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You are here: Home / Archives for Supply Chain

10 August 2022 By David McEwen

The Biggest Part of Achieving Net Zero Could be the Hardest

What is a company’s largest source of greenhouse emissions? For most businesses, the answer lies in their value chains. Or rather, the tangled net that is their value mesh.

Photo by Kristin Snippe on Unsplash

Scoping the Problem

When you think about sources of a company’s greenhouse gas (GHG) emissions, the first thing that might come to mind is emissions associated with its facilities: its factories, warehouses, and offices. If the company is in the transport sector (e.g. a courier company or an airline), you might think about the emissions from its vehicles. If so, you’re thinking about the company’s scope 1 and 2 emissions. 

Country level GHG measurement standards were defined by the UN’s Framework Convention on Climate Change, which stipulates which types of gases need to be measured and the Global Warming Potential (GWP) of each. The GWP assesses how powerful the warming impact of a unit of a given gas is over a specified period of time. For example, a kilogram of methane released into the atmosphere has over 80 times the warming impact of a kilogram of carbon dioxide over a 20-year period. Some refrigerant gases have GWPs in the tens of thousands. 

As an aside, most GHGs persist in the atmosphere for many centuries or millennia, so cumulative emissions count: if we achieved zero emissions globally tomorrow, the climate would just stop getting hotter. It wouldn’t revert to where it was, say, 100 years ago, unless we achieved negative emissions and actually reduced the concentration of GHGs in the atmosphere. 

In turn, corporate GHG measurement standards are defined by the GHG Protocol Initiative, which was established by the World Resources Institute and World Business Council for Sustainable Development. The Protocol established three “scopes” of emissions:

1.      Direct emissions associated with facilities and vehicles directly controlled by the company. Typically associated with the combustion of fossil fuels (such as natural gas, oil and its derivatives petrol and diesel) or releases of GHGs related to various chemical or biological processes, such as cement production or fertiliser use. Leaks of GHGs such as methane (natural gas) and refrigerant gases from equipment or pipelines owned by the company are also counted – these are known as “fugitive” emissions.

2.      Purchased energy in the form of electricity, steam, heating or cooling that is used by the company. A company measuring its emissions needs to understand the “emissions intensity” of the energy sources it purchases. This is assessed in terms of how many kilograms of GHGs (typically normalised as “kg CO2-equivalent”, where the warming impact of the various GHGs is baselined to the equivalent impact of a kg of carbon dioxide) are used to produce a particular unit of energy. For example, in a power grid dominated by bituminous coal electricity generation, a MWh of electricity might produce around 800kg of emissions.

3.      All other emissions associated with what the company does.Scope 3 is where it gets complicated. Because you’re needing to measure the full upstream and downstream value chain of the company. Effectively, its sphere of influence: what emissions would not be produced if that company did not exist (regardless of whether competitor firms simply sold more in that case). And when you set out to do that, you quickly realise that the term “value chain” is altogether too linear. It’s really a “value mesh”.

The Value Mesh Challenge

A manufacturing client I work with purchases over 1,000 items that go into its products, from hundreds of suppliers located around the globe. In all cases, those suppliers themselves source inputs from other companies, who in turn source inputs from other companies, and so on back to the raw materials providers. In addition to emissions directly associated with producing the input, each of those suppliers has emissions associated with their facilities, electricity, employee commuting, business travel, waste, transportation of products, and many more. It’s easy to see how the upstream value chain is more of a tangled net. 

And it’s by far my client’s largest source of emissions. These upstream sources are known as “embodied emissions”. Though it’s very difficult to measure the entirety with any accuracy, given a lack of well-regulated emissions data for many companies; and a purchaser typically having limited influence over their suppliers (unless they happen to be a giant in their sector, like Coles or Woolworths are in Australian FMCG).  

Indeed, contractually it may be almost impossible to get information about a supplier’s ownsuppliers, let alone untangling any further up the mesh. As such, measurement of upstream value chain emissions typically relies on proxy metrics, using datasets that associate an emissions factor to dollars spent on different types of supplies. 

