Low-carbon, high-growth - The 21st century supply chain model
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Low-carbon, high-growth The 21st century supply chain model
Low-carbon, high-growth The 21st century supply chain model
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Authors: Preeti Gandhi, Tata Consultancy Services Dipak Kripalani, Tata Consultancy Services Odd-Even Bustnes, Xyntéo Dr Åsgeir Helland, Xyntéo
4
FOREWORD
The old way of doing business has got us far. Since the Industrial Revolution, economy after
economy has been lifted into modernity, propelled by relentless advances in technology
and the repeated reinvention of how we create value. Yet the enormous wealth generated
over the course of the last few centuries remains out of reach for too many. And though our
ability to innovate has repeatedly defied the limits of what we thought possible, we have still
not severed the link between economic and commercial success, on the one hand, and the
degradation of our natural environment, on the other.
It’s time for a new model – one which can deliver robust economic growth without destroying
the biosphere on which this growth fundamentally depends. We must grow without putting
carbon into the atmosphere, overhauling the way we move around and organise our cities,
how we power ourselves, how we produce and consume. This calls for a revolution of the
prevailing business model and all its aspects – from design and procurement right through to
the delivery of the value proposition to the customer.
There is a strong business case for embracing this paradigm shift. The transition to ultra-
efficiency will open up substantial cost reductions. Shifting customer preferences are
strengthening demand for low-carbon goods and services. Regulation is increasingly
rewarding carbon-efficient business models. Embedding environmental protection, ultra-
efficiency and clean energy into business strategies is now essential for minimising risk.
As in the Industrial Revolution, it will be technology that provides the catalyst for this next
economic revolution. In many cases, the most powerful spur will be information technology.
With this in mind, Tata Consultancy Services and Xyntéo have collaborated to produce a series
of white papers, which set out cost-effective information management solutions to equip
businesses to overcome challenges to low-carbon growth.
This white paper – “Low-carbon, high-growth: the 21st century supply chain model” – makes
the case for overhauling today’s supply chains. The crux of this change will be to build
closed-loop supply chains enabling cradle-to-cradle material flows. Tools to make sense of
and manage a more open flow of information among multiple supply chain actors – not just
direct partners – will be key to success. The result will be more resilient, more agile, more
competitive supply chains that, in tune with the changing production-consumption patterns
now underway, will support high rates of growth with reduced emissions of carbon.
Removing carbon from business models depends on collaboration among value chain
partners; this point forms a red thread throughout the series of white papers. This reflects the
foundational principle of the Global Leadership & Technology Exchange, within the framework
of which this important work has taken place.
N. Chandrasekaran Osvald Bjelland
CEO and Managing Director, Chairman and CEO,
Tata Consultancy Services Xyntéo
Acknowledgments
TCS and Xyntéo would like to thank those who generously gave their time to be interviewed
for this white paper: Salla Ahonen, Director, Environmental Policy, Nokia; Peter Hogsted*, CEO
International, Kingfisher plc; Nils Lie, Vice President SCM & Network, Wallenius Wilhelmsen
Logistics AS; Antoine Namand, Head of Vehicle Logistics Division, Cat Vehicle Logistics; Tommy
Paulsson, Managing Director, Bring SCM AB; Bo-Inge Stensson, Senior Vice President, Group
Demand Chain, SKF; Søren Stig Nielsen, Senior Director, Sustainability, Maersk Line; Markus
Terho, Director, Sustainability, Market, Nokia; and Jean-Eudes Tesson, President, Groupe
Tesson. Their comments added enormous value to the papers by injecting them with up-to-
date industry insights. The participation of these individuals – and their respective companies
– is a strong signal of their collective and collaborative leadership.
We also thank the authors from TCS, Dipak Kripalani and Preeti Gandhi, and from Xyntéo,
Dr Åsgeir Helland and Odd-Even Bustnes. We also thank supporting authors from TCS, Dr
Syama Sunkara and Lakshminarasimhan Srinivasan, and from Xyntéo, Dr Gunther Krell and
Cristian Leordeanu. For all design and editorial, our appreciation goes to the TCS Corporate
Marketing Team and Xyntéo’s Veronica Lie and Laura Bradon Mohn.
Key advisors whom we also thank are, from the TCS side, Amit Bhowmik, Saurabh Jhawar,
Prashanth Kaivar, Anil Kumar, Jayaram N., Edward Robbins, Dr Pardip Sandhu and Suresh Babu
Sugumaran; and from the Xyntéo side, Lars Anisdahl, Thomas Bergmark, Roxana Brebenel,
Stephen Cadden, Peter Carlin, Stephan Carlquist, Rune Frøyland, Dr Kevin Gordon, Phil
Harrison, Lloyd Hicks and Rayson Ho.
Finally, we would like to acknowledge the Global Leadership & Technology Exchange,
for providing a targeted and relevant forum for collaboration around low-carbon growth
solutions.
