From the frontlines of demand and supply > Summer 2008

ViewPOINT
It Isn’t easY Being green
“The volume of global trade has more than doubled in the last decade – reaching six times the rate of growth of the world’s gross domestic product (GDP),” according to Mastering carbon measure emissions as a first step to limiting them. In many cases, it may be more cost effective to shift to lowercarbon practices now rather than wait for the inevitable regulations. As companies decide how to reduce the damage being done, it is understandable that they focus on the lowest hanging fruit first – their direct impact from their immediate operations. Increasingly, however, there will be an expectation to look beyond the emissions from an office block or a factory, to the extended supply chain. This adds its own complications. “There are questions about how and where boundaries are drawn when it comes to carbon emissions,” points out Iain Walpole, company environment manager of Castle Cement Limited. “For example, a UK-produced cement might produce 800kg CO2 direct emissions per tonne. If you then included the transportation of raw materials and electricity within the footprint, the total would be larger. As such, a cement produced in a similar plant in China would have the

Insight and analysis from IBM Global Business Services

But it’s worth it. Ben Schiller considers the climate change that’s driving business. same direct emissions, but the CO2 from transporting this tonne could add 160 kg/tonne in CO2 emissions to the total. Where do we draw the line in this equation? A business that imports the cement from China could draw a boundary around the port and then claim that its carbon footprint is quite low, despite the fact that the product has 20 per cent greater global warming potential.”

management, a report published by the IBM Institute for Business Value in 2008. “This phenomenon has been facilitated by relatively cheap energy, with low attention given to the impact on climate change.” Today, climate change is rising fast up the corporate agenda, becoming a hot topic of conversation – if not actual action. And the timing, it seems, is critical: according to the Stern Review on the Economics of Climate Change (October 2006), one per cent of the world’s GDP needs to be invested in combating climate change each year in order to mitigate its effects. Doing nothing could reduce global GDP by as much as 20 per cent. For many businesses, it’s not a question of what to do, but where to begin. Some are reviewing their supply chain and its impact on climate change. They are assessing how to

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So what’s a supply chain manager to do? The IBM report reviews how managers can make supply chains less carbonintensive. It positions the problem as a trade-off between four factors: cost, service, quality and carbon emissions, and suggests that managers look at carbon impact as an integral part of the overall performance goals of a supply chain strategy. The report points out that one of the biggest industrial contributions to climate change comes from containerised shipping, the volume of which has skyrocketed in the last decade of globalisation. According to a 2007 study by the Institute of Atmospheric Physics, the total emissions of ocean-going shipping is equal to those of all but the six largest countries in the world. To limit the carbon impact of supply chains, the report recommends that managers consider a number of possibilities. The first is shipment consolidation – or, in other words, transporting the same quantity of goods, but using fewer ship journeys to do it. Companies may also consider changing the dimensions of their supply networks. The report says that once the environmental costs have been taken into account – for example, those from shipping, which are currently outside any emissions regulations – it may be that local sourcing becomes a cheaper option. The future economics of carbon may also affect how managers optimise their supply networks, including how large they make manufacturing and distribution facilities, and where they place those facilities around the world. Other advice comes from early-movers. Writing in HBR Green, the environmental offshoot of the

AnAlysis: seeds for the future climate change statistics make for remarkable reading and may leave some wondering what to do next – but there are answers out there.

Harvard Business Review, Brian Walker, chief executive of Herman Miller, describes how the furniture maker has approached the task since it launched its supply chain initiative in 2003. He makes three suggestions. First, design products with sustainability as a core principle (even if the short-term costs are higher than less green alternatives). Second, refine targets and put them on paper; it’s good to have lofty long-term goals, he says, even better to have interim targets along the way. And third, embrace metrics, constantly monitoring and scoring the environmental performance of suppliers (and, in time, their suppliers as well). As Walker says: “A business, and the products it sells, can only be environmentally sustainable through a holistic approach to design, raw materials, production methods, packaging, shipping, recycling, and even marketing – across the entire value chain.”