This simplification may mask wide variation between the relative emissions intensity of different companies producing the same supplies. For example, if one aluminium smelter uses renewable electricity while another uses coal, their emissions intensity for a kg of aluminium would be chalk and cheese.

When Downstream Counts More

On the other hand, for some industries, including fossil fuel energy supply and automotive manufacturing, the largest source of their scope 3 emissions is the downstream value chain, particularly customers’ use of their products. In this case, it is relatively easy to see that a company that exclusively produces electric vehicles rather than petrol/diesel should have lower scope 3 emissions (knowing that charging the vehicles’ battery from grid power largely sourced from coal generation is typically less emissions intensive per kilometre travelled than even an efficient internal combustion engine). 

In terms of an electric vehicle manufacturers’ overall emissions, the embodied emissions of the materials used to make the battery and electric motors need to be compared with the equivalent emissions for a petrol/diesel vehicle’s engine, starter motor, radiator, gearbox, fuel tank, battery, etc. Typically, an EV is somewhat heavier than an otherwise equivalent internal combustion model, but only by about 10%. Nevertheless, all of these factors, along with the end-of-life arrangements – such as the recyclability of the vehicle’s parts – need to be taken into account in assessing the manufacturers’ total emissions. 

A franchise business model might also have large downstream scope 3 emissions, since franchisees’ operations and supplies count as part of its sphere of influence, even if the master franchisor has a relatively small direct footprint.

Investment Emissions

Another potentially large source of a company’s scope three emissions, and one that is seldom considered, is its investments. Where are its free cashflow and reserves invested? If they’re in deposit accounts of banks that lend to emissions intensive industries (such as fossil fuel firms), or in equities or bonds issued by emissions intensive firms, then that could be material (in which case it should require disclosure). Financial services firms have come under intense scrutiny over the last decade given their facilitation of high emitting activities, and companies with large cast reserves are starting to be examined by various think tanks and activist groups.

If You Have Value Chain Influence, Use It Wisely

Purchasing power is a function of how much a company buys as a proportion of the total market for the particular good or service. As mentioned earlier, the supermarket giants in  Australia control a significant proportion of the total spend on entire product lines and industries. Companies with high purchasing power are in the position to transform industries towards low emissions intensity. Or to force a switch to low emissions substitutes. 

But your company needn’t be a behemoth to have positive influence. Simply modifying your standard RFP (request for proposal) procurement clauses to make a supplier’s commitment to sourcing its electricity from renewable sources a desirable (or even mandatory) requirement can make a difference. If nothing else, it will make that supplier think about it. 

In addition to renewable electricity, some key questions to ask major suppliers could include:

  • Outline [supplier’s] plan to achieve net zero GHG emissions including the target date and emissions reduction achievements to date.
  • Has the net zero plan been endorsed by the board and publicised? Is it aligned with other strategic plans? Is executive remuneration tied to the achievement of the plan? To what extent has funding been committed to implement the plan?
  • Is the plan endorsed by the Science Based Targets Initiative?
  • What proportion of the planned move to net zero is accomplished by genuine emissions reduction vs use of purchased carbon offset credits?
  • Explain the extent to which scope 3 value chain emissions are included in the net zero target. How they have been measured or estimated? What upstream/downstream emissions sources are excluded?
  • Have your major suppliers made net zero commitments at least equivalent to yours?

These types of queries will provide a useful reference to baseline and track upstream value chain progress over time. Including contractual clauses requiring updates and evidence of key suppliers’ emissions reduction achievements is also useful. 

Measuring and driving down value chain emissions is a critical step towards delivering net zero emissions. But it requires effort and tenacity.

David McEwen is a Director at Adaptive Capability, providing TCFD-aligned climate risk, and net-zero emissions (NZE) strategy, program and project management. He works with businesspeople, designers and engineers to deliver impactful change, and has delivered dozens of property-related projects. His book, Navigating the Adaptive Economy, was released in 2016.

