The Future of Supply Chain: getting to net zero, the new opportunity

Chloe Taylor (00:06):

Hey there, and welcome to The Future of Supply Chain, a two part EY podcast that takes a deep dive into, well, everything supply chain. I'm your host, Chloe Taylor.

Chloe Taylor (00:19):

Now it's no secret that the pandemic has disrupted supply chains all over the world. Proving them to be fragile and not nearly as resilient as they should be. Board level discussions around cost and efficiency, have evolved to also focus on resiliency and sustainability. And they're realizing that net zero carbon emissions and circular economies are the next big opportunities for business. Today, I have EY Americas ESG sustainability supply chain leader, Rae-Anne Alves, an EY Americas chief sustainability officer Velislava Ivanova with me to shed some light on these topics and bring us up to speed and tell us why net zero carbon emissions in the supply chain are the next big opportunities for business. Welcome Veli and Rae-Anne.

Velilava Ivanova (01:06):

Thank you. Thank you for having me, such an exciting topic today, and a lot to cover.

 Rae-Anne Alves (01:12):

It's a pleasure to be here. Thank you for having me on the podcast.

Chloe Taylor (01:16):

Indeed, let's start with the changing landscape. For regulators, investors and customers. Expectations have all become more focused on sustainability and companies are moving to reduce their carbon emissions, with some stating ambitious goals to be carbon neutral in the next five to 10 years. Yet, these goals can be more theoretical than concrete. So, what are you seeing in the marketplace as clients wrestle with sustainability.

Velilava Ivanova (01:44):

Environmental, social and governance topics are not new on the C-suite agenda. And the business case is well established. In the marketplace, investors, customers, regulators expectations are becoming more focused on sustainability. Across the board, we are seeing client efforts to establish ESG goals and set KPIs for tracking success. In fact, in some companies, executive compensation is now being tied to meeting ESG metrics. I will also add that companies are looking for increased transparency with their suppliers so that they can measure the true impact of their ESG performance across the supply chain.

Chloe Taylor (02:30):

Great Veli, thanks. And as companies set carbon neutral or carbon negative goals, supply chains are a natural target because the lion share of emissions comes from manufacturing and transportation, right?

 Rae-Anne Alves (02:44):

Yes. Supply chains are a key area of ESG focus, because they are a large activator of several net, zero commitments around logistics and fleet. Manufacturing is obviously another source of carbon emissions when enterprises are not using renewables to power the factory. Thirdly, planning effectively to reduce your supply chain emissions means taking steps forward today. And while a net zero supply chain, isn't easy to achieve, smarter use of resources can have a big impact both on your bottom line and the health of the planet.

Chloe Taylor (03:21):

Great. Thanks Rae-Anne. Regulatory action has added greater urgency around considering ESG more broadly with supply chains. What more can we expect to see?

Velilava Ivanova (03:31):

We have seen significant changes since the start of 2021. The bylaw administration has issued executive orders on environmental sustainability and its impact on the economy. Most recently to drive more responsibility among financial institutions on climate disclosures and financing. DSCC hosted a public consultation process on climate related disclosures, and its spring 2021 room making list, includes a proposed rule on climate change disclosures among other ESG topics. More changes on the horizon regarding what companies will need to provide, not just in their operations, but also in their supply chains. Globally, the US has rejoined the Paris agreement on climate change. The social element of ESG is also important because in the supply chain, companies must be concerned about whether their raw materials or unfinished goods are coming from conflict regions or are created using forced or child labor. We also cannot overlook governance, since in some countries, companies can be fined for failing to address human rights and environmental abuse.

Chloe Taylor (04:47):

And it's not just the government and regulators, right? How are investors and consumers compounding the pressure to act?

Velilava Ivanova (04:54):

In the most recently why survey of global institutional investors, 73% of responders, say that they would develop considerable time and attention to evaluating the physical risk implications of climate change, when they make asset allocations and selection decisions. And 71% said the same about transition risks. EY, future consumer index published in March 2021, found that 49% of consumers said they would prioritize environment and climate change, in how they live and the products they buy. And 26% said, sustainability will be their most important purchase criteria three years from now.

