The Greening of Supply Chain Information SystemsPublished in Knowledge@Wharton
While robust software has helped revolutionize the management of today's global supply chains, the far more powerful software needed to green those supply chains is still evolving. The challenge is daunting: Not only must new systems collect, store, analyze and report on huge amounts of environmental data that no one has ever paid much attention to before, but they also have to weave all this new data into the complex web of supply chain records already in use. These were some of the key themes to emerge from a recent conference organized by the Initiative for Global Environmental Leadership at Penn/Wharton (IGEL) entitled, "Greening the Supply Chain: Best Business Practices and Future Trends."
This last step is crucial if companies want to use the output of these systems to actively manage their supply chains and not just report on them, says Adam Savitz, sustainability and climate change consultant at PricewaterhouseCoopers (PwC). To be truly sustainable, environmentally and economically, environmental factors must be fully integrated into information systems, along with the existing financial data. Only then can managers weigh all the relevant information when making long-term decisions.
According to Alan McGill, a partner in PwC U.K.'s sustainability and climate change practice, merging sustainability and financial data in the same system gives people in an organization the ability "to understand the impact of sustainability concerns on their business much better." He adds: "The organization will be better positioned to know where the risks and opportunities for innovation are, and where they should focus their scarce resources, and avoid potential disruptions to business."
Critically important, as well, is the ability to make this fused environmental/financial information transparent both internally, so managers throughout the company can use it to make decisions, and externally, to allow for independent verification, information sharing throughout the supply chain and timely communication with various stakeholders. This kind of transparency has proven difficult to realize because corporations often consider the information confidential and resist any steps that might make it available to competitors.
To give clients a sense of what such transparency might look like, and to showcase what Bob Lobue, vice president of services partner operations at SAP North America, describes as the company's "very broad portfolio of sustainability solutions," SAP publishes its own sustainability report online. Following the reporting guidelines specified by the Global Reporting Initiative (GRI), SAP's report incorporates environmental, social and economic metrics. It also uses detailed graphics and interactive dashboards that allow anyone to review, for example, the company's greenhouse gas footprint, in absolute terms from 2000 to 2011, both in total and by segment (everything from business flights to data centers). It also gives users the option of drilling down to get more detail -- for instance, one can examine the same data by employee, by region.
But the SAP report also shows the difficulty of merging environmental and economic information. The fact is, that while some financial information is integrated with the environmental data in the SAP report, there are two separate reports online, Economic and Environmental. There is no "triple bottom line."
Given all these challenges -- collecting the right data, merging it with existing information, especially financial information, and enabling companies to share the potentially confidential results with others -- it is hardly surprising that, as Gil Friend, CEO of Natural Logic, said at the IGEL conference, "the systems we have today are wholly inadequate to the task." (Natural Logic is a strategic advisor to businesses on sustainability issues.)
What is surprising is that so many businesses are still only at the starting line when it comes to analyzing environmental metrics. Friend told conference participants that many of the world's best and largest corporations are using Excel to compile the data they need. "If you think about a global enterprise, with perhaps hundreds or thousands of locations, with spreadsheets at every location being sent into corporate where someone is collating those spreadsheets manually to produce a report, the economic cost of that is huge, but the opportunity cost is even bigger," Friend explained. "We know one company where it's a senior vice president doing the collating."
And it takes months, if not a year or more, to compile all this data and turn it into actionable information, which means that by the time the information is available to use, it is already out of date. "Spreadsheet mayhem," he calls it.
Even so, there are advantages to be gained by such cumbersome, manual systems. Alex Markevich, senior principal at SAP, points out that companies can gain a new perspective by tracking and analyzing environmental data, even at the most basic level. "Sustainability is a lot about attention," he says. Once people start focusing on sustainability, they begin to notice things they never paid attention to before. "That's why that first step is so powerful. Even a bunch of people running around with Excel spread sheets are going to see some obvious, glaring things right away."
Markevich adds an important caveat. SAP advises companies just starting out to take the time to map out the sustainability path they hope to travel with their suppliers in the future. Otherwise, with a short-term focus and limited budgets, suppliers may start down one path, only to find that they have to stop what they are doing and start the process all over again, ultimately wasting time and resources.