Filed Under: Climate Change Adaptation, Emissions Reduction, Supply Chain

19 August 2015 By David McEwen

An unexpected windfall

Cable Recycling 230467069For most people, recycling is something we typically take for granted. But with increasingly sophisticated waste processing facilities, there are opportunities for organisations to capture residual value from old assets and avoid unnecessary costs simply through small changes to their contractual processes.

Take an office refurbishment, for example. When a company has been in its premises for 10 years or more, it is not uncommon to embark upon a significant refurbishment. Often this involves stripping out (demolishing) the old fit-out, a process that produces significant waste.

Many companies will simply engage a construction contractor to undertake the works. That contractor will then appoint the various trades to undertake both the strip out and the construction of the new fit-out. Whoever winds up with the job of removing the old environment may find themselves with a gold mine of opportunity, ranging from good quality furnishings in reasonable condition that can be on-sold; through to carpet tiles, copper cabling, air conditioning units, other metals, glazing and in some cases even plasterboard (drywall) and structural concrete.

By diverting these waste streams away from landfill, an immediate saving can be made by avoiding tip fees (which vary, but are generally in the hundreds of A$ per tonne in Australia).

Secondly, waste transportation and handling costs can be avoided if the recoverable value is sufficient for it to be profitable for a recycler to collect the waste material from a building site.

Thirdly, net of transportation and processing, some materials have a sufficiently high recoverable value that they can yield a profit, that may be split between the recycler and the strip out contractor.

Most organisations undertaking an office renovation (and even a number of construction contractors) are not well versed in the relative recyclable value of different items and materials. Furthermore, the scope of what can be profitably recycled is expanding every year. As such, the recoverable value opportunity often sits with the organisations that are at the bottom of the contracting food chain. Or worse, items with high recyclable content or resale value wind up in landfill.

As an asset owner, i.e. a company that is about to undertake a refurbishment, or a landlord whose tenant has agreed to a negotiated make good settlement at the conclusion of their lease (and therefore has walked away from their fitout), there is an opportunity to carve out some of that recoverable value by engaging directly with a specialist recycling company (or several recyclers, each specialising in separate materials).

While it involves a little more coordination, and a slight change to the typical contractual structure (which should be negotiated in advance), savvy asset owners can:

  1. Avoid unnecessary landfill fees;
  2. Yield a handy financial contribution (it’s a rare but welcome change to be sending invoices rather than receiving them as the client of a fit-out project!); while
  3. Improving the sustainability outcomes of their project.

Thinking outside of the square can result in innovative disruption to normal asset lifecycles. Talk to Adaptive Capability today about this and other ways benefit your business.

Filed Under: Projects, Strategic Adaptation, Supply Chain

12 May 2015 By David McEwen

How resilient is your supply chain?

How resilient is your supply chain?With supply chains increasingly complex and global, it’s difficult to manage the risks effectively.

A recent Hepatitis A outbreak from frozen berries labelled as Australian but sourced from China shone a spotlight on several aspects of supply chain risk, predominantly product liability. Around the same time the 2015 FM Global Resilience Index prepared by Oxford Metrica showed Australia slipping 10 places since 2014, with perceived supply chain risks increasing markedly.

Supply chains are exposed to a wide variety of risks ranging from corruption, counterfeiting and safety concerns to the ethicality, sustainability and provenance of sourced products and, critically, the resilience of both producers and the logistics methods used to move goods. Customers depending on your products want to ensure they can obtain them when required, with consistent pricing, known quality and compliance with applicable standards and laws. However, business’ efforts to make supply chains lean (efficient and cost effective) may also compromise their resilience.

With many supply chains highly complex and spanning multiple borders, the risks are growing. It’s not sufficient simply to talk to your organisation’s direct suppliers. For example, Japan’s entire automotive industry was crippled following a relatively minor 2007 earthquake in Kashiwazaki in Niigata Prefecture after a single specialised supplier that produced piston rings for every brand – some seven layers down the supply chain – was knocked out. In that classic case of concentration risk the impact was limited to about a week as the industry rallied to help this critical supplier recover their operations, but it’s not always that simple.

