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ML Journal

Harnessing M4.0 to Embrace the Circular Economy

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.

New Priorities

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

Footnotes:

1.   https://ec.europa.eu/environment/strategy/circular-economy-action-plan_en
2.   https://rsmus.com/economics/rsm-middle-market-business-index-mmbi/environmental-social-and-governance-esg.html
3.   https://www.bloomberg.com/professional/blog/supply-chains-get-serious-about-the-circular-economy/
4.   https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/plugging-in-what-electrification-can-do-for-industry

ML Journal December 2021

Thinking Beyond Normal

Leaders need to be ready to think and act outside the normal lanes of operation and stay ahead of future threats to success, believes Lisle Corp. President, Mary Lisle Landhuis.   

Q: What is your role and focus at the company?
A: As President of Lisle Corporation and its sister company, EZ Way, Inc., my on-going focus for both companies is their short and long-term growth and health, both organically and through acquisition of new opportunities in their respective markets.

Q: What do you see as the most pressing issue facing the manufacturing industry today?
A:
The workforce, specifically the need to attract, train, and develop talent into manufacturing and showcase the wide variety of jobs available with strong opportunities for career advancement. A great deal has already been done, but much more outreach and recruiting is needed to support future growth for all manufacturing sectors.

Q: What is the most important corporate initiative you are involved in?
A:
As with most US manufacturers, the pandemic introduced several substantial challenges including on-going price increases, significant supply chain issues, labor shortages, increased sales demand, and the need to maintain fill rates. As a result, we’re focusing heavily on recruitment, training, employee development, dual sourcing, and increased quality measures to ensure we maintain delivery of quality products on time.

Q: What are the most important qualities that manufacturing leaders will need in the future?
A:
Many aspects of manufacturing have changed drastically over the past few years. To be competitive and successful looking forward, leaders need to be ready to think and act outside the normal lanes of operation and stay ahead of any future threats to success. Leaders at all levels need to embed a culture of a commitment to continual improvement and a habit of always asking, “How can we get better?”

Q: What are the greatest opportunities for manufacturers over the next five years?
A:
Well-considered adoption of Industry 4.0 concepts offers tremendous opportunity, and as a broad concept involving all aspects of an enterprise, is applicable to any organization. While the concept is far from a one-size-fits-all solution, careful analysis and planning by involved team members can produce impactful results.

Q: What is your favourite activity outside work, or the last book you read?
A:
My husband and I enjoy any activity where we’re active and outdoors. Fortunately, Iowa offers great resources year-round to keep us busy – from hiking, biking, kayaking, and boating, to anything else we can dream up to get outside and enjoy time together.  The last book I read was “The Body”, by Bill Bryson. It’s a fascinating book about how the human body functions and is full of extraordinary facts. It may sound like a yawner, but it’s hard to put down.  M

EXECUTIVE PROFILE: Mary Lisle Landhuis
Title:
President
Company: Lisle Corporation
HQ: Clarinda, Iowa
People: 285 Employees
Revenues: (Privately Held)
Industry: Specialty Automotive
Tool Manufacturing
Web: www.lislecorp.com

ML Journal

The Sustainability Calculus

New objectives offer unique opportunities for innovation and efficiency, but leaders must understand organizational dependencies and underlying risks.   

Sustainability initiatives are becoming increasingly important in the manufacturing executive agenda. The drivers behind this are manifold, and failure to act could have a far-reaching impact for an enterprise. Some sustainability programs are simple and offer quick returns. However, in some cases returns are questionable and require complex and drastic changes to product portfolios and business operations.

Manufacturers must overcome significant challenges to attain sustainability objectives. These include dependencies on assumptions that are foundational to existing enterprise and industry value chains. Institutional inertia can also hinder initiatives. Those factors along with cost and risk/benefit assessments pose significant impediments.

At the same time, sustainability mandates also offer a unique opportunity to manufacturers. They can help businesses better manage their corporate risks, help accelerate product innovation, enhance brand image, and improve operational efficiency.

During a sustainability journey, ensuring a business continues to grow profitably requires a complex calculus, vision, and the right technology foundation.

In comparison to an enterprise’s sustainability initiative, a circular economy relies on an ecosystem of interdependent sustainability models. That interdependency enables a symbiotic relationship among multiple enterprises, often across different segments. This amplifies the degree of alignment, the potential impact, and the level of complexities.

Manufacturing leaders must begin to deconstruct the sustainability calculus. That includes understanding drivers for the growing importance of sustainability and the circular economy, learning about common initiatives, the impediments to such initiatives, key parameters for executives to consider, and digital relevance in sustainability.

Sustainability: A Growing Urgency

The 2020s zeitgeist holds sustainability near its core. For manufacturers this means an increased focus on sustainability at all levels. You might know that the average vehicle emits 4.6 metric tons of CO2 per year. But lesser known is that a typical smartphone user emits 88kg of CO2 per year, and producing a pair of running shoes generates some 12.5kg of CO2-equivalent emissions.1

Ensuring a business continues to grow profitably requires vision and the right technology foundation.

 

This acute awareness of environmental issues is unlikely to fade. Everything from regulatory policy to board mandates to customer preferences have enterprises considering a wide range of sustainability initiatives. As such, we are seeing the rise of executive roles responsible for sustainability, with titles such as Chief Sustainability Officer and Chief Corporate Social Responsibility Officer. These are some of the key drivers ushering in the new era of sustainability.

Customer preference and branding: Environmental concerns are influencing consumers in their buying decisions, as shown in numerous studies.2 An actively pro-green brand may confer an advantage in recognition, particularly in certain product segments, geographies, and customer demographics. Enterprise customers are beginning to source raw materials with a lower or zero carbon footprint to achieve carbon neutrality.

Policy and regulation: Regulatory bodies are increasingly propagating requirements – such regulations have increased at least 38-fold since the first U.S. environmental laws were passed in 1972.3 For example, manufacturers now see regulations in areas such as pollution, forest, and water conservation. Some of these regulations can be addressed through reporting. Others can require a totally redefined product portfolio, such as the new movement toward electric vehicles in the automotive industry and alternative sourcing for raw materials for many other manufacturers.

Regulations aimed at mitigating effects of global warming have inspired targets such as a net-zero carbon footprint across a wide variety of manufacturers and their supply bases. Manufacturers are increasingly focusing on achieving carbon neutrality. Such changes are likely to proliferate as regulations and demand increase, technology advances, and the cost of alternate materials and energy drops.

