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Faculty & Research -Eco-friendly business management – more than just an end product?

Eco-friendly business management – more than just an end product?

In these environmentally-sensitive times, corporations are under growing governmental and legislative pressure to keep carbon emissions to a minimum. However, the matter of doing profitable business is even more complex when consumer interest in greener products is factored into the equation. The emissions-versus-profits conundrum is now becoming an even stiffer challenge to overcome as demand increases not only for a green end result but also for one that is produced and distributed in a manner that does the least possible damage to the environment.

When 83% of Europeans told a 2008-09 European Commission survey that they were sensitive to environmental issues and above all that of carbon emissions, it was clearly time for firms to wake up not only to the eco-friendliness of the products they were commercialising but also the way in which they were going about their business. Behind every product carrying a green label is a whole process which, in many cases, involves multi-site manufacturing, production and distribution channels. All of these links in the overall supply chain carry a potential environmental risk, depending on such factors as distance and mode of transportation. Getting the supply chain strategy right can make a crucial difference. However, firms are still in it to make a profit, so how best to balance these two concerns?

The customer’s always right, but not always interested

The links in the supply chain are numerous, from facility location, manufacturing management and choice of technology through to transportation, supplier selection and order allocation. However, it is no longer possible to overlook the potential reactions of consumers to the end product and also the way in which it was produced. To do so, the recommended approach is to anticipate the market response both from the carbon emissions-sensitive consumer and the more “ordinary”, less eco-conscious equivalent.

Research into this field has so far identified the various links but generally neglected the impact that consumer sensitivity (or lack of) can have on the success of the final product once launched onto the market. As a result, a new model has recently been devised and tested both empirically and via a case study that takes into account not only carbon emissions-sensitive demand but also the scenario where multiple customers are involved in the process across multiple sites. Just as one should anticipate complex market responses, a more complex supply chain should also be considered.

Giving out but not giving up

The model in question was based on a series of assumptions (the carbon emissions sensitive customer versus the disinterested, one production technology per production facility, and one supplier per production facility) and tested via a case study focussing on a multinational working in the textile sector. The final product was due to be delivered to distribution centres in Italy and Germany who could then choose from production centres in China, Tunisia, Italy and Poland, after which four modes of transportation (road, rail, air and water) were available. These four centres all came at varying costs and levels of carbon emission. The main challenge? To balance the need to generate a profit with meeting the concerns (or otherwise) of the market for the cleanest possible supply chain as well as end product (in this case, a lady’s jacket).

The biggest dilemma posed to the firm via the study was the one faced in reality by a great many organisations – to opt for a lower cost, more polluting supply chain that would ultimately generate business by keeping the price of the final product down or, alternatively, run the risk of marketing a more expensive product that might nevertheless appeal to the increasingly green sensitivity of the market. The results were surprising but no cause for firms to give up on making the necessary ecological efforts.

Defining a green, local strategy

The most surprising result to emerge was the importance of a green policy, however high or low the level of interest of customers in green issues. In short, the cost-cutting, more polluting supply chain option should be abandoned altogether in favour of a higher-cost but greener strategy, as neither green nor “ordinary” customers proved to be attracted by the former option, contrary to what one might expect in the case of the less eco-conscious customers. Localising operations as far as possible by situating the production area as close to the areas of consumption, bolstered by the use of local suppliers, also came out as a strong driver of operations. As a consequence, firms considering an offshore approach to managing affairs should think again, especially when the variables of financial fluctuations and natural disasters are taken into account for set-ups of this nature.

Above all, though, the study provides concrete evidence that a multi-site supply chain is worth considering, combining cheaper but higher emissions sites with more expensive, lower emissions locations. And the lesson for firms? Do not put all your eggs in one basket by plumping for an exclusively lower cost or exclusively greener policy but try to bring together the best of both worlds. And do not assume that a green final product will guarantee success without a conscious effort to produce it in a green manner.

This article draws inspiration from the paper Design of forward supply chains: Impact of a carbon emissions-sensitive demand, written by Imen Nouira, Ramzi Hammami, Yannick Frein and Ceclia Temponi and published in Int. J. Production Economics 173 (2016).

Imen Nouria is an Assistant Professor at Rennes School of Business, France. Her areas of research interest include purchasing and supply chain management.
Ramzi Hammami is the Head of the Research Centre for Supply Chain Management& Purchasing at Rennes School of Business, France. His research interests cover supply chain design, supplier selection, and inventory management.
Yannick Frein is a teacher-researcher at Grenoble INP and deputy director of the G-SCOP research laboratory. His research interests cover logistic flow management in production systems (particularly within the automobile industry) and supply chain design (international factors, time delay and environmental concerns).
Cecilia Temponi is a professor of Management at the McCoy College of Business, Texas State University. Her research interests include Quality and Supply Chain, Enterprise Modelling and Demand-Driven Supply Chain Networks.