* Please note that Peter Hogsted’s insights are based on his industry perspectives, and are not necessarily identical to
those of Kingfisher plc
Contents
Executive Summary������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 2
Opportunity Highlights����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 4
Introduction��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 5
1 A New Business Paradigm��������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 6
2 The Existing Supply Chain Model Leads to High-Carbon Growth����������������������������������������������������������������������������������������������10
2.1 Early supply chain models����������������������������������������������������������������������������������������������������������������������������������������������������������������10
2.2 The existing supply chain model – strengths���������������������������������������������������������������������������������������������������������������������������10
2.3 The existing supply chain model – limitations�������������������������������������������������������������������������������������������������������������������������12
2.3.1 Restricted scope���������������������������������������������������������������������������������������������������������������������������������������������������������������������12
2.3.2 Slow business response������������������������������������������������������������������������������������������������������������������������������������������������������13
2.3.3 Constrained information management������������������������������������������������������������������������������������������������������������������������14
3 The 21st Century Supply Chain Model Delivers Low-Carbon Growth��������������������������������������������������������������������������������������16
4 Growth Opportunities Enabled by the 21st Century Supply Chain Model�����������������������������������������������������������������������������20
4.1 Enabling product sustainability�����������������������������������������������������������������������������������������������������������������������������������������������������23
4.1.1 Driving product sustainability through supplier sustainability information management�����������������������23
4.1.2 Driving product sustainability by using life-cycle information����������������������������������������������������������������������������25
4.2 Eliminating product waste���������������������������������������������������������������������������������������������������������������������������������������������������������������29
4.3 Driving low-carbon logistics������������������������������������������������������������������������������������������������������������������������������������������������������������33
4.4 Maximising the reverse supply chain�������������������������������������������������������������������������������������������������������������������������������������������37
5 Outlook�������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������42
Glossary���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������44
1
Executive Summary
By upgrading supply chains to deliver growth as well as carbon reductions, businesses
can capture value in an emerging competitive landscape characterised by changing
consumer preferences and tightening resource constraints.
The changing supply chain context
Today’s competitive business model is driven by cost-efficiency, growth, economies of scale
and the disaggregation of consumption and production. The corresponding supply chain
model optimises costs against service-levels. It features little emphasis on total sustainability,
and is therefore carbon-inefficient and resource-intensive.
This model has delivered high growth to be sure. But, now, a new business paradigm
is changing the landscape, creating new sources of pressure and opening up fresh
opportunities. Resource constraints are tightening, and regulation is increasingly favouring
carbon-efficient businesses. Consumption and production points are moving closer together.
Customer preferences are shifting towards lower-carbon goods and services; many are
becoming less interested in owning products and more interested in the value of the service
that the product ultimately offers.
These paradigm shifts suggest that we are facing an unprecedented opportunity to align
business, society and the environment around sustainability. To meet these 21st century
requirements, the supply chain needs to adapt to deliver on total sustainability (financial,
social and ecological). Rising to this challenge will mean moving away from the linear
approach to supply chain management and building closed-loop systems. This will position
businesses to make progress in four key opportunity areas: product sustainability, product
waste, low-carbon logistics and reverse chain maximisation.
Four key opportunity areas
Enabling product sustainability
Recalibrate design, engineering, manufacture, supply, use and recycling to improve product
sustainability. Key enablers include collaboration to share life-cycle information among
various actors in the supply chain.
Eliminating product waste
Remove product waste from along the supply chain by ensuring products fulfil their intended
use. Key enablers include direct communication, real-time monitoring and information
exchange along the supply chain. These enablers help improve demand forecasting as
well as inventory and asset management for product waste reduction, which could in
turn improve customer service levels.
Driving low-carbon logistics
Use transportation and warehousing capacity to move goods with maximum efficiency.
Improved information exchange among actors in the supply chain can enhance capacity
utilisation, inter-modality, route planning and transportation asset efficiency. Moreover,
2integration of carbon information at a strategic level can optimise network efficiency
while reducing carbon emissions, both during initial design and network re-design.
Maximising reverse supply chain
Re-capture materials in used products or extend product lifespans. This requires extending
the forward supply chain with a reverse chain, in turn lengthening product lifespans and
securing the resource base. This strategy is proving an effective means to create business
value while reducing carbon. Enacting it requires high levels of collaboration and
integration as well as transparent information exchange between the manufacturers and
the actors in both the forward and the reverse chains.
For some product categories, the largest sustainability gain will come through the adoption
of a service-based business model. Several companies are already improving profitability by
pursuing this route. To be successful the model needs to be rooted in a deep understanding
of the value proposition for the customer and the precise nature of the sale – that is, a service
from a product, rather than ownership of the product itself.
Benefits of employing the 21st century supply chain model
The 21st century supply chain model will deliver high-growth, low-carbon performance. It
does not constitute a wholesale replacement of the existing supply chain model; it builds
upon it, continuing to deliver on agility and growth while radically improving sustainability
performance.
Some highly competitive companies are already working towards the 21st century supply chain
model. Businesses from diverse industries are lowering carbon emissions while delivering high
growth by pursuing one or more of the four opportunity areas identified in this paper. Xerox
saved $400 million in 2009 (85% of net income) by designing for and using remanufactured
parts in its production lines, eliminating 42% of carbon from equipment production. Since
its inception, Caterpillar’s remanufacturing business grew twice as fast as its main business,
reaching 5% of Caterpillar’s total revenue and avoiding 77,000 tonnes of CO2e in 2010 (the
equivalent of 60,000 new cars in Portugal that same year). Zara’s profit margin has been best-in-
class in its industry, remaining stable at around 12% over the past five years, while having some
of the lowest product waste rates in the industry – avoiding 188,000 tonnes of CO2e in 2009, the
equivalent of 150,000 new cars in Portugal in 2010.
Cradle-to-cradle material flows, enabled by closed-loop supply chains, are central in the
evolution of supply chains towards the 21st century model. The result for businesses that
embrace this new model will be more resilient, agile and competitive supply chains that will
support high rates of growth and lower carbon emissions.