Corporate mandates: Investors are increasingly demanding action on sustainability, driving the need for stronger corporate mandates. Sustainability-focused executives can expect support and direction at the board level. Boards react to market forces and create a backdrop against which enterprises can establish their own corporate mandates. For example, long-standing priorities such as operational efficiency may pivot to highlight reductions in waste and consumption. Strategies for acquiring and retaining recurring long-term business through recycling may include a stronger emphasis on corporate social responsibility and sustainability. Even marketing basics such as brand recognition must be managed with an eye toward consumer expectations for sustainable products and services.

Legacy technologies and simple inertia can also pose significant challenges to sustainability initiatives.

 

A circular economy embodies the pervasive impact of a sustainability focus. When initiatives and mandates start to cross boundaries between enterprises or industry segments, and when mandates impact a wider set of related stakeholders, a common interest and sponsorship develops, promoting a collaborative economy between partners in the chain. Circular economies promise to drive the wide-ranging benefits of a symbiotic, cross-enterprise value chain. But realizing those benefits requires that enterprises formulate and effectively communicate strategies, messages and expectations around specific needs, larger common interests, and motivations.

Specifically, enterprises must clearly articulate principles such as a shared commitment to inclusive development. Bringing the benefits of symbiotic industrial synergies into focus encourages collaboration and sustained innovation across industry sectors. In short, it provides motivation to invest toward the greater good.

Sustainability initiatives: The sustainability outcomes that enterprises seek are wide-ranging. Among the top benefits realized from sustainability are improvements in resource efficiency and costs, enhanced brand image, product and service innovation, and alignment with markets, investors, and regulatory bodies.

Sustainability initiatives are as varied as the enterprises that undertake them. They can include energy management and optimization, transitioning to power train electrification, or exploring the use of alternative fuels.

Logistics and shipping have been a long-term focus to reduce material usage, freight, and cost. Recycling is prevalent in industries such as metals, plastics and batteries and becoming pervasive in more industries. They now constitute a significant influence in local and national economies.

Initiatives around product portfolio optimization and platform standardization can improve sustainability metrics. Moving toward composable product architectures can lead to reduced variations and consumption of material.

Additive manufacturing presents an opportunity to significantly reduce waste generation in the manufacturing process. While conventional manufacturing processes often start with a piece of raw material that is cut down or otherwise excised to get to a finished part, additive builds parts layer by layer, allowing use of only the quantity of materials needed to create the part with very little excess. This can significantly lessen the use of raw materials and reduce or eliminate the production of waste.

The sourcing of key raw materials is also becoming key in driving sustainability outcome. For example, in the advent of net-zero carbon steel products, automakers are sourcing net-zero carbon steel to help reduce the overall carbon footprint of their product.4 Reductions in raw material carbon footprint has a similar effect as additive manufacturing toward net-zero contribution downstream.

In addition to material and core operations-related initiatives, IT and digital-related sustainability initiatives are gaining prominence. One example of this is the Green Software Foundation. Made up of academia, for-profit and non-profit organizations, this foundation focuses on 45% reduction in greenhouse gas emissions in the information and communications technology industry by 2030.

NTT DATA is a steering member of the foundation and has developed a carbon-neutral vision to be realized by 2050. This includes introducing and increasing the use of renewable energy in data centers and office buildings. Other initiatives include deploying advanced energy conservation methods to reduce cooling energy consumption within our data centers.

Impediments and Challenges

Even with a supportive board, a strong Chief Sustainability Officer, and formal environmental, social, and governance criteria, orchestrating a circular economy is still challenging. This is in part because members of the extended ecosystem will invariably have conflicting priorities. Aligning the stakeholders around a profitable common cause poses a high hurdle.

Costs, investments, and ROI lead time are major impeding factors. In the 2022 3PL survey, 67% of shippers and 52% of logistics providers cited cost as the greatest challenge to aligning in a circular economy.5 But the same survey showed that only 8% of shippers and 8% of providers felt that the inability to validate ROI improvements represented a prevalent challenge.

Legacy technologies and simple inertia can also pose significant challenges to sustainability initiatives. If an equipment manufacturer has a large installed base, shifting or transitioning to newer technologies such as alternative fuels could be a challenge. The adoption rate in the existing customer base could vary widely. In addition, the people factor, such as resistance to change and skillset gaps, impacts sustainability initiatives similar to any big change in the industry.

Sustainability initiatives are yet to drive top-line revenue growth in most instances. Instead, they come with a required cost, the potential for longer returns, and in some cases disruptions to current operations that can pose risks to business operations. Unclear ROI and unfavorable risk/benefit position pose challenges as well. This leaves manufacturing executives with a conundrum of how best to navigate sustainability.

Key Considerations for Executives

While there are no easy solutions, there are measured considerations manufacturing executives can take when establishing a sustainability program. To succeed, sustainability should be an integral part of an organizational culture and reflect in every aspect of business operation.

An effectively designed digital strategy, combined with judicious sourcing, can help significantly improve a business’s sustainability position.

Sustainability initiatives depend on an enterprise’s extended ecosystem, so it is helpful for a leadership team to adopt a 360-degree view of interdependencies. Managing change impact on internal operations and proactive communication is important for success. Leadership must mandate contributions to sustainability initiatives by function. For example, innovations in product and service offerings can emerge from sustainability initiatives and can potentially drive growth. Green procurement could help lower carbon footprint, an effective digital strategy can help drive, monitor, and track progress in sustainability initiatives.

Looking outward, circular economy efforts often align to regulatory requirements and can strengthen an enterprise’s compliance stance. Similarly, these initiatives will often bolster an enterprise’s social responsibility position. Establishing a partner ecosystem that is sustainability-aware and is actively contributing to the initiative is vital. Changes rippling across the ecosystem, however, can give rise to supply issues. As key circular economy drivers, customers will likely respond favorably to such initiatives, but this gain can be offset by product delivery interruptions and delays. An enterprise’s brand can experience the same mixed results.

Among the risks an enterprise incurs when undertaking sustainability initiatives is disruption to the business. Taking steps to minimize interruptions to sales and to product delivery are a top priority. And since the cost to implement can impact potential returns on investment, it is important to establish clear ROI metrics for assessing the success of such efforts.

Establishing a formal environmental social governance program can be a priority to some in an enterprise’s extended ecosystem. Among shippers, for example, 59% indicated their organization had an ESG program with defined goals and objectives, and 51% indicated their supply chain had an ESG program with defined goals and objectives. At the same time, only 45% of 3PL providers said their organization had an established ESG program. This difference in prioritization is reflected in differences in perception, as 20% of shippers feel that their 3PLs’ ESG programs are further ahead of their own programs, while 65% of 3PL providers feel that their customers’ ESG programs are further ahead of their own programs.

Digital Relevance in Sustainability

Digital and information technology can contribute greatly to the success of sustainability initiatives. Digital and IT solutions are recognized as similar in importance to key technology enablers such as renewable energy and management, recycling, and materials technology.

