these cost of sales benefits and margin improvements. See my prior posts on this topic. Besides the obvious cost benefits, you will also attract top, the purpose-driven talent of the Millennial, Gen-Z, and Gen-A generations - those employees who will carry your company into the next decades.
Mid- to long-term, the prize is simply the ability to continue doing business: If scientists are right and climate volatility increases, regulatory and market pressures will likely heat up (no pun intended) simply by demands by the electorate and your customers. Being ahead of your competition concerning GHG emissions will be good business if the regulators and your customer’s market are more and more restrictive for non-compliant firms.
How to set up GHG emission reduction in the supply chain?
So, the gap is clear, and the prize size is also clear enough to start the journey, right? How to now go from knowing to doing?
Project Team: With a dedicated team in place, led by the Head of Procurement or the COO or Head of Supply Chain, and a 24-month time frame for implementation, with ongoing progress monitoring after that (which brings us to the 1’000 days mentioned above), you can ensure alignment of actions with the goals hopefully set by the board.
Homework: This will involve conducting desktop benchmarking and fact-gathering, including engaging in discussions with your large suppliers to understand their current status and identify areas for collaboration to drive the ISO standards through your supply chain.
Operationalize: The supply chain and mainly engineering will work towards achieving ISO14064/83 compliance in the statement of works and contracts across all suppliers. They set up digital control mechanisms to ensure that efforts are validated. Nothing special - it just needs focus.
Change Management: Effective change management will be key to the success of this initiative, and it is essential to communicate the triple-bottom-line ambitions to all stakeholders. Get customers, employees, shareholders, regulators, suppliers involved and use their momentum to push you forward.
Oversight: The board has to review progress quarterly, utilizing automated reporting from supply chain systems while implementing consequence management to maintain a high 'say/do' ratio.
Digitalization: The opportunities for digitalization and automation in this initiative are significant, while the risks associated with this initiative are low, considering the alternative.
Cost: The overall costs will depend on the current status of your supply chain excellence and level of digitalization.
‘C’ for Control: the last letter of the six sigma solution methodology. The reported compliance of suppliers needs to be regularly validated with internal or qualified external companies to ensure that the pressure stays on. Again, not difficult. It just takes persistence.
Watch-outs
As always, there will be pushback from those primarily focused on keeping the status quo. As a leader, it is, therefore, essential to stay focused on the benefits of this initiative mid- to long-term - before it is too late.
As the quality guru, W. Edwards Deming, said: “It is not necessary to change. Survival is not mandatory.“ (forgive me for repeating this from an earlier post. It was just too good not to use again.).
Want to go deeper?
Listen to the podcast on the same topic with more insights and real-life examples.
Stay safe. Be bold.
Daniel
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