Chloe Taylor (05:41):

Right, where does electrification fit, as businesses plot a net zero future for their supply chains?

 Rae-Anne Alves (05:48):

I think that's a really good question. Considering the recent passage of the Biden bill. What we are seeing is that there is significant opportunity in the factory with using electric, from renewable resources, to run robots and machinery in plants. Electric vehicles are becoming more and more available for the supply chain. This will help reduce emissions for logistics and distribution, as the fleets go electric. The switch to alternative fuels though is a good starting point, but it's not just up to companies to act within their four walls. Let me give you an example. Let's say one manufacturer sets a goal of having a net zero fleet by 2025. So they need to engage with a third party logistic supplier to support that effort. The three PL in turn, will then put pressure on the truck manufacturers to be electric, which partly explains why there's a push by truck manufacturers to improve the battery technology, so that they can get to zero emissions free.

Velilava Ivanova (06:55):

Let me add to that Rae-Anne. Thanks to cheaper battery technology, economics of fleet electrification, are making more and more sense. And some auto makers are moving away from internal combustion engine vehicles altogether, while perhaps considered a niche product for the affluent and environmentally focused today, electric vehicles are expected to achieve cost parity with internal compassion engine vehicles in about five to six years in most regions, and government incentives and regulations are fueling the transition. Separately, implementing a digital twin, a virtual replica of your full supply chain, provides a way for you to experiment virtually with new logistics routes and warehouse pickup trucks loading, for greater optimization, which in turn, can reduce your company's overall carbon footprint.

Chloe Taylor (07:53):

Wow. Really exciting changes and great information here. So we haven't talked about supply chain procurement yet. Isn't that part of the equation?

 Rae-Anne Alves (08:03):

Well, traditionally, yes, but supply chain leaders, they have to think differently now. Let me explain, procurement used to be focused, solely on price. However, sustainability causes that role to expand, to consider other factors such as environment and social impacts, in addition to price. So procurement used to be the place where companies would focus on decarbonization because it was a low hanging fruit in terms of pushing suppliers to just be more efficient and sustainable with their resources. This is usually when they would get pushed on price. And that was procurement's function. With the journey to being more sustainable, what we are seeing is now procurement is focusing not just on a cost play, but also a true value, especially long term value plan. But now we've gone beyond just looking to the procurement function, to help us reach net zero supply chain. We're looking closely across the supply chain, which includes manufacturing, logistics, distribution, planning and operations. So that in totality, across the ecosystem, we're looking for ways to reduce emissions.

Chloe Taylor (09:20):

Wow. So, what do you recommend to get everyone on the same page? Moving forward all together?

Velilava Ivanova (09:27):

I would say, define about forward. Don't just set a goal. Many companies today are announcing that they've set net zero targets for a certain period of time, but there is a need for more specific roadmaps behind these commitments. Renewable offsets and virtual power agreements are useful today, but companies need to determine how to affect meaningful emission reductions, driving the debate from the beginning and scrutiny on the supply chain is imperative, across sourcing, manufacturing and transportation. The EYD carbonization architecture, offers a framework, for understanding where to start and what tools are at your disposal, and how to align metrics with the desired outcomes. This is not a reporting framework, it is intended to provide suggested capabilities, or competency areas for discussion.

 Rae-Anne Alves (10:23):

I couldn't agree with you more Veli. You also need to benchmark and baseline your data. That means knowing what your carbon footprint looks like now. And to what extent supply chain makes up that footprint. This will be a crucial first step when you're defining your roadmap. Now, once you do that, you're equipped to focus on the decarbonization methods and levers that are best suited for your business, and to think about the metrics to embed, to track that activity.

Chloe Taylor (10:52):

Okay, so define a path forward and benchmark and baseline your data. Makes sense. Anything else companies should do?