A well-defined sustainability vision requires the support of a well-orchestrated digital strategy.

 

Digital technology adoption is not free of environmental impact or carbon footprint. But an effectively designed digital strategy, combined with judicious sourcing, can help significantly improve a business’s sustainability position. In particular, the following premises can help manufacturers shape their digital strategy.

Digital strategy to enable sustainability outcomes: Digital technologies such as 3D printing, AR/VR, IoT, data analytics, AI/ML, cloud, automation, and blockchain have significantly enhanced the ability to run an efficient business. Moreover, these technologies help drive and manage sustainability initiatives such as additive manufacturing, green planning and sourcing, energy management, product platform standardization, product portfolio rationalization, waste elimination, resource optimization, remote working, product innovation, and supply chain and logistics optimization, to mention a few.

A well-defined sustainability vision requires the support of a well-orchestrated digital strategy. The vision should align to business priorities. It should also guide functional mandates for stakeholders throughout the enterprise value chain.

Digital tracking and monitoring of sustainability outcomes: The advent of carbon and other sustainability taxes, emission trading, and other concepts of carbon pricing has made it increasingly important for enterprises to track and report their carbon footprint. Most levies from a carbon pricing system are currently passed on to consumers. But as more sustainability initiatives get underway and more options become available, these levies could significantly affect an enterprise’s price competitiveness.

In the U.S., EPA mandates emission reporting for most of the industry segments likely to fall in the polluting category. Some enterprises already report their emission and carbon footprint information voluntarily, and the trend is for such reporting to become common in other industry segments as well.

In the U.K., the Streamlined Energy and Carbon Reporting policy coming into force has created a requirement for all large companies to report their carbon emissions and energy usage on an annual basis. Enterprises embarking on such a journey will benefit from considering a digitally enabled monitoring, accounting, and tracking system.

Sustainable digital sourcing: Digital and IT technology product and service providers are increasingly committing to achieving specified levels of carbon neutrality by specified points in time. For example, NTT group has taken an aggressive target of achieving an 80% reduction in greenhouse gases by 2030 and becoming carbon-neutral by 2040. This involves usage of renewable energy, an internal carbon pricing system, and introduction of innovative technologies Innovative Optics and Wireless Network, which incorporates an all-photonics network with new optical technologies at every level to enable ultralow power consumption.

Additionally, we see cloud providers placing tremendous focus on reducing power consumption in the operation of their cloud and data centers. As such, an effective cloud transformation strategy can help organizations collectively reduce their carbon footprint.

Numerous such examples exist and could contribute to sustainability. Sustainable procurement of digital and IT technology products and services can contribute to a business’s carbon footprint reduction. As carbon pricing and credits advance and become pervasive, a focus on sustainable digital sourcing can help enterprises get closer to carbon neutrality.

The move toward sustainability and the circular economy is no longer a nice-to-have – for businesses, it is now a must-do. Like all business initiatives, a well-planned strategy and holistic approach are necessary for the best possible outcomes. The time is now for manufacturers to determine how they will travel this necessary and essential path. M

Footnotes:

1.   https://www.nbcnews.com/shopping/footwear/adidas-allbirds-sustainable-shoe-n1267111
2.  https://www.frontiersin.org/articles/10.3389/fpsyg.2021.644020/full
3.  https://www.unep.org/news-and-stories/press-release/dramatic-growth-laws-protect-environment-widespread-failure-enforce
4.  https://www.bizjournals.com/charlotte/news/2021/10/05/nucor-indtroduces-full-line-of-net-zero-steel.html
5.  https://www.3plstudy.com/ntt3pl/nttds_3pl.home

ML Journal

A Digital Path to Improved Sustainability

Tapping into existing operations data can be the driver for manufacturers who are taking on sustainability goals.   

The production of greenhouse gases, inefficient water and energy usage, and significant harmful emissions have earned the manufacturing industry a less-than-sterling reputation for its impact on the environment. Adding to these concerns, manufacturers are now being asked to do their part in the fight against climate change by setting sustainability goals and showing their progress toward them, as companies can no longer operate without addressing their environmental impact.

Improving key performance indicators for environmental, safety, and governance provides multiple benefits to manufacturers. A good score will provide better access to capital for new investments, along with more efficient, climate-friendly operations. The efficient use of raw materials to reduce waste and lower energy consumption provides significant cost savings. Sustainable practices boost a company’s reputation, giving it a competitive advantage in the market.

But despite these benefits, obstacles remain when striving to reach sustainability goals, and they start with money.

Challenges to Investing in Sustainability

According to the Climate Action 100+ initiative,1 159 companies around the world are responsible for 80% of the global industrial greenhouse gas emissions. The initiative’s most recent data, published in January 2021, reports that 46 of the top emitters are in the industrial manufacturing space (29%), 75 in energy (47%), 12 in consumer packaged goods (8%), and 26 in transportation, which includes automotive (16%).

Of this group, 90% of companies have acknowledged concern for climate change and have assigned a C-level executive to their board to lead sustainability efforts and create concrete KPIs for greenhouse gas reduction targets. Despite the public steps taken to address the environmental and societal demands concerning sustainability, there is still a significant disconnect between words and their actions as 90% of these organizations do not have a clear allocation of capital for sustainability initiatives
In its global 2021 Climate Check report2, Deloitte reported that the lack of capital allocation is due to several factors. The main one is difficulty quantifying the return on investment assigned to reducing an organization’s impact on the environment because of the volume of possible outcomes and the undetermined timeline of when these outcomes will be realized.

For example, in the energy industry, green and blue hydrogen are options for transitioning into less carbon intensive processes, but these are new technologies, and only green hydrogen is viable at an industrial scale. In other industries, such as consumer packed goods, reducing energy use is a significant step toward sustainability, and it is relatively simple to do so.

Sustainable practice boost a company’s reputation, giving it a competitive advantage in the market

 

While a lack of capital allocation and clear ROI calculations remain top challenges for process manufacturing industries looking to improve sustainability KPIs, many overlook a valuable resource, namely data.  Process manufacturers have collected time-series process data in data historians for decades, and with the right tools they can empower their employees to make sustainability a constant focus, and thus begin making progress toward goal attainment immediately.

Empowering the Workforce

Sustainability is an area that all process industries should be investing in due to changing political, regulatory, and market trends. For example, sustainability has become a deciding factor for job candidates, particularly with younger generations. Forbes has dubbed Gen Z as “the sustainability generation.”

The perception that these industries are harmful to the environment, are not taking action to reduce their impact, or are not innovative enough not only impacts corporate image, but also the ability to hire new talent. Luckily, digital technologies can provide important benefits in reporting and reducing greenhouse gas emissions by implementing energy models while requiring minimal capital expense.

