The desire to adopt more sustainable and environmentally responsible practices is now an overwhelming sentiment among manufacturing executives, reveals the MLC’s latest sustainability survey. But the pace of change still needs to increase if the industry is going to achieve the world’s Net Zero goal by 2050.
Manufacturing’s race to New Zero and the transition to a more sustainable and regenerative circular industrial economy is demonstrably underway. But while there are an increasing number of public promises and future targets being announced every day, and some noticeable achievements so far, overall practical progress still needs to accelerate to achieve the industry’s Net Zero goal.
The desire to do so among the manufacturing leadership community is now powerful, clear, and present. An overwhelming 87% of the senior manufacturing executives who responded to the MLC’s latest M4.0 Sustainability and Net Zero survey agree that the manufacturing industry has a special responsibility to society to become more sustainable and accelerate the transition to a future circular industrial economy.
What’s more, that sustainability transformation is regarded as either essential, or increasingly important, to the future competitiveness and growth of the companies they work for, say 72% of respondents (Chart 1).
The question now is no longer if, or whether, manufacturing needs to work to create a cleaner, greener, and more globally responsible industrial future. It’s all about the when, and how it can get there in the most effective and swiftest way possible.
Gaining Leadership Attention
While many companies were already pursuing their own sustainability strategies before the COVID crisis began in early 2020, the resultant strategic refocusing and global disruption over the last two years of the epidemic has had a positive impact on how leadership is now prioritizing its green efforts at a number of organizations. Respondents report that management focus on sustainability and Net Zero strategies has actively increased at a third of manufacturing companies as a result of COVID (Chart 2). And despite the urgent need to crisis manage a host of short-term issues during that period, a further 51% say their previous sustainability focus has nevertheless remained in place. Only 12% say the last two years of COVID disruption have actually decreased their management focus on a greener future.
Net Zero Momentum
With future competitiveness and growth at stake, it’s perhaps not surprising that a rapidly increasing number of those manufacturing companies are now publicly declaring their targets to reach Net Zero carbon emissions in the years ahead.
The MLC’s latest research results show that around a third (32%) of respondents already have publicly stated Net Zero targets in place (Chart 3), and while another 16% have not yet announced publicly, they already have Net Zero plans actively underway. A further one in five (21%) are still considering their New Zero stance and have yet to decide on their approach.
“Respondents reporting a formal corporate-wide sustainability strategy with publicly stated goals has risen noticeably over the last three years, up from 39% in 2019, to 50% this year.”
Yet that still leaves almost a quarter of companies who say they have no plans to announce any Net Zero targets. It will be interesting to see if this currently inactive section of the manufacturing community shifts its position as the pressures of competition, rising customer demands, regulation, and public pressure build in the decade ahead.
As Greg Barker, Chairman of global energy and metals company EN+, the largest aluminum company outside China, warned at the recent COP26 Climate Summit in Glasgow, in his view, companies that are not able to ditch their fossil fuel habits simply “don’t have a future”.
Not If, But When
The timeline for companies to reach their Net Zero goals inevitably depends on numerous determining factors, from industry sector to location to corporate ambition. However, the latest survey results suggest that around a third of companies have already set their Net Zero targets within the next 15 years by 2035 (Chart 4), and some early movers, around 14%, are already on plan to hit their Net Zero horizons as soon as 2025.
Reassuringly, over half the companies in the survey (55%) now have, or plan, Net Zero targets that fall within the 2050 timeframe highlighted by global climate change organizations as the date by which the world needs to achieve net zero emissions to try to keep future global temperature rises as close as possible to C1.5 degrees.
Nevertheless, a few companies (5%) are still looking at a longer timeframe of beyond 2050, and there remains a host of manufacturing organizations yet to declare any Net Zero intent. To reach the 2050 climate goal, these organizations may need to act soon to allow sufficient time to effectively transition to a carbon neutral operational status by the middle of the century.
Sustainability Structures in Place
Net Zero targets apart, the vast majority (72%) of manufacturing companies have already embedded some form of corporate sustainability structures and processes into their organizations (Chart 5). For example, the number of respondents reporting a formal corporate-wide sustainability strategy with publicly stated goals has risen noticeably over the last three years, up from 39% in our previous 2019 survey, to 50% this year. A further 22% say that while they may not yet have a formal strategy in place, sustainability initiatives are now embedded into business practices.
Those sustainability approaches and policies are also covering an increasing number of key criteria (Chart 6). Targeted reductions in energy usage (81%), waste (73%), water (60%) and improvements in material efficiency (60%) are becoming industry standard, while circular economy policies covering material reclamation (55%) and product lifecycle strategies including safe disposal (50%) are becoming more popular. Almost a half of respondents (45%) also say their companies are now either using or generating renewable energy to help power their operations.
“Over half the survey respondents now regard 4.0 digital tools as either extremely or fairly significant in their sustainability efforts.”
The way companies are managing and driving their sustainability strategies has also shifted over the last three years (Chart 7). The number of companies that have now established dedicated teams or functions tasked to drive corporate sustainability and Net Zero initiatives has risen from 51% in 2019 to 61% in the latest survey as leadership teams increasingly recognize the importance of focusing direct resources and management attention around their efforts.
A Reputational Issue
Interestingly, the key factors now motivating leadership teams to pursue sustainable practices have become more about corporate reputation and values than hard costs. In this year’s survey, respondents ranked an improved reputation among customers and investors (57%), the importance of a cleaner and healthier environment (56%), and better alignment with their corporate mission and values (56%), as their top three primary motivations for embracing sustainability (Chart 8). In the 2019 survey, reduced costs ranked at number three in the table, yet this has now fallen to number six on the motivation list at 38%. By contrast, customer requirements are clearly becoming more vocal and intense, rising from sixth to fourth as a key factor in driving more sustainable approaches.
This shift of emphasis is also apparent when respondents were asked which groups now most influence a company’s sustainability and Net Zero strategies. C-suite leadership teams remain as the primary influencers, yet their impact has risen sharply from 61% of respondents saying they were the most significant group in 2019, to 84% this year (Chart 9), perhaps reflecting a growing recognition by leadership teams that sustainability has now become critical to the company’s overall reputation and mission. This may also be linked to the fact that the influence of customers and consumers has also increased sharply over that period, from just 27% in 2019, to a substantial 54% this year. The market, it seems, is already playing a significant part in driving sustainable industrial change.
Certainly, there has already been significant change in the industry’s attitude to, and ability to deliver, more sustainability in manufacturing enterprises (Chart 10). Compared to 5 years ago, 40% say they have already made significant progress in their sustainability achievements, up from 31% in 2019.
“It’s the level and power of human sentiment that is likely to make the most difference to how, and how fast, the manufacturing industry can develop more sustainable global approaches in the years ahead.”
Manufacturing and production activities have made the most progress in achieving their sustainability goals so far, according to the survey (Chart 11), with 63% of respondents saying these areas rank among their company’s top three areas of success. There are, however, other activities where progress has not been as impactful and may now be ripe for further attention, especially in supply chains (24%), transportation and logistics (15%), and partner compliance (10%).
These activities, of course, are inevitably more challenging to transform as they are essentially dependant on external factors, infrastructures, and ecosystems, unlike the directly controlled manufacturing facilities within the walls of the company. Nevertheless, as environmental performance and carbon footprints are increasing judged on the basis of full end-to-end value chains, rather than just in-house activities, companies may need to pursue sustainable ecosystem approaches more intensely in the future.
And although cost reductions may not rank as high on the overall corporate priority list of motivational factors in sustainability efforts these days, the survey results do indicate that cost factors dominate the list of key targets for in-house manufacturing and production facility improvements (Chart 12). The top two areas where respondents say they now have specific sustainability goals and metrics in place at their manufacturing plants include reduced energy consumption (67%) and less materials waste during the manufacturing process (64%), both of which have direct cost implications. Other areas of focus that also help manufacturers directly reduce production costs include more efficient use of raw materials (48%) and the use of reclaimed or recycled materials (45%), again delivering bottom line benefits.