Velilava Ivanova (11:00):

I would say rethink how you engage with suppliers. When you identify the levers to pull, think about which layers are impacting those levers and engage with them. You may be surprised by how much they have in place already. Amid the greater pressure from stakeholders, such as investors and consumers, as well as advances in electrification and technology. Collaboration across the value chain is vital for meeting goals and commitments. Companies should feel empowered to demand database targets from their suppliers, rather than nearly asking them to reduce emissions. There are several examples of collaborations across sectors, when really companies and their suppliers across tier one, tier three, are collaborating together to meet the carbon commitments across the whole value chain.

Chloe Taylor (11:55):

Okay. And that seems to totally tie back to the need for global transparency and end to end visibility. What else do companies need to do to get to that all important net zero?

 Rae-Anne Alves (12:05):

I think your question is the million dollar question. But a few things that I think companies can do on their journey to net zero, is scrutinize the full life cycle of their products. You can make a large impact on reducing emissions through upfront innovation, during product development. Maybe your product and packaging can be redesigned, around greater energy, efficient or recycling and sustainable materials, for example. In sustainable manufacturing, a view of the entire product life cycle, is crucial for optimizing manufacturing systems, products and services. And even if you don't use a lot of energy to manufacture your product, perhaps the end consumer will use it in a way that strains the environmental resources, which then may create an indirect emissions in that life cycle when you come to your sustainability reporting. With a full life cycle view, you can drive positive change through adapting things like, the raw materials, the suppliers you rely upon, and when and where your manufacturing takes place.

 Rae-Anne Alves (13:13):

When we keep all of this in mind, you can also look beyond just the four walls in terms of supply chain sustainability. We have many large companies using three PLS for logistics and distribution, as well as manufacturing. So if you are going to work on your carbon footprint, you need to look at the entire ecosystem, beyond just those four walls, the journey and I stress the journey, to net zero requires us to invent and reinvent in some cases, the way we think about our water ecosystem, our suppliers, employees, communities, competitors, and industries, as they're all required to work together for us to achieve this goal. This will require maturity in operations, partnerships, and relationships to an unprecedented level. Quite frankly, we have seen in only isolated pockets, the right solution for net zero supply chains, will definitely vary by company. So collaboration with all of your stakeholders will be key.

Chloe Taylor (14:14):

Thanks so much Re-Anne and Veli. Wonderful information, stuff we all need to know. Thank you for being here with us. Switching gears just a little bit. Anyone who's opened a major business publication in the last two to three years has probably heard about the circular economy, but what exactly is the circular economy? And how's it from the ways companies typically make products and how they're used by the end consumer. We've invited Jade Rodysill, a principle at EY, to discuss the circular economy with us. Welcome Jade. Just about every day you lead client workshops and discussions on circular economy. Can you explain what it is and why it's important?

 Jade Rodysill (14:57):

Well, I will certainly take a swing at it. Basically, circular economy takes aim at the existing, take, make waste business model. So the main difference between the circular economy and traditional sustainability efforts, is that the circular economy is not trying to reduce the negative footprint of a company, but rather create a positive footprint of an ecosystem of companies. This means closing material loops in all stages of the extent of value chain, keeping products and materials in use for as long as possible with maximized quality and flexibility of use. As opposed to the straight or traditional recycling we do today. Aiming for zero waste along the entire value chain, using and producing non-toxic resources, and using renewable energy in manufacturing and across logistics flows, footprints and all the partners that we use. Ultimately the circular economy, decouples economic growth, from resource consumption.

Chloe Taylor (15:48):

Great, thank you. That's super succinct and helpful, in definition there. Here's a question, how much of our economy is circular now?

 Jade Rodysill (15:57):

So a great question, but you may not like where we are. So the global economy is currently under 9% circular, yet it has the potential to cut emissions by almost 40%, according to the circular to gap report of 2021. Now the primary intent is to avoid scope two and certainly scope three emissions from sourcing through distribution, by reusing and refurbishing products and encouraging an end of life return to the original manufacturer, or any designated ecosystem partner they may have, providing the resources needed for new products. Products, and their enabling value chains must account for durability and consistency. They must account for how easily components can be disassembled or decomposed. And in the case of chemicals, that decomposition is quite keen, to keep them in play longer. Ultimately, a circular economy, creates a positive global footprint and drives long term buy for all stakeholders. You, me, our families, our friends and neighbors.