Digital transformation is not exclusive to the process design teams with a fancy digital twin running simulations, or the maintenance groups doing predictive maintenance, and neither is sustainability. These and other technologies can also be used, for example, by an environmental engineer and a process engineer collaborating with other groups to make the necessary progress toward more sustainable operations.

As with safety, reducing an organization’s environmental impact should be everyone’s responsibility, and it can be achieved without a large investment. It just takes the right technology applied to the right data.

The Answer Is in the Data

With the right advanced analytics solution, process engineers can gain insight into the organization’s historical and near-real time process data, including access to environmental process data. Thanks to automated data cleansing and contextualization, engineers can significantly reduce the time spent wrangling data to generate reports, and instead focus on process improvement projects, like optimizing environmental performance.

Additionally, advanced analytics provide users with the capability to switch from a compliance-focused and reactive approach to a more proactive approach by continuously monitoring parameters to detect and mitigate environmental violations. If a violation is detected, users can assess process performance to identify events that led to the incident.

Subject matter experts using advanced analytics solutions can also better understand how process changes will impact the organization’s environmental performance by building models to predict process or equipment behavior based on operating conditions. For example, energy models based on steam generation and consumption in the plant can be used to reduce steam use, and therefore overall plant energy use.

With the real-time collaboration capabilities provided by advanced analytics software, sustainability becomes a common goal among all employees. Accelerated insights can be communicated with the broader organization, alleviating siloed and error-prone processes that exist when employees are dependent on more traditional technologies for analysis, such as spreadsheet applications.

Achieving Goals with Global Impact

Software combined with self-service advanced analytics and machine learning tools can lower the risk on investing in sustainability initiatives with unknown ROI, but it can also help organizations work toward Agenda 2030. In 2015, the United Nations adopted 17 sustainable development goals3 to address the global concern for sustainability, noting that the goals were “a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030.” When it comes to the process industries, there are four common goals where progress can make the most impact:

  • Clean Water and Sanitation: Ensure availability and sustainable management of water and sanitation for all. Process industry organizations can reduce water consumption and optimize treatment processes.
  • Affordable and Clean Energy: Ensure access to affordable, reliable, sustainable and modern energy for all.  Process industry organizations can predict and report on energy consumption to lower use.
  • Responsible Consumption and Production: Ensure sustainable consumption and production patterns. Process industry organizations can improve process efficiencies to minimize waste and rework, while mitigating safety risks.
  • Climate Action: Take urgent action to combat climate change and its impact. Process industry organizations can monitor, report on, and predict emissions—and then take steps to reduce them.

Use Cases: Putting It into Action

Greenhouse emissions reporting: Reporting greenhouse gas emissions is a challenge for any company for two reasons: lack of standardization and regulatory requirements. Most often, greenhouse gas reporting is done with spreadsheets that need to be massaged, and in some cases manually updated, to provide a single status report that takes several days to create. Digital tools can provide the ability to locate, aggregate, and analyze the data necessary to provide overall emissions numbers.

Despite the public steps taken to address sustainability, 90% of these organizations do not have a clear allocation of capital for sustainability initiatives.

 

Once a model for reporting is in place, reports can be created in a matter of hours, as opposed to days using spreadsheets. The ability to create a model to report emissions does more than save hundreds of hours of engineering hours, it also addresses the problem of auditing the process. Every step of the calculations and data sources selection can be recorded, so if there is a question on excursions from the goals or achievement toward the goals, root causes can be determined.

Energy consumption prediction models: A specialty chemical company wanted to create energy models of their critical assets. Creating prediction energy consumption models is difficult, and in most cases the models are rarely updated, which makes them obsolete quickly. Relevant data needs to be cleansed, aligned, and then featured in a sample that can be put into a mode. Advanced analytics applications enabled the chemical company to develop and update models, many with multivariate complexity, to consistently identify energy use reduction opportunities.

It is important to note that any models developed should represent the process, and simple tests can be done to confirm conformity. For example, when opening a valve feeding a steam jet, if something does not look right, the issue may be in the instrumentation, or the control loop associated with it. A model allows an organization to discover relationships defined by energy models, creating an effective energy reduction program that consistently delivers results and attractive ROI.

Digital tools can provide the ability to locate, aggregate, and analyze the data necessary to provide over-all emissions numbers.

 

Boosting production and safety: A critical aspect of sustainability is the impact on people. Safety first is a motto that all manufacturers live by, which means anything that can help reduce risk and improve work conditions is highly valued.

One example of how digital technology helped to improve safety is in fire prevention for a maker of paper consumer goods. In the tissue making process, high temperatures are critical for drying the tissue paper so that it has precise strength and softness qualities, but there can be a fire risk in the hood where those fibers dry if proper care is not taken.

Deploying condition-based monitoring helped the company manage temperatures during the process to ensure the proper high temperatures and other conditions were maintained for evaporating water off the fibers while also preventing dust collection – the primary ignition source for fires. After experiencing eight fires in the first half of 2021, the manufacturer has had none since deploying the monitoring solution and has since expanded its use to all similar equipment across the company.

Regardless of the industry or use case, the common thread among these examples is that these projects don’t require significant capital investment. Instead, positive impacts can be realized through better use of existing assets, specifically by analyzing existing data to create insights and perform actions.

Sustainability initiatives do not need to be complicated or capital-intensive, and they don’t have to be manual actions relegated to an area detached from operations. Instead, self-service analytics provides a platform for analyzing operational data that can give manufacturers insights to enable cleaner, safer, and more efficient operations.

Digital technologies provide the means for collaboration and access to the many years of operational data that is already available to process manufacturing organizations. Many manufacturers are ready to make sustainability a top priority, and by leveraging existing data, they can start their sustainability journey today. M

Footnotes:
1.   https://www.climateaction100.org/
2.   https://www2.deloitte.com/global/en/pages/risk/articles/2021-climate-check-business-views-on-environmental-sustainability.html
3.   https://www.undp.org/content/undp/en/home/sustainable-development-goals.html

ML Journal

Overcoming Roadblocks to Advance Sustainability Programs

To get the most bang out of their sustainability investments, manufacturers should focus on data-driven initiatives and indicators.   

The methodologies of Kepner Tregoe, Ford’s 8D, TQM (Total Quality Management), Kaizen, PDCA (Plan, Do, Check, Act), Lean Enterprise, ISO standards, and Six Sigma are the foundation of today’s best manufacturing practices. The management mindset of continuous improvement, mistake and accident reduction, risk mitigation, benchmarking and KPI’s, compliance, agility, and safety have been in place for several decades. These practices improve efficiency and effectiveness by eliminating waste activities, maximizing productivity, and increasing resiliency in response to the single line at the bottom of a financial report.

