Research Project Sustainable Supply Chain

Published Date: 02 Nov 2017

Akanksha Negi

Ankit Mittal

Kailas Damle

Roll No.

GLM 038

GLM 039

GLM 042

Email Addresses

[email protected]

[email protected]

[email protected]

Course Name & Specialization

Field Research Project,

Global Logistics and Supply Chain Management

Faculty Name

Prof. Tharwat

Assignment

Report

Due Date

Submitted On

Submitted by

Introduction:

The Fast Moving Consumer Goods (FMCG) industry is one of the more complex industries. The most crucial aspect of this industry is the movement of the essential day to day consumer goods through a series of nodes. Businesses operating in fast moving consumer goods meet with several challenges at all stages; be it sourcing of raw materials, managing the basic inventory, production, packaging and movement of final goods from suppliers to distributors, retailers and customers. To understand the supply chain processes in this industry is very interesting and challenging. Companies strive to optimize production and supply chain costs, achieve world class delivery performance, and satisfy an avalanche of customer demands and changing requirements just to remain competitive . Many organizations in this space are thus relying on innovative technology and operational efficiency to drive profitability.

However, competition has made many of these companies oblivious to the amount of pollution they have been causing to the environment. In today’s business world, companies cannot ignore environmental issues (Walton, Handfield, & Melnyk, 1998). Increasing government regulation and stronger public mandates for environmental accountability have brought these issues into the executive suite, and onto strategic planning agendas (Fotiou, 2007). At the same time, companies are integrating their supply chain processes to lower costs and better serve customers. These two trends are not independent; companies must involve suppliers and purchasers to meet and even exceed the environmental expectations of their customers and their governments.

Various companies have further moved on towards integrating sustainability with their business. This means that the company will take care of people and planet while managing profitability. Although several best supply chain practices aimed at achieving sustainability are being implemented, we feel that there is scope of improvement. Our research is aimed at recognizing the gaps still not identified and come out with better ways to achieve further sustainability.

Research Objectives

This report examines the various components of the supply chain in fast moving consumer goods industry.

We examine the various challenges faced by the supply chains in the business today

We identify the negative impacts of these supply chain on the environment

We identify specific actions the government and companies should take to improve supply chains and reduce harmful emissions in the environment.

Theoretical Framework:

Key components

Supply chain

A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to the end customer.

Producers

Producers are the important link in the supply chain that connects to the suppliers for supply of raw materials for production / manufacturing of goods and to the Distribution centres and /or retail chains for taking the manufactured product to the end users i.e. consumers. It thus manages supply chain from both the supplier as well as distributor end.

Suppliers

Supplier selection is the key factor to improve the whole competitive power of a supply chain. So selecting a supplier reasonably well will affect directly reduction of the cost, increase of flexibility, and improvement of competition power. (Liu & Zhang, 2011) The suppliers should be flexible to cope with environmental uncertainties (Bhagwat, Chan, & Wadhwa, 2009) Flexible suppliers are capable of supplying/processing other jobs in addition to the one for which they are the original supplier. After receiving order from the product manufacturing company, the suppliers supply raw materials to the company. There can be more than one supplier in the entire process. The raw materials are inspected at supplier’s facility and then transported to producer’s warehouse, where stocking is done.

Distributors / Retailers

The distributors / retailers are the closest link to the end users i.e. customers. Supply chain scheduling concepts (Dawande, Geismar, & Sriskandarajah, 2006) must be applied to the supply chain which reduces the total scheduling and batch delivery cost. The finished products are stored in warehouses of distributors / retailers. Proper warehousing facilities can ensure minimal wastage of items.

Diagram4.png

Figure:1

Sustainability (Triple Bottom Line Concept)

"People (society), planet (environment) and profit (Economy)" succinctly describes the triple bottom line (Triple bottom line, 2009) and the goal of sustainability. In this competitive world today, various organizations are taking innumerable steps to attain high profitability. In this quest, various operational activities practiced by these organizations have caused several environmental concerns which have resulted in a sense of realization among big corporate regarding maintaining a balance in their societal and financial responsibilities. Societal responsibilities include cutting down on air pollution, educating rural sections of the societies, preserving non renewable resources.etc

SUSTAINABILITY

Figure:2

Sustainability is the Connector of Any enterprise’s bottom line initiatives.

