The supply chain executive suite is looking pretty green for 2010, but it isn’t because of the color of money. Cash-strapped companies are closely scrutinizing their environmental plans, experts say, as they look for the cost savings that green initiatives can bring even as they weigh the potential tradeoffs between cleaner transportation and the efficiencies they can’t live without in the downturn.
Even as green initiatives are rocked by volatile oil prices, new mandates and the prolonged recession, sustainability hasn’t lost its momentum with supply chain executives, said Jonathan Wright, global head of fulfillment and supply chain management at Accenture.
When fuel costs were sky high, emissions-reduction plans sprouted everywhere. Good corporate citizenship, after all, dovetailed nicely with the bottom line. Now, with companies focused on survival, capital expense initiatives for sustainability such as the purchase of energy-efficient vehicles are on hold while operational sustainability initiatives, such as new driver rules and reduced fuel usage, continue.
There were signs of that conflict in December when the California Air Resources Board eased its rule for motor carrier emissions, due to take effect this month. The board pointed to the economic hardship trucking companies are enduring, although CARB also said truck emissions have declined sharply because shipping has fallen off so much.
But there is still relentless environmental pressure on companies, coming from many quarters — governments, consumers, shareholders and “channel masters” such as Wal-Mart — and that will continue throughout 2010 and for the foreseeable future, Wright said.
Consumer pressure and government environmental mandates add up to a permanent change in the way companies do business, said Andrew Winston, an environmental strategist and author of “Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value and Build Competitive Advantage.”
“Things have shifted very fast, and transportation companies are right in the heart of it,” he said.
According to the U.S. Environmental Protection Agency, transportation sources accounted for 29 percent of U.S. greenhouse gas emissions in 2006, and 47 percent of the increase in emissions since 1990. The trucking industry alone spent a whopping $151 billion on diesel fuel in 2008, about 39 billion gallons, according to the American Trucking Associations.
On the freight side, much of what companies are doing under the mantle of sustainability — changing modes, optimizing routes, moving from LTL to truckload and continuous moves — is just basic transportation management.
“Cost reduction and efficiencies are really proxies for green initiatives and sustainability measures,” said Greg Aimi, research director at AMR Research. “It’s about reducing empty miles.”
That’s exactly what Kraft Foods did when it implemented an environmental effort across its global supply chain. It said recently it took 50 million truck miles out of its distribution network. For the food products giant, the drive included moving truck shipments to barge along with more familiar shifts such as consolidating loads and eliminating empty miles.
Kraft, a major Wal-Mart provider, did not say how much it saved in costs.
But in a recent AMR Research survey of 158 logistics and supply chain executives, 73 percent of respondents cited cost reduction as the main driver of transportation strategy, followed by customer service, 61 percent; competitive advantage, 56 percent; and sustainability, 38 percent.
The most common sustainable transportation measures are fuel reduction, 46 percent; route optimization and delivery efficiency, 44 percent; continuous moves and/or freight co-mingling, 37 percent; use of alternative fuels, 34 percent; and empty miles reduction, 32 percent.
Global corporations that have made commitments to reduce their carbon footprints appear undaunted by the recession.
According to a May 2009 survey of 60 corporations by the U.K.-based Carbon Disclosure Project, only one respondent announced a significant decrease in discretionary spending on climate change activities. “Overall, the view is that most companies will not reduce their spending in this area on the grounds that they have no choice but to try to hit carbon emissions reduction targets, whether mandatory or voluntary,” the report said.
In exchange for continued investment in low-carbon technologies — despite the economic downturn — corporations want global standards for greenhouse gas emissions, and consistent and simpler regulatory frameworks. They want tax breaks and incentives for early adopters, and elimination of subsidies to the fossil fuel industry. Government investment is seen as crucial, whether through university research, private-sector grants or increased protection of intellectual property rights.
Still, it appears only the biggest companies are going green in any significant way. For companies with less than $1.5 billion in sales, sustainability “hasn’t really hit the radar, at least enough to be a priority yet,” Aimi said.
At Pepsico, environmental sustainability is considered “performance with purpose,” said John Sheehy, senior manager of transportation. Pepsico, based in Purchase, N.Y., is one of the world’s largest food and beverage companies, with 2008 revenue of $43 billion and more than 198,000 employees worldwide.
Supply chain executives from each of Pepsico’s four business units are accountable for defining and driving actions to help meet the company’s environmental goals, which include reducing water consumption and electricity usage by 20 percent and fuel consumption by 25 percent by 2015.
“Those are really where we get the biggest impacts to reduce our footprint going forward,” Sheehy said.
Pepsico recently introduced an ionized air sterilization process for cleaning bottles; it previously used water. Some bottlers have installed high-speed filling lines, which produce less spillage.
In February 2009, the company mandated its roughly 210 carriers be certified by the SmartWay Transport Partnership. Pepsico works with each carrier to score and track mileage efficiency and CO2 emissions per mile. G&J Pepsi-Cola Bottlers of Columbus, Ohio, installed shut-off equipment on trailers to prevent idling for more than five minutes, saving about 17,500 gallons of fuel annually.
The company is expanding its use of intermodal and is trying to build alliances with other shippers.
“What we’re looking to do is to partner up with some other folks to help fill those boxcars to take trucks off the road,” Sheehy said. “Everyone knows that rail is more efficient from an emissions standpoint.”
But some industry officials say more must be done in the larger arena that only governments can control. For U.S. ports, freight mobility and congestion are closely linked to the environmental restrictions under which they operate.
“Changes are needed to decrease road congestion due to freight movement that will result in reduced fuel use, pollution and transportation costs,” Kurt Nagle, president and CEO of the American Association of Port Authorities, said in a November 2009 letter urging congressional leaders to press forward with a new surface transportation spending bill.