John Elkington’s definition of the “Triple Bottom Line” (1994) proposed a new accounting method. It expanded the single-line financial approach to include social and environmental impact, reporting people, planet, and profit. The vision of linking financials based on efforts to improve social and environmental policies has never been timelier. Enter ESG.

ESG (Environment, Social & Governance) has different meanings for different audiences. The term ESG came from a landmark study entitled “Who Cares Wins,” initiated by UN Secretary-General Kofi Annan and UN Global Compact in 2004 in collaboration with the Swiss government. “The goal was to influence, support and enable capital market stakeholders to better integrate environmental, social, and governance (ESG) factors into capital allocation and portfolio management processes. Seventeen years after this study, manufacturers issue ESG reports, and banks use ESG ratings to valuate businesses (including manufacturers) for resiliency.”

The overarching definition of sustainability includes ESG and lean manufacturing within its scope. Therefore, lean manufacturing methodologies, including human, environmental, and financial impacts, have led to sustainable manufacturing and, henceforth, the base of ESG reporting. Enterprise systems are updated accordingly and can identify how a company is a steward of the environment and its resilience under various risks and volatilities. The current generation of practitioners captures energy efficiencies, greenhouse gas emissions, deforestation, biodiversity changes, waste management, and water usage. The driver is to build reputation and stakeholder engagement, grow business, and improve ESG ratings.

Only recently has the subject of Environment, Social and Governance become a C-suite topic of interest.

 

Despite those drivers, only recently has ESG become a C-level topic of interest. This reality is a response to government-sponsored targets, compliance/regulatory demands, and shareholder activism. In 2021, 82% of the executives interviewed by Deloitte (2021 Climate Check: Business’ Views on Environmental Sustainability) said that their organizations are concerned or very concerned about sustainability. However, 65 % of those same executives said that their organizations would need to cut back on environmental sustainability initiatives due to the Covid-19 pandemic. The conclusion is that firms will prioritize revenue-generating activities such as marketing and sales when facing uncertainties. For the sustainability practitioner, the grim reality is that sustainability investments remain sensitive to market fluctuations.

Therefore, efficient sustainability spending is required, so external sustainability programs will not be scaled down or rolled back whenever market oscillations impact the ability to generate cash to be reinvested.

The Power of Data

Efficient sustainability spending starts and ends with data-driven initiatives and indicators. Manufacturers collect data from functional areas, and they carry value for sustainability affairs, including operations, finance, marketing, own ESG-focused departments, human resources, and research & development. This functional data plays an essential role in internal and external sustainability programs in at least three dimensions:

Program Justification: Data is key for the sustainability practitioner to get enough funding to maintain and expand sustainability programs. Compliance and regulations aside, most organizations evaluate investment in sustainability like any other program. It is an exercise driven by financial metrics related to the expected return on investment.

Program Impacts: Data supports measuring corporate targets accurately, including sustainability targets. “What gets measured gets managed,” as the saying goes, and any sustainability program requires a solid baseline and KPI that would be tracked against. Only by measuring impact with credible data can companies change the perception that ESG programs are a cost center when they are a profit center.

Program Improvements: Data is also an instrument to achieve sustainability targets. Manufacturers have been leveraging data analytics in different sides of the business to improve their operations and the financial bottom line. The same logic can be applied to sustainability where data can drive sustainability indicators from the baseline toward committed targets.

The Challenges with Sustainability Data

Before assessing technical challenges, data-driven sustainability programs can face foundational problems inherent to company culture and organization.

Lack of Transparency: Like financial information, sustainability data reside in nearly every aspect of internal and external operations. Yet, the data are not always available or complete due to a lack of transparency in processes or supply chains. As a result of limited data access, public trust diminishes, and potential benefits are reduced.

Third-Party Certifications: Manufacturers have been confronted with an urgency to get third-party certifications which can be costly, time-consuming, and redundant. The data held by certification organizations tend to be subjective, unavailable for public review, updated only annually, driven by industry sectors, and costly. They report information from the certificate holder at a specific time and act as a barrier to innovation.

Furthermore, audit fatigue impacts both auditors and auditees. Brands and retailers end up pressuring manufacturers to adopt third-party sustainability solutions and certifications to manage impacts. Siloed solutions can be subjective, irrelevantly defined, expensive, and may not present valuable data to help drive sustainable change within a facility.

“Data analytics help manufacturers use large volumes of historical and streaming data from cross-industry systems.”

 

Reporting, not Reducing: Without advanced data analysis and predictive capabilities, data reporting only catches a moment in time. Data need to be modeled to identify pain points and hot spots, offer predictive insights, and drive change beyond its current capabilities. Risk assessments, underlying climate threats, political changes, and human rights can be added to make the tools more practical for business decisions.

Non-Data-Driven Culture: The manufacturing sector has antiquated subsets which are slow to identify the value and adopt data analysis for objective and predictive decision-making and adhere to the “if it isn’t broken, why fix it” mentality. The lack of a data-driven culture or excessive gut-feeling culture hinders progress on sustainability.

Rigid Phased-Approach Mindset: One misconception is the fact that sustainability datasets must be complete before any value is generated out of them, from basic data transformation to advanced analytics. Companies cannot wait for data completeness. Value realization should grow as the sustainability data infrastructure grows.

Bolt-on Solutions: Firms are recognizing the costs of reporting, which is leading to adoption of several tools within the organization, spanning homegrown tools, newcomer solutions, and additional modules of a well-established platform within the organization. And herein lies the issue: many pockets of data not being analyzed for greatest results.

Anonymization: Brands and retailers, manufacturers, suppliers, advocacy groups, labor unions, and academics invest time and effort to collect data for multiple organizations across the supply chain, including an extensive manufacturing value chain. This data should be anonymized and analyzed collectively for proprietary ownership and protection to make a credible impact. Then, many interested parties could scrape, share, manage, and analyze data, and develop objective environmental and social impact reports. 

Limited Institutional Knowledge: The internal knowledge of any industry sector is limited, and new subject matter expertise is highly valuable to understand current challenges in data modeling and water, energy, carbon, data protection, fraud, and human impacts. Sharing manufacturing analysis between consumer products, food, automobiles, and white goods can help drive change across industries. Lean manufacturers hold the data and knowledge to benefit each other and the brands and retailers who look for the best suppliers.

Data Analytics Drive Sustainability

Data analytics help manufacturers use large volumes of historical and streaming data from cross-industry systems. Data can help forecast future conditions, identify pressures, constraints, threats, and opportunities, and foresee trends that can provide timely insights. Advanced modeling solves significant problems in new ways, allowing for objective, fact-based insights, while predictive analysis allows for the best objective decision-making. Software and services help manufacturers quickly access and prepare relevant data for modeling, simulation, and insight generation. Environmental metrics can be analyzed and put to work to drive lower impact decisions through advanced data modeling. Above there is a non-exhaustive list of available use cases for continuous improvements of sustainability programs using data management and data analytics.

