Greening the Supply Chain: Driving Transportation ReformPublished in Knowledge@Wharton
Although Whole Foods is a major national chain, it prides itself in "buying local." Shoppers who stroll its aisles are met with black-and-white photographs of the men and women who bake its bread or catch its shrimp. Reducing food transportation miles is an issue that resonates with environmentally conscious consumers, and it's an important piece of the supply chain puzzle when it comes to reducing companies' carbon footprints.
As the recent Initiative for Global Environmental Leadership at Penn/Wharton (IGEL) conference, entitled "Greening the Supply Chain: Best Business Practices and Future Trends," made clear, however, there are opportunities and limits when it comes to reducing miles traveled.
Tracking Food Miles
"It can be better to buy strawberries that are imported from Chile than to grow them in a hothouse in Rotterdam," said Dan Guide, professor of operations and supply chain management at Penn State,. "Transportation is only 4% of the global supply chain, and it can be a bit of a red herring issue. There isn't that much to save there."
Gil Friend, the CEO of Natural Logic, a strategic advisor to business on sustainability strategies, looked at those same much-traveled strawberries and said that the advantages of growing them in Chile or Holland "depend on what kind of agriculture is practiced in each place. These issues aren't as easy as you think." Guide agreed. Among the factors that could tip the scale either way, he noted, are the heat source for that Rotterdam greenhouse, plus the energy and materials used to build it. On the Chilean side, it matters whether the strawberries were grown under natural conditions (outdoors) and whether they were shipped as part of a regularly scheduled flight, not a special trip for strawberries alone.
Jim Mason, co-author with Peter Singer of The Ethics of What We Eat, points out:
- Delivering small quantities of local products to many different markets may use more fuel than trucking a full load to a distant supermarket.
- Consumers who drive to outlying local farms or markets instead of doing one-stop shopping at a large grocery store may use as much fuel as would have gone into delivering distantly grown food to centralized supermarkets.
- Food production in another country may be less energy intensive than domestic production and the difference may be greater than the energy used in shipping the food thousands of miles. Mason says, "If you're a Californian, imported rice produced by family farmers in Bangladesh is better energy- and ethics-wise than rice from energy- and chemically-dependent local agribusiness rice. In general, 'buy local' is best but sometimes there are stronger ethical reasons for buying imported food."
Food is a world traveler, and 817 million tons of it is shipped around the world annually, reports the World Watch Institute. In the U.S., the Leopold Center for Sustainable Agriculture at Iowa State University says that food travels an average of 1,500 miles before it reaches the plate. But even so, Britain's Carbon Trust tracked a bag of potato chips and found that only 10% of its lifecycle greenhouse emissions were due to transportation and distribution; 36% came from farming and producing the raw ingredients.
Transportation is often mixed in with other issues, and agriculture makes that point clear.
Robert Giegengack, a professor emeritus at the University of Pennsylvania's department of earth and environmental science, pointed out that 80% of the winter fruits and vegetables grown in California's richly productive Imperial Valley use water pumped from long distances, a big energy drain that contributes to its carbon footprint. "The energy cost of transporting that water exceeds the transportation cost of moving it to market," he said. "Energy use is a fundamental issue. It takes 10 calories of fossil fuel for one calorie of food delivered to your home."
A 2010 Department of Agriculture study entitled, "Energy Use in the U.S. Food System," notes that half of that energy goes to moving highly processed snack foods -- only a sixth is used to transport such essentials as grains, fruits and vegetables.
Rooting Out Transportation Waste
This isn't to suggest that transportation-related carbon doesn't matter, because often it's low-hanging fruit that can be easily picked with a satisfying return to the corporate bottom line. Edwin Keh, former COO and senior vice president of Walmart global procurement, and now a lecturer at Wharton, said that when the company began its deep dive into sustainability goals in 2006, it discovered that 90% of its carbon footprint was "outside the building," and transportation was a big part of that, often in unexpected ways.
For instance, Keh said, "When a consumer returns a defective product, it's a terrible waste of energy, with nobody profiting from it." The transportation cost includes returning the product to the distribution center, as well as the consumer's time and energy in making a round trip to bring it back, and more resources consumed in disposal. Walmart's new focus on product quality from its myriad suppliers brought returns down dramatically. At the same time, the company took 700 trucks off the road by pressing suppliers to downsize packaging so that shipments take up less space.
Walmart challenged its manufacturers, within three years, to manage with 20% less energy use. "The first big chunk came from energy that was being wasted," Keh said. "We helped them locate some of that waste, such as machines that were running without doing anything because people didn't bother to turn them off at appropriate times. We put in meters that could measure consumption, and it resulted in behavior change: People started turning off lights, motors, water supplies." Also high on the list were idling diesel engines and unnecessary transportation trips.
In 2008, Walmart brought its Chinese suppliers together and told them that a central company goal, by 2012, was zero defective merchandise returns, which would obviously lead to a huge reduction in unnecessary transportation costs.
