Friday, March 26, 2010

Greening the Manufacturing Supply Chain, Part 2

Part of a series

We started a discussion about supply chains with respect to environmental impacts related to the various actors in the chain. We'll continue here with an example.

But, first, a story from the trenches.

I've mentioned Interface Carpets before as an example of a company dedicated to green manufacturing and on a path to sustainable business practice. An AutomationWorld article recently on "Sustainability Leads To Next-generation Manufacturing" (by Gary Mintchell, March 10th, 2010; download the article at http://www.automationworld.com/print.php?id=6671) gives some statistics on how Interface has done in the words of its founder and retired CEO Ray Anderson. Anderson talks about the 12 year process starting from the Kyoto Protocol in 1997 which he says "was widely derided by his fellow CEOs that sought to reduce greenhouse gas (GHG) emissions by about 7 percent in the United States by 2010. Others were afraid that meeting that goal would drive them out of business."

His statistics show the opposite is quite true if pursued consistently and with metrics to measure where you are and where you are going. Anderson states "Interface’s performance by 2008 revealed a reduction of 71 percent in absolute tons of GHG emissions while sales increased by two-thirds and earnings doubled. Interface consumption of fossil fuels per square yard of carpet was down 60 percent, and waste reduction measures put a cumulative $405 million of avoided costs directly into the bottom line."

Energy per unit of product reduced by 60%! Recall the "master equation"? It defined impact as a product of three terms: population, per capita GDP, and impact per unit of GDP. I noted that the only "knob" we can twist on this equation is impact/GDP. And 60% reduction as realized by Interface is on track to meet the reductions needed that we spoke about several postings ago.

Anderson goes on to enumerate the tangible benefits of following this path - strong competitive position, growth in sales, higher profits (since costs are down) and adding to employee satisfaction being part of such an organization.

Back to supply chains (although if you are a builder of commercial space then Interface is probably in your supply chain!). A recent article in Environmental Leader (Feb 1, 2010, see http://www.environmentalleader.com/2010/02/01/survey-56-of-cdp-members-may-cut-out-suppliers-who-dont-manage-carbon/ for the full article) discussed a survey of the Carbon Disclosure Project (CDP) regarding their attitudes towards suppliers (supply chain) that do not manage their carbon. These are real companies in the survey (like PepsiCo, Dell, Google, IBM, Kellogg, HP and Unilever.)

The results are enlightening. Over 1000 suppliers to these companies were surveyed. Survey reported that 38% of the supply chain respondents have some type of carbon reduction targets in place. Of these respondents, almost two thirds report Scope 1 and Scope 2 emission. Scope 3 emissions are reported by 8%. Strikingly, 56% of the CDP members (remember the big companies listed above?) say that they may eliminate suppliers who don't manage carbon.

You can get the full CDP report (download the pdf) online at https://www.cdproject.net/reports.asp.

Now, let's look at an example of the impact of supply chains and, in particular, energy mix and transportation.

This example comes from one of my PhD students, Corinne Reich-Weiser, who is studying decision-making methodologies as applied to reducing the greenhouse gas emissions of manufacturing.

In this example,  the effect of minimizing global emissions on a supply chain is considered by looking at a simple vehicle manufacturing global supply chain with four candidate facility locations for assembly and stamping. We assume that the company serves the US market and wants to decide (1) where it should open facilities and (2) how to ship from the stamping facility to the assembly facility, and from the assembly facility to the market. The manufacturing technology, and the product produced, is the same regardless of location.

That is, the energy consumption for stamping and assembly is the same at each facility. But, the CO2 emission will be different at each facility due to the different energy mixes associated with the electricity supplier in that location (recall our discussion about conversion factors for kilowatt-hours to carbon dioxide for different regions of the world and US - this was in one of the earliest postings, see http://green-manufacturing.blogspot.com/2009/07/why-green-manufacturing-part-2.html.) There is only one supplier in this example (the stamping facility), one component (the stamped metal sheets),
and one manufacturer (the assembly facility.) We assume that the rest of the components needed for vehicle assembly are produced in local facilities. Also, the location and transportation mode are determined independently.

For this example, we assume that a typical vehicle weighs about 1,500kg and the total stamped sheet metal weighs about 1,000kg. The cost for stamping and assembly of one vehicle are $700 and $100, respectively.

The table below shows the estimated CO2 emission levels associated with vehicle stamping and assembly the different areas we are manufacturing in this example derived from EIO-LCA data.


You can see from the table (and apologies for the clarity of the table and figure below) the candidate locations for our stamping and assembly and, eventually, market example.

If a facility is outside the US, then components have to be sent to a port and then shipped internationally. We assume that air transportation is not an option here. There is only one way to ship products internationally, but one can choose either truck or train to deliver the product domestically. Further, emission characteristics will differ depending on the type of vehicle used. Because the carbon emission factor of trains (0.022 kg-CO2/tonne-km) is less than trucks (0.033 kg-CO2/tonne-km) according to Mike Ashby's data, it is always optimal to select trains over trucks if we only consider carbon emission.

One must include some production costs in the analysis as these will vary substantially with location. We can estimate the variable production cost in different areas by considering labor cost, utility cost, and facility rental costs in different countries.

The summary carbon footprint using three different distribution options (minimal economic cost, local manufacturing, and optimal carbon emission) is illustrated in the figure below.


The figure shows the contribution of transportation (hatched), stamping (black) and assembly (white) for each of the scenarios.

The lowest cost option is to stamp and assemble in China and then ship to the US. The minimal cost option  emits more than twice as much CO2 as the minimal CO2 option. The minimum carbon emission is achieved when the stamping is done in Germany with  assembly in the US. This is because the energy mix in Germany is half the impact of that of the US. The transportation emission is also smaller compared to other countries except the US because of the relatively short distance between our assumed location for stamping (Stuttgart) and the port. Because local manufacturing (i.e. in the US) saves on dramatically on transportation costs and emissions, it ends up in the middle in this example (due to energy mix issues again.)

This example shows that supply chain designs change when environmental impact is considered. This was arguably a very simple example with only a few options for organizing the supply chain. But, as seen in the lower figure comparing the results, there is a tremendous difference in these three scenarios. The optimal chain is less than one half as impactful as the "minimum cost" chain.

So, specially if you are a supplier to any of the CDP companies, it might make sense to look at all your supply chain options!

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