Until a few years ago, if you’d asked any senior leader or executive the most important contributing factor to the ‘sustainability’ of their business they would most likely have answered that it was rate of growth and financial profitability. Yet, more recently, the importance has unarguably shifted towards a more balanced view, which includes environmental impact.
For decades environmentalists have been warning about the effect economic growth is having on the environment and it is clear a change in our production methods is becoming increasingly urgent. Most recently, the impact of Covid-19 has caused major disruption for many businesses, leaving them in no doubt that they need to address the weaknesses in their supply chains now, in order to remain competitive.
Many believe moving towards a ‘circular economy’ is the answer. This economic model aims to still encourage growth but in a way that limits waste and pollution by re-using existing resources. It relies on the principles, ‘reduce-reuse-recycle’ – sometimes referred to as ‘the three Rs’ - in opposition to the traditional linear model ‘make-take-dispose’.
The European Union, where countries are mostly small, crowded and rich but lacking resources, is investing billions in this strategy. The Netherlands has pledged to go fully circular by 2050, and several other EU countries say they are making plans to do the same.
What does this mean for businesses? They need to adapt.
As concern over climate change continues to increase, shifting consumer behaviours and new laws on everything from recycling to emissions targets mean businesses are no longer able to ignore the impact they are having on the environment. The terms ‘circular economy’ and ‘reduce-reuse-recycle’ are becoming common in the boardroom and on the high-street. At Oliver Wight we have seen examples of some companies making incremental improvements, for example with changes to packaging or logistics, but there is still a long way to go for many.
The problems with packaging
While changing packaging materials might be good for the environment, businesses need to also consider how changes will impact the operations of the end-to-end supply chain. In one case, a drinks retailer Oliver Wight works with is progressively switching from logistically efficient polyethylene terephthalate (PET) containers to 100% recyclable glass, despite higher reverse logistics costs. This was after market research revealed that consumers were more likely to purchase more environmentally friendly glass bottles over plastic. The business had to react to consumer sentiment, however its footprint will have to fundamentally evolve to absorb the current impact on its operations.
Businesses need to look more closely at their people and processes alongside the overall business plan, to see where they can make more fundamental improvements. This might include ways to offer their product differently, such as moving towards a ‘Product as a Service’ (PaaS) model. We have already seen this to some extent creeping into the consumer goods industry, with supermarkets offering a variety of foods in loose form for customers to purchase as much as they need, using their own containers.
So why aren’t all businesses moving towards this model? There are a number of barriers to overcome for any organisation looking to make this shift, including the implications it could have for brand awareness if packaging is removed, and potential health and safety restrictions for some products. For example, current regulations in Spain specify that water has to be sold sealed. If a customer goes into a restaurant and orders water, it has to be brought in a bottle and opened in front of them, which rules out the more sustainable option of providing water for multiple customers from larger containers. Similar regulations exist in many countries and prevent the model from being used. There is also the issue of cost. PaaS is less cost efficient in the short-term, and this means financial teams within businesses that are not looking at the longer-term planning horizon may fail to see the benefits.
A waste of good food
One big benefit to the Product as a Service model is less waste. An area where we have seen the biggest changes towards sustainability in many businesses is in their reduction of plastic. Consumers have largely embraced this, with behaviour shifting towards more people buying their coffee in reusable cups and using their own shopping bags. This has also put pressure on governments to make changes. In 2019 the EU introduced new rules to reduce 10 single-use plastics that make up most of the litter found on European beaches.
When it comes to waste, packaging is not always the problem, there is also leftover product to consider. According to a study by the Waste Resources Action Programme (WRAP), 9.5m tonnes of food waste was created in the UK by the retail supply chain, hospitality sector and individual households in 2018. This includes an estimated 4.5m tonnes (worth 14bn) which could have been eaten. PaaS models where consumers only buy the amount of a product they need could provide a solution. A test with some UK retailers showed that eliminating ‘buy-one-get-one-free’ promotions cut fresh food waste by 20% as consumers were no longer invited to buy volume they did not really need.
Although the 2018 food waste figures are down on previous years’ figures, showing that the problem is being addressed to some extent, Covid-19 has had a detrimental impact. Complicated logistics mean many food producers found themselves unable to get certain products to retailers during periods of lockdown, which resulted in large amounts of fresh foods such as dairy products, fruit, and vegetables being wasted. Health and safety regulations meant even food that was successfully delivered and would have been safe for consumers, was thrown away due to short sell-by dates.
The impact of offshoring
Recent shortages in many supply chains have brought to light the amount of offshoring that has taken place in Europe in the past two decades. There were short-term benefits to offshoring that have made it an appealing prospect for businesses and their stakeholders in the past so they could, for example, source goods more cost-effectively. But when Covid-19 caused a shortage in some urgently required products, including medical equipment and devices, these had to be at least partially re-shored. A large car manufacturer used 3D printing technology to manufacture respirators, which raised the question for many - if Europe could produce its own supplies, particularly strategic ones, why was it so heavily relying on sources in the Far East?
Companies have been left with consumers at a local level, but their supply points are now far away, which also makes it difficult to maintain the circular economy model. Taking the production of textiles, footwear, and apparel as an example, many businesses have moved this activity out of Europe to low labour cost countries. However, when the garments are used, it is uneconomical to ship them back to suppliers for re-use/recycling and they are typically disposed of. Lower sourcing costs (which are usually associated with lower quality and less durable goods) shortens consumption cycles and exacerbates the lack of efficient waste management.