In 2009, U.S. seaports received about $30 million in stimulus funds from the Environmental Protection Agency for projects related to reducing diesel emissions. The Port Authority of New York and New Jersey was the largest recipient, with nearly $11 million. The ports of Los Angeles and Long Beach got a combined $6 million in awards.
The greening of U.S. ports shifted into high gear in 2004, when the Natural Resources Defense Council identified seaports as the nation’s largest and most poorly regulated source of urban pollution. Soon after, the EPA and the freight industry jointly launched the SmartWay Transport Partnership, which to date has reduced fuel use by 1.4 billion gallons, according to managers of the EPA program.
The Port of Los Angeles’ clean-trucks program, the first in the nation, was adapted in 2006 to improve air quality at the port by phasing out high-polluting trucks. This month, a ban on pre-1994 vehicles and newer trucks without EPA-mandated retrofits will take effect.
Despite legal challenges to parts of the plans in LA and neighboring Long Beach that don’t specifically address emissions, the targeted environmental mandates have proceeded and produced results, port officials say.
More than 5,500 new clean-burning vehicles now serve the ports, making about 66 percent of containerized cargo gate moves. Particulate matter emitted by trucks at the ports has been reduced by 30 tons annually, equal to emissions from nearly 200,000 cars.
And, underscoring the high profile the ports have, drayage trucking was pointedly left off the CARB decision to ease its motor carrier emissions rules this month.
For sustainability purposes, ports tend to look at the maritime operations in five categories — cargo handling equipment, trucks, rails, harbor vessels and oceangoing vessels — said Sarah Flagg, seaport air quality program manager at the Port of Seattle.
“We have short- and long-term goals for each of those source categories,” she said.
Nearly 200 pieces of cargo-handling equipment in Seattle have been retrofitted with emissions-reducing devices, and all equipment runs on biodiesel, low-sulfur fuel or a blend of the two. In April 2009, the ports implemented a comprehensive plan to reduce truck emissions. Currently, 75 percent and 86 percent of trucks that serve the ports of Seattle and Tacoma, respectively, meet stringent regional clean air standards.
Ports are taking other measures to reduce emissions. Los Angeles and Long Beach encourage vessel operators to steam at slower speeds within 20 miles of the coast and to use low-sulfur distillate fuel in their main as well as auxiliary engines. Ports are using electric shoreside cranes, installing diesel oxidation catalysts on yard equipment, using alternative-fuel tractors and shoreside electric power transformers that would allow vessel operators to shut down diesel engines at berth, a practice called cold-ironing.
But higher environmental costs are exactly what the beleaguered trucking industry doesn’t need. Between 2007 and 2009, nearly 6,000 trucking companies went out of business and thousands of independent operators left the industry, which remains mired in one of its worst downturns the industry has seen, according to the ATA.
The 2007 EPA diesel emissions standards added an average $9,000 to the cost per truck, and 2010 standards are expected to be as costly.
Carriers nationwide are equipping trucks with low-emission engines, limiting idling time to five to 15 minutes, equipping trucks with auxiliary power units, capping speeds at 62-63 mph, mandating hotel room stays for drivers, implementing tire-pressure programs, using high-efficiency lubricants, and deploying software that optimizes route efficiency and alerts drivers to the most cost-effective fueling locations.
The railroad industry trumpets strong environmental credentials today, a point investor Warren Buffett made in announcing his purchase of BNSF Railway late last year. Railroads are “the most environmentally friendly way of moving goods,” Buffett told a television interviewer.
A freight train moves a ton of cargo an average of 457 miles on a single gallon of fuel, according to the Association of American Railroads. According to BNSF, the world’s largest intermodal carrier, the average BNSF intermodal train moves the equivalent of 280 truckloads of freight.
Railroads are working on equipment to improve performance. The Evolution Series, a new generation of locomotives manufactured by General Electric, produces 83 percent fewer particulates and 60 percent less nitrogen oxide emissions than locomotives built in 2004. In March 2008, the EPA issued strict new locomotive emissions standards.
Railroads are taking other measures to reduce their emissions footprints. In May 2008, Union Pacific deployed the first of 160 Genset switchers, a cleaner yard locomotive that reduces harmful emissions by up to 90 percent. To limit idling, Canadian Pacific has equipped more than 80 percent of its locomotives with some form of anti-idling device.
It’s one example of the growing focus on technology to extract more efficiency, and environmental benefits, from operations. As sustainability efforts mature and benefits become harder to realize, companies will turn to complex energy-saving strategies, such as network optimization and multishipper collaborations, that require new capabilities, said Hal Feuchtwanger, managing director of global logistics for Dallas-based i2 Technologies.
Technology is crucial to Pepsico’s green initiatives. Advanced routing software used by Pepsi Bottling Group has cut mileage by about 12 percent. Pepsico is working with i2 to expand its reporting and score-carding capabilities. Longer term, it will need optimization tools to maximize its assets and truly understand emissions-cost tradeoffs.
“We want to look at the whole ball of wax from a sustainable emissions cost trade-off, and make the right decisions for the environment going forward,” Sheehy said.
Kraft Foods uses transportation and warehouse optimization software at its 20 largest North American plants and distribution centers to maximize its shipments per truckload, taking the equivalent of 1,500 trucks off the road. It also used transportation management software from Oracle to cut more than 500,000 empty miles from its private fleet trips last year. The company’s top 50 for-hire motor carriers use the software as well, the company said.
As carbon regulation becomes more complex and as global standards emerge, big supply chain software providers will likely flood the market with new reporting tools.
“At the moment, companies can report carbon footprints at corporate level, but what customers will ask for and what legislation will demand is product-level carbon foot-printing and labeling,” Wright said.
Contact David Biederman at email@example.com.