Companies need to be fully aware of global climate change conversations and how they will impact their supply chain in the near future. One of the biggest driving forces behind controlling greenhouse gas (GHG) emissions and climate change is the Paris Agreement. On September 3, 2016 China and the US agreed to ratify the Paris Agreement on climate change. The agreement, not yet in force, commits signatories to keep global temperature increase “well below” 2⁰ C and to pursue efforts to limit it to 1.5⁰ C. The USA says it intends to reduce emissions by 26-28 percent below its 2005 level by 2025, trying hard for the upper limit. Announced at the G20 summit in China, the US/China deal will also put pressure on other G20 nations to move faster with their pledge to phase out subsidies to fossil fuels.
Outside of the Paris Agreement, the European Union (EU) has a goal of reducing greenhouse gas emissions from transport by around 60 percent below 1990 levels by 2050. It currently has no limits on truck emissions, unlike other countries such as the United States, China, Japan and Canada, which already have truck fuel efficiency standards. For example, the US Environmental Protection Agency (EPA) is phasing in fuel efficiency standards starting with trailers in 2018, truck standards in 2021, which are estimated to provide 2-4 year payback periods. The European Commission will soon follow suit and has announced that they will soon propose legislation that will require CO2 emissions from new heavy vehicles to be certified, reported and monitored.
The impact of these changes are difficult to predict. Cost reductions sometimes go hand-in-hand with GHG reductions, but some measures could increase transport costs. It’s not difficult to imagine regulatory authorities putting levies on transport – through taxes or other measures – that significantly increase costs on GHG-heavy methods in order to reduce usage and help to achieve the overall goals of the Paris Agreement. Supply chain network and transportation optimization can help make better sourcing and multi-stop route decisions that ultimately result in route design that balances low costs with higher service. With the EU and US introducing CO2 emission limits for trucks, the design of these transportation networks needs to change.
The corporate world is recognizing the importance of emissions. Apple, Coca-Cola, Walmart and PepsiCo are among 13 of the largest companies in the US that have signed the American Business Act on Climate Pledge with some ambitious company specific goals. In 2010, Walmart announced its goal to eliminate 20 million metric tons of GHG emissions from its global supply chain by the end of 2015. Last year the company announced that it has exceeded this commitment early by eliminating 28.2 million metric tons to date, saying that some measures had led to a doubling of fleet efficiency.
Companies are realizing that they can’t just look to themselves when considering emissions. GlaxoSmithKline would like to be the most sustainable healthcare company and has set a target to reduce its carbon footprint by 25 percent by 2020 and have a carbon-neutral value chain by 2050. With 40 percent of GSK’s carbon footprint coming from the procurement of raw materials, the company recognised that tackling its own emissions wouldn’t be enough to reduce its carbon footprint – it would need to support suppliers to do the same.
Supply Chain Models Enable Companies to Compare and Test GHG Reduction Strategies
Companies can set up models of their supply chains to identify major sources of emissions and model different scenarios, quantifying the financial benefit or costs of achieving sustainability goals. They can build multi-year models to develop and phase GHG reduction programs, and to monitor and report on progress during implementation. If there are major changes to the costs of particular transport modes or operating sites, alternative supply chains can be assessed and implemented.
Companies may even want to evaluate the impact and benefits of early adoption of the emission-regulated fleet. They can identify the optimal cost trade-off between early capital investments in new low emissions vehicles with lower fuel consumption versus phasing out the existing transportation fleet. This analysis should be extended into suppliers’ operations as much as possible, so that an end-to-end view can be taken. These approaches allow for informed decision-making as well as providing the means to demonstrate corporate responsibility.
Austin Chrzanowski is the Product Manager of Network Optimization and Transportation Optimization Technologies at LLamasoft. At LLamasoft since 2011, Chrzanowski has worked with customers from multiple industries including food and beverage, healthcare, military, manufacturing and petro-chemical to execute supply chain projects and identify new strategic designs. Prior to LLamasoft he spent time at Pfizer, the U-M Health System, and the Australian Submarine Corporation in Adelaide, Australia. He holds a Master’s Degree in Industrial and Operations Engineering from the University of Michigan.