Comprehensive Dashboarding: B2B integration via an accessible dashboard offers transparency and drives growth. In the B2C scenario, a connected dashboard can tell the story of manufacturing in an impactful and interactive manner, increasing stakeholder engagement and driving buying and consumer behavior changes. Manufacturers will ultimately have immediate access to impactful reports for making agile decisions for sustainability, as well as for public transparency.

Supply Chain Optimization: The world’s supply chains remain mostly horizontal and volatile, leaving sustainability efforts in the value chain isolated and making it challenging to offer comprehensive sustainability reports about finished goods. Amongst the slew of troubles manufacturers, brands and retailers have in traceability and transparency, they continue to lag in innovation and adoption of technological products that can collect data throughout their supply chains. Manufacturers still benefit from ESG activity in terms of savings and new businesses. However, brands and retailers, since they reside downstream in the value chain, are not successfully capturing the sustainability data from manufacturers.

The world’s supply chains remain mostly horizontal and volatile, leaving sustainability efforts in the value chain isolated

 

Energy Efficiency: Energy use is a basic datapoint monitored in lean manufacturing management and ESG reporting. Improvements in energy intensity can quickly translate into savings. Manufacturers invest significantly to replace outdated assets (from electrical drives to heat exchangers) with energy-efficient assets to save on electricity, fuel, steam, and other energy sources. However, even the most efficient industrial asset by design can be operated in a sub-optimal fashion. Data modeling allows energy forecasting and real-time process optimization to make the same product spec and yield lower energy consumption, resulting in higher energy efficiency.

Sustainability Risk Assessment: Manufacturers use traditional techniques and systems, such as first principles (laws of physics) and CAM (computer-aided manufacturing) for process simulation. Data models are proven to be as good as or better than those techniques and systems in specific scenarios. Data models also fit nicely as a hybrid solution when working in tandem with traditional simulation. Similarly, sustainability risks and impacts can be modeled and leveraged to predict the sustainability risks based on external and internal factors. Simulations look at weather, international regulations, and policies, and predict implications for manufacturing. Real-time tracking and alerts help improve sourcing decisions. Advanced forecasting models use existing and live data to enhance supply chain decisions, assess commodities, and predict climate risk.

Capital Allocation: Following the Triple Bottom Line, capital allocation considers not only economic but also social and environmental benefits. In this scenario, financial allocation is not a one-dimensional problem, but a multivariate optimization scenario. Data models are the only way to determine or validate decisions avoiding antiquated guesses that will likely not bring the best return on assets and cash reinvested.   

Raw-Material Efficiency: Recent trade wars, COVID-19, and subsequent deglobalization drive manufacturers to identify more resilient raw material resources. Adding to this problem, manufacturers are also pressured to find more sustainable materials that meet specifications. Data analytics is vital in this process to support the practical design of experiments and quicker time to patent and time to market.

Manufacturers should benefit by externalizing the excellent work they do both B2B and B2C to improve reputation and grow business.

 

Customer Experience: Consumer insight software uses artificial intelligence and machine learning to engage consumers and drive change towards more sustainable consumer behaviors by identifying effects of policy and development changes and improving awareness of socio-environmental impacts for buyers and consumers. New generations are more concerned about the social and environmental impact (such as carbon footprint) of manufactured product and see that as a reason to buy.

Leap of Innovation

The intersection of lean manufacturing, data management and analytics, and sustainability is the foundation of ESG in the manufacturing sector. While a gap seems to exist between manufacturers’ and activists’ ideas of sustainability, manufacturing has been championing sustainable activities for quite some time, even if disguised within other industry terminologies, such as lean manufacturing.

Manufacturers should benefit by externalizing the excellent work they do both B2B and B2C to improve reputation and grow business. They also need to be open to making an innovation jump to improve their sustainability scores and ESG reports by using improved data management, modeling, analytics, and IoT in the Triple Bottom Line — people, planet, and profit.  M

ML Journal

4.0 Sustainability and the Circular Economy

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

ML Journal

Developing a Manufacturing Net Zero Action Plan

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:

  1. Establishing a baseline of the carbon footprint for the business, inclusive of operations, supply chain, and assets
  2. Developing and implementing a path to reducing, eliminating, or even positively offsetting the carbon footprint across the enterprise
  3. 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:

  1. Energy demand management
  2. Major infrastructure upgrades
  3. On-site clean energy generation and storage
  4. Renewable energy procurement
  5. 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

ML Journal

The Sustainability Imperative: A Socially and Environmentally Responsible Future

As investors and regulators increase the pressure for greener, more ethical business practices, manufacturers look to get ahead of increasingly urgent demands.  

Over the past decade, public concern over corporate social and environmental impact has spiked and investors have responded by aligning with consumer priorities. Subsequently, manufacturers have made strides to adjust their business models and incorporate environmental, social, and governance strategies that benefit all stakeholders.

However, some manufacturers have yet to reimagine their processes, as federal and local regulations have not yet required they do so. Manufacturers that prioritize ESG strategies can protect brand reputation, mitigate risk, and improve capital access — all while doing their part to minimize climate risk and contribute to the communities where they operate. To achieve these goals, manufacturers should rely on a holistic approach to ESG that considers a number of variables and cross-industry practices.

Areas Influencing ESG
Strategies in Manufacturing

Depending on the type of manufacturing, associated processes have varying effects on social and environmental responsibility. Some practices have routinely fallen short of the mark and resulted in substantial waste, significant greenhouse gas emissions, inequitable working conditions, and other negative impacts.

Fortunately, manufacturers across all industry sectors are becoming increasingly aware of their social and environmental impact on the world, and they’re making changes to adjust priorities. In particular, manufacturers in the automotive and food sectors have made significant strides with initiatives that can lower carbon footprint, address challenges with forced labor, and more.

Despite the impact of COVID-19 on the automotive sector, companies have maintained steady growth in sales of electric vehicles — now projected to reach 58% of global passenger vehicle sales by 2040.1 EVs are also expected to account for 12% of fleet vehicles by 2030.2 Trucking companies are up against the need for a scaled charging infrastructure to support electric fleet efforts, but they’re continuing to support growth projections by finding opportunities to deploy electric tractor trailers along regional and last-mile routes and investing in long-range batteries. By offsetting the market share of gasoline-fueled vehicles, EVs have the potential to significantly reduce greenhouse gas emissions on the road.

Manufacturers that prioritize sustainability strategies can protect brand reputation, mitigate risk, and improve capital access.

