Is your company tossing away money? The authors, members of Deloitte’s consulting team, offer five steps to uncover wasted resources in the supply chain.
Regardless of competitive or macroeconomic circumstances, organizations always seek cost reductions to release cash to their business. Many traditionally focus on internal operations, but this approach many not address one of the most significant savings opportunities: upstream and downstream supply chain.
Many organizations have long recognized that cost benefits can be realized by asking suppliers to reduce the cost of their operations. Leading organizations, however, are going even further in the pursuit of untapped savings by re-looking at their supply chain and focusing on reducing use and production of five metrics: energy, carbon, water, materials and waste. Is your company leaving money on the table?
Why These Metrics?
The reason is simple: They’re ubiquitous throughout the entire supply chain. Thus, they’re an excellent proxy for operational efficiency. Energy is often expensive; carbon, in the form of emissions, represents profits gone up in smoke; water and materials are becoming expensive due to scarcity and commodity inflation; and waste is, well, wasted profit.
Leading companies examine these resource metrics to optimize supply chains. Projects that reduce energy, carbon, water, materials and waste represent some of the easiest ways to remove significant cost; they typically have rapid payback periods and they can be among the lowest risk projects. These resource metrics are often similar to what organizations look at when examining environmental sustainability. But make no mistake, many view managing these resources the same way they look at any other game-changing business opportunities that force them to think differently about their operations. These organizations realize if their supply chain uses too much energy, or if it uses too much water or materials, or if it produces too much carbon or waste, they are spending too much money. Extra expense is passed on to product cost.
Supply Chain Inputs and Outputs
What exactly does a resource-focused approach mean in the supply chain context of a supply? Two inputs go into the supply chain process of every upstream supplier (materials and energy) and two things come out (product and non-product). (See figure 1). Three of these streams cost money; only one makes money.
This is the case up and down the supply chain, whether you look at raw materials at the beginning or go all the way through to end of life beyond the retail side. Along the chain, companies might use different materials, different amounts of energy and produce different components or products, but the unfavorable ratio is the same: three expense streams for every one revenue stream.
Figure 1. Example of supply chain inputs and outputs
Broaden this concept as holistically as possible to think about the size and scale of your own supply chain. Think about the entire value chain of a product and the materials that go into it; the energy and waste material within the manufacturing process; the retail disposal, and all the transportation to move materials and finished products. Put all of this into the equation and you can begin to see all the dollar signs that pop up in all the nodes along the supply chain. Apply the five resource metrics into this context to learn where these dollars are coming in and going out of each node in the value chain. All of a sudden, something that seemed like a good savings opportunity at one facility can become a very significant cost reduction opportunity when applied to all processes and facilities up and down the entire supply chain.
Again, if your suppliers use too much energy, water or materials, or produce more carbon or waste than needed, they’re spending too much money – needlessly draining your profit and cutting your competitive pricing and other advantages. Therefore, expect that effective use of these metrics at a holistic level along the supply chain—not merely incremental adjustments to your own internal operations—can help significantly reduce operating costs. These savings can be shared between suppliers and your company to help everyone along the value chain reinvest in new product development, reduce product cost to improve margin, or reduce product price to take market share – any one of which may ultimately contribute to competitive advantage and increased shareholder value.
Organizations might not be interested in reducing carbon output in their supply chain by one million tons until they multiply each ton by $175 and call it cash.
There are five broad steps an organization can take to determine where the five resource metrics are most overused along the supply chain so that savings can be rooted out. Let’s look at each.
- Assessment – The first step is the broad assessment, or the discovery phase. You hone in on the broad areas that represent the biggest potential resource savings. Actions should be based on a solid understanding of a company’s resource use across the entire chain, from product development, sourcing and manufacturing through distribution, use and disposal. To clarify where it should focus efforts, the company should strive to understand what we call its “resource impact profile,” so that cost reduction and efficiency efforts can be prioritized to make a difference for business objectives (see Figure 2). A bottled water manufacturer, for example, will likely recognize a greater savings opportunity by looking at what goes into the plastic water bottles provided by its supplier than it will by looking at the cost of the ink that goes onto the product label. The manufacturer isn’t going to focus on the ink because on order of magnitude and also in terms of where the energy use is, there is no comparison. So the assessment step will help identify priorities that matter in terms of resource efficiency opportunities. These hotspots of resource use can be discovered through a process called Lifecycle Analysis (LCA).