Profit

It is imperative for various organizations to maintain profitability in their working respectively. All the resources should be utilized in the most efficient way in order to earn maximum profits (Kearney, 2010).

People:

In addition to considering financial responsibilities the organizations should also take steps to improve the welfare of the people and take care of societal responsibilities (Kearney, 2010).

Planet:

It is imperative for each organization to maintain a balance between the financial and environmental responsibilities (Kearney, 2010).

Green supply chain:

Green refers to sustainability in supply chain through low emission to the nature and recycling strategy for products.

FMCG Industry (India)

With a population of nearly 120 million and steady annual GDP growth of 9%, India is fast becoming a major player in the world economy. Owing to its growth and potential it is projected that by 2050, India will become the third largest economy after the US and China (Mitra & Bhardwaj, 2012).

India’s economic prowess is being driven forward by the purchasing power of the rapidly growing middle class as wealth progressively seeps down to the bottom of the economic pyramid. Responding to this vigorous growth, domestic industries are out to compete against time to expand capacity, increase production, and achieve greater market access via all possible distribution channels. One sector that is expected to shoulder this growing demand is FMCG, which is currently estimated at US$17.44 bn3 and the retail sales are expected to touch $40 bn by 2015. FMCG include a wide array of products which include toiletries, cosmetics, toothpastes, shampoos and shaving cream; soap and detergents; chocolates and snacks; foods and beverages; garments, music, jewellery, etc. The FMCG sector in India is the 4th largest sector in the economy with a total market size in excess of US$13.1 bn (Mitra & Bhardwaj, 2012).

Supply Chain Management attempts to put together Lean, Agile, Resilient, and Green approaches in Supply Chain Practices. (Lee, 2004) Lean supply chain management aims to get close to zero inventories and reduce work-in-process; Agile goes for quick respond to customer enquiries and market changes while controlling costs and quality; Resilience is about sustaining disturbances which may hit supply chain.

Issues that can be debated:

Is increasing environmental concerns a major challenge for companies?

Is reducing carbon footprint / creating a ‘greener’ supply chain one of the top two goals of companies?

Are companies prepared to meet supply chain challenges related to increasing environment concerns?

Research methodology:

We will go with secondary research such as Academic journals, white papers, books, magazine articles and other web sources to get data. After going through

In addition to this we shall keep a mix of both qualitative and quantitative research methods, follow an analytical approach and reach respective conclusions.

Literature survey

Supply Chain Management

Definition of supply chain management incorporates both strategic and tactical objectives (Cox, 1999). Supply chain management here refers to ‘the systemic, strategic coordination of the traditional business functions within a particular company and across businesses within the supply chain, for the purposes of improving long-term performance of the individual companies and the supply chain as a whole’ (Mentzer, Dewitt, Keebler, & Smith, 2001). Coordination at systemic and strategic levels addresses two fundamental requirements for a successful supply chain: efficiency within the supply chain by driving costs out of the system, and successful alignment between what is being produced and delivered in the chain with the end-user’s demand for intrinsic and extrinsic product or service characteristics (Westgren, 1998).

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The concept of supply chain management (SCM) is gaining increased importance in today’s economy, due to its impact on firms’ competitive advantage. SCM describes the discipline of optimizing the delivery of goods, services and related information from supplier to customer, and is concerned with the effectiveness of dealing with final customer demand by the parties engaged in the provision of the product as a whole (Bottani & Eleonora, 2009).

Fast Moving Consumer Goods (FMCG)

FMCG usually refer to non-durable products. The characteristics of which are

Frequent purchase, Low involvement of consumer while buying and low price (Product Management in India, 2004).

Examples include soft drinks, toiletries, grocery items etc. Based on prime factors behind their buying fast moving consumer goods can be further subdivided into 3 categories.

Staples – Goods that consumers purchase on a daily basis. E.g. Milk, bread, groceries, toiletries etc.

Impulse Goods – Goods that are purchased without any planning or search effort. These goods are usually purchased due to external stimulus. E.g. Chocolates, chips etc.

Emergency Goods - Goods that are purchased when a particular need arises. E.g. Umbrellas.

The FMCG industry is extremely competitive. Consumers have high demands on price and quality, and are increasingly disloyal to brands, quickly choosing a different brand or product if the other offer appears better. Demand for FMCG can be very seasonal, meaning manufacturers must be very flexible to produce different goods. Thus, SCM becomes further more important in FMCG industry (Flexlink).