The M4.0 Opportunity
For many manufacturing organizations, digital technologies have become fundamental enablers in how they streamline processes, measure performance, and virtualize operations to help drive sustainability. Analytical and predictive tools can also provide unprecedented insights into how best to maximize resources and reduce energy and waste. Virtual platforms, meanwhile, not only speed up processes and improve quality, but the ability to act remotely also cuts travel requirements and overall carbon footprints.
The recognition that 4.0 approaches have a direct role to play in helping to achieve sustainability and Net Zero targets over the decade ahead is clear. Over half the survey respondents now regard 4.0 digital tools as either extremely or fairly significant in their sustainability efforts (Chart 13). And they see some of the most advanced technologies currently being adopted today as having an increasingly important impact on their sustainability goals over the next ten years to 2030, especially augmented and virtual reality systems (80%), AI and machine learning (76%), and more advanced networking platforms like 5G (73%) that can deliver information in rapid real-time from assets, products, and partners alike (Chart 14).
Over half (57%) also highlight innovations in new materials as important to their greener future, while 69% anticipate the increased adoption of digital production techniques like additive manufacturing to help transform their production operations by increasing efficiency and maximizing the use of raw materials.
Towards a Circular Industrial Economy
Broader changes to the way the overall industrial sector operates are also expected to have a major impact on future business models and improvements in industry wide sustainability. Eighty one percent of respondents believe that the shift from traditional “Take, Make, Dispose” approaches to a more regenerative and circular economic model of “Refurbish, Reuse, Recycle” will be highly (38%) or fairly (43%) impactful for the future of the industry. Only a mere 4% still believe this accelerating shift toward a new industrial paradigm will have no impact at all (Chart 15).
Some of the key elements of that circular future industrial model are already being adopted by early movers in the industry. For example, over half the respondents (59%) now say their companies have design and development criteria to promote the recycling of all or some materials, while 29% also design with the reuse of some components in mind (Chart 16). There remain many areas for further progress at the majority of organizations, however, with only 16% who have intentionally designed refurbishment procedures, 15% who are actively designing products for easy disassembly at end of life, and just 10% who are exploring remanufacturing approaches. Over a quarter (27%) have still yet to formally embrace any of these design-driven circular economy practices at all.
Some of the key elements of that circular future industrial model are already being adopted by early movers in the industry.
Looking specifically at recycling, almost a third (30%) now provide ways for customers to return products to a dedicated recycling partner at end of life, and almost the same proportion (27%) have ways to return products directly to the manufacturer (Chart 17). Eighteen per cent even offer incentives to their customers to take one of their recycling options.
A Global Obligation
With all these various sustainability activities, targets, policies, opportunities, technologies, and areas of progress as the background to today’s manufacturing sector, the MLC thought it was especially important to stand back and take a broader view in this year’s survey as we begin what may be a pivotal decade in the development of a more sustainable industrial paradigm for the future.
More specifically, we wanted to know, not just what manufacturing companies now have underway or planned, but what manufacturing leaders and senior executives themselves, those who are now actively working in the industry on the front lines, feel about the manufacturing industry’s role in the race for sustainability in the face of increasingly urgent warnings about the impact of climate change this century.
The results cannot be underestimated or ignored. An overwhelming 87% of the senior executives who responded to the survey agreed that, due to the nature of manufacturing with its use of raw materials and complex production processes, the industry now has a special responsibility to society to become more sustainable and accelerate the transition to a future circular industrial economy.
Technologies can certainly help, but it’s the level and power of that human sentiment that is likely to make the most difference to how, and how fast, the manufacturing industry can develop more sustainable global approaches in the years ahead, from transforming operations, to slashing emissions, to creating more sustainable ecosystems, to driving climate smart innovation for the benefit of future generations.
That’s going to be the real challenge for global manufacturing over the next decade. Perhaps the most important challenge in the industry’s history. M
Part 1: SUSTAINABILITY STRATEGY
1. Sustainability Seen as Key to Future Competitiveness and Growth
Q: How does your company regard the importance of sustainability and Net Zero targets to its competitive profile and future growth?
2 A Third Say COVID-19 Has Increased Leadership Focus on Sustainability
Q: What effect has the COVID-19 pandemic had on
your leadership team’s focus on sustainability and
Net Zero initiatives?
3 A Third Have Already Announced
Net Zero Targets
Q: Has your company publicly announced a Net
Zero decarbonization target?
4 A Third Aim to Reach Net Zero Within 15 Years
Q: What is the timeframe for achieving
this Net Zero target?
5 50% Now Have Formal Corporate-wide Sustainability Strategies in Place
Q: How are your company’s sustainability / Net Zero
initiatives organized and deployed?
6 Corporate-wide Sustainability Policies Cover Increasing Number of Key Criteria
Q: Does your company’s approach include specific
policies, codes of conduct, or goals covering the following sustainability / Net Zero criteria? (All that apply)
7 Over 60% Now Have
Dedicated Sustainability Team
Q: Does your company have a dedicated team or function tasked to drive corporate sustainability / Net Zero initiatives?
8 Reputation, Environment, and Corporate Values Are Driving Change
Q: What are your company’s primary motivations for embracing sustainable/Net Zero practices? (All that apply)
9 C-Suite and Customers Have
Most Influence on Manufacturing Sustainability Strategies
Q: To what extent do the following groups influence your sustainability / Net Zero strategy?
Part 2: SUSTAINABILITY PROGRESS
10 40% Have Already Made Significant Progress in Sustainability Over Last 5 Years
Q: Compared to five years ago, how would you characterize your company’s sustainability / Net Zero progress and achievements so far?
11 Manufacturing Activities Lead; Partner Compliance and Logistics Lag
Q: In which of the following corporate activities do you feel you have made the most significant progress in achieving your sustainability goals so far? (Top 3)
12 Over Half Now Have Formal Goals/Metrics for Energy, Materials, and Waste
Q: In your manufacturing and production activities specifically, which of the following areas have specific sustainability goals/metrics? (All that apply)
Part 3: M4.0 & SUSTAINABILITY
13 Over 50% Believe M4.0 Will Be Significant to Reaching Sustainability Targets By 2030
Q: How important will Manufacturing 4.0 technologies
be to achieving your company’s sustainability and
Net Zero goals by 2030?
14 AR/VR, AI, and 5G Technologies Expected to Have Most Sustainability Impact by 2030
Q: Which of the following M4.0 technologies are already having the most impact on achieving your Sustainability / Net Zero goals today and which do you feel will have the most impact by 2030?
Part 4: The CIRCULAR INDUSTRIAL ECONOMY
15 81% Believe Circular Economy Approaches Will Increasingly Impact Manufacturing
Q: Looking forward, how impactful do you think the concept of a regenerative Circular Industrial Economy — where traditional ‘Take, Make Dispose’ approaches increasingly give way to ‘Refurbish, Reuse, Recycle’ approaches — will be to the future of manufacturing?
16 Recycling Increasing, But Significant Room for Improvement in Sustainable Product Design
Q: During your product design and development process, which of the following are formal design criteria related to product end-of-life? (All that apply)
17 30% Now Provide Programs to Return Products to Recycling Partner at End-of-Life
Q: Which of the following programs or processes does your company have in place that support product returns/end-of-life activities? (All that apply)
Part 5: SOCIETAL RESPONSIBILITY
18 87% Believe Manufacturing
Has a Special Responsibility to Society
to Become More Sustainable
Q: Due to the nature of manufacturing, with its use of raw materials and often complex production processes, do you think the industry has a special responsibility to society to become more sustainable and accelerate the transition to a future circular industrial economy?
Survey development was led by Paul Tate, with input from the MLC editorial team and the MLC’s Board of Governors.
Middle market executives are increasingly shifting from a linear to a circular economy mindset because it offers a systemic approach to economic development that benefits business, overall society, and the environment. Advanced 4.0 technologies can help them get there.
