The Impact of Sustainability on Strategy and the Supply Chain Triangle
This blog discusses the impact of sustainability on strategy and the supply chain triangle. It is based on a discussion with Mathias Fahy, sustainability expert at MÖBIUS, a European management consultancy. Mathias was preparing a workshop on sustainability, for a technology company that historically qualifies as a true product leader (in the definition of Treacy & Wiersema). Discussion with Mathias was how to link sustainability to the supply chain triangle. In the end it was clear that sustainability not only links to the supply chain triangle, but also to strategy.
Starting point of the discussion was that current initiatives were focused on reducing the CO2 footprint by shifting cargo to slower transportation modes, for instance from air to sea. This was lowering the CO2 footprint, but also lowering the cost per m³. One of the issues was that slower transport modes are increasing the in transit inventory, and the inventory at destination, as safety stocks need to be increased. The company has strict inventory targets, leading to an obvious conflict in our supply chain triangle.
How to ‘solve’ the conflict? Well, the guiding metric in the triangle is the return on capital employed or ROCE. Questions to answer are: “What is the EBIT impact? What is the inventory (or more generally capital employed) impact? What is the resulting impact on ROCE?” If ROCE goes up, we should go with the decision, if ROCE goes down, we don’t.
While on the one hand the triangle helps in managing this type of discussion, the true conflict in this discussion is the conflict with the company strategy as a product leader. As discussed in a previous blog, as a product leader you need flexibility and adaptability (using SCOR terminology), and sea freight is bluntly conflicting with these objectives.
The discussions with the supply chain team were on which type of products would qualify for the modal shift. This would certainly need to be high volume, low value products, preferably with a stable demand. In the discussion with Mathias we added ‘a low number of engineering changes’ as an extra parameter. If there is a lot of changes to the product, you want to keep the supply chain short, to ensure a fast time-to-market. Adding up these criteria would provide a good fit for an operational excellence company, but the intersection might be empty at a product leader.
So how could a product leader then work on sustainability? Our belief grew that we need to look for options that, on the one hand reduce CO2 footprint, but at the same time reinforce the core strategic positioning of the company. An example for a product leader might be going to regional manufacturing, as opposed to centralizing into a single manufacturing plant. Local sourcing and manufacturing will reduce CO2 and reduce customer order lead time.
One of the examples discussed was to have a local assemble-to-order on different continents, whereas some of that was currently done in only 1 central location. The reason we don’t easily come up with this solution, is because it increases cost … but that should not necessarily be an issue. If it reinforces our strategy, the question becomes ‘what extra value does a shorter time to market generate’? If we can do a local assemble-to-order instead of flying stuff in, we can probably shorten the lead time with 1 week, and more easily offer a broader product portfolio. What are customers willing to pay for this? What will be the impact on sales volume? What will be the impact on the sales price? Yes, as supply chain we’ll need to involve sales in the discussion, which is not necessarily our favourite, but this type of ‘strategy-reinforcing’ initiatives, across sales and operations, may drive much more CO2 reduction and value creation compared to seemingly ‘easier’ initiatives.
As a product leader, branding is important. We might use the CO2 reduction to enhance the branding of our product. Giving a green edge to our products, could enhance the perceived value, and as such boost volumes and margins.
In summary, as a product leader, you might not be looking for a modal shift but for regional sourcing and production when trying to reduce your CO2 footprint. More generally, when thinking about sustainability or reducing CO2 footprint, look for initiatives that reinforce your core strategic positioning. That may be modal shift for an operational excellence player, but it could be different for a product leader. So yes, you’ll need the triangle to balance the impact of service, cost and cash when evaluating sustainability initiatives, but make sure to watch the strategy impact. The strategy impact may indicate ‘where is the real value’ and ‘how to ensure adoption’.