Today is Earth Day, the celebration of preserving our planet and its resources.
Any blog with a focus on the broad umbrella of manufacturing, supply chain and product management is compelled to acknowledge that supply chains and their actions have a lot to contribute to preserving our planet, its resources and its air. The good news, we feel, is that a lot has been accomplished in sustainability and green supply chain initiatives across multiple industry sectors. However, much more work remains, particularly in low-cost manufacturing regions such as Bangladesh, China, Cambodia, Vietnam and other countries.
Led by many multi-national manufacturers, sustainability efforts directed at reduced use of water, natural resources and packaging have both added creditability to brands as well as saved money for businesses. Likewise, food producers have invested in more organic and ethical supply chains. Producers such as Procter & Gamble, Nestle and Unilever and others are recognized for their wide reaching efforts for incorporating sustainability in business strategy. Consumers have in-turn, continued to actively support brands that demonstrate a commitment to sustainability and preserving our planet. Indeed consumers are the most important stakeholders in influencing the way in which corporations manage and respond to societal expectations. Our commentaries and observations of today’s consumer product goods industry reflect how consumer expectations are radically changing former processed foods business practices. Likewise, suppliers have an ever more important contribution to make in these efforts.
However, supply chains that have high consumption of water, chemicals, and resource intensive energy have far more work to do. Today they predominately reside in low-cost manufacturing regions where governments and businesses sometimes look the other way when it comes to active commitments to curb abuses to the environment. Recent reports indicate that China senior leaders are getting more serious about pollution and environmental abuses, which is long overdue. We have read reports of gross pollution and waste in countries such as Bangladesh. While multinationals such as Apple, Cisco, Hewlett Packard, H&M and others are actively establishing, monitoring and enforcing sustainability goals across their extended supply chains, too many others have turned a blind eye, perhaps far more concerned with lower costs. Supply Chain Matters recently highlighted National Resource Defense Council’s ongoing efforts in the greening of China’s textile and apparel producers, helping suppliers to cost justify more sustainable practices.
There is a lot more to do, and supply chain leaders and teams need to be actively supporting additional green and sustainability efforts. The good news is that our up and coming millennials, the leaders of tomorrow, are very tuned into sustainability of the earth’s resources as well as innovative ideas to make a difference.
These efforts are good for business as well as the environment.
We congratulate all that are demonstrating commitment and we urge others in our community to add their continued influence.
Recent postings appearing on the Natural Resources Defense Council (NRDC) and Mother Jones note that the industrial processes used to make our jeans and sweatshirts require loads of water, dirty energy, and chemicals, which often get dumped into the rivers and air surrounding factories in developing countries. China of course, is a major global source of fabric production. According to the NRDC, almost 20 percent of the world’s industrial water pollution comes from the textile industry, and China’s textile factories, which produce half of the clothes bought in the United States, emit 3 billion tons of soot a year.
NRDC recently hosted an award ceremony in Shanghai to recognize 33 Chinese textile mills which completed NRDC’s Clean By Design program in 2014. Four prominent apparel retailers and brands, Target, Gap Inc., Levi Strauss and Co., and H&M participated in the program, handing out certificates of achievement and inducting some star mills into a newly created Clean by Design Hall of Fame.
The effort to get to this point is described as starting five years ago under the umbrella of green supply chain initiatives, providing practical tools to reduce production and environment impact while saving money. Today, NRDC’s Ten Best Practices provides what are described as practical improvements, low cost and offering quick payback for producers.
In terms of results, NRDC indicates that its Clean By Design practices delivered, on average, savings of $440,000 in the first year, with the top five mills saving more than $880,000 – with a payback time (return on investment) of only 14 months.
The NRDC blog posting further describes efforts underway to increase awareness to broader amount of skeptical fabric and textile mills in China as well as to involve more global based buyer brands as sponsors.
Since getting the word out is important to this effort, Supply Chain Matters is pleased to spread awareness of this program to our global and China based readers. We also extend our Tip of the Hat to those retailers who are actively supporting these current efforts.
Supply Chain Matters has featured numerous prior commentaries regarding the difficult challenges and structural business challenges facing large consumer packaged goods producers and their associated supply chain ecosystems. Yet while the industry continues to respond with severe cost cutting and a sense of crisis, the industry may well be overlooking the more important strategic need for meaningful investments in organic and sustainable food supply chain capability and supplier development.
Currency headwinds and activist investors focused on short-term shareholder value and increased earnings add more cost cutting pressure to the crisis. Signs of increased merger and acquisition activity, most recently the announced HJ Heinz and Kraft Foods mega merger, add more turmoil and stark actions surrounding CPG supply chains.
