As if supply chain managers didn't have enough to worry about with supply shortages, uneven demand and inflation, they now have to stay on top of Environmental, Social and Governance (ESG) factors too. The good news is that taking action on ESG can help solve other challenges at the same time, based on the experience of companies in business spend management vendor Coupa's customer base.
The not-so-good news is that addressing all of these challenges requires joined-up data from across the supply chain. That's often difficult to gather because of the piecemeal evolution of supply chain systems. During Coupa's recent EMEA conference I caught up with Madhav Durbha, VP of Supply Chain Strategy, who joined Coupa in its acquisition of supply chain planning specialist Llamasoft in late 2020. He's a veteran of supply chain management software, having previously served at Kinaxis, JDA and i2 Technologies.
The technology has changed dramatically during Durbha's 24-year career. In the beginning, the limited compute power available meant that companies had to slice up their supply chain into segments. This led to optimization within functional silos that corresponded to those segments — manufacturing, distribution, sourcing and so on — but limited visibility across the supply chain as a whole. Today, the combination of cloud computing and AI-powered analysis makes it possible to construct what Coupa calls a 'digital twin' of the supply chain, with an end-to-end view of the various elements. He explains:
The technological shift that we are seeing is, now there is this emergence of this digital twin model. How can I have the central representation of my supply chain and be able to almost use it like a flight simulator? I can stress-test my supply chain before the problems manifest ...
The idea of a digital twin now becomes a reality. It starts surfacing all the hidden rocks in your supply chain, all the speed bumps. Now they are all visible in plain sight.
Organizations have the ability to now work cross-functionally, and be able to optimize their supply chain in a much more holistic manner.
Finding the tipping point
This optimization can either be strategic, such as planning a new production facility that takes three years to build out, or highly tactical, such as a retailer that had to adjust its daily vehicle route plan to accommodate spikes in driver absence due to COVID-19, or a beverage company rapidly adjusting its product mix to optimize profitability during a lockdown-inspired shortage of cans last year. The strength of Coupa's technology is that it can analyze the data for many different parameters, including availability, margins, sustainability goals, and so on, and find the 'tipping points' that will produce the optimal outcome. As Durbha puts it:
What is very unique about our proposition is that you throw all these balls up in the air. What is the optimal answer? You have to find these tipping points.
The sustainability pillar of ESG was a big talking point at the Coupa event, with companies including French multinational Saint-Gobain and Swiss food and drink giant Nestlé presenting examples of how they've used supply chain modeling to reduce carbon emissions through network optimization. The majority of these examples focus on optimizing distribution, with Nestlé describing how it has reduced costs and emissions by reconfiguring distribution networks in Mexico, North America and China.
Madhav adds another example from Microsoft, which found savings and reduced emissions by moving certain components from air freight to ocean shipment. While this extended the lead time, the cost of adding extra stock in inventory as a buffer was far less than the saving from switching to sea freight. He says having the data and the technology to analyze it is the key to identifying these opportunities for action:
What you're doing is, with the technology we provide, they can not only model the cost, they can actually model their carbon footprint — and they're optimizing around their carbon footprint. What Microsoft is realizing is, they're seeing about 10% or so savings in terms of both cost and carbon footprint when they did this.
Examples like that are extremely powerful. It's not for lack of intent, it's for lack of technology [that] sometimes organizations struggle — lack of technology and lack of data.
Day-to-day decision making
Madhav points out that older ERP and supply chain planning systems — even those implemented as recently as five years ago, do not have sustainability 'baked in' to the day-to-day decision process. This leaves organizations forced to produce after-the-fact reports on sustainability, rather than being able to work with data in real time and take decisions that have an active impact straightaway. Coupa's philosophy, as Donna Wilczek, SVP Product Innovation & Strategy, told me in an interview during the EMEA event, is to go beyond reporting and enable change. She said:
I fundamentally think that we can help change how businesses spend. And if we change how businesses spend, then the impact will be very different than if we just help businesses report on it.
New regulations will continue to have an impact, both in nudging companies towards taking action on ESG issues, and also on the supply chain itself. Madhav points out that next year, the International Maritime Organization will classify ocean ships into five categories according to their carbon emissions, and owners of ships in the bottom two categories will have to either withdraw them or commit to remedial actions. The simplest and quickest way to reduce emissions is to reduce the ship's speed, which he explains will likely have a knock-on effect on ocean transit times across the board. It's not practical to overtake in busy shipping lanes, and so all vessels will have to fall in line with the slowest. He draws a moral from this example:
Sustainability goals are deeply intertwined with how much capacity you can provide your customers.
All of this adds up to a unique challenge for supply chain leaders. He summarizes:
There are material shortages. There are labor shortages. There are transportation capacity shortages — it's very hard to get transportation capacity right now. All this while we as consumers, our demand patterns are significantly shifting. Where we consume the products and how we consume the products is very changeable.
What is unique about the current situation we are in here is that one or two of these problems have always happened in the past for supply chains. But all these problems coming together at the same time — especially at the same time as the regulation is tightening around ESG and sustainability initiatives — makes the whole idea of supply chain management that much more of a challenge.
These are challenging times indeed for supply chain planners, and all of us have become acutely aware of these challenges as we feel the impact in our own lives as consumers, as well as in our businesses. It's becoming essential to break down the old silos and get that end-to-end view so that planning can be truly data-driven.
It's good to see evidence of companies starting to take action on sustainability and other ESG issues. I do feel though that we're only at the beginning of collecting the relevant data and analyzing it. Distribution represents an obvious starting point when seeking to reduce emissions, as seen in the customer examples cited above. Deeper analysis and more radical changes are needed to progress other actions such as adopting more sustainable components or moving manufacturing to a circular economy.
Nevertheless, Coupa is taking a welcome lead in encouraging customers to share their stories, as well as setting an example with its own ESG initiatives, which it recently summarized in an annual report.