In the food sector, rising priorities include reducing harmful chemicals in packaging and processing, reducing food waste, ensuring ethical labor practices, and mitigating environmental impacts. Food waste also produces methane — a greenhouse gas that’s 20 times more damaging to the environment than carbon dioxide.3 Food manufacturers are also examining the practices of companies at every stage of the supply chain, which helps ensure they’re not using forced labor or child labor, encourages fair trade, and can minimize ecological damage. For example, palm oil is found in many consumer products, but traditional sourcing is largely unsustainable and contributes to deforestation, pollution, and habitat loss for native species. Cocoa production can have similar effects. Food manufacturers can significantly curb these negative impacts by ensuring that sustainable practices are used throughout the process.

These larger trends go beyond the automotive and food sectors — manufacturers of all types are facing pressure to lower their carbon footprint, conduct business with ethical suppliers, and prove third-party companies are compliant with ESG standards and laws. Amid disparate reporting standards in the U.S. and increasing regulations in the EU, manufacturers have invested in supply chain technologies to help in many areas, including to track and trace raw materials, combat fraud, conduct third-party monitoring, assess workplace hazards, identify supply chain vulnerabilities, and more. These technologies help manufacturers mitigate risk and measure their social and environmental footprint — while also communicating these efforts to regulators, investors, and the public.

Many manufacturers have made their ESG commitments loud and clear. These include:

  • Net-zero carbon emissions by 20504
  • Evaluating opportunities with electric vehicles
  • Switching to renewable energy power sources in manufacturing processes
  • Implementing diversity, equity, and inclusion strategies and offering competitive wages
  • Retrofitting facilities to reduce environmental impact
  • Increasing investments in cybersecurity to protect operations against attacks and breaches

In order to reach these goals, manufacturers have to approach their ESG plans holistically and evaluate all areas that impact those initiatives, including criteria for capital access, stricter labor laws, Industry 4.0 acceleration, expanding regulations, and rising governance standards.

Sustainability and Capital Access

During the height of COVID-19, most investors and lenders sought to avoid the financial risks of manufacturers’ product shortages, increased transport costs, and trade tensions. As these challenges remain, investors and banks are continuing to analyze the industry with a critical eye. ESG scores are increasingly a factor in access to and cost of capital, as financial institutions evaluate the risks of lending to non-sustainable and unethical companies.

Leading manufacturers are protecting their supply chains from forced labor by investing in supply chain transparency solutions and continuously monitoring the practices of their suppliers.

However, reporting metrics and frameworks are disparate across practices for internal tracking and external disclosures. Investors recognize the importance of aligning with key stakeholders across business functions to develop industry-specific standards for ESG criteria. As a result, public companies are contending with disclosure pressures to report on their ESG compliance, incentivizing companies to share corporate data and form cross-functional teams to approach ESG holistically.

Private equity funds and lenders are also taking a closer look at ESG ratings. In fact, 94% of fund managers say incorporating ESG investment criteria into their investment strategies is a priority for their limited partners, according to BDO’s spring 2021 Private Capital Pulse Survey.5

As a result, it’s more important than ever that manufacturers ensure transparency and accuracy in their disclosures. Without standardized guidelines, investors must make decisions based on the data companies can provide. If standardized metrics aren’t available, manufacturers are at an increased risk of losing critical sources of capital. To navigate this risk, companies should invest in data tracking and analytics capabilities as they pursue ESG goals to support long-term impact.

Ensuring Fair, Equitable Labor Practices

Federal and local governments are looking to enforce more strict regulations around companies’ impact on social equity, introducing new pressures for manufacturers to improve fair labor standards, including workplace conditions, compensation, and DEI strategies.

For much of 2020, labor laws related to COVID-19 were unclear or underdeveloped, but the impacts of the pandemic were immediately clear. While essential workers continued to report to their jobs, the pandemic sent unemployment rates for nonessential staff to near-record highs.<sup>6</sup> Even after manufacturing companies temporarily paused operations and furloughed some staff members, COVID-19 still posed a threat to workers’ health. Manufacturers learned that getting their workforce back online would require more than allowing six feet between stations, and they began taking additional steps to ensure workplace safety.

Political leaders took steps as well. Since President Biden’s inauguration, American workers have seen a new Family and Medical Leave Act, an increase to minimum wages for federal contractors and private-sector employees, and federal support for unionization.

And the workplace safety conversation goes well beyond U.S. borders. Internationally, there is a web of labor laws and reporting requirements for supplier monitoring, including the Labor Value Content guidelines in the recent U.S.-Mexico-Canada Agreement, which requires a threshold of product content to be made by workers earning a higher minimum hourly wage. Furthermore, Section 307 of the Tariff Act of 1930 explicitly “prohibits U.S. imports of any product that was mined, produced, or manufactured wholly or in part by forced labor, including forced or indentured child labor.”

As the industry continues to see new policies around ethical labor emerge, it’s critical that companies take advantage of current opportunities to explore evolved compensation practices, worker safety needs, and DEI strategies. Leading manufacturers are going a step further in protecting their supply chains from forced labor by investing in supply chain transparency solutions, continuously monitoring the practices of their suppliers, and developing ethical labor standards for their own business and their partners.

Another step manufacturers can take to ensure ethical workplace conditions is to look at outsourcing with a critical eye. While outsourcing functions to third-party agencies can give manufacturers the opportunity to expand their service offerings, it can also increase their risk of engaging in unethical labor practices and falling short of compliance obligations. Industry 4.0 technologies can help manufacturers ensure the third parties they engage with are following ethical labor practices by providing real-time, data-backed insights on supply chain management and reporting.

The Role of Industry 4.0

Industry 4.0 also influences the adoption of ESG programs because of the benefits it offers through advanced, real-time data collection, tracking performance of ESG goals against key metrics, and automating reporting and disclosures. However, the industry is split between two types of manufacturers. Manufacturers who adopted Industry 4.0 strategies well ahead of the COVID-19 outbreak were well-poised to respond to the pandemic and the new challenges it introduced, including those around ESG requirements. On the other hand, manufacturers who are still using legacy technology are in a less advantageous position when it comes to tracking and reporting their ESG commitments.

For those who have yet to fully implement an Industry 4.0 strategy for sustainability, the competitive disadvantage will only grow over time.