Met oFFice: keep a weather eye open when it comes to climate change, most of the focus is on prevention or mitigation, while not as much is being paid to adaptation – and this may be one area where the biggest challenges and opportunities can be found. “one of the greatest challenges facing most businesses is reducing and preparing for the effects of the weather and climate change,” says phil Johnston, Met office commercial Business director. “By ignoring the weather, the uk retail industry alone misses out on potential annual sales worth £4.5bn. to safeguard success, businesses must build weather and climate change into the plans, projects and policies they make today. “Met office consulting works with individual businesses to optimise their response to today’s weather while adapting to changes in tomorrow’s climate.”

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of the uK’s existing power-generating capacity will have to be replaced by 2025,creating opportunity for a lower carbon footprint
[Source: Climate change: Everyone’s business – A report from the CBI Climate Change Task Force, November 2007]

ukti: consider low carBon according to a change in the climate: is business going green?, a report published by uk trade & investment and produced by the economist intelligence unit, “companies increasingly have to consider not just the co2 produced in their own operations, but that arising from their supply chains and use of their products once sold. leading firms are still working out best practice for this sort of measurement and are learning just where their efforts could have the biggest impact.” according to the report, going low carbon is possible, if you keep the following in mind: 1. carbon reduction is not an add-on. 2. securing detailed knowledge of your total carbon impact is essential. 3. carbon reduction is about more than just energy efficiency. 4. use carbon reduction as a way to look for savings. 5. communicate your efforts to the market.

cBi: words oF wisdoM in its report, climate change: everyone’s business, the cBi determined that the uk has many areas of strength on which to build in light of the inevitable long-term impact of climate change: 1. British businesses in areas such as ict, finance and aerospace “are well positioned to provide relevant products and services, and to generate the intellectual property and skills needed to function in this new global landscape”. 2. British institutions “are worldclass in global climate prediction, and in other diverse sectors such as civil engineering, water treatment and pharmaceuticals”. 3. smaller businesses could flourish: according to one analysis, “five key areas for sMes... could generate markets worth nearly £3bn in the period to 2010 in the uk”, including renewable electricity, domestic energy efficiency and housing.

dale Vince of Ecotricity and hitesh amin of IBM Global Business Services review some essen

interVieW: wInds of change dale Vince is ceo of ecotricity – the “world’s first green energy company”, founded in 1995. It reinvests the money it earns in building new, clean forms of power like wind energy. Working with Hitesh Amin of IBM Global Business Services, Ecotricity is striving to become an even more efficient and streamlined operation, and to create a zero carbon energy future for the UK. Q how can Mid-sized Businesses MitiGate their iMpact on the enVironMent, especially with More leGislation on the way? Vince: Legislation is coming and, for the most part, the effect of legislation is to increase the cost on businesses for their impact on the environment. The cost of energy and carbon is going up, the cost of landfill is rising – the thing that joins all of this together is a need to operate more efficiently, use fewer resources and wasting less. If you’re doing that, then you’re going to be pretty well ahead of the legislation curve. aMin: For over 30 years, IBM has focused on the impact that business is having on the environment. The company issued its first corporate policy on environmental affairs back in 1971, backed up by a global environmental management system. And this is perhaps the first thing that any business should consider: place the issue at the core of corporate culture. It should not be bolted on to a company’s CSr policy, but a policy in itself. Take a leadership position and you will be prepared for any legislation that is on its way. Q is there a Business case For GoinG Green riGht now? Vince: There are benefits to businesses of being green – or being seen to be green:

consumers increasingly want to see that these days. But there are other more pressing aspects to this question. one is cost, particularly the rising cost of energy. The price of electricity in the UK market has doubled in the last 12 months, following the rising price of oil. Carbon is a cost driver, as carbon limits and therefore trading is coming to more and more firms. Legislation is also a cost driver, this is how Government gets businesses to react, through taxation. But the energy crisis – and we’re only at the start of it – isn’t about legislation or taxation, it’s about a shortage of the stuff. Energy is becoming a precious commodity.

ntial climate change questions for mid-sized business.