Policing Supplier Fleets
Ensuring that supplier-based trucking fleets run smoothly is also a challenge. Jeff Langenfeld, Walmart's vice president of international logistics, said that one of the company's biggest challenges is ensuring reliable truck transportation from its suppliers. "We have no expectation that every supply chain has to be world class," he said. "Most of the time, our suppliers over-promise. But our goal is to be first among our competitors. We work with their supply chains to add efficiency to the last 50 miles before products reach our store shelves."
Tom Carpenter, director of logistics for International Paper in North America, said the company sees a distinct advantage in shipping by rail, which is 3.5 times more efficient than moving the same goods by truck. "Trains don't go everywhere," he said, "so not everything can go by rail. But becoming an intermodal shipper means a 50% reduction in fuel consumption."
The company also aims to reduce the number of shipments, and thus carbon impact, by running larger loads. Carpenter said that if it could increase each truck's load by 1.5%, some 5,000 trucks could be taken out of the company's network. International Paper has taken aim at freight regulations that restrict truckloads to 80,000 pounds on federal highways. "That means a 10-foot void in every truck," Carpenter said. "We're recommending passage of H.R. 763, which calls for a federal weight limit of 97,000 pounds, and a sixth axle on trucks to redistribute the weight and avoid increasing damage to the roads." Some truck safety groups oppose the bill.
The Dow Chemical Company doesn't own its trucking fleet, preferring to focus on its core competencies. It moves 85% of its product shipments globally by truck, compared to just 77% in North America. Rail is 5% of shipments (but 20% of volume) globally, but 10% of shipments (and 35% of volume) in North America. Henry Ward, global supply chain director at Dow, attributes the numbers to inadequate or missing freight networks in many parts of the world. "Clearly, we would like to see rail infrastructure grow in other world regions in order to provide more sustainable transportation options," Ward said.
According to Ward, since 2007 Dow has "focused heavily on the energy and greenhouse gas emissions involved in transporting our chemicals. We're looking not at where our footprint is today, but where it will be in 2015. Our goal is to set a cap at 2008 emission levels and reduce below that." Since 1998, Dow has reduced its energy intensity 40%, saving $24 billion and 5,200 trillion BTUs of energy -- the equivalent of the annual consumption of 20 million homes. The same reduction avoided more than 270 million tons of greenhouse gas emissions.
Achieving those goals has meant, among other things, more fuel-efficient vehicles and hybrids, adoption of no-idle policies, and improving truck aerodynamics and driving practices (which alone reduced fuel consumption by 7%). The company is also working with the U.S. Environmental Protection Agency (EPA) Smartways program to choose the most efficient trucking options. Some 70% of its volume by weight, and 80% of its ton miles, are moved by Smartways carriers.
And, like International Paper, Dow is working to combine shipments. It uses GPS technology to track the movement of its goods around the world and to ensure they are transported as efficiently as possible. Ron Widdows, CEO of Rickmers Holdings in Germany and chair of the World Shipping Council, said that the International Transport Forum, "80% of shipping orders still arrive by fax... there is a huge opportunity to get more sophisticated." Walmart's Langenfeld adds, "The need for better and more detailed levels of information is absolutely critical if supply chains are going to become more dynamic. We need to speed up information flow."
Bottom Line Benefits
Adding efficiency to any part of the supply chain produces better returns. "The good thing is that much of what we do to improve fuel economy translates to the bottom line as improved profitability," Ward said. "Every bit of energy you save is money in your pocket." That's important for Dow, a winner of five American Chemistry Council "responsible care" awards for energy efficiency, because like many other companies it has concluded that the reforms it makes in the value chain must enable profitable growth. Every change has to be cost-competitive.
Fuel costs are a huge driver for supply chains, particularly in the current market, and that's why fuel-efficiency gains matter so much. According to Widdows, large container ships can burn through $50,000 a day in bunker fuel, so a 10% to 20% efficiency improvement on the most modern designs is highly significant.
The engines on trucks and container ships often burn fuel around the clock, so delays at border crossings can be hugely costly. Standardization is key. Catharina Elmsäter-Svard, the Swedish minister for infrastructure, points out, "It's hard to have seamless shipping corridors when trains cross a border and encounter many differences in how rail lines operate."
Walmart also saved on transportation carbon by switching fuels -- four out of 10 of its trucks now run on biodiesel. Other companies have made similar commitments to alternative fuels, and Frito-Lay (a division of PepsiCo) made headlines by announcing in 2012 that it plans to switch its entire tractor-trailer fleet to natural gas. Because of the low-cost of natural gas -- with a savings over diesel equivalent to $2.50 a gallon -- the company expects to payback the extra cost of the trucks in as little as a year and a half.