3Opportunity Highlights
The business paradigm is changing, and supply chains will have to evolve to meet the
challenge of new opportunities and risks. By transitioning to a 21st century supply chain
model featuring closed loop systems, multilateral connectivity and information sharing,
companies will be positioning themselves to satisfy emerging customer demands and
achieve high growth in a carbon- and resource-constrained environment. By moving towards
this model, businesses are already capturing value in four key areas:
Developing more sustainable products
Supply chains will increasingly require the exchange of life-cycle information among
various actors. Two of the biggest players of the office furniture market, Herman Miller
and Knoll, have understood this, engaging their suppliers in systematic efforts to make
furniture with a lower environmental impact. Herman Miller and Knoll have improved
market shares and net incomes in the years following concerted efforts to improve
product sustainability.
Reducing product waste in the supply chain
By localising its supply chain, compressing lead times and deploying an intelligent
feedback system from store to designers, Zara was able to reduce product waste
substantially, avoiding about 188,000 tonnes of carbon emissions compared with the
industrial average in 2009. The profit margin of Zara has been stable at around 12% for
the past five years and the reduced product waste secured about €500 million in EBIT
margin in 2009.
Driving low-carbon logistics
New ways of exchanging information and coordinating the movement of goods will
provide low-carbon logistics solutions. An example of a new initiative is Shiply, an online
exchange platform addressing unused capacity by matching people needing to move
goods, on the one hand, with transport companies with available space, on the other. The
shipper can save up to 75% compared to standard rates. Since starting business in 2008,
Shiply has saved about 9,000 tonnes of carbon emissions.
Closing the loop by reusing, remanufacturing and recycling
New planning tools can help fully integrate the reverse chain in the forward supply chain,
thus truly closing the resource loops. Companies which have integrated remanufacturing
into their offering or business models are making a profit. Caterpillar gets 5% of their
revenue from its remanufacturing business, while Xerox saved $400 million in material
and production costs by using remanufactured components in its production line.
The consumer base is changing: more consumers are re-evaluating the functional value of
their consumption choices and, in some product categories, moving away from ownership.
This is opening up new ways of running businesses, including the emergence of service-
based business models to support both environmental and financial performance. For
example, the Xerox printing service business line made 25% out of the total company revenue
in 2009.
Pioneering companies have already started the transition to the 21st century supply chain
model. By focusing on connectivity, collaboration and information management, they are
moving towards a low-carbon, high growth supply chain model.
4Low-carbon, high-growth
The 21st century supply chain model
Introduction
This white paper forms part of a TCS-Xyntéo series which aims to map out practical ways key
industries and business models can contribute to profits and lower carbon emissions. In so
doing we hope to support better business performance while contributing to cost-effective
solutions to the pre-eminent challenge of our era: the creation of a low-carbon economy.
This paper argues that the business paradigm is changing, creating new risks and
opportunities for supply chains. Transitioning to a 21st century supply chain model, based
on closed-loop systems, multilateral connectivity and information sharing, will help equip
businesses to meet changing customer demands and achieve high-growth performance
in a carbon- and resource-constrained competitive landscape. The paper, which combines
the results of joint research and analysis with interviews with senior industry executives, is
structured as follows:
Chapter 1 gives an overview of the changing business paradigm. It describes how supply chains
and businesses geared for high-volume throughput are facing new challenges. Tightening
environmental regulation, growing resource constraints and changing consumption patterns all
suggest a turning point in the way supply chains are designed and run.
Chapter 2 assesses the evolution of the existing supply chain model and analyses how it has
led to deficient sustainability performance, including high levels of carbon emissions.
Chapter 3 introduces the 21st century supply chain model, which delivers high-growth,
low-carbon performance. The section describes how this model 1) enables connectivity and
collaboration among various players in the supply chain; 2) allows new types of information
(whether industry-specific or sustainability-related) to be collated, analysed and acted upon;
and 3) empowers businesses to develop new capabilities in effective, innovative supply chain
management.
Chapter 4 outlines the four main opportunity areas in pursuing supply chain sustainability:
product sustainability, product waste, low-carbon logistics and reverse chain maximisation.
The opportunity areas are complemented by case studies of companies that have reduced
carbon while increasing profitability by pursuing elements of the 21st century supply chain
model.
Chapter 5, the final chapter, demonstrates how the new supply chain model reduces supply
chain and business risks while delivering on sustainability. It also highlights the gradual
shift within some product categories towards a service-based business model. It concludes
that the leaders of the future will gain competitive advantage by capturing, processing and
sharing information in a way that enables new types of collaboration across low-carbon, high-
growth supply chains.
5Chapter 1
A New Business Paradigm
Prevailing approaches to supply chain management have enabled business
competitiveness by delivering high-volume throughputs and growth.
This has heightened operational efficiency by keeping inventory and
transaction times and costs low; enhancing direct supplier and customer
communication; and increasing the focus on customers. But for all these
strengths the approach has neglected environmental externalities;
sustainability performance, such as carbon-efficiency, has not received
A transition to low-carbon
growth is already happening priority. This chapter elaborates how the business paradigm of today is
at the global level. We see changing and how it will shape supply chain management in the future.
this as part of a larger trend
of shifting production and Businesses need to contend with an evolving context. Steep population growth will aggravate
consumption patterns, competition over resources: the world’s population is due to explode from 7 billion today to
moving from global to 9 billion by 2050.1 The rapidly growing ranks of the middle class in emerging nations now
regional. As a result, within include almost 2 billion people, who are keen to spend their money on products and services.2
regions, we are seeing a And as global consumer demand increases in emerging markets, demand for products
transition to higher volumes
with lower transaction costs is likely to increase. Resource constraints are tightening and
over longer distances,
enabling significant mode- regulation is increasingly favouring carbon-efficient businesses. Consumers are increasingly
switching to lower-carbon expecting businesses to deliver on sustainability as well as on quality and cost. A 2007 global
options, from truck study found that 21% of consumers were willing to pay more for ethically produced and
to rail and from rail to ship environmentally-friendly products.3 A likely growth in service-based products relative to
and barge. We now operate goods represents one way in which these emerging consumer demands can be met.
two Atlantic-sized vessels, and
our flexibility and service level The supply chain has traditionally been viewed as a linear process viewed from the vantage
is, due to thoughtful multi- point of a single company, starting with the supplier and ending with the point of sale.
port logistics, actually at least What happens to the product materials after use has not been a core business concern. The
as good. limitations of this perspective have important implications for the supply chain’s ability to
Antoine Namand, compete in the emerging business paradigm.