Chloe Taylor (16:49):

For everyone, for sure. So, how far along are we with circular thinking? I mean, I know it's not a new term. We've been talking about it for a while now, but how common is it in actual practice, the approach?

 Jade Rodysill (17:03):

Great question again. While we've indeed been talking about it for a long time. It is not as widespread in the US as it is in Europe, but American companies are increasingly getting on board. They are designing products that use fewer resources, and are easy to disassemble for reuse. Redesigning product packaging that encourages reuse rather than disposal. They're adopting incentive driven take-back programs that return an end of life product to the original manufacturer, or again, any designated partner in their value chain, providing those resources needed for new products, repurposing recycled materials, such as plastic bottles made of PET, to make products more sustainable. And dematerializing product offerings, lots such as using cloud-based software downloads to upgrade our EV automobiles while just sitting at our own homes.

Chloe Taylor (17:49):

Can you give us some examples of circular thinking?

 Jade Rodysill (17:53):

Sure. Happy to share a few. So one example is a recyclable carpet, that cleans the air by trapping fine dust particles. I can certainly use that one. Another is a recyclable sneaker, made from recycled plastic bottles, carbon neutral rubber, and recycled yoga mats, and one brand that provides a prepaid shipping level to customers to return shoes and get credit towards the next pair. Now that might be somewhat commonplace, but if the shoes have life left in them, the company actually cleans and donates them. Otherwise, the materials that you recycle for reuse. There are certainly a number of increasingly innovative examples out there that we just have to look for them.

Chloe Taylor (18:26):

Wow, fun. This is fun stuff. It's like a win-win for everyone. Win, win, win, consumers, business, and the planet.

 Jade Rodysill (18:33):

It is however, for a secure strategy to work significantly and sustainably all of the ecosystem partners, including the suppliers, the logistics service providers and manufacturing partners, must commit to the process and act as one extended enterprise, not just for themselves. A circular value chain is larger, longer and more complicated than a traditional linear model. It is a number of different interactive material loops. Designs must account for durability and consistency, to keep components in play longer, for ease of disassembly and decomposition to efficiently reuse resources. Also, they may be dramatically impacted by new and ownership models, such as pay per views, which we're very comfortable with here as we've come through COVID.

 Jade Rodysill (19:14):

Tracking all components of a product and their histories is necessary to determine which components need to be replaced and when. And, and it's a big and, reverse logistics are a significant often added or enhanced link in the value chain, to make sure parts get returned to the original manufacturer or design E, for reuse of recycling. And these reverse value chains are often immature and not to scale today. Just because, you know the Ford value chain, does not mean that you can simply put it in reverse.

Chloe Taylor (19:41):

And these are all reasons that end to end visibility is critical from R and D sales, purchasing and manufacturing through to finance.

 Jade Rodysill (19:49):

Absolutely. Companies shouldn't be afraid to jump in now. Start small with initial efforts, then move with pace to quickly scale, letting the small ones accumulate and fuel the transformation.

Chloe Taylor (20:00):

Right. So smarter use of resources and end-to-end visibility can have a huge and positive impact on the health of a company's business, not to mention the earth. You've given us a lot to think about Jade. With a lot of upside, thanks.

 Jade Rodysill (20:14):

You are very welcome. I'm all about the upside.

Chloe Taylor (20:16):

So there you have it. Organizations are rethinking their business models and putting their supply chains at the center, with a focus on sustainability and greater emphasis on getting to net zero carbon emissions, in the circular economy. Thanks for listening to part one of the EY future of supply chain podcast. In part two, we'll be talking about how the future of the supply chain is digital and autonomous, and what that means for humans across the supply chain ecosystem. Exciting, right? I'm Chloe Taylor, stay tuned.