Time spent standardizing definitions early on is also time well spent. Setting standards and sharing sustainability information is useless without one centralized source of "truth" all along the supply chain, says Markevich. Such standardization is essential to good communications within and among companies, and it is a great enabler of both collaboration and creativity.
Companies just starting to build a greener supply chain tend to focus first on compliance, whether with government regulations or retailer demands. When Walmart announced its intention to become more sustainable several years ago, "that one statement got more attention in more boardrooms in the United States than anything that came out of the EPA (Environmental Protection Agency)," said Friend.
Even this first step, compliance with a clearly articulated set of pre-established rules, is not simple. Europe's REACH program (Registration, Evaluation, Authorization and Restriction of Chemicals) involves 100 pages of regulations and thousands of pages of guidance on how to comply with those regulations, points out Stephen Bogart, a partner at CSC Consulting. And REACH regulations are focused not on individual products, but on companies, says Markevich, "so it's important to know how much of a given toxic substance is in each and every product individual companies are shipping into Europe."
With so many companies forced to comply with REACH, and with clear, even if voluminous, specifications about what compliance is required, it did not take the IT market long to respond. Several companies developed and now offer compliance software packages that address REACH, as well as other major regulatory programs. SAP's package, for example, automates and documents data collection, coordinates all players and company stakeholders, and updates for the latest requirements.
Over time, companies that begin with compliance start to move along what PwC describes as "a maturity path, on a continuum that spans compliance, obligation, efficiency and leadership." As they proceed on this journey, a company's sustainability effort evolves from a compliance issue into an enterprise-wide operations issue. And that ultimately means that sustainability needs to be fully incorporated into the company's Enterprise Resource Planning (ERP) system. As Bogart told the IGEL conference, "It cannot be done manually. It cannot be done on spreadsheets. It requires full integration with ERP." And that, he said, "does require a huge investment in technology. Most large companies," he added, "will spend upwards of $200 million to try to get this right."
Mixing sustainability data into ERP systems is worth this level of investment because ERP systems can enable companies to look at their businesses holistically and make decisions using information integrated company-wide: accounting, manufacturing, sales, marketing, distribution and customer relations.
While SAP and other companies structure environmental modules so that the components tie into existing ERP systems, this is still a long way from full integration of all relevant environmental data into ERP systems. According to SAP's Markevich, companies cannot tell how much energy, carbon or water is embedded in individual products, for instance. Consider something as basic as electricity. ERP systems track how much a company pays the utility each month for electricity, but not how many kilowatt hours it used or what the source and carbon footprint of the power is. "The data set has to be expanded," says Markevich. Every record has to have new fields added for all that information, "and people aren't there yet. The answers to most environmental questions, as soon as they deviate from finance, are, 'We don't know.'"
As Peter Graf, the chief sustainability officer and executive vice president of sustainability solutions at SAP, puts it, SAP "has always tracked financial resources, human resources and capacities, but the company has never tracked energy, water, wood or any other type of natural resource. We never tracked these, as there was no perceived need, because it was considered infinitely available. Now we are starting to manage these areas as a scarce resource, which is why applying enterprise resource planning and management is essential."
Says Graf: "We used to live in a world where energy was cheap and information was expensive. Now, information is a resource that is becoming limitless, and energy and other environmental resources are becoming constrained. The sustainability journey is about using information to become better at managing the constrained resources."
All of which explains why a December 2010 study of middle-market to large manufacturers, conducted by IFS North America and Affinity Research Solutions, found very few companies that gave high ratings to their ERP systems' ability to handle environmental data. According to the study, "Manufacturing professionals were asked how helpful their enterprise software solution is in terms of its ability to help manage green supply chain initiatives. Slightly over half rated their current enterprise solutions unfavorably in its ability to assist with their green supply chain requirements. Only 5% rated their enterprise software as excellent in this area."
But ERP providers are not sitting still. Markevich notes that environmental modules are "being integrated deeper and deeper into the core ERP offering." It might take three to five years ("road maps haven't even been defined yet," he says), "but at some point, the environmental add-ons will move so deeply into the core ERP that it won't be a separate thing." When that happens, say the authors of the PwC Technology Forecast article, titled "Closing the Loop on Sustainability Information," ERP will become ESP, or Enterprise Sustainability Planning.