Head of Vehicle Logistics Division, 1. To keep up with increasing consumer demand for products while coping with
CAT resource constraints, the supply chain cannot continue to waste resources that could
have brought consumer value. Every year in the US, the embedded energy
contained in aluminium beverage cans that are not recycled is worth approximately
$750 million; associated CO2e emissions equal 4 million tonnes, or close to 0.1% of the
country’s total emissions.4
1 United Nations. (2009, March 11). Press Release. World Population to Exceed 9 Billion by 2050: Developing Countries
to Add 2.3 Billion Inhabitants with 1.1 Billion Aged Over 60 and 1.2 Billion of Working Age. Retrieved March 28,
2011, from http://www.un.org/esa/population/publications/wpp2008/pressrelease.pdf. All cited websites were last
accessed on 3rd March 2011 (unless otherwise specified)
2
David Court and Laxman Narashimhan, “Capturing the world’s emerging middle class” - McKinsey Quarterly website
July 2010, https://www.mckinseyquarterly.com/Capturing_the_worlds_emerging_middle_class_2639#1.
3
S. Bonini, G. Hintz, and L. Mendonca, “Addressing consumer concerns about climate change” - McKinsey Quarterly website
March 2008, https://www.mckinseyquarterly.com/Addressing_consumer_concerns_about_climate_change_2115.
4 Assumption: 41.1 billion cans in the US were not recycled in 2009. This equals about 500,000 metric tonnes. One
kg of recycled aluminum saves 14 kWh and totals about 7.5 terawatt-hours of energy. 1 kWh = 0.1 USD. http://
www.aluminum.org/Content/NavigationMenu/NewsStatistics/StatisticsReports/UsedBeverageCanRecyclingRate/
UBC_Recycling_Rate_2009.pdf All cited websites were last accessed on 3rd March 2011 (unless otherwise specified).
62. The linear view of the supply chain also means that companies’ external relations rarely
go beyond the organisations with which they have direct dealings. This misses important
opportunities. For example, about one third of the European truck fleet is, at all times,
running empty.5 Enabling cooperation among a wider range of supply chain players We are seeing shifts in
could put more of this capacity into play. sourcing: the south/south
trades are growing and
3. The current supply chain model is not geared to deliver the transparency that the new regionalisation is happening.
business paradigm demands. Recent events illustrate the risk to businesses which do not We are also seeing larger
take steps to heighten visibility throughout their whole supply chain: companies diversifying their
sourcing, going direct and
In 2010, Toyota had to foot a $2 billion bill for the recall of defective parts; improved looking at producing closer
systems to trace products along the supply chain would have made the identification to the point of consumption.
of the defect easier and more cost-efficient.6 Some are even talking about
closed loops.
Mattel recalled 10 million toys in September 2010, just three years after even larger-
scale recalls of lead-contaminated and tiny magnets in toys.7,8 Søren Stig Nielsen,
Senior Director, Sustainability,
Apple’s brand value dropped after making the headlines in February 2011 following Maersk Line
the discovery that subsuppliers in China were using toxins which jeopardised the
environment as well as the health and safety of workers.9
To stay competitive against these pressures, businesses need to upgrade their supply chains.
In 2008, 2.6 billion tonnes of waste was generated in the EU-27 countries, equalling 5,300
kg per inhabitant.10 More than half of the waste generated was from businesses. Growing
Why should we care about
political and societal awareness of these impacts is increasing pressure on businesses.
making supply chains more
Supply chains need therefore to dramatically reduce raw material requirements and move sustainable? Fundamentally,
towards zero-waste processing cycles in which resources are completely recycled or reused. it has to do with what the
customer wants and acting
The supply chain needs a new shape: it needs to be moulded into a closed loop enabling the
in a responsible way in
flow of goods from the point of consumption back to the point of origin in order to maximise
the markets we operate –
the capture of value. The core competitive advantage of the future will lie in an ultra-lean ultimately, taking out risk
supply chain boasting minimal resource and carbon intensities, enabled by a high level of and creating value. The
connectivity and information exchange. Reducing the environmental burden of supply chain customer wants it – at no
operations is not only a question of “corporate social responsibility”; it is becoming a matter of price premium. Because
strategic risk management. competition in the future will
be between supply chains,
The changing business world needs supply chains that can cope with the pressures, not companies, trusted and
expectations and realities of the 21st century. Although the current supply chain has its collaborative networks will
advantages, it needs to change to remain competitive. increase in importance.