The era of linear lifecycles for manufacturing products is gradually becoming a thing of the past, especially as the growing focus on environmental, social, and governance issues raises the stakes for firms to be competitive in these areas. As companies embark on new goals to create more circular economy oriented products and production systems, it will be crucial for manufacturers to examine new ways in which advanced strategy and technologies can help them meet environmental targets.
The concept of a circular economy—in which a company makes reducing waste, reusing materials, and recycling products central to its production processes—is not new. But there is a confluence of factors making it particularly urgent right now: the Biden administration’s climate and energy goals, demand from customers and investors to adopt more sustainable practices, rising input costs for manufacturers, the semiconductor shortage, and new challenges around mining for and developing batteries, to name a few.
All of this is ramping up attention on circular economy efforts, and more and more research shows that this approach can help manufacturers tap into a huge market opportunity.
Industry 4.0 technologies such as advanced data analytics, digital twins, and 3D printing can enable companies to develop and hone their circular economy processes, thereby helping them realize these opportunities for savings, improved efficiencies, and reduced waste.
The growing prominence of the circular economy goes hand in hand with that of ESG priorities, and companies and governments are setting new standards related to these measures. The European Union, for instance, in March of 2020 adopted a circular economy action plan that includes “initiatives along the entire life cycle of products.” The plan “targets how products are designed, promotes circular economy processes, encourages sustainable consumption, and aims to ensure that waste is prevented and the resources used are kept in the EU economy for as long as possible.”
Industrial companies that want to keep pace with such changes need to act quickly to determine where they may need to make capital investments that make their products and processes aligned with circular economy principles. Investments in advanced technologies can help provide visibility into their production and supply chains that will identify, monitor, and improve critical areas.
“It will be crucial for manufacturers to examine new ways in which advanced strategy and technologies can help them meet environmental targets.”
Even companies that are profitable with their current use of linear production systems need to understand that a broad range of stakeholders will factor waste reduction and product reuse into their buying decisions more and more in the future. Going forward, companies will increasingly be judged on the process they took to develop a given part or product, rather than just the fact that they were able to manufacture that part or product.
Leadership teams need to get comfortable with competing on these new criteria and goals around reducing emissions, especially as familiarity around ESG has grown: “Familiarity among middle market executives with the use of ESG criteria to evaluate the performance of businesses, organizations and/or investments rose significantly in the third quarter of 2021, compared to the fourth quarter in 2019,” according to a recent RSM report that polled executives in July this year on ESG- and climate change-related questions. “In the last part of 2019, 39% of executives were very familiar or somewhat familiar with using ESG criteria to evaluate performance, and in Q3 2021, that figure was 69%,” notes the report.
High Impact Technologies
Along with identifying problems and how to fix them, advanced technologies can also help manufacturers identify new opportunities and figure out how best to tap into them.
For example, some specific 4.0 technologies can actively help manufacturers accelerate and deliver on their aggressive waste and emission reduction targets:
- 3D printing: Advancements in additive manufacturing technologies have enabled manufactures to make products using fewer components and consequently fewer resources. Moreover, additive manufacturing processes lend themselves to more rapid prototype development, significantly reducing the time, energy, and resources otherwise consumed in multiple iterations of physical tooling and molding prototypes.
- Digital twins: Digital twins provide virtual representations of products, processes, or equipment. By performing design activities, maintenance, and build changes on the virtual models, manufacturers can optimize the design or process and reduce time and resources involved in assembling, building, maintaining, installing, and validating factory productions systems. The successful implementation of digital twins requires IT infrastructure that supports the Industrial Internet of Things and the use of real-time data.
- Advanced data analytics: It is common knowledge that the manufacturing sector is one of the highest energy consuming sectors. Data will be central to manufacturers’ ability to adopt more circular production processes and it is critical to have the right infrastructure to access that data. Having access to key operational data is only the first step; companies also need to harness that data for insights that can reveal inefficiencies and identify opportunities for growth. For example, manufacturers can improve energy efficiency through real-time, data driven decision-making, allowing plant managers to monitor excess or untimely energy consumption so they ca organize quick interventions to reduce energy costs by realigning production schedules. Businesses can also use predictive analytics to reduce machinery downtime by anticipating factors that lead to machine breakdown or reduced performance, streamlining processes and reducing bottlenecks through real-time visibility into processes, suppliers, and priorities.
Opportunities and Challenges
While manufacturers can use circular economy practices to achieve their emissions targets and differentiate themselves from their competition, there is a wide array of possibilities for exactly how a company might implement these practices. As OEMs increasingly make ESG and circular economy principles central to their procurement practices, middle market suppliers can increase their relevance to OEM customers by helping them achieve such targets.
“Setting a defined methodology for tracking circular performance indications is imperative and will enable better corporate decision making.”
A number of areas may be ripe for progress, depending on where a manufacturer is on its journey toward closing the production loop:
- Shifting to the use of renewable energy sources
- Improving the traceability of sourced materials
- Using lighter and more aerodynamic materials (which can translate to using less fuel)
- Reducing or eliminating packaging waste
- Redesigning products to reduce waste
- Providing transparency around circular business practices
While some of these may be low-hanging fruit, companies should waste no time integrating these solutions. Competition will only get tougher as more and more companies embrace such practices. Companies are already getting serious about circular economy approaches across both their operations and supply chains. As Bloomberg’s BNEF research service revealed earlier this year: “There were a record number of supply agreements for recycled material in 4Q 2020.”3 Adding that, “Not only is the number of circular economy partnerships rising, but the engagements are more substantial.”
McKinsey estimates that of all the fuel that industrial companies use for energy, almost 50% can be replaced with electricity using technologies available today.
Manufacturers should be prepared to take advantage of government incentives around recycling and other programs related to reducing waste and emissions, but they should also think just as strategically about managing their inputs—that means using fewer inputs and using greener inputs. Companies are now exploring the production of green steel, for example, which involves making steel using hydrogen or other renewable sources of energy. And many are already moving toward electric products and the electrification of production processes.
McKinsey4 estimates that of all the fuel that industrial companies use for energy, almost 50% can be replaced with electricity using technologies available today. That shift toward electrification, of course, brings its own challenges of increased costs and investments needed, especially if the technologies are not yet widely adopted. Moreover, as companies increasingly move toward green products and processes to reduce their carbon footprints, demand for green metals such as nickel and copper are at an all-time high, driving up prices.
Middle market executives understand well the pro-societal outcomes that result from circular business practices, and yet, many still want to see the correlation between changes in business practices and improved financial, and even nonfinancial, performance. Setting a defined methodology for tracking circular performance indications is imperative and will enable better corporate decision making.
The shift to circular economy practices will bring many benefits for manufacturers, but the scope of challenges will vary greatly depending on where in the supply chain a given manufacturer operates. Middle market component suppliers, for instance, may have to rethink their broader value proposition if their customers need fewer components overall.
Businesses are now focused on more than just shareholders, and increasingly must meet the demands of a broader range of stakeholders including customers and suppliers. Middle market executives are continuing to shift from a linear to a circular mindset because they recognize that the circular economy is a systemic approach to economic development that benefits business, overall society, and the environment. M
Time to redefine the focus of
industrial sustainability around creative climate-smart innovation.
Today’s urgent debate on the need for greater industrial sustainability often focuses almost exclusively on reduction – reductions in carbon emissions, materials, energy, water, waste, transport miles, and more.
These challenges are all critically important. The World Economic Forum estimates that the global manufacturing and production sector currently generates around 20% of global CO2 emissions and consumes 54% of the world’s energy. Reductions are essential, both to drive efficiency and to curtail the worst excesses of climate change.
Yet, that’s only half the story. As with every industrial transformation over the last two and a half centuries, major shifts in operational approaches and priorities have opened up massive new areas of opportunity for game-changing innovative ideas that have transformed markets, competition, business models, economies, and often whole ways of life.
Manufacturing now stands on the threshold of a new seismic shift in priorities: the sustainable industrial era. The opportunities for competitive climate-smart innovation in this new era, from smart products to green production approaches to global climate-saving solutions, are almost boundless.