FMCG supply chain:

Figure 3 shows the various components of the supply chain of FMCG products with the inputs and environmentally harmful outputs at each stage. The supply chain of FMCG products starts with the production of goods. The inputs include raw materials, water, land, seeds, diesel etc. The outputs or the by-products of this component of the supply chain that effect the environment include emissions of the GHG , releases into water etc. From here the unfinished products are passed on to the next level of the supply chain which is processing. The inputs here are the unfinished goods themselves along with chemicals (for the treatment and preservation of goods), water, land, packaging, refrigeration, gas and others. This part of the supply chain also produces some environmentally unwanted by-products such as packaging wastes, GHG etc. Post processing the final products is passed on to the distributors or retailers. Here, they require refrigeration, electricity, gas, diesel to store the products and the harmful outputs are the same as those at the production and processing stage. From the distributor’s shelves the products move to households or consumers. A lot of logistics planning is required to transport the products from the manufacturers to the distributors and consumers. (Estrada-Flores, 2008) During the process of transportation (through ships, road vehicles, air carriers etc.) a lot of harmful emissions are let out into the environment. Today about 4% of global CO2 emissions come from shipping and an equal amount of CO2 is contributed by aviation (Heineken, Maersk Line ,BSR, 2013).

Diagram1.png

Figure: 3 (FMCG Supply chain, Source: (Estrada-Flores, 2008))

Examples Of supply chain of some FMCG products

Supply Chain Model of Milk

Milk production in Australia is typically seasonal, peaking at around 1200 million litres in October with a low of 600 million litres produced in May and June. Seasonality of milk production is greatest in south eastern Australia, where a greater proportion of milk produced is used for manufactured dairy products (ACCC, 2008).

Production is less cyclical in other states where more milk production is directed towards fresh drinking milk for consumption in the local area.

The dairy milk supply chain (figure 4) has three distinct levels:

Dairy farm – This is the place where the production system begins (The Australian Dairy Industry – The Basics).

Dairy Processor

Retailer

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Figure:4

Supply Chain Model of Apples

Apples are grown in all six Australian states (although not in the Northern Territory). Victoria is Australia’s largest producer of apples, producing more than 30 per cent of the nation’s apples—mostly from the Goulburn Valley area, around Shepparton. New South Wales is the next largest apple-producing state (ACCC, 2008).

Between 50 and 65 per cent of fresh apples sold in Australia are sold through either Coles or Woolworths, approximately 5 per cent through other grocery retailers, 25 per cent to 40 per cent through greengrocers and 5 per cent are exported (ACCC, 2008).

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Figure:5

Challenges of Supply Chain

In this competitive world one of the key challenges various organizations practicing supply chain practices face is to make their supply chain more sustainable. In order to make the respective supply chain more sustainable it is imperative balance the company’s responsibilities towards three categories: people, planet and planet. It is therefore imperative to be competitive not only in terms of profitability but also environment sustainability.

Challenges faced in pursuit of profits

Too Much Product Complexity: All firms know they carry too many SKUs (Stock keeping Units) and concede that they do not have effective processes to eliminate underperforming products (Dittmann, 2009).

In case of FMCG industry, the problem becomes more complex as too many SKUs of many items are required to be managed at a time

A few companies have "broken the code on this intractable issue" and developed disciplined processes in place to manage SKU growth (Vitasek, Manrodt, & Kelly, 2003).

 

 

Too Much Slow-Moving and Obsolete Inventory: Many companies struggle with tracking and disposing of obsolete inventory. Marketers are often resistant to reduce prices to clean the inventory out, for example, even though old inventory "never gets more valuable." This inventory can sit for months or even years, consuming cash and incurring inventory holding costs until it is finally scrapped or sold at a steep discount (Flexlink).

The FMCG (Fast Moving Consumer Goods) industry is extremely competitive. Consumers have high demands on price and quality, and are increasingly disloyal to brands, quickly choosing a different brand or product if the other offer appears better. Demand for FMCG can be very seasonal, meaning manufacturers must be very flexible to produce different goods (Dittmann, 2009).

Thus, too much slow-moving and obsolete inventory will only create a challenge to this industry.