Information Technology giant Hewlett Packard was not immune when floods ravaged Thailand in 2011/12, knocking out key suppliers’ manufacturing facilities, causing production delays and a reported 20% spike in input costs. While most organisations’ enterprise risk assessment processes consider the impacts of a loss of a key supplier, in many cases the analysis of supply chain risks is relatively superficial. Unless an organisation has considerable buying power it may be difficult to implement cost effective risk treatment measures.

The effects of a changing global climate are beginning to exacerbate supply chain resilience risks in the following direct ways:

  • Extreme weather events are becoming more frequent and/or intense in many regions. Depending on the area this may include devastating storms, flooding rains, droughts and heat waves, the latter also triggering bush fires.
  • Many coastal areas are exposed to storm surges, the impact of which is being magnified by higher wind speeds and rising sea levels.
  • The overall warming of the atmosphere and oceans is increasing average temperatures and changing rainfall patters, affecting agricultural and forestry production.
  • Marine food supplies are also under threat as a lot of the excess carbon dioxide being emitted into the atmosphere from the burning of fossil fuels (coal, oil and gas) dissolves into sea water and forms carbonic acid, increasing acidity and threatening krill and other crustaceans at the bottom of the food chain.

Some countries are significantly more exposed to these impacts than others given their geography and economic capacity to adapt their infrastructure accordingly.

Costs may also increase if the jurisdictions within which suppliers operate impose new regulations or taxes. Carbon taxes are a current case in point, and for products that are energy intensive or whose production results in other forms of greenhouse gas emissions, their imposition could materially affect pricing. If alternate suppliers exist whose goods are not subject to such taxes, their pricing could become preferential. The same goes for water intensive industries in regions where supplies are in decline.

In another case, food suppliers already grapple with periodic droughts and storms that cause supply shortages and consequent price hikes. Retail prices for bananas, for example, have soared over 500% in the months following several recent Queensland cyclones.

And paying a closer eye to local conditions can also pay dividends for a range of businesses whose demand and product range is correlated to the weather. This includes categories such as fashion, gardening and even fast food. As local climates change this will in turn affect longer term product range and market geography decisions.

Meanwhile, responding to changing consumer sentiment regarding climate change and environmental protection, corporate, government and individual purchasers are increasingly interested in ensuring that the products they consume are sourced and produced in ways that minimise their environmental impact.

To inform purchasers and provide product differentiation, a sub-industry of so-called “eco-label” schemes has sprung up in the past decade or two. There are currently over 450 such labels covering dozens of categories and thousands of products, on top of existing labels for quality management, food nutrition, standards compliance and so on.

The problem is that the quality of such schemes varies considerably and even corporate procurement professionals are often bamboozled by the sheer range of environmental certifications. Some only cover a fairly narrow aspect of environmental impact, some may cover a particular stage of processing but not the full supply chain or lifecycle impact, some lack independent assessment or verification, while others are little more than marketing fluff. Notwithstanding that in many cases corporate purchasers don’t prioritise environmental considerations in their product evaluation process to the extent that it has a material influence on supplier decision-making.

Supply Chain Risk Heat Map

At Adaptive Capability we specialise in helping businesses manage risks and capture opportunities arising from the manifold emerging impacts of a changing climate and other macro-environmental issues. Our risk assessment process helps our clients assess multiple levels of risk and opportunity across existing suppliers or as part of selection processes. Benefits include:

  • improved supply chain resilience;
  • reduced cost variability;
  • better control of reputational risk;
  • a more sustainable supply chain; and
  • increased market attractiveness of your products or services.

Talk to Adaptive Capability to enhance and safeguard your business.

Filed Under: Climate Change Adaptation, Operational resilience, Risk management, Supply Chain

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