- Drill down into the hotspots – For each hotspot identified in the assessment phase, the next step is to really drill down and get more detailed data. You will be in the ballpark with the initial assessment, but in the drill-down phase you have to refine your case. For the bottled water manufacturer, this means obtaining from its raw material provider data about the plastic resins used to produce bottles. They will want to understand how the supplier uses energy and raw materials and learn more about the carbon and waste created in the process. Data collected from both the raw material supplier and the bottle supplier can be used to project a much more precise representation of what the plastic bottle portion of the supply chain represents regarding its energy, carbon, water, materials and waste profile.
- Map to existing solutions – The next step is to look at existing efficiency solutions in the marketplace and map them to the areas of energy, carbon, water, materials and waste inefficiencies discovered within the supply chain via steps one and two. These solutions can be as simple as adding insulation to hot water pipes, to something more complex, such as finding alternative raw materials that require less energy or less expensive materials in the manufacturing process. The bottle supplier might want to use less plastic in the bottles to reduce overall product weight as well as to insulate itself from crude oil price shocks, both of which could reduce expenses and put the supplier in a better position relative to its competitors. Figure 3 demonstrates how a resource impact profile can serve as a guide to identifying the cost reduction actions that can be taken at various points in the supply chain to have a positive impact on a particular stage.
- Engage the supplier – Discuss with your supplier the results of your resource impact assessment, pointing out where energy, carbon, water, materials or waste is too high for the type of component it makes, and ask how the solution you have identified to remedy the inefficiency can be implemented.
- Monetize – The final step in a resource-focused approach is monetizing the efficiency opportunities you have found, because without turning them into cash savings, this is just a nice story. You would present the case to the supplier in this way: “Given our analysis of your data, we believe you can save this much energy or this much on water or materials cost, or this much by reducing the amount of carbon or waste you currently produce. We want you to keep part of the savings, because you will be making a capital investment to remedy the inefficiency, but we want part of it as well so we can sell more of our product and more of your products and create a competitive edge in the marketplace.”
Typical Benefits of a Resource-focused Approach
Rewards of this kind approach can be substantial. These include:
- Good proxy for operational efficiency – due to the ubiquitous nature of energy, carbon, water, materials and waste all up-and-down the supply chain.
- Very low-hanging fruit – a process improvement at one facility or one node in the supply chain can be easily replicated at all facilities.
- Significant savings – are possible when your supply chain is looked at holistically, from raw materials suppliers all the way through retail and product end-of-life.
- Low risk – because cost is being taken out of the supply chain without introducing new risk.
- Rapid payback – because the remedies to reduce resource use can be fairly simple and easily replicated, payback periods can be among the fastest of any corporate project.
- Insulate against commodity price shock – by reducing the amount of energy or materials required to produce a product, you are reducing exposure to price shocks when energy or commodity prices rise.
- Relationship-building – the output of one vendor along the supply chain becomes the input for another. This dynamic paves a natural path for engendering collaboration between manufacturer and suppliers to reduce energy, carbon, water, materials and waste to save money for everyone.
Figure 2. Resource impact profiles and mapping to supply-chain phases
Figure 3. Actions in the supply chain that can increase resource efficiency
We believe application of a resource-focused approach can have a transformative effect on business performance and on collaborative, negotiated relationships throughout the supply chain.
Our method of thinking about resource efficiency as a value driver by looking at supply chain input and output efficiency adds a new dimension to how companies think and strategize around their supply chain. We believe this approach can create wide-ranging value – from immediate and significant cost savings, to improved competitive positioning, to improvements in areas such as strategic sourcing, complexity reduction and management of commodity price volatility. In fact, we believe the application of this approach can have a transformative effect on business performance, helping organizations up and down the supply chain focus on rooting out energy, carbon, water, materials and waste inefficiencies that may be converted into bottom-line savings for all involved.
A successful and efficient supply chain program depends on aligning resource efficiency initiatives with broader business goals, effectively identifying and interpreting the supply chain’s impacts, and integrating resource impact profiles (and resulting efficiency plans) with business operations. Organizations that do these things may create a better opportunity to capitalize on the supply chain’s potential to yield financial and competitive benefits for the business that go far beyond the traditional view of supply chain optimization.
About the Authors: Scott M. Sopher is U.S. Operations & Supply Chain Leader at Deloitte Consulting LLP. He can be reached at firstname.lastname@example.org. Sanjay Agarwal is U.S. Operations & Supply Chain – Sustainability Leader with Deloitte Consulting LLP. He can be reached at email@example.com. Kyle Tanger is a director with Deloitte Consulting LLP (ClearCarbon by Deloitte) and can be reached at firstname.lastname@example.org. David Linich is Senior Manager at Deloitte Consulting LLP. He can be reached at email@example.com.