 

According to BDO’s 2021 Industry 4.0 Survey, only 24% of manufacturers have fully implemented an Industry 4.0 strategy.<sup>7</sup> However, they’re already showing use cases that help achieve their ESG goals, including:

  • Blockchain: Blockchain is commonly known for its use with cryptocurrencies, but for manufacturers pursuing ESG strategies, there’s additional value to be unlocked. Blockchain can capture and share data across the supply chain in an immutable record, automate reporting, and improve traceability and origin tracking to measure environmental footprints, which is particularly useful for the food and lumber sectors.
  • Simulation and digital twins: By building simulations of their operations and testing changes virtually, manufacturers are better equipped to evaluate their carbon footprint and calculate associated carbon emissions based on a range of factors, such as the types of fuel used, their facilities, and more. Digital twins can also help manufacturers find efficiencies for resource usage and cut costs by removing redundancies.
  • IoT sensors: IoT sensors have been used to conduct predictive maintenance and optimize processes while enhancing production output. With this technology, manufacturers can better manage power use in facilities by having the sensors detect when to provide power and when to switch to a power-saving setting. Buildings contribute significantly to global carbon emissions, but by combining renewable energy sources with IoT sensors and other technologies, manufacturers can reduce their pollution and increase energy efficiency.
  • Dashboards: Manufacturers can leverage dashboards and integrate them with carbon capture technology to measure carbon impact, monitor energy usage, and determine how to respond. From a social and governance standpoint, dashboards can also identify and monitor vulnerabilities in operations and provide insights on customer and workforce management.

There is a wide range of technology solutions at manufacturers’ disposal as they pursue ESG implementation. Manufacturers that still rely on legacy technology should prioritize investing in digital solutions to support their ESG commitments. For those who have yet to fully implement an Industry 4.0 strategy, the competitive disadvantage will only grow over time.

Mounting Regulatory Pressures

Although consumer and investor pressures are currently outpacing regulatory policy, the Biden administration has committed to developing policies that will further ESG maturity in the U.S. Multinational companies should already be cognizant of regulatory policies in Europe and Asia, and they should consider the implications for their business if customers or suppliers are located in those regions. For example, sustainable investments have become a top priority for Europe’s asset management industry. In 2019, the EU rolled out its Sustainable Finance Disclosure Regulation, which aims to better define ESG metrics for end investors, allowing companies’ ratings to be compared more clearly. The regulation falls under the EU’s sustainable finance framework, which provides broad guidelines for sustainable investments.

In the U.S., manufacturers have already seen changes on the state and local levels. But they shouldn’t wait until federal policies are formally introduced, as the costs and risks associated with failing to support global ESG demand will weigh more heavily on the bottom line over time. To prepare, manufacturers can build standardized ESG models now with the help of variability analysis — including adjusting assembly line speed, motor efficiency, and overall social and environmental impact — and by maintaining adequate documentation for reporting disclosures.

The Need for Standard Governance

While ESG programs are spreading across industries, metrics and reporting frameworks remain disparate. As manufacturers are on the front line of business-to-business and business-to-consumer impacts, there’s a heightened need for standardized language and guidelines. Not only does this lack of standardization impede manufacturers’ ability to track the progress of their own ESG efforts and those of competitors, but it also makes new companies unsure of where and how to start. There are ESG ratings agencies that have developed algorithms and metrics to compare companies, but their methodologies differ vastly and sometimes tell contrasting stories of companies’ ESG performance, which limits the usefulness of ESG ratings for today’s reporting frameworks.

Beyond good business sense and being a responsible global steward, ESG strategies offer a plethora of opportunities for manufacturers

On the other hand, most ESG data is self-reported. Companies leverage the data they have on hand to attract investors and state and local government funds looking to make sustainable decisions with long-term value, but that data can lack transparency if companies are unable to disclose holistic reporting.

State and local fund managers are leaning into ESG investments, and regulations are following suit. In California, officials have released a policy requiring renewable and clean energy sources to “supply 100% of electric retail sales to customers by 2045,” according to the California Energy Commission.<sup>8</sup> And as the Biden administration continues to push a renewable energy agenda, more state and local governments will likely take similar steps. For those companies that haven’t prioritized socially and environmentally sustainable practices yet, the need for greater transparency to fuel capital access and new governance requirements on reporting ESG impact will be strong incentives to catch up to their sustainability-savvy peers.

An Evolved Manufacturing Landscape

Beyond good business sense and being a responsible global steward, ESG strategies offer a plethora of opportunities for manufacturers to incorporate enhanced and more formalized ESG standards as a part of their business improvement strategy and everyday operations. At the same time, it can help mitigate risks and reduce vulnerabilities associated with regulatory compliance and capital access. Going forward, manufacturers should take a holistic approach to ESG initiatives and leverage digital technologies that help support a sustainable business model of ethical labor and sourcing practices to bolster deeper community support. M

Footnotes:

1 https://www.forbes.com/sites/arielcohen/2020/10/26/plugging-into-the-future-the-electric-vehicle-market-outlook/?sh=1ccb14449812

2 https://www.greenbiz.com/article/8-electric-truck-and-van-companies-watch-2020

3 https://www.forbes.com/sites/quora/2018/07/18/what-environmental-problems-does-wasting-food-cause/?sh=6046d1462f7a

4 https://www.unpri.org/pri-blog/seven-major-companies-that-committed-to-net-zero-emissions-in-2020/6909.article

5 https://www.bdo.com/BDO/media/Report-PDFs/PE_Private-Capital-Pulse-Survey_Spring-2021_brochure_WEB.pdf

6 https://www.pewresearch.org/fact-tank/2020/06/11/unemployment-rose-higher-in-three-months-of-covid-19-than-it-did-in-two-years-of-the-great-recession/

7 https://www.bdo.com/BDO/media/Report-PDFs/Digital%20Transformation/2021-Industry-4-0-Survey_web.pdf

8 https://www.energy.ca.gov/news/2021-03/california-releases-report-charting-path-100-percent-clean-electricity

ML Journal

The Circular Solution

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.

Footnotes:
1 https://www.forbes.com/sites/arielcohen/2020/10/26/plugging-into-the-future-the-electric-vehicle-market-outlook/?sh=1ccb14449812
2 https://www.greenbiz.com/article/8-electric-truck-and-van-companies-watch-2020
3 https://www.forbes.com/sites/quora/2018/07/18/what-environmental-problems-does-wasting-food-cause/?sh=6046d1462f7a
4 https://www.unpri.org/pri-blog/seven-major-companies-that-committed-to-net-zero-emissions-in-2020/6909.article
5 https://www.bdo.com/BDO/media/Report-PDFs/PE_Private-Capital-Pulse-Survey_Spring-2021_brochure_WEB.pdf
6 https://www.pewresearch.org/fact-tank/2020/06/11/unemployment-rose-higher-in-three-months-of-covid-19-than-it-did-in-two-years-of-the-great-recession/
7 https://www.bdo.com/BDO/media/Report-PDFs/Digital%20Transformation/2021-Industry-4-0-Survey_web.pdf
8 https://www.energy.ca.gov/news/2021-03/california-releases-report-charting-path-100-percent-clean-electricity

The Sustainability Gap

  

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

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