Supply Chain Considerations Not Part of the Product Design Process: 

This is perhaps the last area of business operations that is often not well integrated into the supply chain. When product design engineers develop a new product, they rarely consider inventory, transportation, or warehousing issues, even though often very small changes in the design can yield big logistics savings (Dittmann, 2009).

No Supply Chain Strategy:

As the smart ones usually say, start with the current and future needs of customers. Determine the capabilities needed to meet those needs. The strategy development process then determines the new supply chain capabilities the company will need in the future to meet its customers' needs. Plans (people, process, technology) need to be developed to meet those needs, at a cost the company can manage.

Unfortunately, most supply chain organizations are so consumed with the daily battles of cutting cost, managing inventory, and delivering good customer service that that they don't plan properly for the future, sometimes with disastrous results (Dittmann, 2009).

(5) Ineffective Matching of Supply with Demand: This typically results from functional silos within the corporation. Metrics are also an issue – at the most basic level, sales is driven by revenue, and manufacturing by cost management – goals which often conflict. While Sales and Operations Planning (S&OP) processes can substantially reduce this functional thinking and generate better alignment, the fact that "most would acknowledge that they still have a long way to go" in S&OP means the problem is likely to remain timeless for awhile (Dittmann, 2009).

 

(6) Physical Network Problems: The good news for supply chain professionals – the physical supply chain network will never be exactly right. Do we build networks that anticipate sky high fuel costs, or moderate ones, just as one example? "Logisticians are confused to say the least; and the old answers don't work anymore," Dittmann says, adding "One thing is certain however. All firms should question their physical network configuration under a wide range of future fuel prices." But fuel, of course, is just one of many elements effecting network design (Dittmann, 2009).

(7) Global Issues and Outsourcing Problems:  

Globalization holds many promises – but also many challenges. The long supply lines, incredibly volatile fuel costs, exchange rates, the geopolitical risks have all come home to roost. Few firms consider the total cost of an

Out-sourcing decision and even fewer incorporate the additional risk of a global source in their formal analysis process (Dittmann, 2009).

Environmental concerns

During various manufacturing and production stages various raw materials are processed to form the final product. This results in direct or indirect pollution of the environment thereby causing potential harm to the ecosystem in long term future. For example, during the production of milk and groceries various agricultural activities results in water pollution. The estimated environmental costs due to damage could reach millions (Estrada-Flores, 2008). In countries such as Australia whose economy depends mostly on agricultural activities 58 percent of land mass is used for agriculture, mainly for grazing animals and the production of crops used in animal feed, as a result of which estimated environmental costs due to damage to soil quality could cost millions (Estrada-Flores, 2008). One of the key negative impacts various supply chain activities have had in past years has been emission of carbon dioxide in the environment. For example Livestock emissions in Australia were 62.1 Mt CO2‐e in 2005, which represents 70.7% of the agriculture sector’s emissions and 11.1% of net national emissions (National Greenhouse Gas Inventory 2005, 2007). Agriculture contributed 16.8 % of Australia’s GHG emissions in 2005, making it the 2nd largest emitting sector behind stationary energy. Agricultural sources accounted for 76% and 30% of total U.S. nitrous oxide and methane emissions in 2005, respectively (Emissions of Greenhouse Gases in the United States 2005, 2006). Increase in CO2 and other chemicals in the environment further leads to an increase in temperature. It is expected that temperatures will increase in 1 to 6 degrees by 2070 (Howden, 2007). Further this could also lead to a reduction of rainfall in various parts of the globe there by resulting in water scarcity and irrigation facilities. Also, higher potential evaporation from the soil and accelerated transpiration in the plants themselves will cause moisture stress.

During the post production stage the final goods are supposed to be preserved, packaged and transported to the various distribution centers and retail outlets. Human activity generates annual greenhouse gas emissions of around 50,000 mega-tonnes CO2e. According to (Forum, 2009) 2,800 mega-tonnes – or 5.5% of the total – are contributed by the logistics and transport sector. Road freight is a major element of this footprint minerals and food transportation are the largest contributors by product category In absolute terms, road freight is the greatest part, at around 57% of the total, with ocean freight some way behind at17%

(Forum, 2009). FMCG goods such as groceries, milk etc need to be preserved and packaged in order to avoid wastage. This can be done through various preserving technologies such as cooling, freezing, drying and canning that further contributes to the emission of CO2 in the environment and hence global warming. Packaging waste is generated from the discarded primary packaging and other wrapping container materials handled by the consumer, used in various distribution centres and during various transit operations. Europe generates about 78.6 million tonnes of packaging waste (Packaging waste, 2008). About 54% of this waste is recycled. Packaging represents 10 to 14% of the solid waste going into New Zealand landfills.  The average recycling rate is 49%. In Australia, the total packaging waste in 2005 was about 4.2 million. The recycling rate was 56 percent (Covenant, The National Packaging 2005–2006 Annual Report, 2007).