Unless supply chains can
enable sustainability, they
will be outcompeted on this
dimension alone, and run a
5 “Empty running - Road freight - Maps and Graphs”, Excel file, European Environment Agency website, http://www. higher-risk strategy.
eea.europa.eu/data-and-maps/figures/average-load-factor-utilization
6 F. Thomas, “Data driven: How technology is reviving GM, Ford and Chrysler”, news article, Fortune Tech, April 5th, Bo-Inge Stensson,
2010, http://tech.fortune.cnn.com/2010/04/05/data-driven-how-technology-is-reviving-gm-ford-and-chrylser/ Senior Vice President,
7 H. Chernikoff, “Mattel’s Fisher-Price to recall 10 million products”, news article, Reuters, September 30th 2010, http:// Group Demand
www.reuters.com/article/2010/09/30/us-fisherpricerecall-idUSTRE68T2ZB20100930
Chain, SKF
8 “Mattel issues new massive China toy recall – Business - Consumer news - msnbc.com”, August 14th 2007, http://
www.msnbc.msn.com/id/20254745/ns/business-consumer_news/.
9 D. Barboza, “An Apple supplier’s murky record in China”, New York Times, The Global Edition, February 23rd 2011, p.17
10 European Commission, eurostat. (2010). Waste statistics - Statistics explained. Retrieved March 28, 2011, from http://
epp.eurostat.ec.europa.eu/statistics_explained/index.php/Waste_statistics
7Key Messages:
The current supply chain model’s weak sustainability performance is not only
exposing businesses to risk; it is also missing opportunities
The business environment will change dramatically as population growth picks up,
resource competition intensifies, carbon regulation tightens and the sustainability
expectations of consumers grow
To thrive in this future, businesses need ultra-lean supply chains fit for the 21st
century, featuring minimal resource and carbon intensities
89
Chapter 2
The Existing Supply
Chain Model Leads to
High-Carbon Growth
A supply chain structures and coordinates how a company works with its
partners to move goods from suppliers to customers. Along the supply
chain, there is a flow of not only materials and products, but also information
and financial transactions. Multiple actors are typically involved in driving
the process forward, starting with raw materials extraction, then moving
through various stages of production and on to the delivery of the final
product to the consumer.
This chapter begins by describing early supply chain models and considers their
evolution into the prevailing model of the day. This is followed by a discussion of the main
characteristics of the existing supply chain model – its strengths as well as its limitations.
2.1 Early supply chain models
A review of supply chains indicates that after the second world war supply chain models
focused on increasing internal efficiencies – for example, maximising the utilisation of
machinery or reducing the number of workers required to produce a given measure of
output. One stage of manufacturing “pushed” its outputs to a storage location, from which
later production stages could then draw. These early models were therefore characterised
by high levels of raw materials and semi-finished or finished products in the system. Since
communication between supply chain players was limited, the early models were very
resource-intensive and slow to react to changes in customer demand.
Eventually, a quest for efficiencies prompted companies to look beyond their own operations
for improvements. Toyota, for example, pioneered an early, low-tech form of just-in-time
production to tighten the coordination of its production demand with its suppliers’ schedules.
The system – called “kanban” (the Japanese word for signboard) – used coloured cards to
signal the need to replenish materials.11 This “pull” principle helped Toyota drive “muda”
(waste) out of their production system, leading to faster turnarounds in production and lower
inventory levels.
2.2 The existing supply chain model – strengths
In the 1980s, the supply chain evolved into the model that is prevalent today. Following
Toyota’s lead, companies saw that in order to improve agility and reduce the costs of moving
goods from suppliers to customers, they needed to overhaul their way of interacting in
supply chains. Today’s supply chains are consequently much better at collecting and sharing
information across different points.
The existing supply chain, as illustrated in figure 1, is a linear sequence of processes, starting
at raw materials extraction or in the supply network and ending at the manufacturer’s
customer, for example a distributor or retailer. The illustration shows that materials, products
and services flow downstream from supplier to customer, with information being bilaterally
exchanged both between the manufacturer and its suppliers and between the manufacturer
and its customer. A number of tools help companies keep track of supply chain activities.
11 T. Ohno, “Toyota Production System: Beyond Large-Scale Production”, (Productivity Press), 1988, pp.17-44
10Figure 1: The existing supply chain model
Manufacturer
Supplier
network
Distributor
(retailer)
Product flow
Information flow
The principal company (ie, the manufacturer), uses its internal enterprise resource planning
(ERP) system to integrate information (such as orders, order forecasts and shipment
information) from its direct suppliers and customers. An advanced shipment notification
(ASN) notifies the consignee that certain goods are en route and provides information about
the shipment’s contents. This information is usually transferred via electronic data interchange
(EDI) interfaces, directly updating the consignee’s ERP. The consignee can then use this
information to update records of available inventory and to speed up unloading, checking
and storage processes at the receiving gate.
Making use of tools like ERP and ASN has given today’s supply chain model important
benefits, enabling high-volume growth:
improved information exchange with direct suppliers or customers
better service levels to customers, via better knowledge of the materials available from
suppliers or in transit but not yet in company inventory
reduced inventory levels and transaction time and costs
procurement benefits from working with suppliers and partners around the world
There are other advantages of the existing supply chain model. These include:
Agility and cost-efficiency
The existing supply chain model uses far less inventory in process than earlier models, as
it enables a high level of integration between companies and their direct suppliers and
customers; this has helped speed up and even automate transactions. Electronic data
exchange eliminating the need for manual data capture supports operations, increases
volume throughput and lowers the cost per transaction. It also allows the company to
11keep much tighter stock control and therefore lower inventory levels. This cuts down on
transaction times and costs and enables big volumes to flow through the supply chain.