There’s no shortage of new ideas out there, many of them already gaining traction. In the last two months alone, Dow has announced plans to open the world’s first zero carbon emissions ethylene cracking and derivatives complex in Canada; Rolls-Royce’s experimental Spirit of Innovation aircraft broke three world records for speed and rate of climb as the world’s fastest all-electric vehicle; the Jones Food Company in the U.K broke ground on what aims be the world’s largest vertical farm providing 148,000 square feet of energy-saving vertical growing space; and one urban air purification project in Anyang, South Korea is even turning compressed smog particles into sustainable jewelry.
In every industrial era, the power of innovation has always driven manufacturing’s development and success. As we begin a new decade, perhaps it’s time the global manufacturing industry rebalanced its whole focus around the sustainability debate, away from a preoccupation with the challenges of disruption and towards a new era of competitive opportunity for creative climate smart innovation. – Paul Tate M
Combatting climate change in a manufacturing operation can be daunting — but it doesn’t have to be. Here is a roadmap manufacturers can use to reduce their carbon footprint and take the lead in the race to net zero.
On the opening day of COP26, U.N. Secretary General Antonio Guterres laid bare the challenge associated with reversing the effects of climate change. “The science is clear. We know what to do. First, we must keep the goal of 1.5 degrees Celsius alive. This requires greater ambition on mitigation and immediate concrete action to reduce global emissions by 45% by 2030.”
Held in Glasgow in November 2021, the COP26 climate summit was a global gathering of world leaders, climate activists, and business representatives hosted by the United Nations in pursuit of the goal to reduce carbon emissions to net zero by 2050 and to mitigate the risks we already are facing.
Consensus has coalesced around the need to address the climate emergency, both through climate risk management and decarbonization. Governments are establishing stricter regulations and setting targets to stimulate investment and action. At the highest levels of industry, leaders are making ambitious, broad-based commitments to positively contribute to addressing the climate emergency. Global organizations are advancing frameworks and guidance to support the drive to net zero carbon and beyond.
What role should manufacturers have in responding to climate risk? A significant one, it turns out.
What the Research Tells Us
A pre-pandemic study by the International Energy Agency (IEA) found that nearly 40% of total direct and indirect CO2 emissions are driven by the built environment. Additionally, according to IEA’s recent Energy Efficiency 2020 report, in only one type of building — food sales services — was average energy intensity higher than in manufacturing and industrial facilities, based on smart meter data in two regions of the U.S. Taken together, these statistics lead us to a stark conclusion: The manufacturing and industrial sector shoulders a disproportionate share of the burden to reverse the impacts of climate change.
Incorporating Climate into Corporate Operations
As global consciousness, increasing regulations, and increases in costs continue to drive companies to commit to ambitious sustainability targets, the manufacturing sector will increasingly feel pressure to reduce its carbon footprint. Companies are establishing sustainability commitments, many of which include achieving net zero carbon operations by 2050 at the latest. But setting commitments is the first step in a long journey. In a survey of global JLL clients, 96% responded that their companies had established ambitious, publicly stated sustainability goals, but only 19% of companies had an action plan with identified financing sources to achieve these targets.
This gap between ambition and action will likely drive more pressure down into the organization to realize sustainability outcomes. The responsibility for driving emission reductions will increasingly fall on managers and directors, most of whom have little guidance on how to successfully achieve these goals across the scale of their real estate portfolio. With respect to climate, the challenge for leadership of manufacturing firms is twofold: affirmatively acting to mitigate climate risk and driving decarbonization of operations, while facing increasing costs and increasing regulation.
Climate Risk Management
Climate risk management includes identifying, quantifying, and addressing both transition risk and physical risk. Transition risks arise as our global economies transition from dependency on fossil fuels to low- or no-carbon economies. Examples of transition risks include reputational risk, regulatory risk, legal, and market risk. Physical risks arise from the changes in weather patterns and climate. Examples of physical risks include both chronic impacts, such as extreme heat or drought, and acute risks such as hurricanes and wildfires.
To understand current exposure, leadership should employ climate risk analysis, which entails assessment of physical climate hazard risk and financial exposure related to operations, supply chain, assets, or markets. Once risks are known, companies should identify specific actions to mitigate and, where possible, eliminate risks.
“What role should manufacturers have in responding to climate risk? A significant one, it turns out.”
Climate risk analytics are increasingly powered by artificial intelligence and digital platforms, although the quality of the output of these technologies is limited by the veracity of the inputs. The most arduous part of assessing climate risk and establishing mitigation strategies often relate to gathering and verifying data on operations and ensuring accuracy and relevance of market-sourced information.
In addition to internal drivers of climate risk assessment, the manufacturing sector is increasingly facing market-specific regulatory requirements related to assessment and disclosure of climate risk exposure. Increased scrutiny of climate risk management is creating demand for monitoring, reporting, and disclosure of company- and asset-level status with respect to transition and physical risks.
The Time to Align with TCFD Is Now
The Task Force on Climate-Related Financial Disclosures (TCFD) was established by the Financial Stability Board to identify guidance on corporate disclosures related to climate to enhance decision-making of investment, credit, and insurance stakeholders. Alignment to TCFD is intended to advance the inclusion of climate-related risks into corporate strategy while also providing transparency to the market on the exposure of companies to climate risk. TCFD’s climate-related financial disclosure recommendations incorporate four areas: governance, strategy, risk, management, and metrics and targets.
Companies are increasingly expected to align to TCFD, particularly with the growth of ESG investing. Climate risk management is a key underpinning of TCFD alignment, and companies will be increasingly challenged to demonstrate robust and outcome-driving initiatives to assess and address the transition and physical risks in business operations.
Decarbonization Journey Starts With Three Steps
The corollary to climate risk management is decarbonization, which involves transitioning to a net zero carbon economy. A hallmark of the Paris Agreement, a legally-binding commitment to address climate change and to pursue a sustainable carbon position, is to maintain global temperature rise below 2 degrees Celsius relative to pre-industrial levels and an ambition to limit the rise to 1.5 degree Celsius. Substantially reducing the aggregate carbon footprint of the global economy is necessary to achieve these targets.
“Decarbonization is a marathon, not a sprint, and requires continuous monitoring of performance relative to stated targets and commitments.”
Realizing the level of decarbonization needed to fulfill the Paris Agreement requires partnership between government and industry, as well as accountability on both sides. Within the manufacturing sector, ownership of carbon action plans must cascade throughout the organization, including to individual plant managers and regional operators.
How do operational leaders practically contribute to the global temperature mitigation efforts identified in the Paris Agreement? Most simplistically, by following three steps:
- Establishing a baseline of the carbon footprint for the business, inclusive of operations, supply chain, and assets
- Developing and implementing a path to reducing, eliminating, or even positively offsetting the carbon footprint across the enterprise
- Monitoring and measuring the ongoing performance of operations relative to stated and evolving targets
Many standards and tools exist to enable companies to establish carbon footprint baselines. Often, the most challenging part of baseline setting is accessing, verifying, and synthesizing available data from various sources, which is compounded for global operations and complex organizations.
With a baseline in hand, leaders should set action plans to achieve carbon footprint reduction in the timeline and manner set forth in sustainability commitments and identify the capital and operational funding that will facilitate fulfillment of the elements of the plans.
While decarbonization pathways for manufacturing firms are not limited to mitigating fossil fuel usage in plants, the breadth of strategies available for use in carbon reduction-related action plans is exemplified when considering energy consumption in manufacturing facilities. Considering the share of global emissions related to the built environment and the relative energy intensity of manufacturing assets, addressing energy demand and supply will provide meaningful contribution to achieving the ambitions of the Paris Agreement.
