Quantifying the impact of green supply chain management : a South African case study

Abstract

South African supply chains have moved from basic survival mode to a focus on optimised supply chains. These focus mainly on a reduction of inventory, cost, and lead time. The further shift to end-to-end supply chain visibility might be required to improve customer service and the competitiveness of supply chains (KPMG n.d.). The World Resources Institute (WRI) reported that, since the Conference of Parties 21 (COP21) in December 2015, six climate change milestones have been met. These milestones are: 2015 being recorded as the warmest year on record; record levels of heat was experienced in each month in 2016; the Arctic Sea ice currently at record low levels; a clearer connection between extreme weather conditions and climate change induced by humans; the impact of carbon-intense behaviour being more serious than predicted; and the Western Artic ice sheet is melting at a faster rate than previously predicted (Gilder, Parker and Rumble 2016). South Africa's greenhouse gas (GHG) emissions constitute the largest single contribution on the African continent. If carbon emissions (CO2e) are not reduced, this will continue to grow exponentially. South Africa's emissions are placed in the top twenty in the world when considering per capita emissions. The intensity of the emissions, calculated as the ratio of emission to gross domestic product (GDP), is also above the world average and is similar to that of other industrialised countries globally, such as Japan. The indication is that the South African Parliament will implement a carbon tax from January 2017 (as predicted in April 2016). It is not a question of whether a carbon tax will be implemented in South Africa, but when (Gilder et al. 2016). From the above statements it is clear that there is a need to understand and quantify the impact of implementing environmentally-friendly initiatives on business profitability and sustainability. This would be carried out through a multiple case study approach at a global, South African-based, fast-moving consumer goods (FMCG) company, so that the carbon tax could be minimised and the impact on the environment be reduced. This will be the main objective of the study. To achieve this, objective, the following secondary objectives must be achieved in order to develop a framework that can be used to quantify the impact of green supply chain initiatives on the profitability and sustainability of a business' supply chain. The developed Green Business Profitability Framework is applied to a South African company's supply chain to determine whether the framework can successfully quantify the impact on environmental and business profitability. Yin (2014) emphasises that a good research design should address the research objectives or questions, the propositions, and the unit of analysis. The research design should also enable a logical link to the propositions and the criteria that will be used to analyse the results of the case study. This research investigates the difference between environmental management and green supply chain management (GSCM). Subsequently, the history and theories behind GSCM are highlighted. Different decision-making methods for GCSM are identified to address supply chain performance, environmental performance, cost modelling, and performance measures. Existing frameworks of GSCM are also analysed. The research study aims to answer how the impact of implementing environmental initiatives on business profitability and sustainability is best quantified in a South African business. Previous supply chain research is reviewed, and arranged in an end-to-end supply chain matrix view to understand on which areas of the previous supply chain methods, frameworks, and research to focus. This research suggests that there is a need to quantify the impact of implementing green supply chain initiatives in a company, based on the profitability and sustainability of that company's supply chain. Existing methods that are used to assess the business profitability and sustainability impacts of initiatives do not focus on monitoring the complete supply chain, from operational activities to longer-term strategic initiatives (Porter and Van der Linde 1999; Schaefer and Kosansky 2008; Marchal et al. 2011). In this study, carbon emissions are used as a measure for the impact of sustainability, and are combined with the activity-based costing (ABC) method to understand the impact on profitability as well. The analytical framework aims to help a company to evaluate the financial and environmental impact of sustainability initiatives, make strategic decisions to improve the business' environmental impact, and to operate in such a way to gain competitive advantage. The end-to-end supply chain view can aid the understanding of GSCM from a wider perspective, and can help the business to be more responsive to, and aware of, the impact of business decisions on its supply chain. The notion of business profitability impact, rather than performance measures, is used to evaluate the supply chain in view of the greater impact business profitability will have on the supply chain. Relevant case studies were identified and used to determine the impact on the environment and on profitability of implementing initiatives aimed at reducing greenhouse gas (GHG) emissions. The supply chain operations reference model (SCOR) level 1 processes aided in selecting the case studies to ensure that different areas of the supply chain were addressed. The duration of the case studies was one year, because all the peak and off-peak times were included, and because financial performance is reported annually to the business and its shareholders; only then could the full annual impact be assessed. The developed green business profitability framework uses a combination of existing methods: the value-added analysis (VAA) approach, life cycle assessment (LCA), SCOR, product costing, 'cost to serve', the ABC method, the green supply chain operations reference model (GreenSCOR), and business profitability modelling (BPM). GreenSCOR enabled environmental initiatives to be tracked back to logistics operations, which made it easier to understand and implement. GreenSCOR also helped to link carbon emissions to their source, and to translate green supply chain actions into goals. Cash and Wilkerson (2003) noted that GreenSCOR helps with green management by linking best practices to the detailed processes; and, if it is applied, it can help to reduce carbon emissions. The framework of the South African Department of the Environment, Food, and Rural Affairs (DEFRA) as used to convert the savings into carbon emission savings. The green business profitability framework aims to determine the impact of green supply chain initiatives on business profitability and sustainability. The case studies addressed different applications of optimisation initiatives, from short-term to longer-term strategic objectives. In the plan case study, the framework was applied to determine whether it could be used to solve short-term network planning queries. The source area focused on long-term strategy development, while the make case study incorporated recommendations from a third party consultant. The deliver case study focused on modelling the impact of the current internal initiatives and market trends, while the return case study determined the impact caused by operational changes in the case study company. The results from using the green business profitability framework to model short-term strategic planning indicated that the reduction in kilometres travelled obtained by optimising the secondary transportation network was directly related to the total carbon emissions, but not to the increase in business profitability. In the case study, the net effect was reduced carbon emissions and increased business profitability; but it could not be assumed that all the distribution centres (DCs) would show a carbon emission saving. The case study results interpreting the third party consultant's environmental sustainability initiatives indicated that the impact on profitability from implementing the various sustainable manufacturing initiatives was directly related to the carbon emissions, while the savings in lliquefied petroleum gas (LPG) had a bigger impact on profitability but a lower impact on sustainability. The deliver case study indicated that the impact on profitability was not directly related to carbon emissions. The daylight harvesting initiative had a bigger impact on carbon emission reduction, but a lower increase in business profitability than the fluorescent lighting initiative. The return case study showed that a higher carbon emissions reduction had minimal impact on business profitability. As South African businesses move from basic supply chains to optimised supply chains under the current economic pressure, business will need to reconsider all options to reduce costs. With the carbon tax legislation looming in 2017, businesses need to become smarter about implementing sustainability initiatives that makes financial sense. The green business profitability framework developed here is a possible tool to consider, as it could help determine the break-even point between environmental sustainability and cost saving.