We have now started to Good data access
work differently with our In the existing supply chain model, a series of company processes – from sales forecasting
customers. The 2008 crisis and order tracking to revenue tracking and purchase order allocation – benefit from
taught us to collaborate a lot increased access to real-time data from customers and suppliers. This has helped create
more, and moved us from a single view of the “true” business environment, making decisions quicker and more
hard-edged negotiations
accurate. The same setup has enabled companies to control access to information and
singularly focused on price,
to what makes most sense protect their commercial interests.
from a systems view. We see
very good reasons for why 2.3 The existing supply chain model – limitations
carbon should enter this
The existing supply chain model has equipped companies to grow, cut costs, improve
conversation. We are actually
very well prepared for it. operational excellence and enhance customer service levels. However, the model has
limitations which have negative implications on sustainability. There are three main limitations:
Antoine Namand,
Head of Vehicle Restricted scope
Logistics Division, CAT Slow business response
Constrained information management
2.3.1 Restricted scope
The scope of the existing supply chain is limited by its linear design, making it difficult for
businesses to look beyond their immediate supply chain partners to find opportunities to
increase efficiency or service levels.
Organisational “blinders”
The existing supply chain is a linear set of processes that starts at the point when supplied
materials or components are sourced by a company and ends at the point where a product
is handed over to a customer. Companies find it difficult to deal with processes outside
this scope. For example, after-sales customer service and product maintenance tend to be
perceived as a burden rather than the opportunities they really are.
Viewing after-sales services as a chance for continued customer engagement requires
companies to extend their view of the supply chain; they need to remove their organisational
“blinders”. Companies who have done so are reaping the rewards. Caterpillar, for example,
has expanded its supply chain focus to include their customers, the aftermarket network and
remanufacturing partners. In so doing the company has not only improved its sustainability
performance; it has also created new market opportunities.
Closing the loop
The restricted scope of the existing model means that companies lose sight of the products,
components or packaging materials flowing through the supply chain. This is a problem for
those manufacturers which, under European legislation, have extended producer responsibility
(EPR) for products and packaging material they put on the market. It also restricts manufacturers
in moving their products, components and packaging materials from the point of consumption
back to the point of origin, in order to recapture value from used goods.
12The current supply chain model is set up in a way that most process waste emerging from the
supply chain, as well as the products themselves, is not recaptured. This is illustrated in figure 2.
Figure 2: The physical flows of the existing supply chain
Remanu- Repair &
Recycling facturing reuse
Extracted Supplier Manufacturer Product
Distributor
materials network use
Waste/
landfill
Closed-loop processes are also needed to provide feedback to all actors in the supply chain
about how their respective roles can be improved to raise overall sustainability levels. For
example, optimising product design requires that component designers receive detailed,
regular feedback from downstream actors. The consumer, too, is increasingly demanding
sustainability information, most notably information about products’ carbon footprints. The
existing supply chain model is not well-equipped to generate and share this kind of intelligence. The company has had to make
very fundamental decisions
about how we will operate
2.3.2 Slow business response
and go to market in the
While the existing supply chain model can move high-volume goods fast, it is ill-equipped to future: ship design for lower
deal with fast-moving changes in the market landscape. It also does not lend itself to efficient speeds,18,000 containers
per ship, collaborating with
logistics. A rigid information exchange structure increases the costs of changing the supply chain
ports and suppliers– all
constellation and opening up to new collaborations to improve operational or carbon efficiency.
providing economies of scale
and forcing innovation. The
Market dynamics company is now engaged:
from senior leadership to our
The existing supply chain model helps companies deal with fluctuations in demand. However,
captains who are incentivised
it is not flexible enough to cope with major changes to the operating framework itself. As the
around energy efficiency and
current supply chain model is tuned into one specific configuration, switching to new supply- carbon reductions. Leadership
markets or demand, or even changing distribution channels, is difficult. This rigidity makes is coming from all levels of the
setting up new trade relations too expensive and time-consuming. For example, upon the company now.
arrival of online shopping, retailers and manufacturers both struggled to adapt their supply
Søren Stig Nielsen,
chains to sell via both traditional and e-channels.
Senior Director, Sustainability,
Maersk Line
Network design
Maximising network performance and minimising resource consumption are contingent
upon the efficiency of the logistics network. Yet efficiency takes effort: designing and setting
up a supply chain network, and linking and testing the required IT systems, consume time and
resources. Moreover, by the time the set-up is complete, the business environment may have
13moved on, making the re-design obsolete. A more flexible approach to network design and to
systems integration is required.
Implementation cost
Though rigid, the structure is well equipped to cut operational cost of transactions between
a company and its current supplier and customer base. However, whenever new supply chain
constellations or collaborations are needed, implementing the new operational processes
becomes time-consuming and expensive. These “sunk costs” constitute a significant barrier
to the flexibility needed to optimise supply chain partnerships; and they hinder the network
from adapting to changing supply chain requirements. Suboptimal configurations waste
resources and lower customer service levels.
2.3.3 Constrained information management
The existing supply chain model’s reliance on concrete (and therefore historical) data
compromises its ability to plan for different scenarios in the future. Furthermore, by
centralising ownership of supply chain information with one company, today’s model holds
back open information exchange around sustainability factors.
Dealing with uncertainty
The existing supply chain works with hard numbers. It is assumed that data have a high
degree of accuracy and are commercially relevant. This works well for data from transactions
that have occurred in the past, such as orders, inventory at hand or lead-times. However, it
poses a problem for forward-looking data; data featuring uncertainty (eg, data dependent on
future capacity in terms of resources, people and time); or changing parameters caused by the
unforeseen, such as an extreme weather event. Supply chain decisions need to be “smart” and
able to contend with more than the mere calculation of hard numbers.
