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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

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