5 Levers of Change for the Built Environment
On the surface, the interconnectedness of energy demand and supply and the associated rapidly emerging technology landscape complicates the development of decarbonization investment strategies. To simplify, consider five discrete, although not all-encompassing, levers related to energy demand and supply in the built environment:
- Energy demand management
- Major infrastructure upgrades
- On-site clean energy generation and storage
- Renewable energy procurement
- Carbon offsets
Of the levers, energy demand management is often the default when considering reducing energy usage in an asset. Energy demand management entails a programmatic approach to assessing and establishing initiatives to address the significant contributors to a facility’s carbon footprint. These programs include actions such as reviewing and revising operational protocols, identifying energy retrofit projects and pursuing associated energy grants and incentives, incorporating carbon footprint reduction tactics into vendor contracts, and utility data management and monitoring. Among the most common retrofit project options for consideration in action plans are optimization of building control systems, smart building technologies, LED lighting and lighting controls, and retrocommissioning of Heating, Ventilation, and Air Conditioning (HVAC) systems.
While the adoption of energy efficiency retrofits and demand management programs has grown, underinvestment in major infrastructure improvements is prevalent due to the high capital investment required, complexity of the upgrades, and criticality of the major building equipment to production and overall site operations. This opportunity is often the most substantial in older assets and can be the single largest action owners can take to reduce onsite energy use. Energy demand management and major infrastructure upgrades combined can typically only address between 20%-40% of total carbon emissions. As a result, a comprehensive path to net zero carbon requires supply-side strategies as well.
The 2018 Corporate Sourcing of Renewables, published by the International Renewable Energy Agency, identifies Industrial, with 19 TWh of renewable energy consumption, as the fourth-ranked sector with respect to renewable energy sourcing. According to the same report, only 8% of electricity consumption in the Industrial Sector is renewable energy.
In geographic markets where on-site renewable energy generation is both viable through favorable regulation and financially supported, manufacturing sites often provide ideal conditions for a variety of clean energy solutions, including rooftop and carport solar photovoltaics, scaled wind turbines, battery storage and microgrids, and electric fleet and vehicle infrastructure. Costs of renewable energy technologies have declined substantially in the past decade, and the reliability of various approaches has increased. Further, the marketplace of renewable energy developers continues to mature, providing more aligned capital and financing structures and reducing counterparty risk.
Beyond utilities, the availability of alternative approaches to reduce carbon footprint of assets through energy procurement is increasing.
This convergence of positive drivers of the growth of on-site strategies is well-timed. With increasing regulation and investor pressure for decreased carbon footprints, the ability to generate energy on-site and to integrate storage and infrastructure such as EV charging and fleet electrification provide the benefit of achieving sustainability goals while simultaneously enhancing resilience.
In situations where on-site generation is not viable or feasible, offsite solutions, including renewable energy procurement, provide meaningful outcomes and are becoming more readily available in many major geographic markets globally. In some jurisdictions, investor and regulatory drivers are greening the grid, as local utilities have incentive to accelerate the transition from fossil fuels to clean energy.
Beyond utilities, the availability of alternative approaches to reduce carbon footprint of assets through energy procurement is increasing. Among the suite of available options are power purchase agreements (PPAs) or virtual power purchase agreements (vPPAs), renewable energy marketplaces, and aggregation of demand to achieve scale. Each of these strategies allow manufacturing firms to maintain, if not enhance, operational performance of the asset while decarbonizing their footprint.
The final major lever in decarbonizing manufacturing assets is unbundled energy attribute certificates (EACs), which allow companies to purchase specific units of renewable electricity through a contract that specifies the source of that energy generation. The purchaser of unbundled EACs does not purchase specific electric generation. Unbundled EACs are often secured through marketplace agents. The most widely-known energy attribute systems include renewable energy certifications (RECs), International Renewable Energy Certificates (I-RECs), and guarantees of origin (GOs). While important in the decarbonization ecosystem, unbundled EACs are transitioning from a solution of first resort to an approach to offset residual carbon footprint not mitigated by the first four levers discussed above. M
Scientists, politicians, global bodies such as the United Nations, and a variety of other groups often refer to the problem of climate change using words like crisis, existential threat, and emergency.
Given the fact that the nations of the world haven’t yet been able to keep global warming from rising, such highly charged characterizations of climate change may indeed be warranted and even useful in accelerating action to combat climate change.
But theory doesn’t seem to be leading to needed behavioral change. A huge gap exists between the language being used to describe the effects of climate change and the actions to deal effectively with it. Neither the world’s governments nor many of its citizens are behaving as if a real emergency exists.
Case in point: the meeting last month of the COP26 group in Glasgow, Scotland. About 200 countries met to discuss ways to deal with climate change but the outcome of the meeting, although producing some positive results, disappointed many, leading to the event being branded by skeptics as “COP-OUT26”.
There is little chance, of course, that those who are genuine in their desire to save the planet will stop using those highly charged characterizations. Perhaps if the messages are sent with greater frequency and force more people will demand action.
But more clearly needs to be done to close the gap. This is an opportunity for industry to take the lead. And many in industry seem inclined to do so. One of the most interesting findings in the MLC’s new survey on sustainability, results of which are published in this issue, is that 87% of respondents believe that the manufacturing industry has a “special responsibility” to deal with climate change.
As the manufacturing industry applies its considerable muscle and many hands to the problem, the gap will, hopefully, shrink, leading to progress.
As Katherine Hayhoe, chief scientist for the Nature Conservancy, said in a recent interview with McKinsey:
“The giant boulder of climate action is not sitting at the bottom of an impossibly steep cliff with only a few hands trying to push it up. … when we encourage others to add their hands too, it will go even faster.” M
P&G aims to slash transportation CO2 by 50% by 2030 and to achieve net zero emissions by 2040.
U.S.–based global FMCG manufacturer Procter & Gamble has launched comprehensive action plan to accelerate its fight against climate change. At the Geneva headquarters of P&G Europe, Pietro D’Arpa, Vice President Supply Chain Europe, explains, “P&G has announced its ambition to achieve zero net greenhouse gas emissions by 2040 for all of its production activities and for its entire supply chain, from the collection of raw materials to retailers’ distribution centers.”
D’Arpa, who is leading the effort in Europe to find new solutions, particularly in the field of logistics, says the company also is planning to reach intermediate targets for transportation emissions by 2030, “Significant progress will already be made in the current decade.” At the global level, P&G aims to reduce transportation carbon emissions by 50% over 2020 levels in 2030.
P&G is using a multipronged approach to accomplish its 2030 goal, including developing key partnerships with multiple types of organizations to help fill strategic gaps as well as use both new physical and digital technologies to get materials and products from point A to point B with the lowest possible carbon footprint.
One example is a European Union–funded initiative to develop a dynamic, real-time digital network optimizer to bring new technology to the age-old problem of determining the best mix of transport modes — and how they’re scheduled. The plan is to reduce inefficiencies, such as sending out trucks that are just half full, and unnecessary delays at transfer points, as well as minimize costs. The initiative also includes exploring a novel technology that could help pack pallets more efficiently and reduce packaging waste before products even leave the warehouse.
Procter & Gamble makes household consumer goods including well-known brands such as Tide, Pampers, and Gillette, in 70 factories around the world. It sells these FMCGs in 180 markets to the tune of $71 billion annually and employs 100,000 people around the globe.
Just in Europe, P&G has more than 30 manufacturing sites and warehouses that serve both Europe and overseas markets. Altogether, these European operations alone move 7.5 billion TonKm across Europe using a multitude of modes, including over-the-road trucking, rail, and ocean.
“Significant progress will already be made in the current decade.”
P&G has already reduced its emissions considerably: For 2020, the company announced a 20% reduction of the truck-miles driven per unit of product vs. base 2010 — and exceeded that target. “So we decided to set a new, more ambitious set of goals for 2030 using 2020 as a baseline,” says D’Arpa. “Today we have implemented a methodology (known as GLEC) that allows us to track directly greenhouse gases expressed as CO2 equivalents, and we set our new goals using this metric.”
The European Union also has set an ambitious goal with its European Green Deal: To become carbon neutral by 2050, with an economy that produces net zero GHG emissions. While many business sectors are already taking steps to reduce their carbon footprint, road freight transport, which accounts for 6% of total EU CO2 emissions, could continue to grow as much as 50% unless all the players work together to decarbonize transport, according to a report by transportation and logistics company Transporeon.