Risk and gain sharing is
needed to align incentives Centralised ownership of information
for carbon reductions in the
supply chain. This can be In the existing supply chain model, suppliers and customers both send information, but
enabled by focusing on end- only the principal company has full access. This lack of transparency around the use of the
results and adopting a longer- information makes other actors ambivalent about sending it.
term perspective. Today, too
Supply chain participants are thus incentivised to provide as little information as possible,
often, contract terms and
tenders work as a wonderful not least on sustainability, despite the fact that information sharing would strengthen their
tool for mediocrity. ability to comply with future legislative restrictions on carbon emissions. Clearly information
exchange would help all parties to cut costs and energy consumption, but the lack of control
Tommy Paulsson,
over the use of the information is seen to endanger primary commercial interests.
Managing Director,
Bring SCM AB Exerting pressure on suppliers and vertically integrating companies are two ways to enforce
information exchange between supply chain actors. However, this enforcement is costly and
limits organisational flexibility. There are also challenges in horizontal markets, where a spirit
of collaboration, not enforcement, is the key to information sharing.
The evolution of the supply chain into today’s model has generated important benefits in
terms of cost-efficiencies with lower inventory levels, lower transaction times and costs, good
communication with direct suppliers, global procurement benefits and improved customer
14focus. But changes in the economic environment mean that the supply chain needs to
evolve again: the limitations of the current model – its restricted scope, its slow response to
market dynamics, its effect on information management along the supply chain – make it ill-
equipped to thrive in the emerging competitive landscape.
A new supply chain model is needed, one which enables companies to compete in the 21st
century. Unlike the current, linear supply chain, the future model will draw on a closed-loop
system, connect companies to both direct and indirect supply chain partners, and promote
the transparent exchange of information without jeopardising commercial interests. New
opportunities will accordingly open up in product sustainability, the reduction of product
waste, sustainable logistics and reverse chain maximisation as well as in the discovery of new
business models.
Key Messages:
Today’s supply chain model is narrowly focused on transactions between a
company and its direct suppliers and customers
While the current model benefits customers through low supply chain costs
and high service levels, these supply chains are slow to respond to changing
market dynamics
Information exchange is often constrained by the current model, limiting
collaboration and further efficiency gains
Companies singularly focused on optimising their own transactions miss
business opportunities along the full product cycle
15Chapter 3
The 21st Century Supply
Chain Model Delivers
Low-Carbon Growth
The changing expectations, pressures and realities of the business
environment requires a new supply chain, capable of delivering growth
Supply chains must shift while minimising carbon emissions. While building on the strengths of the
from a traditional focus on existing model in terms of its capability to handle high volumes with low
making and delivering, to a inventory transaction costs, the distinguishing feature of the 21st century
model which incorporates
customer needs and considers supply chain is its shape – a “closed loop” rather than a straight line.
the global challenges we
Envisioning all actors as part of a cycle will overcome some of the current model’s limitations
are facing. The end-2-
end perspective (design, and enable the systematic pursuit of cost and environmental efficiencies throughout the
responsible sourcing, product cycle; more collaborative and flexible information exchange among partners; and
waste free manufacturing, quicker response times to changing market dynamics.
logistics and recycling
Developing closed-loop supply chains will demand innovative collaboration among supply
management), along with
integration and collaboration chain constituents, taking into account the forward product and reverse resource flows. The
between partners that share key actors in the collaborative 21st century supply chain model are:
information and knowledge, suppliers
is key. This will create a
manufacturers
sustainable supply chain that
gives the right information logistics service providers
and enables the right distribution partners
decisions in a faster way with consumers
visibility, transparency and repair, remanufacturing and recycling partners
connectivity. Large companies
must show and offer Dealing with 21st century business realities means that these actors need to start working
leadership when it comes with a closed loop model (see material flows in figure 3). Diverting the physical flow from
to operational and business the landfill back into the product chain requires collaboration from all supply chain partners,
excellence and show the way drawing on smart and integrated information exchange between direct and indirect partners
for smaller suppliers. across the supply chain.
Bo-Inge Stensson,
Senior Vice President,
Group Demand Chain,
SKF
16Figure 3: The closed resource loop of the 21st century supply chain model
Future supply chain managers
must optimise the entire
supply chain. This means
Remanu-
that they need access to
Repair &
Recycling facturing reuse all information – physical,
financial and administrative,
in full visibility – to drive
win-win-win outcomes for
Extracted Supplier Manufacturer Product
all actors. To get the package
Distributor
materials network use right, we need to build
real connectivity into the
system between companies;
Waste/
landfill integrate sub-systems and
enable choices between many
partners in the supply chain
network. Integration tools will
The closed loop system will be supported by changing the way information is collected,
be key and new capabilities
handled, processed and shared. Most importantly the new supply chain model will enable: will then follow.
Going from bilateral to multilateral connectivity. Currently, connectivity is mostly bilateral, Tommy Paulsson,
restricted between a company and its direct suppliers and customers. To improve Managing Director,
efficiencies and respond to simultaneous changes in many areas of the supply chain, Bring SCM AB
communication needs to become two-way and connectivity to become multilateral,
encompassing all the key players in the supply chain (both direct and non-direct actors).
Integrating new types of information on, for example, sustainability performance or real-time
indicators (eg, logistic fill rate). This will optimise the entire supply chain by generating
intelligence about, for example, total supply chain cost, low-carbon logistics performance
Retailers of the future are
and product waste reductions.
likely to be doing a whole lot
New capabilities to arise as a result of enhanced connectivity and integration of sustainability less selling and more leasing.
and actor information. As this information can be made accessible to a larger set of Volumes, but not profits, will
decrease. Because quality
stakeholders, real-time decision making, reverse chain integration and design for
will go up and raw materials
product sustainability can become reality. One such capability could be migrating from a
use down, the leasing model
product- to service-based model. Enabling a service-based business model would require directly enables retailers’
significant restructuring in the supply chain. margin per-unit per-product
lifetime to go up much more.