Regulation is also a major factor. According to Eric Israel, a managing director of PricewaterhouseCoopers (PwC), companies like FedEx and UPS are deeply committed to tracking their carbon emissions, for a variety of reasons. "The price of oil and fuel volatility is definitely a driver, but not as much as the push to reduce carbon emissions," he said. "Trucking firms, the maritime industries and aviation globally, they're all responding to tightening regulations governing emissions. We're going to see major shifts to improve their overall efficiency."
Frito-Lay has also invested in battery power for its short-haul box trucks, as have Coca-Cola and Duane Reade pharmacies. But hybrid and electric trucks have longer return-on-investment times, and large fleet operators -- including UPS and FedEx -- have moved cautiously in adopting the technology, often making purchases only when federal subsidies can reduce the purchase price.
Subsidies and Fleet Fairness
A variety of federal and state programs help defray the cost of "greening" corporate fleets, including a $7,500 federal tax credit for purchasers of electric or plug-in hybrid vehicles. But Ruben Lobel, a Wharton professor of operations and information management, asks why those subsidies have to be one-size-fits-all. It's an important question if reducing fleet emissions is seen to have some urgency to it.
"Someone who buys photovoltaic solar panels in New York pays $30,000 and gets $20,000 back from the government," Lobel said. "Where did that figure come from, and how many solar companies will go into business based on it? And if a consumer buys a Chevrolet Volt and gets back $7,500, why isn't it $9,000? Why do cars all have the same rebate when they cost many different prices?"
Lobel points out that with a fixed subsidy, the $109,000 Tesla Roadster gets much less subsidy relative to its cost than a $40,000 Chevy Volt. "That could be perceived as unfair," he said, "but a one-size-fits-all subsidy has the advantage of not favoring any particular company, and it adds a level of certainty to the market for manufacturers, retailers and consumers, as opposed to a more complex incentive system. One problem is that fairness is a poorly defined concept, and we understand economic efficiency much better than fairness."
Subsidies are important, but used the wrong way they can kill a market, Lobel said. He cites the example of Spanish government incentives, launched in 1997, that were intended to not only jump-start the solar market, but establishing the country as a major player in it. "But in 2008 they cut back on the subsidies and the industry went down, with the bankruptcy of some companies," Lobel said. "Such changes of policy can be devastating to industries." Germany's government has been a more reliable partner for solar start-ups.
Rethinking Corporate Fleets
Companies that buy transportation services, rather than own large fleets, have a range of options for reducing the impact of moving their goods. Nate Morris, co-founder and CEO of Rubicon Global, a new player in the waste and recycling industry, points out that waste haulers own both trucking fleets and landfills, giving them a vested interest in maximizing the use of both.
Rubicon Global, which is an "asset-light" company, does not own any trucks or landfills and is thus motivated to help clients avoid the costs involved in hauling waste to landfills. Rubicon Global was able to help a major grocery chain dramatically reduce transportation costs to and from the landfill by re-engineering their logistics to operate at peak efficiency. And in one case, Rubicon Global actually turned part of the waste stream into a revenue stream by selling thousands of worn-out uniforms slated for disposal to a company that that shreds them for alternative sustainable uses, including animal bedding and furniture padding. Overall, Morris said, his company helped this customer increase revenue from recovered goods by 25% and reduce gas consumption related to waste by 40%.
A goal, says Andrew McKeon, founder and principal of the BusinessClimate consulting firm, is to see transportation as a service, and one not necessarily provided by an in-house fleet of vehicles. This is the business model Xerox uses when it leases and services its copiers, and that Electrolux uses when it leases washing machines in Sweden. And it is inherent in the car-sharing model pioneered by companies such as Philly Car Share (now owned by Enterprise) and Zipcar.
"If you want a convertible or a minivan, you can have access to one just when you actually need it," McKeon said. "BMW could become a service company." One advantage of automakers retaining ownership of their vehicles is it simplifies end-of-life options.
Car-sharing has proven a robust model internationally, and it has expanded into being a service provider for corporations. Sharing has also been taken up by mainstream car-rental agencies such as Hertz. The most recent twist is so-called personal car sharing, which allows individuals to in effect loan out their own cars. Legalizing that service requires state action and insurance guarantees.
The "last mile" of the transportation supply chain is increasingly important, and in Europe there's renewed focus on making that last mile zero emission if possible. The European Cyclists' Federation is getting serious consideration for its proposals to move as much as 25% of light goods on cycles (sometimes with electric assist). It's already happening in France. La Petite Reine moves a million packages a year with a fleet of 60 cargo bikes, and has saved 203 tons of carbon dioxide. Urban Cab, recently launched in Paris, and its 10 Cyclo-Cargo bikes have delivered more than 200,000 packages in France, covering 37,000 miles per year. The French railway, SNCF, has also invested heavily in cargo bike delivery.
The modern supply chain clearly faces many challenges. Reforming the transportation component is not the largest target, but it's one of the ripest pieces of low-hanging fruit.