green and supply chain strategies in a volatile world
TRANSCRIPT
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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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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
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
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
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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©Copyright 2008 ILOG
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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