Driving Supply Chain Transparency and Collaboration Decreased volumes will also
lead to dematerialisation,
The 21st century supply chain model needs to be supported by an “information and even in the face of growth.
collaboration hub” – a smart, integrated information exchange to deliver transparency and The implications for supply
visibility across the supply chain. All supply chain actors would be able to access the hub in chains will be profound.
this new supply chain model as illustrated in figure 4.
Peter Hogsted,
CEO International, Kingfisher
plc
17Figure 4: The information and collaboration (I-Collab) hub of the 21st century supply
chain model
Logistic
Collaborative information Service
sharing for the new supply Providers
chain model is a must. For
Supplier
example, by thoughtfully network
sharing deeply confidential Manufacturer
design information, five years
later we have seen gains of Logistic
8-10% in our asset’s loading Service
factors. Today we furnish end- Providers
SRM
Logistic
to-end carbon information to Service
help customers optimise for Providers
PLM
cost, lead-time and carbon.
What is key here is that this
may also be transformational
I-Collab
to capacity smoothing, but Hub TMS
will require transparency and
more connectivity between Repair/
companies. remanufacture/
recycle
ERP
Antoine Namand,
Head of Vehicle Logistics CRM
Division, CAT
Distributor
Logistic (retailer)
Service
Providers
Logistic
Product flow Service
Consumer Providers
Information flow
We have started a drive to
improve our efficiency by
30% and make low-carbon The information and collaboration hub enables connectivity among the various actors in
a competitive advantage. the supply chain. The principal company or an external third party could serve as the natural
For this, I believe we need focal point or ‘hub’, ensuring all supply chain actors are able to provide and extract relevant
trustworthy information of
information. Multilateral connectivity will enable visibility and access to data across all the
very good quality, and it will
also be important to find a players in the supply chain, underpinning new collaborations.
good way to communicate Information systems, such as the ones shown in the middle cycle of figure 4 – Enterprise
this information. Resource Planning (ERP), Transport Management System (TMS), Product Life-Cycle
Jean-Eudes Tesson, Management (PLM), Customer Relationship Management (CRM), Supplier Relationship
President, Groupe Tesson Management (SRM) and others – could process information captured in the supply chain.
The inner circle of figure 4 illustrates a smarter hub that could enable new capabilities through
tools such as real-time monitoring and decision making, capability-to-promise, collaborative
designs and development, reverse chain planning and online exchanges (logistics, energy,
materials, waste management, etc).
18mKRISHI12 – Supply chain connectivity and capability through a mobility platform
for farmers
Qualified, third-party verified
mKRISHI (‘krishi’ means ‘farmer’ in Hindi) is a mobile phone-based agricultural advice
information sharing is where
service through which farmers can receive personalised information from experts to
the new supply chain model
enable efficiencies across their entire agricultural value chain. All constituents in the chain needs to go for transparency
– suppliers, farmers and farm produce buyers – can benefit from this tool: and improved decision-
making. Visibility between
Suppliers (companies supplying seeds, fertilisers, crop protection agents) benefit
companies and handover
from understanding consumption demand and can redesign their supply chain and
points in the value chain is
inventory management systems accordingly. crucial in order to remove
Farmers are able to send queries and images through their mobile phones and waste and determine impact,
for example upstream
receive a personal response with advice or relevant information to enhance the
traceability of demand and
sustainability and quality of their crops. The experts can remotely advise the farmers
materials. Many companies
on the type and amount of seeds to use, local weather, fertiliser requirements based have significant ‘carbon blind
on soil conditions, pest control and current market prices. spots’ across their supply
chains and products. Yet we
Farm produce buyers benefit from constant location-based visibility of the amount,
see consumers increasingly
quality and potential selling price of a particular crop. The buyer can then, for
expecting more accurate
example, combine this information with a digital location map to ensure the efficient information about the
collection of output, saving fuel. It also gives overseas buyers importing agricultural products they buy. Our work
products full traceability, as they can have access to the entire history of pesticide with NGOs, Google and
and fertiliser use before making a purchasing decision. Microsoft will enable supply
chain stakeholders to build
In the fisheries industry, large buyers can direct small fishermen to catchment areas on our performance data
where more fish is expected, based on information regarding marine currents, sea and support systems-based
temperatures and previous catchment profiles. solutions.
The mKRISHI platform makes the entire agricultural value chain more carbon efficient Søren Stig Nielsen,
through enhanced product sustainability; more efficient logistics and storage; and Senior Director, Sustainability,
reduced waste. Maersk Line
12
Key Messages:
The 21st century supply chain model will not replace but will build upon the existing
supply chain model
Connectivity among supply chain actors is necessary to enable collaboration and
information exchange in the supply chain
In the 21st century model, supply chain participants will be linked through an
information and collaboration hub
Innovative IT systems will provide smart decision support and new capabilities while
ensuring the full supply chain cycle delivers on agility and sustainability
12 ‘mKrishi’ is TCS’s Mobile Agro Advisory System, being implemented in collaboration with organisations such as Tata
Teleservices, M.S. Swaminathan Foundation, Tata Chemicals & Rallis, National Centre of Grapes, Cotton Research
Centre and (National Commodities and Derivatives Exchange Limited) NCDEX. Link: http://www.tcs.com/resources/
brochures/Pages/TCS_mKrishi-Mobile_Agro_Advisory_System.aspx
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