All of this means that companies need to rethink the way they do business, in order to be more efficient. The second thing is the moral imperative, which I think is much bigger than anything to do with money. But nine out of ten businesses are driven by money and will respond primarily to financial signals, while one out of ten may have other drivers.

aMin: The evidence to date highlights the fact that it will be far more expensive to cope with the impact of climate change later than it would cost if we were to mitigate against that impact now – both the Stern report and the IPPC agree on this point. This goes to the heart of the business case: why pay more later, across your entire supply chain, when we’re all going to have to pay one way or another eventually? What more financial incentive does a business and its suppliers need? Q what role could technoloGy play in MiniMisinG the daMaGe we’re doinG to the enVironMent? Vince: Technology can either be the gasguzzling, Devil-may-care monster that we’ve had in the past – when resources were plentiful and cheap – or it can be sustainable and renewable, and bring with it lots of efficiencies. Energy generating technology is one example, but there are other ways technology can help things run more efficiently. one of the big things we’re hoping to get out of IBM is a much more efficient, more streamlined organisation. In so doing, we’re hoping to quarter our costs to serve each customer. That’s a major efficiency and will help us to build more windmills. aMin: Technology can be a double-edged sword where climate change issues are concerned, but the fact is that technology is embedded in our business culture and within

the supply chains on which businesses rely. The key is to choose your technology wisely and to manage it as efficiently as possible, with minimal waste. Look at the whole technological picture and understand the impact it has on all levels of the business, from energy management to waste. It’s not just a question of better technology, it’s about using what we have in a better way. Q are you optiMistic or pessiMistic aBout the Future oF the enVironMent? Vince: I’m optimistic. The biggest driver will be the consumer’s desire for change and we’re seeing that increase as people become more aware – or perhaps more accepting – of the reality of climate change. They’re keen to see something done about it and to play their part. When people sign up to Ecotricity, that’s what they’re telling us: they’re glad to be able to do something and they’re glad to see what we do with their money, investing it in new sources for renewable energy. aMin: I don’t see how we can afford to be anything but optimistic. To suggest otherwise would be to admit defeat – and I definitely think we’re capable of making this a better world.

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europe: BurGeoninG BioFuels – Good or Bad?

gloBAl: ClimAte chaIn 3 asia-pac: More aware while pollution from chinese and indian coal-powered factories remains “a very real problem” according to a recent survey by ukti (a change in the climate: is business going green?), it also reveals something quite unexpected: “Firms from the region lead even europe in terms of the percentage that are monitoring energy use, enacting a range of carbon-reduction strategies, and in particular in the impact that carbon issues have on their investment decisions. Moreover, asian firms are far more likely to see benefits arising to their companies from carbon reduction, and... pay more attention to environmental activists.”

how are the world’s supply chains coping with the environmental agenda?

europe may be about to reconsider its target of 10 per cent of transportation fuel to be made from biofuels by 2020 – a significant concern for supply chains worldwide – amid continuing concern over the impact of its initiative. the un’s Food and agriculture organisation has said growth in the use of biofuels, which are often made by food crops, has led to steep price increases around the world. this was one reason behind recent street riots in indonesia, the philippines and haiti. environmental campaigners say biofuels have encouraged deforestation in indonesia and Malaysia, as farmers cut down trees to grow palm oil plants. Germany’s environment minister said recently that hitting the target was possible without substantial damage abroad. But some high-profile Meps are not so sure – they want a reduction to eight per cent, or for the target to be scrapped.

united kinGdoM: nuMBers GaMe only a quarter of suppliers who responded to a survey by the carbon disclosure project supply chain leadership collaboration have established targets for cutting dioxide emissions. however, 96 per cent of the respondents said that taxes or limits on emissions were significant risks to their businesses. only 12 per cent of the companies, who partner with many major international brand names, could account for the carbon impact of their own suppliers.

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china: risks and rewards

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china: GoinG coastal
Increasing government oversight and the sensitivities of some western companies are causing some coastal chinese factories to relocate inland in order to avoid increasing scrutiny, according to china greening: the

emerging role of the Public, a report from the Institute of Public and environmental affairs, a chinese think-tank. stricter pollution control measures in coastal regions are among the factors that have raised costs for suppliers in the recent months, making such moves worthwhile, according to the IPe. hunan, guangxi, Zhejiang and Jiangxi are among the inland provinces with less strict controls, which are thought to be winning business at the expense of the coasts and the environment at large.