Key Focus Areas
P&G Europe is working to accelerate the migration from road to train/ship, known as inter-modality, with a particular focus on dramatically increasing its use of rail for long-haul freight. “This is the number one of the number one,” says D’Arpa. “This is crucial! Long-distance transport (>600 miles) represents a significant portion of greenhouse gas–equivalent emissions in Europe. Because rail transport is 75% less CO2-intensive than over-the-road trucking, if we could shift all of these loads to multimodal solutions, this intervention alone would get us very close to our 50% reduction by 2030 goal.”
The second opportunity D’Arpa sees is to maximize efficiency for road transport. “We cannot afford one single yard of empty miles and we cannot afford one cubic foot of empty space in our trucks.”
Over the medium to longer term, the company is also focusing on converting its ground transport vehicles from fossil fuels to electric and renewable alternatives.
There are many challenges to overcome. For example, in Europe, the railway system could be better coordinated nationally or internationally. That would simplify the switch from road to rail and unleash additional capacity, says D’Arpa.
Also, despite efforts to reduce trucks running empty over the years, the problem persists, with an average of empty miles still running at around 20%. While the percentage for cross-border haulage tends to be lower than for domestic transport, post-Brexit almost 40% of trucks are traveling empty between the UK and the EU.
While inter-modality — shifting more road freight to rail as the long-haul — is a key strategic intervention, the reality is that heavy vehicle trucking won’t disappear any time soon. To get a clearer picture of the actions businesses, policymakers, and financial organizations can take to get heavy vehicle transport on the road to decarbonization by 2050, the World Economic Forum instituted its Mission Possible Platform Initiative Road Freight Zero (RFZ).
One important step of the initiative’s plan is to showcase what first-movers are doing to overcome key barriers and achieve shorter-term gains, such as switching more freight hauling from over-the-road to rail, transforming overland trucking vehicles to more-efficient fuel sources, optimizing routes and load-building, and building partnerships and tools to optimize loading.
In concrete terms, Procter & Gamble is relying heavily on innovation to decarbonize its supply chain. For example, it is working actively to introduce electric trucks to transport goods within its facilities; this technology will have to be developed further before it can be deployed on a larger scale. The same applies to the use of biofuel for long-distance transport: “There is not enough production to meet the demand and the cost is high,” says D’Arpa. “Short-term investment and industry commitment are needed for this technology.
“We believe that between 5%
and 10% of our emissions
could be reduced through
synchro-modality,” says D’Arpa.
“P&G has joined a group of companies that have publicly declared their support for A.P. Moller-Maersk, one of the world’s largest shipping companies, which wants to develop innovative solutions related to biofuel,” says D’Arpa. It should be noted that A.P. Moller-Maersk will launch eight methanol container ships as early as 2024. “This is an important decision, as it gives a clear signal to the whole industry. There will be a big market for biofuels. In the short term, we’ll spend more money, but in the medium to long term, it’s the right thing to do,” says D’Arpa.
In the area of logistics innovation, P&G is also working with some institutions to develop CO2-capture devices, which D’Arpa calls “A very promising technology.”
P&G is looking to move beyond inter-modality into synchro-modality, which includes looking at the transport modes that will minimize delays at transfer points while determining the tradeoffs of different transport modes when it comes to cost, service, and speed. The final goal is to allow for sustainable transport solutions with no deterioration on service levels.
To help determine the best synchro-modal transport mix to achieve its goals, P&G has been working in the context of an EU Horizon 2020 Innovation project, ICONET, to develop a real-time digital network optimizer. The aim of the ICONET project is to demonstrate how a concept known as the Physical Internet (PI) could work. P.I. is an open logistic network concept where all transport and logistic assets and infrastructures are cooperatively and dynamically optimized with an approach similar to the handling of data flows and storage in the digital Internet. The project has shown that indeed it is possible to minimize freight logistics environmental impact without increasing costs or reducing service levels. “We believe that between 5% and 10% of our emissions could be reduced through synchro-modality,” says D’Arpa.
It will take collaboration and visibility to eliminate empty miles. Because greater sustainability and greater efficiency will require having both shippers and carriers share data through a well-connecting network so they can make better decisions in real time, P&G already has initiated conversations with third-party product and logistic suppliers, retail customers, and other shippers that use a complementary transport service to determine how they can collaborate to eliminate or reuse empty miles in the spirit of the Physical Internet.
As D’Arpa notes, “If we create a micro-cluster of lanes — not just one lane from A to B but looking from A to B to C to D — we can identify new opportunities to reduce empty miles.”
P&G also is testing another idea to use vehicle capacity more efficiently and increase Vehicle Fill Rate. The company has joined a GS1 Germany-led initiative to introduce the SMARTBOX, a reusable, recyclable plastic box that, by standardizing container usage across the industry, could optimize pallet usage and reduce packaging waste. SMARTBOX, which keeps its contents anonymous, could help companies raise load factors by pooling consignments. The rationale is that if products fit the pallets more efficiently, trucks can be loaded more optimally. It has been estimated that an increase of average weight load factors to 80% would reduce trips in half.
The Need For Partnership
D’Arpa is quick to re-emphasize that the work ahead is vast and requires leveraging existing solutions and seeking out new ones that are not available in the market today.
“This will require a partnership between the private, public and nonprofit sectors and will involve all aspects of our business,” he says. “We need to work with actors across the whole playing field. Everyone who might accelerate this journey is welcome, from the EU, from industry, from academia, everyone’s contribution is necessary.”
He adds that it’s time to stop talking and start testing some of these new solutions — after all, “the best solution might be an average of many solutions,” he says. “This we need to test. The more we test and the faster we do it, the more we learn. Talking is fine but it’s time we test and learn together and quickly reduce emissions.” M
Aircraft manufacturing demands the highest-quality materials, highly trained experts, rigorous quality control, and precision processes that remain largely manual. These demands make it an ideal candidate for a digital reinvention.
By combining major leaps in operating technology (OT) with integrated IT for a fully optimized environment, aircraft manufacturers can take advantage of recent advances in automation and analytics to improve manufacturing speed and accuracy and reduce waste, making manufacturing cells both more efficient and sustainable.
A single-aisle commercial aircraft contains tens of thousands of nutplates. The manual installation of each one takes three to four minutes.
This process is repeated thousands of times over the life of the craft as plates are removed and reinstalled for routine maintenance. Until now, nutplate installation has been done manually, exposing manufacturers to risks including:
- Human error: Over the course of tens of thousands of manual actions, mistakes are inevitable. The potential for error is compounded by the small size of nutplate components, which make them difficult to handle and increase the potential for mistakes.
- Rising costs: Beyond the sheer labor cost of time on the job, the associated errors of manual installation lead to increased costs through scrapped materials, poor inventory management and time-intensive quality control.
- Inefficiency: Manual installation often requires down time for changing tools and changing shifts. It also limits visibility across the manufacturing environment, which means that resources are sometimes unavailable or poorly optimized.
To meet today’s demands to become more sustainable and socially accountable, manufacturers must also find ways to reduce the waste and inefficiencies inherent in their legacy processes, and the aerospace industry is no exception.
To address these multiple challenges, automated manufacturing and robotics technology provider, JR Automation, has deployed Hitachi Vantara’s Lumada Manufacturing Insights in its SmartAttach™ manufacturing cell as a way to merge the huge advances in automation at the operational level with superior insights at the informational level to help drive a comprehensive shift toward smarter aerospace manufacturing for the future.
How manufacturers can take advantage of the positive benefits of integrating a circular economy model
Change at any scale can be a challenge, but when it comes to manufacturing companies and the environment, early adoption will be less costly than inaction. The key to adapting effectively will be to ensure the adaptations address forward considerations while taking present needs into account. A circular economy framework can help businesses to bridge this gap effectively.
