Even though there’s a critical need to cut carbon emissions, the integration of decarbonization into a supply chain strategy is still limited. Industries face an ongoing challenge in balancing supply and demand, calling for immediate attention.
Currently, while many companies can measure scope 1 and 2 emissions from their operations, assessing scope 3 still faces considerable difficulties.
Many struggle to fully grasp the scope and nature of the problem. Especially for those with diverse product portfolios and extensive supplier networks. The lack of transparency and data sharing regarding product emission further complicates the matter.
Even with available transparency, reducing emissions is not a straightforward task. Supply chain emissions are spread across numerous tiers of suppliers, spanning multiple countries, making them dynamic and challenging to address.
Related: Strategies for businesses to overcome sustainability challenges and thrive
Intricacy of the supply chain
The food industry currently dominates the supply chain industry (Figure 1). As supply chain complexity continues to escalate, businesses should formulate risk management strategies to effectively address future disruptions.
The strategies should enable organizations to proactively identify potential risks and vulnerabilities within their supply chains and devise comprehensive plans to mitigate them.
Cost is often cited as a huge barrier. However, with the increasing popularity of AI-driven cost analyses and predictions, supply chain partners can more accurately anticipate the disruptions coming from cost implications. Here are some of the other challenges faced by the stakeholders:
- Lack of digitalization hinders productivity and efficiency. By leveraging digitalization and automatization, businesses can optimize numerous repetitive manual tasks and facilitate transparency. This simply reduces the operations’ reliance on manual labor.
- Lack of diversification can be a huge disruption as we have previously seen during COVID-19 when China’s lockdown disrupted manufacturing.
- Ineffective evaluation of internal processes is another cause. By promoting agile practices that include cross-functionality and granting teams greater autonomy, internal processes such as product development can become swifter and more adaptable. During the pandemic, 93% of businesses reported that their agile business units outperformed their non-agile counterparts.
Focus on supplier decarbonization
Deloitte’s survey of nearly 160 leaders revealed that environmental, social, and governance (ESG) considerations have emerged as top challenges for supply chains. The top influencing factor for the choice of solution turned out to be operational efficiency (Figure 2).
Furthermore, the capacity to assist in achieving respondents’ carbon reduction objectives ranked as the second most important factor influencing their choice of supply chain solution provider, with 37% indicating its significance.
The survey also highlighted that companies are either implementing or planning initiatives for supply chain optimization to align with their ESG objectives. These efforts include actions, such as minimizing transportation distances, consolidating shipments, and optimizing inventory levels.
Nevertheless, significant challenges persist, including the absence of standardized reporting, supply chain stability issues, and a lack of transparency across most sectors.
Relationship between reducing supply chain emissions and economy
The majority of emissions from the supply chain are embedded within raw materials, agricultural processes, and the transportation of goods. While only a small fraction of these emissions occur during the final manufacturing stages, producers of these materials and transport companies face significant challenges to meet decarbonization goals.
In this case, across entire value chains, emissions can be addressed more cost-effectively through material reuse. Additionally, renewable alternatives can replace a substantial portion of emissions from conventional power sources.
Related: Renewable energy investments call for stronger commitment to net-zero initiatives
But there is good news for the consumer side. Because the materials make up only a minor portion of the final consumer costs, companies at the end of the value chain find decarbonization to be significantly more affordable.
BCG calculated the estimated end-customer pricing for different products with net-zero supply chains (Figure 3). Analysis across various value chains indicates that achieving full decarbonization would result in no more than a 4% increase in end-consumer prices. For food that dominates the supply chain emissions, there is less than a USD 1 increase for the customers.
For automotive, considering a car priced at USD 35,000, steel production is one of the most emissions-intensive activities. Transitioning this car to zero-carbon steel could substantially raise production costs. However, since steel accounts for only around USD 1,000 of the total car cost, the resulting increase in the final product’s price is relatively small—approximately USD 600 more for a car made entirely from zero-carbon materials. That is roughly a 2% difference. So why hasn’t decarbonization become more widespread?
Supply chain strategy to mitigate emissions
Effectively mitigating these emissions requires a deeper understanding of economics in upstream sectors, collaboration with suppliers, training, and long-term partnerships.
Despite these challenges, there are some key initiatives that companies can implement to address their supply chain strategy effectively:
- Establishing ambitious reduction goals for scopes 1 to 3 and openly disclosing progress. Upon achieving transparency regarding supply chain emissions, companies ought to set public objectives in line with emissions goals.
- Embedding sustainability into product design is crucial. This includes improving re-usability, recyclability, and opting for environmentally friendly materials.
- Reassessing their value chain design choices, such as make-or-buy decisions and reducing dependence on long-distance logistics.
- Engagement in sector initiatives for sharing best practices, obtaining certifications, ensuring traceability, and streamlining operations.
According to a recent survey conducted on 334 participants in November 2022 by Protolabs, approximately 43.7% and 41% of respondents admitted that increasing local sourcing and diversifying the supply chain are the key measures to reduce supply chain disruptions, respectively (Figure 4).
Businesses have understood that collaborating with suppliers to mitigate their emissions is essential, especially for those lacking knowledge or resources. The efforts are also crucial to reducing costs, speeding up learning curves, and establishing market stability.
It facilitates the efficient exchange of expertise and assets, leading to the development of more economically viable decarbonization technologies. This approach not only reduces the financial burden on individual sectors but also fosters market predictability.