The LCA Approach
For companies not ready or able to invest in such state-of-the-art ESP systems, Life Cycle Analysis (LCA) software has become an increasingly popular option. Noting the ability of LCA systems to collect, store, audit, report and analyze the environmental data related to a product's complete life cycle, a 2011 study by Verdantix, "Smart Innovators Product LCA Software," describes how companies can use LCA solutions to "address sustainable supply chain challenges."
"New product LCA software suppliers," says the Verdantix report, "have entered a market that was previously dominated by complex solutions." Among the benefits these suppliers offer are third-party databases, such as econinvent, the European Reference Life Cycle Database, and AMEE, which provide environmental data that might otherwise be hard to come by, especially for global companies. These databases track everything from resource extraction to waste management services, and they are most helpful when they are tailored to specific industries and regions. Other LCA benefits include the ability to define the scope of an analysis and to tailor the methods used and the outputs generated to suit user's needs.
For all of these benefits, LCA studies can still be expensive and time consuming, which is why buyers started expressing interest in simplified LCA solutions two years ago. The market responded and new suppliers, says Verdantix "are bringing solutions to mainstream business concerns," including simplified versions of programs that are less demanding and more user-friendly to non-technical staff. These new programs also offer a range of new LCA functions, including the ability to tailor interfaces to specific industries, automate legislative updates, access proprietary databases and run multiple scenarios that can help product designers make decisions about materials early in the design stage.
The Verdantix report recommends 18 "smart innovators," based on what a company wants to use its LCA software to accomplish: environmental product compliance, supply chain optimization, sustainable product design or sustainable product communications. While a few of the 18 suppliers are best suited to one or another of these objectives, many can be useful for a variety of purposes, according to the report.
A New Approach to Data
As Friend, said at the IGEL conference, "life cycle assessment is a well-developed discipline that unfortunately is founded on really inadequate data."
In fact, the same fundamental data problem underlies all of the IT solutions involved in greening the supply chain. Actually, there are two different problems. First is the issue of business confidentiality. "Customers want to know everything," said Friend, "companies are reluctant to disclose everything. In some cases it's competitive issues; in some cases there are concerns about re-engineering or about customers end-running a supply chain, going to less expensive competitors." Whatever the concern, the problem is that companies want and need to see each other's data, but are unwilling to share their data.
The second issue is that the data everyone needs is distributed among countless suppliers in all corners of the globe, and each of these suppliers is collecting the data it believes is essential in the format that it finds most useful. The problem, of course, is that none of these data sets match up. "So how do you get comparability?" asked Friend. "How do you get computability? How do you reconcile all this information in a way that is actually functional? That's the problem."
Databases like those cited above have been developed, and Walmart is working with other major companies to try to develop a common framework for the methodology of life cycle assessment. But Friend's new venture is taking a radically different approach to solving the data problem. Open Data Registry's goal is to give "every product, every component, every batch that's being moved through the system, its own URL." The beauty of this patented approach is that, if it can be shown to work -- and Open Data Registry is working on a pilot project now with a major international brand -- it solves both parts of the data problem:
Confidentiality: According to Friend, the URL or internet product code, "is a long bar code like string of data that codes the critical information, carries the computable data -- what materials are in here and in what quantities -- but masks them to inappropriate access." As a URL, the product code is "an addressable information fragment on the web that can be found from anywhere, addressed from anywhere, and have its confidentiality masked. So the data becomes accessible without disclosing where it is coming from."
Distributed data: Friend believes it is unrealistic to think that all the disparate suppliers worldwide will ever agree on which information to collect or be able to standardize whatever data they do collect. "But what's possible now," he says, "through tools like Semantic Web is to build data dictionaries and manage distributed data systems so that we can find the right things and know where they fit without them having to be called the same thing or managed in the same way."
Finally, rather than trying to anticipate everyone's needs, Open Data Registry is planning to use an open platform, in the same way Apple uses an open platform for the iPhone, so that each company can design its own app, whether an LCA tool or something else. That way, concluded Friend, "companies can themselves easily build the analytics that answer their questions, using common reference data, the same data that everybody else is using, and we can accelerate this process of greening the supply chain."