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Figure:6

Measures to overcome enviromental concerns:

Steps taken by government

Supply chain carbon emissions will increasingly be regulated through a variety of legal standards

as numerous policy developments are underway. By December 2009, the 192 member countries of the United Nations Framework Convention on Climate Change have agreed to launch a mechanism to achieve "deep cuts" in emissions2. Independent targets in developed nations call for significant cuts in emissions – the European Union‟s Energy Policy calls for a 20% reduction in greenhouse gas emissions by 2020 while California‟s AB 32 „Global Warming Solutions Act‟ seeks state-wide emissions reductions of 25% by 2020. The UK Climate Change Act mandates an 80% cut in national carbon emissions by 2050. There is increasing convergence in the debate towards a universal price for carbon.

What companies can do?

The following is a case study about Goodman Fielder (GF) is an Australian/Asia-Pacific company that has expanded greatly through takeovers of small niche brands. They manufacture and distribute a wide range of food products – fresh bread, frozen pastries and dairy products, requiring a range of storage systems

C:\Users\Akanksha Negi\Desktop\frp GROCERIES\suppliers and retailers\model - how companies should go forward case study.png

Depicted in the diagram, is the bread supply chain from Morebank bakery. GF broke their supply chain into small components to bring out the wastage and optimise their supply chain in an effort to move towards sustainability. Each component was analysed individually and the energy saving opportunities were listed out and worked upon to achieve better results.

Companies like BSR develop sustainable business strategies, solutions, consulting and research. It has clients / members like: MAERSK, IKEA, IBM, Microsoft, unilever, Walmart and likes. One of the initiatives of BSR is ‘Clean Cargo Working group (CCWG)’ project. It is a B2B initiative made up of leading cargo carriers and their customers (33 companies) dedicated to environmental performance improvement in marine container transport through measure , evaluation and reporting of sustainability standards and bench marks. (http://www.environmentalleader.com/2013/02/08/clean-cargo-working-group-discussion/)

Carbon trading/ Offsetting

Emissions (or carbon) trading schemes allow the Government to regulate the amount of emissions produced in aggregate, by setting an overall cap. The carbon trading scheme allows companies to determine how and where the emissions reductions will be achieved.

Participating companies are allocated a number of carbon credits or allowances, each one of these being equivalent to one metric tonne of CO2‐e emissions. Companies that emit in excess of their credit allocation will need to purchase further credits from the market. Similarly, a company that emits less than its credit allocation can sell its surplus allowances. Therefore, emissions trading gives companies the flexibility to meet emission reduction targets by: (a) reducing emissions on site or (b) by buying allowances from other companies who have excess credits. The overall environmental outcome is not affected because the amount of credits allocated is fixed. Under an emission trading scheme, the impact of carbon emissions becomes clearly linked to the internal cost of doing business and therefore visible in the profit & loss and the balance sheets of a company. (Food chain intelligence)

Just In Time

The term ‘Just-In-Time’ (JIT), used for instance to describe the delivery of materials to a construction site, suggests that materials will be brought to their location for final installation and be installed immediately upon arrival without incurring any delay due to storage in a laydown or staging area. JIT is a concept developed by the Japanese who created the Toyota Production System, later translated into English as the lean production system. The ultimate objective of JIT production is to supply the right materials at the right time and in the right amount at every step in the process. (JIT supply chain).

ERP

Companies are using softwares like SAP and Master data management (MDM) for stock / inventory management (supply chain management in Australia, part-1). Some Logistics firms also use Transit Schedule Distribution which track the most efficient route and vehicle types for cargos. The inputs include peal traffic time, updated road maps, tolls etc.(Sustainability in supply chains) (Woodhead, A. (2009) Guidelines for Sustainability in Supply Chains: Thinking Systems for Business Sustainability. Published by the Australian Research Institute in Education for Sustainability.)