Today’s consumers demand healthier food choices and more natural ingredients, shunning high volume, well-known iconic food brands. Consumers are more interested in knowing where their food originated, the ingredients within food and how food is produced with sustainable methods. Well known producers, food service providers and suppliers such as Hershey, Nestle, MacDonalds, Tyson Foods, Costco, Yum Brands and others have all embarked on initiatives directed at curbing the use of antibiotics in animals, artificial food coloring within food, and higher quality standards for suppliers.
In a previous commentary, we advocated the need for CPG producers to focus on increased product innovation and quicker introduction of new and healthier products. These capabilities need to be obviously enhanced, in spite of continued pressures to reduce costs. However, we have wondered how the ever increasing consumer needs for more organic and sustainable food products can be fulfilled among current food supply chains. Is there a discernable capacity shortage?
A recent report published by The Wall Street Journal, Hunger for Organic Foods Stretches the Supply Chain (paid subscription or complimentary metered views) brought forward such a perspective. According to the report, the increasing need among consumers for more organic foods is literally: “hampering the growth of one of the hottest categories of the U.S. food industry.” Farmers, dairies and ranchers face significant costs and risks in attempting to convert from conventional to organic farming or animal production techniques. “While organic produce or livestock can command prices as high as three to four times that of conventional food, farmers generally have to sell their food at conventional prices during the transition.”
Mentioned specifically are organic and natural foods producer Hain Celestial Group, soup maker Pacific Foods and fast casual restaurant chain Chipotle Mexican Grill recruiting, financing and training more farmers willing to utilize and adhere to organic methods. Some producers such as Hain Celestial have had to initiate long-term buying agreements, as much as three to five years, to insure the transition to more organic supplies. Two years ago, Chipotle began providing financing incentives to help black bean farmer’s transition from conventional to organic production. This fast-growing restaurant chain that prides itself on higher quality, ethically based food ingredients recently took the bold step of suspending sales of its pork product in nearly a third of its restaurants after discovering a supplier was not complying with animal welfare standards.
With increasing reports of supplier bullying and cost squeeze tactics occurring among the larger traditional packaged foods producers, we wonder if that approach actually lends itself to required investments in organic and sustainable food supply. If the ultimate strategy among activist investors is ultimately to squeeze existing costs across the entire conventional processed food supply chain to free-up cash to fund acquisitions of smaller, more organic and healthier food producers, will such innovative and dedicated producers wither amidst an environment of draconian cost-cutting?
By our lens, it may be an argument for supply chain and individual brand segmentation anchored on market differentiation and segments.
For us, one tenet appears obvious, the industry needs to respond to growing consumer tastes by actively investing in boosting capacity and capability in organic, sustainable and healthier food products. To do otherwise is opportunity lost.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters ® blog. All rights reserved.
In our Supply Chain Matters perceptions of this year’s ranking of the Gartner Top 25 Supply Chains, we noted how pleased it was that Unilever had finally made top-five recognition and how this global consumer goods provider actually garnered the highest score among the Gartner analyst community More than many consumer goods supply chains, Unilever has demonstrated agility in supporting expanded revenue growth tapping emerging global markets and agility in managing its extended value-chains.
The June 10th edition of Fortune provides more evidence of Unilever’s stature as a global supply chain leader. The article paints a broad portrait of CEO Paul Polman, and specifically his charge that sustainability goals will not trump traditional goals such as shareholder return. Fortune declares that Unilever “has gone beyond big U.S. companies like GE, IBM, and Wal-Mart by putting sustainability at the core of its business.” Polman iterated to Fortune: “The essence of the plan is to put society and the challenges facing society in the middle of the business.”
While some may be skeptical of these statements, the business results certainly speak for themselves. Since taking over as CEO, Unilever has increased revenues by 30 percent, made larger penetrations in emerging markets and is giving competitors such as Nestle and P&G a run the money. The article points out that last year, despite the severe economic crisis impacting Europe along with rising commodity costs, Unilever posted record revenues and profits. Its revenues grew in every region while it was successful in reducing the costs.
Unilever translates its passion for sustainability in many phases of its direct consumer marketing as well. Fortune points to one examples of a campaign related to the Axe brand of grooming products that challenges young men to save more water by showering with a friend. Last year the company rolled out a program to begin the rollout of new, climate-friendly ice cream freezers in the U.S.. Ben & Jerry’s ice cream, along with other Unilever ice cream brands like Breyers, Good Humor and Klondike, are to be kept in freezers that use at least 10 percent less energy and replace harmful “F” gas coolants with hydrocarbon (HC) refrigerants.
From a supply chain lens, the company is driving farmers and suppliers to be certified as sustainable or else risk losing Unilever’s business. Unilever’s plan includes 60 targets with targets related to chickens, cows, cocoa, use of paper harvested from manageable forests and consumption of water. Fortune points out that: “Unilever’s sustainable sourcing program is intended to ensure that the company will have access to affordable raw materials as logs as it needs them.”