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russia: cliMate chanGe – coMinG in FroM the cold? the uk was ranked as the biggest foreign investor in russia in 2007, at around £13bn, with exports to russia reaching an all-time high of £2.8bn. clearly, russia is playing a growing part in the uk’s global supply chain. But is it doing its part to combat climate change? yes, albeit slowly. according to dr evgeny polyakov, head of the russian-British Business centre at the university of huddersfield: “with growing pressure to prevent climate change, some russian manufacturing companies are facing the need to replace their aging facilities. with this in mind, they are adopting international practices and technologies to help reduce carbon emissions. Many young private companies are choosing to operate with greater social responsibility and, although large cars are still very popular in russia, reduction of carbon emissions is gradually earning more and more attention among russian businessmen.”

notes from the front lIne

hilary Benn Mp, Secretary of State for Environment, Food & rural Affairs, on the challenges that climate change and carbon issues are placing on businesses of all sizes today.

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The current UK emissions total is just under 550,000,000 tonnes of Co2 a year and we’ve got to bring it down. But even if, for the sake of argument, the ’developed’ world could kick the carbon habit tomorrow, we would still be facing the threat of dangerous climate change because of rising emissions from emerging economies. “However, if you contemplate the consequences of runaway climate change, the economic impact would be devastating. That’s what the Stern report showed with such clarity. He said, you may not be interested in the science, and you may not be interested in other considerations, but I’ve done the numbers and there’s a cost for

dealing with it and a cost for not dealing with it. That latter cost is the First World War, the Second World War and let’s throw in the Great Depression for good measure. Now who’s up for spending more later and the consequences that runaway climate change would have? “It seems to me that is a pretty powerful argument for getting on with it. And if we do get on with what needs to be done first, there’s a real opportunity here. “Ultimately, successful economies, successful countries, successful companies – in future, they are going to be low carbon and a growing number of businesses are taking this issue of climate change very seriously wherever they operate in the world. For example, the investor community is

increasingly asking multinationals and other companies: what’s your carbon exposure? Ten years ago, if somebody had asked about carbon exposure, you’d have said, what? This is a profound change that is taking place in our economy and it is driving change. “Look where the price of oil is now, look at development at the EU Emissions Trading Scheme (ETS), look at the number of countries considering carbon trading schemes – this is where the future is. Those countries have a real opportunity to invest in the technologies that we are going to need. It’s about seizing the market opportunities – this is an opportunity as well as a challenge.”

ForthcoMinG ForuMs: the executiVe dialoGue series the executive Forum series – iBM Global Business services’ ongoing series of exclusive dinner debates and breakfast briefings – brings together senior executives from manufacturing, distribution and retail organisations of all sizes from across the uk. these events offer executives a unique opportunity to debate issues that are central to their industries, from supply chain Management efficiencies to delivering growth through customer relationship Management. don’t miss out on this unique opportunity. > GettinG More FroM your custoMers > date: septeMBer 2008 what are you doing to attract, retain and manage your customer base? what do your customers expect of you? this dinner debate brings together experts and executives from around the uk to discuss the properties and benefits of modern customer relationship management best practice. if you would like to receive advance notice of executive Forums scheduled for 2008, please contact Jonathan young (details below).

in next issue

econoMic uncertainty is ForcinG coMpanies oF all sizes to adapt to a chanGinG Business landscape. is your Business prepared to cope with the disruption? what aBout your supply chain? we Find out More aBout the dynaMics oF chanGe in the next edition, due out in septeMBer 2008.

For more information on how iBM Global Business services can deliver lasting change for your organisation, contact: Jonathan young, Global Business services, Mid-Market, t: +44 (0)208 818 5108, e: jonathan_s_young@uk.ibm.com; ibm.com/gbs/uk/midmarket iBM and the iBM logo are trademarks or registered trademarks of international Business Machines corporation in the united states and/or other countries. ©2008 iBM corporation. all rights reserved