As well as the environment, there are people to consider in the ‘social cost’ of any supply chain. There’s often a vast difference between the low production cost of a product and its retail price. If companies have set up their supply chains to save on production costs but the savings are not being passed on to the consumer, nor shared with the producing entity, who is getting the largest share of the profit? In most cases the money ends up in shareholders dividends, employee pay-outs, and tax, all the while the suppliers remain in poverty.
The impact of Covid-19 has brought the logistical problems with having supply chains spread out across the globe into sharp focus, which is likely to cause many businesses to rethink. They will need to weigh up whether more reliable, sustainable and ethical options, which are preferable to their customers, provide a better chance at survival in the 21st century than maximising on short-term cost savings.
Covid-19 and the delivery boom
It’s not just changes in production and manufacturing that have been accelerated by Covid-19, consumer behaviour has changed dramatically, with more shopping online than ever before. Retailers have had to adjust their business models to meet a large increase in demand. While they may have addressed this in the short-term, they should also be prepared that some consumers will have permanently changed their buying habits and demand may never return to pre-lockdown levels. One of the areas that will need to be addressed in the long-term is looking at how products are transported to the customer.
In one example, a healthcare company Oliver Wight work with was able to meet increased consumer demand by increasing its number of product drops to pharmacies. This meant that a customer could place an order in the late morning and they would be able to pick it up the same afternoon. Increased demand made it worthwhile for the business to increase the number of deliveries, and this also increased the level of service being provided to the customer.
The ecommerce boom has had another significant effect. Instead of customers coming to the retailer to purchase products, the retailer was mostly bringing its products to the customers. This has a beneficial environmental impact, as only a limited number of vehicles are required to deliver the product, in contrast to the pollution caused by many separate individuals travelling to a physical location to buy an item.
Similarly, the way businesses operate has changed. More communication between people in different locations is being conducted via online video conferencing software. The requirement to travel to different branches of the business to meet with other members of the team, suppliers and customers, has been reduced or, in some cases, completely removed. There are many benefits that come with this to make it an appealing prospect to businesses, including the time and money saved, as well as reducing the company’s carbon footprint.
We have already seen some businesses being forced to adapt their supply chains in line with new regulations and environmental targets. In one example, Oliver Wight worked with a car manufacturer which was forced to look at its demand planning processes when the EU introduced new regulations requiring that a specific percentage of the cars it produced were electric. Exceeding the internal combustion vs. electric vehicle ratio now results in the company being heavily fined, so it became very important that its sales forecast was more accurate to predict how many electrical vehicles to assemble - even if at a loss. Although the introduction of this process was driven by an external force, its impact on the business will be beneficial or disruptive depending on whether it is managed just to solve short-term issues or re-think itself strategically.
There are European non-mandatory recycling targets of 65% of municipal waste by 2035 and 70% of packaging waste by 2030, with individual levels as high as 85% for paper and cardboard - how long will it be before they become enforceable? Organisations that make steps to address these issues now are the ones that will be best equipped to survive, and thrive, in the future.
We have discussed some of the key issues around sustainability, the challenges they pose and how some businesses are taking steps in the right direction. However, what Oliver Wight has not seen is businesses measuring their environmental impact. Changes are often being made because they are driven by client and consumer pressure or government regulation without a longer term holistic, end-to-end supply vision and approach. While financial teams pressure the business on short-term cost reduction and profitability, they miss the point on how improving environmental sustainability can influence financial sustainability in the long-run, or even determine the survival of the business.
Eco-friendly KPIs should be a fundamental part of business plans and performance scorecards, so the results can be measured and processes readjusted to ensure continuous improvement. An integrated approach ensures this is achieved; as in the earlier example, there is no point in making packaging more sustainable if it has a detrimental effect on logistics. All areas of the business should be aligned in its common short and long-term goals, whether they are financial or environmental.
Future-proofing your supply chain
Although it may have caused disruption to supply chains in the short-term, Covid-19 has offered many businesses time to reflect on their processes and re-evaluate their long-term business plans and goals. There has never been a better time to ensure that your supply chain is fit for the future.
Building strong collaborative relationships with suppliers is key to creating a robust supply chain. A supplier you have confidence in and are sharing information with reduces your need to shop around. One of Oliver Wight’s clients that produces rare metal catalysts has established this loyalty with its suppliers; it has left them in a much better position to deal with any supply and demand changes through the pandemic.
Businesses that have effective demand and scenario planning processes in place will be better prepared to deal with unexpected changes. While some businesses will be reacting to consumer behaviour once lockdown is eased, those with scenario planning will be responding by actioning plans based on real data fed through from a strong demand planning process.
Retailers have already seen the shift in customers towards more eco-friendly, ethical companies, and this is likely to increase. If your business has already made steps to be more sustainable, it is important your customers know about it so they can make an informed choice. We have seen some brands already shifting away from marketing the product towards marketing the ethics of its brand. A Spanish beer company recently launched a campaign that, instead of advertising its beer, focused on the sustainability of its new cardboard packaging – a cardboard tray replacing plastic ring can holders. As consumers become more concerned with the values of businesses, it is only logical that there will be a shift towards emotional marketing over product marketing.
All the elements we have discussed are important, but they need to be aligned with each other and the overall business plans to be effective. Having an Integrated Business Planning (IBP) process in place ensures that all areas of the business are working towards the common business goals. Processes need to be measurable so results can be regularly reviewed and evaluated. Establishing performance criteria across the whole of the end-to-end supply chain is essential – it is as important to have KPIs in place for sustainability as it is for financial performance and customer service levels to ensure continuous improvement across the business. This is key to achieving a resilient supply chain that will give your business the best chance at survival and success when facing an unknown future.