Reduce carbon emissions with accurate inventory management
Fleur Smits - Straathof
The Intergovernmental Panel on Climate Change (IPCC) reports that warming of the earth is creating a serious threat to the planet we live on. The most likely cause of the problem: carbon emissions. In order to reduce carbon emissions, the European Union (EU), United Nations (UN) and many individual countries have introduced or are currently introduced legislation to force companies to reduce their global footprint.
In Australia, clear legislation is currently missing. However, with the per capita emissions of CO2 amongst the highest in the world, there is no doubt the increasing pressure will force Australian Government to act.
If government and industry projections for fossil fuel expansions are realised, and if the rest of the world adopts policies consistent with the Paris Agreement, by 2030 Australia could be responsible for up to 17 per cent of global emissions. (Climate Analytics, 2019)
Do you manage the carbon footprint of your supply chain?
Whether a business is faced with new legislation or decides to take action based on its own desire to take action, the starting point to reduce emissions is typically focused on optimising the usage of their buildings and fleet vehicles. However, many businesses fail to optimise the operational decisions they make around inventory management, production and transportation.
As highlighted by CDP, a not-for-profit charity who help organisations to manage their environmental impact, carbon emissions in supply chains are on average four times those of a company's direct operations (e.g. carbon emissions from buildings, machines).
Given that these areas alone could help businesses to achieve huge reductions in carbon emissions with little or even no investment (Benjaarfa et al., 2010), it is a real shame that inventory management is so often overlooked.
what is the supply chain carbon equation
As highlighted above, there are many areas of supply chain management that can be investigated and optimised. However, when focusing on inventory management, it is all about making the right inventory decisions at the right time. But most importantly, it's all about looking at the facts instead of gut feeling.
The most important areas to reduce carbon emissions are as follows:
Accurate forecasting helps companies to make sure the right products are available at the right place at the right time. Although this sounds easy, this presents many inventory and supply chain managers with a real headache. As a consequence of ineffective forecasting, many business face overstock and understock situations.
Robust forecasting helps supply chain teams to detect trends, seasonality and volatility. However, each industry has its own complexities:
When it comes to the food industry, managing perishability is a major role in preventing and reducing waste. To create effective forecasts, it is of vital importance to take an item’s shelf life into account.
A better and more accurate forecast for food items can reduce waste and therefore minimise unnecessary carbon emissions. To achieve a more reliable forecast, this could mean forecasting based on shorter horizons. For fresh products for example, a daily level forecast is likely to deliver the best results.
Furthermore, for items with a very short shelf life, it may be possible to adopt a differentiated approach to minimise risk and waste. When looking at ready-to-eat meals for instance, it is not necessary for every meal to be available right until the end of the day. As a result, a forecast can be developed on a group level.
For example: the customer should have a choice between an Italian and an Indian meal. But within the Italian meals, this does not necessarily mean that every type of pasta must be available until the end of the day as long as at least some of the pasta meals are still on offer.
This means that the safety stock does not have to be calculated on item level, but on item-group level. As a result, the risk of waste at the end of the day is drastically reduced.
The fashion industry is well-known for its markdowns at the end of the season. However, if products are still not sold after heavy discounting, they have to be destroyed.
Of course, the fashion industry is subjected to its own set of challenges; long lead times and short product life cycles with many new product introductions. However, providing that seasonal patterns and demographic figures, such as size curve distributions per store, are all taken into account, it is still possible to develop accurate forecasts.
By using these forecasts to optimise stock allocations across the stores, this, in turn, will reduce overproduction and waste. Furthermore carbon emissions caused by avoidable internal transportations due to bad allocations can also be eliminated.
When it comes to promotions, many retailers struggle to ensure the right stock is available at the right place, at the right time. As a result, these products need to be discounted, stored somewhere until Christmas next year, or even worse, destroyed.
Ultimately retailers that are able to accurately anticipate promotional demand typically see the most advantage from the promotional activity in question.
The final example is from the manufacturing sector. For most businesses, production capacity is limited. Therefore, accurate planning of production is critical.
To plan production effectively, a robust forecast needs to be established based on future sales. Given that manufacturers are often subjected to long leadtimes for raw materials, the production process can often take many weeks. As a result, it is not uncommon for manufacturing businesses to set up production in order to satisfy demand in six months time.
Inaccurate forecasting techniques can lead to purchasing the wrong raw materials, resulting in unnecessary transportion and production costs. Both of which has an adverse impact on t he company's carbon footprint.
Forecasting is not the only area that is important of inventory management to consider. The way in which products are ordered and shipped is also key to reducing carbon emissions. If you need a couple of pallets of your supplier’s products every week, it depends on the situation whether it’s optimal to order on a weekly basis.
If freights can be bundled with other suppliers, this might be a good solution to fill a full container.
Alternatively, it might be beneficial to order full shipments on a less frequent basis. This will not only reduce costs, but will also lead to a reduction in carbon emissions. Of course, the type of product determines if this is a viable option.
Furthermore, very few companies calculate the actual costs of inventory. Is sourcing overseas really cheaper? Often companies are forced to buy in big MOQs (minimum order quantities) when they order from overseas.
Local sourcing might seem to be a bit more expensive on first glance. However, in reality, local suppliers may be able to offer more flexibility, shorter lead times and lower transportation costs. Furthermore, the lower levels of risk may reduce the need to hold safety stock as well reduce the overall inventory holding costs. Ultimately all of these factors can help reduce carbon emissions across the supply chain.
sTART WITH YOUR OWN SUPPLY CHAIN
Starting inventory optimisation within your company can directly help reduce carbon emissions. Analysing data to create better forecasts, managing the supply chain in a more efficient way (e.g. by ordering full truckloads or combining freights) as well as becoming more agile to react faster to the market are all ways that will help you to reduce your business’ carbon footprint.
In case you are interested in reading more of our blogs about inventory and supply chain management, click here. If you have any other questions, please don’t hesitate to contact us.