Pursuing Sustainability Measures Within Supply Chain Operations Is Easier Said Than Done

Companies are striving hard to adopt strategies and improve workflows to close the gap to emissions goals. However, production and revenue goals are often in conflict with sustainability efforts.

A hearty welcome to the 60th edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.

We are back to discussing sustainability in this week's newsletter. In earlier editions, we've covered quite some ground debating the need for sustainability advocacy within supply chains, rising consumer interest in holding stakeholders accountable, and legislative measures pushing for change amongst industry stakeholders. 

Regardless of such strong tailwinds for change, a large number of companies continue to struggle with the transition as several operations within their supply chain are not ready to make the switch. 

Consider the trucking industry. Almost all trucks on the road today are powered by fossil fuel, with a significant portion of them being gas guzzlers with poor fuel economy. While companies can indeed aim to replace their old trucks with newer ones, it isn't that straightforward.

For one, costs of new equipment spiked at the onset of the pandemic, and while prices have cooled, it still remains noticeably higher than pre-pandemic rates. Nonetheless, with freight rates sliding over the last few months, trucking firms are probably not looking to invest in equipment at this point in time. 

While the market is highly cyclical, the underlying point here is that volatility is a deterrent for trucking companies to strategize and stick to a long-term strategy for phasing out old vehicles. The health of their business lies in their adeptness to capitalize on robust freight trends, which often warrants them to continue running old equipment when market capacity is tight. 

And, of course, there's the discussion of transitioning from internal combustion engines (ICEs) to electric vehicles. While electrification is still in its nascent stages, electric trucks are far from being 'the' ideal solution. While these vehicles don't have emissions at the tailpipe, the same cannot be said of the batteries that power these vehicles. Mining and processing metals that make a Li-ion battery create a massive carbon footprint that cannot be avoided. 

Regardless, for seeing progress, incremental changes are critical. "Most companies are consumer-first — they want to get the customer what they want. While they strategize for zero-emission operations, sustainable packaging, and more, a lot of the backend work is still not very environmentally friendly, and it's hard to address that," said Ali H. Raza, the CEO and founder of ThroughPut.ai, a predictive replenishment platform for supply chains. "Instead of looking to transition systems and machines, companies can start by ensuring all that they produce is consumed."

By strictly monitoring consumer trends, companies can look to contain wastage, mitigating the carbon footprint of the downstream operations that excesses go through before they get discarded due to a lack of consumer interest. 

"We've been working with cement supply chains at ThroughPut. Cement creates a tenth of the world's waste. It's a very energy-intensive process to produce cement, but we found that 30% of the originally planned production volume did not make it to the store," pointed out Raza. "Aside from looking to predict demand accurately, cement producers can also plan raw materials keeping sustainability in mind. Think of green cement and plastic reuse alternatives that help reduce the carbon footprint, even while creating a lightweight but strong material."

Within companies, sustainability efforts can often turn into an exercise of pushing around the emissions blame. "When we shift our emissions from the first world countries to the third world countries by outsourcing production, we aren't reducing the overall emissions footprint," said Raza. Carbon emissions are essentially a zero-sum game — companies looking to push their carbon footprint further upstream are not helping the environment at large. 

Scope 3 emissions measure comes in handy here, making it harder for companies to evade emissions accountability. Scope 3 emissions measure the indirect emissions that result from a company's activities — both upstream and downstream of its supply chain. Strictly enforcing limits on Scope 3 would force companies to reckon with their emissions trail, which could effect change quicker.

"There are sustainability legislations put in place, but they are vastly different across different countries. We look at ESG reporting in the US, but it isn't as stringent as in Europe. Same within the carbon credits scene — this is one of the challenges we face today," said Raza. 

In a highly globalized supply chain environment, ensuring legislation stays uniform across different markets is crucial to streamline sustainability efforts. This is too much to ask for in a world where carbon footprint does not feature at the top of the list of national challenges for most countries. "For companies doing it from a financial perspective, it's about investment incentives they get from the green carbon credits on their tax accounting. But not every country has set up infrastructure to handle that," said Raza. 

There's also an obvious concern with balancing growth and sustainability. "When I worked for Schlumberger, we ran our equipment until we could not run it anymore. A lot of that equipment is old and runs on diesel. As a company, you have billions of dollars of old equipment that works fine, and sustainability — while a pressing need — does not provide enough financial incentive to drop all old equipment for the newer, less polluting ones."

The challenge, Raza contended, is that companies have to add something positive from the sustainability perspective as a value add to society, but from a financial perspective, this is a trade-off on earnings, resulting in a sliding stock price. 

This conundrum extends down to the lower tiers within organizations. In the US, bonuses for operations managers are usually tied to revenue generated, and the pursuit of sustainability is not rewarding monetarily. 

"Companies with their HQ in Europe might push their American offices to pursue green measures, but managers eventually lose their book bonus, and that's a problem," said Raza. "Many companies within the supply chain are set up in a certain way where innovation cannot be implemented too fast. We are in our early stages of the sustainability movement and have a long way to go to really make a difference."

The Weekly Roundup

Ports and supply chains might have had a slight easing in congestion through the end of summer, but that break period is about to end. Black October is underway as the holiday shopping season begins to wind up. Additionally, transportation delays, labor shortages, and environmental factors will all have a tremendous impact on the global supply chain. 

With the Biden Administration’s push towards green energy and carbon emissions, electric vehicles are going to be in high demand. There are, however, concerns regarding the supply chains necessary to build enough EVs to supply that demand. Presently, China controls 80% of the global cobalt supply and 60% of the world’s lithium. 

Ocean carriers have been raking in profits, hand over fist, throughout the pandemic as the global supply of shipping containers became grossly imbalanced. Now, it seems to be trending in the other direction and quickly. Weak demand and softening congestion have created a downward spiral in ocean spot rates. Blanked sailing will likely rise as a result.  

Consumer shopping experiences change from season to season, the rate of which has only been accerleating over the past decade. Now, it seems a new paradigm shift could be on the horizon as job postings for streaming service, TikTok, highlights the need for warehouse workers and personnel as they begin to develop their own ecommerce branch. 

…said who?

“We’re not seeing an avalanche of space coming on the market or anything like that, but we are starting to see some signs that things are slowing down a little bit.” 

- Mark Russo, senior director and head of industrial research at real-estate service provider Savills Inc., commenting on the warehousing market starting to cool off its peak

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