A circular economy is not just about better recycling. It’s a comprehensive systems-based methodology to transforming linear economic patterns into ones that can enhance the longevity of materials and reduce waste and waste impacts, while increasing returns. A circular economy framework can be used in the manufacturing sector to improve transparency and traceability, transition to renewable energy and circular feedstocks, and optimize and extend existing value chains through digitization. Manufacturers can deploy artificial intelligence (AI) to open new market opportunities with reuse, repair, and remanufacturing loops in the value chain.
Manufacturing organizations looking to take advantage of circular economy principles should begin by seeking a basic understanding of how circular their operations are across the value chain — feedstock, manufacturing, distribution, product use, and product end-of-life. This will help to establish a baseline and identify opportunities to reduce waste and create circular material loops.
Next, select an element of the value chain to start with. Feedstocks? Production processes? Product use? End of first life? While some initiatives may span each of these areas, identifying a specific place to start can help organizations best understand how to scale a circular initiative throughout the company or a given manufacturing process.
It’s also important to get senior leadership buy-in to a circular initiative. Circularity in an organization is no small shift to make – if the highest levels of leadership are not helping to champion this endeavor, it will be very challenging to scale circularity throughout the enterprise. Once buy-in and sponsorship has been secured, begin the process of evaluating, planning, and enacting a circular business model. As was seen with COVID-19, businesses that can quickly adapt to rapidly changing global social and political dynamics will more ably leap ahead. Those that cannot adapt to changing global environments and sociopolitical preferences will have a very difficult time maintaining market share and brand reputation moving forward.
Shop Floor to Top Floor Traceability
Industry analysts in the manufacturing sector often talk about the importance of shop floor to top floor traceability. Companies need a framework in place to reduce resource use and create full traceability for certification that proves the inputs into their products are reused, recycled, or renewable.
In a circular economy, economic growth is decoupled from the legacy linear model of material consumption and end-of-life devaluation or waste. The circular economy maximizes both positive value capture by using resources efficiently, and value creation by keeping resources in the market. Value chain members take ownership of the energy, material, human, and data resources that form the products and services throughout their value chains. They design strategies to bring resources full circle for reuse without quality degradation — with an aim of zero waste and regeneration.¹ The circular economy is not just positive for the environment. Businesses that have embraced the model are seeing bottom-line business value – benefit streams can include cost and tax reduction, reduced material costs, energy savings, higher valuations, growth through new products/revenue streams, and favorable consumer and investor goodwill toward their brands.
“Be proactive and become a critical participant in the industrial community for designing sustainability and circularity strategies.”
Manufacturers need to expand dialogues with suppliers to better understand what’s in – and used in the production of – the materials they procure. Consumers are rapidly demanding that companies track every input, every operation, every application of energy for a particular product, and how those impact the various scopes of the global environment or system the business operates in. Now is the time to start looking into these points and building a corporate sustainability initiative. This will require alignment and collaboration vertically and across internal departments, along with external vendors and customers. If you wait to react until regulations are released, you may have mobilized too late. Be proactive and become a critical participant in the industrial community for designing sustainability and circularity strategies.
With the right foundational elements in place, industry 4.0 solutions can help factories – and the supply chains supporting them – meet these challenges. Improved operational agility can be achieved through enhanced visibility and predictive analytics. Fifth-generation (5G) cellular wireless communications leveraging on-machine or edge technology can unleash industrial internet of things (IIoT) devices and sensors to serve as the medium for capturing critical data flows across manufacturing assets — both new and legacy — on a much greater scale. The data generated by the IIoT ecosystem will be quickly processed with machine learning (ML) and lead to AI, generating insights now operationalized by robotic process automation (RPA). The creation of digital twins — software representations of physical manufacturing plants or other assets – will facilitate the simulation, monitoring, testing and modeling of data in a virtual environment to vastly improve real-world key performance indicators (KPIs).²
Maximize Renewable and Reusable Inputs
Manufacturers need to proactively maximize renewable and reusable inputs while minimizing footprints and net outflows with smart resource use. For example, if a facility has a solar thermal hot water energy system, the input is renewable solar radiation energy, while the output is heat in the form of heated water. The water does not exit the facility as waste; it is cycled back through cooling to renew as an input for continuous energy generation.³ In another case, distillery grain by-products are remarketed and sold as inputs to animal feed producers.4 Companies that can identify these types of opportunities can make a noticeable impact on their carbon footprint while positively impacting profits.
This can be very important when it comes to reducing the scope 1 and scope 2 greenhouse gas (GHG) emissions that organizations have some control over. Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain. According to the GHG Corporate Protocol, all organizations should quantify scope 1 and 2 emissions when reporting and disclosing GHG emissions, while scope 3 emissions quantification is not required.5 However, due to customer transparency expectations, more organizations are reaching into their value chain to understand the full GHG impact of their operations.²
In addition to creating a positive footprint with business activity, it’s critical to recommit to and elevate key disciplines to address increased supply/mix variability. Manufacturing processes will need to be more flexible to deal with a more variable supply. It’s not feasible to simply have more setups or big changes in yield, which also create inefficiencies and increased scrap and losses. Manufacturing systems need strategies to adjust to the reality of supply mix variability.
These areas both speak to the importance of visibility throughout the extended value chain. Are there tools and technologies that can help to better understand traceability, waste, value capture and value creation opportunities related to sustainability?
Digital transformation tools that already exist enable manufacturers to embed uniform process execution, quality control, recognize waste, as well as enable business partner management for operational scope outside the “four walls” of the business.
The capital allocation that comes with this may be different. For example, recycling plants, reuse, or surplus material remarketing points may be more distributed and owned by municipalities. Manufacturers may need to invest in those and new plants, embed part of their production system, and digitally integrate with them. Due to the field-based, multi-stakeholder nature of the opportunity, the reverse value chain and the circular economy are not going to be wholly supplier-driven and owned. There may need to be cooperative plants or investments. How can so many partners be managed? Procurement leaders are already thriving in agile relationships with key feedstock suppliers and commercial leaders with top distributors. Manufacturing can learn leading practice by engaging in conversations with their procurement and commercial counterparts.
“Remember to pause along the journey to recognize systems already in place to reduce waste.”
End customers may demand design or engineering for circularity topics such as disassembly, modularity or upgrade, maintenance and repair, favoring leasing business models over single product purchase, and reuse or remanufacture of parts. Lean in. They may optimistically design something that is indeed circular, but that would be very hard to make with current manufacturing capabilities or available materials. Design products with manufacturing processes in mind. Get more engaged in that process from the start by collaborating to match manufacturer readiness with customer demand. Design improvements that can make products and processes more circular. Skate to where the puck will be. If necessary, free-up capital for new plants and partners in the supply chain ecosystem.
Maximize Current Tools and Capabilities
Many manufacturers have invested a great deal of time and effort in becoming lean or earning kaizen and six sigma certifications. These are more than great starting points to building sustainability and creating a circular economy. Existing technology can be leveraged to transfer these concepts to quantify sustainability and circular economy activities. Those in the beginning phases of implementing IIoT technologies may have immediate opportunities in areas such as energy. Avoid hype-cycles like blockchain transformation. There are likely three or four other ways to become more circular at half the cost and in a third of the time. Solutions can be ported to the next technology platform when they are ready for prime time. Investing in the newest technology without considering current knowledge and solution capacity is a waste of resources that may create future problems and inefficiencies with legacy systems or technical debt.
There are always assessments to complete and value cases to build to justify spending significant capital. Start measuring right now. Build a baseline and iterate for the right level of fidelity or data clarity. Building an information baseline will help leadership and operational staff make better-informed decisions faster, and then scale more effectively to system or partner-wide intelligence. Start by aggregating data across multiple clients, recognize commonalities, and assign process and language standards to get benchmarks built.
“Circular thinking demands shifts in company strategies and authentic leveraging of company cultures.”