Of little surprise, Fortune cites that the company is one of the five most-searched-for employers on Linked-In.
Full Disclosure: This author is impressed- I am a current Unilever stockholder.
Supply Chain Matters readers may have noted business media headlines last week indicating that the BNSF Railway, part of Warren Buffet’s Berkshire Hathaway, announced plans to test the use of natural gas to power its locomotives. We view this announcement as highly welcomed and significant news for the transportation industry.
This BNSF trial experiment is slated to begin in the fall of this year. BNSF is working with locomotive manufacturers Caterpillar and General Electric on prototype LNG fueled locomotives for use in the prototype testing. As a prime consumer of diesel fuel in the U.S., railroads have the potential to reap substantial cost and environmental benefits by converting to natural gas powered locomotives. Diesel fuel prices currently hover in the $4 per gallon range while the equivalent amount of natural gas energy could cost an average of 50 cents at wholesale prices. This move is also motivated by the increasing discovery of cheap natural gas supplies within North America. Railroads also have to conform to increased federal air pollution standards take effect in the coming two years, which will require the installation of new emissions prevention equipment. A conversion to natural gas can mitigate some of these pending costs.
The Canadian National Railway retrofitted two of its locomotives to run on a combination of 90 percent natural gas and 10 percent diesel in September and that pilot program also continues.
It is acknowledged that the conversion to natural gas does face some infrastructure, additional cost and regulatory hurdles. The introduction of gas will require the use of special LNG tank cars to haul the fuel for locomotives as well as the construction of new fuel depots. However, given that railroads have fixed routes, the location of natural gas fuel depots is a much more known determinant. With the ability to add multiple tank cars, the travel distance of a single train before the need for re-fueling could also be extended. Thus far, indications are that natural gas fueled locomotives should have the equivalent power and fuel consumption rates as current diesel fueled equipment.
Thus, while the ultimate conversion of the bulk of railroad locomotives to natural gas will involve significant investment, the long-term and compelling economic benefits may far outweigh the up-front investment costs. The CEO of BNSF, Matt Rose, characterized the announcement as a “transformational” event, and other railroads are more than likely to follow at some point, once the benefits are better understood.
We also view the transformational aspects as positive for the U.S. economy as well, since the conversion will drive the need for new and more accelerated equipment replacement cycles, infrastructure and added jobs.
Coincidentally, business media last week was highlighting stories of increased challenges in the trucking equipment industry. North America truck production fell 23 percent in the fourth quarter of 2012 with truck makers considering additional layoffs as the heavy truck replacement market continues to drag. It seems that truck fleet operators are reluctant to invest in new equipment given a number of uncertainties around markets and the economy. Meanwhile, older trucks consume more fuel and emit more pollutants than the newer generation of trucks available.
It would seem that if truck makers joined in the movement toward prototyping more natural gas powered vehicles, the economics for truck replacement would also become more compelling for both small and large fleet operators. Granted, the economics of natural gas fuel depots for trucks is more complex than railroads, the same gaps in diesel vs. natural gas fuel pricing could add to a compelling equipment replacement cycle with positive benefits for industry participants and the economy.
The takeaway is that just as new cheaper supplies of energy in North America have fueled an ongoing resurgence in North America based manufacturing, a similar resurgence may be on the horizon for transportation equipment and infrastructure. The benefits are just as compelling for industry and for more carbon free supply chains.
A recent posting from our friends on Supply Chain Digital indicates that China has succeeded in completing the first ship voyage that utilized an Arctic Ocean and polar icecap route to travel from that country to an Icelandic port. The icebreaker Xuelong sailed this northern route that traversed the coast of Russia and previously ice laden waters. The Polar
Research Institute of China was the prime sponsor of the voyage, and its expedition leader is quoted as being astonished that most of the Northern Sea Route was relatively open with diminished sea ice.
This new milestone is significant in three significant dimensions. First, the report of shrinking ice mass allowing such a voyage to traverse parts of the Artic is yet another sobering indicator of global warming factors occurring on the planet, and that the polar ice caps are indeed shrinking. That alone should be cause for concern, given the increased frequency of severe storms and natural disasters that continue to occur throughout the globe.
The second significance to this voyage is that the Chinese are investigating the potential for a shorter seasonal ocean transit route to Northern European, Russia or North America ports, opening up the possibility of new savings in shipping and other transportation costs. Faster transit options add additional economic evidence to sustain China and eastern Asia as the epicenter of global manufacturing.
The third and perhaps less savory implication is that easier access to the Artic opens up opportunities to mining new sources of oil and gas exploration in that region. China itself could be a prime beneficiary, either as a supplier of drilling and exploration equipment or as a prime consumer of additional energy supplies to fuel its massive production resources.
This is obviously a development for supply chain logistics and transportation professionals to continue to monitor.