Building a baseline with symbiotic and simple processes is leading practice. The exposed baseline is going to trigger projects to effectively figure out when to act on the best opportunities. That’s likely going to be a lean, kaizen, or six sigma type of exercise with cross-organizational, external and customer stakeholders. Implementation teams will need to define success and how to measure across life cycles. Focus on that first objective as an alternative to new technology investments and drill down into that. Remember to pause along the journey to recognize systems already in place to reduce waste. These are value-capture mechanisms that enable the organization to be more efficient and can contribute to even bigger process improvements moving forward. If waste or outputs are still being created, especially ones that require paid disposal, those are key opportunities to turn wasted cash into revenue from reuse or remarketing channels with new downstream customers or municipal material marketplace sellers.
Build the Circular Economy Value Chain
Circular thinking demands shifts in company strategies and authentic leveraging of company cultures, as the traditional view of how a business operates and makes money is turned upside down. Circular models require a multi-term view and ample persistence — sometimes cash flow might not be realized until facilities are reconfigured, or the second iteration of a product when resources finally get reused.²
For a circular strategy to work, all the ecosystem partners — including suppliers, manufacturing, and logistics partners — must commit to the process. One of the biggest obstacles is bringing all the participants of a value chain together to share information and act as one aligned ecosystem. Often, it’s a matter of who goes first, as each supplier may feel it is in the wrong position in the value chain, doesn’t have the authority, doesn’t want to assume liability, or doesn’t want to invest first to launch the effort.
Then there’s the added complexity of extended supply chains. From start to restart, a circular supply chain may consider more and different stakeholders than a traditional linear model. Designs must account for durability and consistency to keep components in play longer, and for ease of disassembly and secondary refinement to efficiently reuse or recycle resources. Tracking all the parts of a product and their histories is necessary to predict and deliver maintenance. Service channels, local production partners, and reverse logistics may be added links in the chain to make sure parts are available for repairs or get returned to the original manufacturer for reuse or recycling.
“For a circular strategy to work, all the ecosystem partners must commit to the process.”
Other implications to consider include:
- Who will certify that a product uses non-virgin materials? How?
- If a company runs short of a recycled product, will it delay delivery or fill the order with a product that uses virgin materials?
- Will it ship from an alternate location with thus a larger carbon footprint?
- Where will repair and disassembly or remanufacturing centers be located to minimize emissions generated from a product’s return?
- Is there a clear plan to manage and cut carbon emissions in the supply chain while meeting ever-tightening service levels?
- If a company is exhibiting material stewardship by storing usable scrap for remarketing rather than disposing of outputs, what are the sales drivers and revenue-sharing mechanisms for municipality-managed materials markets?
Bottom Line: Don’t Wait to Get Started
Circular economy advisors recommend business leaders start simple. If considering a recycling strategy, perhaps focus on a product that uses a raw material known to maintain functionality or integrity through multiple recycling processes, such as glass and metals.6 The next step would be determining how the strategy can quantifiably result in positive impact on the environment — not just hypothetically reduce a negative impact at a single point in the value chain. For example, the reverse logistics take-back solution proposed may inadvertently cause negative emissions impact. The key is to consider the entire scope of the approach — elevating this to a transformational discussion rather than a series of siloed continuous improvements. Thought must be given to the product design, business model, operating model, use phase, partner ecosystem, and process for return² to ensure the improvements are creating solely positive impacts, rather than a domino effect of unintended consequences in the manufacturing process and/or product.
Cultural and operating model transformation must align with the maturing business strategy. Leaders must set broader metrics, align incentives, and provide risk coverage to persuade employees and partners to rethink the way they do business. Map stakeholder knowledge and motivations when building the business baseline; these are the barriers and enablers. Surface areas for learning and mitigating hindering mindsets that could delay or halt initiatives. There will be changes required in all functions, including research and development, sales, purchasing, and manufacturing. Finance considerations come into play if a company moves from a sales model to a leasing platform, as traditional cash flows and key performance indicators such as product turnover will not work in a circular model. Employees need to be backstopped by leadership for making decisions that optimize environmental, social, and governance (ESG) all together, not just the “G.”
Adopting a circular model is not an easy process that will happen overnight. It typically requires a multiyear transformation. It is fine to start small with initial efforts, iterate rapidly to determine best solutions, and then scale. There is much riding on the shift to a circular economy, and markets are expecting transformation — the time to start is now. M
What Is a Circular Economic Model?
A circular economy model can help companies identify, plan, enact and iteratively improve sustainable strategies to reduce their environmental footprints. Key components to enacting this shift within a manufacturing context include optimizing the use of existing tools and supply options, identifying ways to keep materials in active through closed-loop strategies, increasing transparency in the value chain, and increasing renewable and reusable feedstocks, where possible.
Note: The views reflected in this article are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
Artificial intelligence offers manufacturers a host of benefits. These include better visibility into supply chains, insights from predictive analytics and the ability to respond to unexpected changes in demand more efficiently and quickly. Here’s a six-step roadmap for manufacturers looking to integrate AI into their business.
Six-Step AI Roadmap for Manufacturers
- Acknowledge AI’s potential
Engage the C-suite in dialogue about how best to use AI. Allocate resources for specific AI projects and set priorities across the business. Pick company AI “agents” who can create business cases, develop metrics and put AI solutions into action.
- Transform and plan
Create an AI plan that includes key performance indicators in line with your business strategy. Establish a special data unit to address needs AI could help support, such as data collection and cleansing.
- Build your data foundation and structure
Convert any remaining nondigital data, “clean up” other data sources so they don’t contain errors or duplicates and add structure to boost your data quality and effectiveness.
- Create an external “partnership ecosystem”
If your business doesn’t have in-house AI expertise, engage outside experts such as start-ups, academic specialists and consultancies.
- Leverage in-house AI expertise
Employ outside AI experts to teach other staff members about data science. Your existing workforce will need this information to learn new skills and fulfill new responsibilities.
- Create architecture and infrastructure
Consider using standardized infrastructure service offerings that can slot easily into your existing business setup. This will make integration much smoother.
Why does AI matter? Manufacturers that create AI-friendly cultures today are positioning themselves to boost customer and employee satisfaction tomorrow—and they’re gaining a competitive edge to boot.
The human side of digital transformation was on full display at a recent virtual plant tour of BASF Chemical Intermediates Geismar, Louisiana, facility. Hosted by the NAM’s Manufacturing Leadership Council, the tour gave participants an inside look at how the company is using Voovio’s enhanced-reality technology to transform employee training.
Who they are: BASF Chemical Intermediates, a division of German multinational chemical manufacturer BASF, makes approximately 600 distinct products sold worldwide to the chemical, plastics, agricultural and consumer goods industries, among others.
What is Voovio? The company has partnered with simulation-software maker Voovio to design a customized training solution for its employees: a virtually accessible digital replica of the BASF plant.
- Using a computer or other digital device, employees can select plant components such as valves, pumps and control panels to get a detailed view of each. These components respond and perform virtually the same way they would in real life.
- Using the software, trainees can click on any piece of equipment in any workflow to see how it fits into each process.
Why use it? BASF wanted to make worker training faster, more interactive and more self-directed so employees could learn new skills and review existing ones more quickly and easily.
Scalable training model: The tailorable Voovio software offers different training-module levels based on each worker’s experience level and skills.
- Training modules include an equipment replica, tasks to be performed and an action checklist for completing a series of tasks.
- Employees get feedback from the software as they perform each virtual procedure, letting them know whether they’ve performed a task correctly.
Real-world application: Voovio also lets companies take the training into the production facility. Using an approved digital device, employees can perform test runs at any time to ensure they’re prepared to complete a job on the ground.
The verdict: BASF has already begun to reap the benefits of the software. Since implementing Voovio, it has seen a marked increase in both worker competency and productivity.
Sign up for a virtual plant tour: Don’t miss the MLC’s upcoming tour of Johnson & Johnson’s facilities on Wednesday, Dec. 1, from 11:00 a.m. to 1:00 p.m. EST. You will see how Johnson & Johnson uses mobility tools, advanced robotics and material handling, as well as adaptive process controls to drive improvements. After the tour, stay for the panel discussion on how to scale advanced manufacturing technologies to ensure a sustainable, reliable and adaptable product supply chain. Sign up today!