Sustainable Demand Chain Management

Sustainable Demand Chain Management

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Description: In this stand-alone overview of analyzing how sustainability intersects with demand chains, we address the following in order. What is a Demand Chain?:- Answer: it is a sequence network of facilities and activities that support the production and delivery of a good or service. Demand chains are sometimes referred to as supply chains or value chains.

These terms are interchangeable. Marketing tends to view the chain as supporting demand pulls. Operations tend to view the chain as supporting supply pushes.

The default term for the rest of this presentation will be “Supply Chain”.

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Sustainable Demand Chain
Management: an Introduction
S. Cholette
Associate Professor, Decision Science
San Francisco State University
Guest Professor, SRH Hochschule Heidelberg
Development of these materials made possible by a grant from the Leonard
Transportation Center at CSU San Bernardino


In this stand-alone overview of analyzing how
sustainability intersects with demand chains we address
the following in order:

Introduction to the Chain
Chain Management and Strategy
Introduction to Sustainability
Modeling Fundamentals
Logistics, Energy and CO2 Emissions

Analyzing our Chain’s Energy and Emissions


What is a Demand Chain?

Answer: it is a sequenced network of facilities and
activities that support the production and delivery of a
good or service

Demand chains are sometimes referred to as supply
chains or value chains

These terms are interchangeable

Marketing tends to view the chain as supporting demand pulls

Operations tends to view the chain as supporting supply pushes

The default term for the rest of this presentation will be “Supply


The Supply Chain Sequence

A supply chain starts with basic suppliers and extends all
the way to customers via stages
Supply chains are directional: Upstream vs. Downstream
Stages may include the following facilities:


Distribution centers
Retail outlets





Supply Chains:
Complex and Connected

Not all supply chains include all stages, but all supply
chains end with a consumer
Supply chains may be interlinked
 one supply chain’s end consumer may be an
intermediate link in another supply chain
 Example: a consumer of cylinders of compressed
CO2 may be a soft drink producer, which then uses
the gas to carbonate its drinks


Supply Chain Activities

Supply chains go beyond manufacturing, including such
functions as:

Demand Forecasting
Purchasing (also known as Sourcing)
Customer Relationship Management (CRM)
Logistics: the movement and storage of goods, services and
information, logistics is umbrella term for such important
functions as:

Inventory Management
Returns/Reverse logistics

These activities are often complex and interdependent…

Supply Chains Require
Collaboration Across Organizations

Few supply chains are vertically integrated, completely
controlled by one company

Companies may outsource supply chain activities

Manufacturers and Retailers are typically different firms
Many tech and electronics firms use contract manufacturers
examples: Nintendo’s Wii, Apple’s iPhone
Transport and storage functions may be handled more
effectively by Third Party Logistic Providers (3PLs)

Outside firms that form part a company’s supply chain
are channel partners

Extended Enterprise: the network of channel partners


The Supply Network for a Winery
On-Premise Retailer:


Bottle Maker

Off-Premise Retailer:
Wine Store



3PL: Wine Shipper’s Warehouse

Corrugated Supplier
Tasting Room


Supply Chain Management (SCM)

SCM is the coordination of business functions within an
organization and its channel partners in order to provide
goods and services to fulfill customer demand
responsively, efficiently and sustainably


Levels of Supply Chain
Management Decisions


Designing and building the appropriate supply chain
for the good or service to be provided

Long-term, decisions made at the executive level



Leveraging the existing supply chain to support
medium-term goals



Short-term monitoring and control to support the
supply chain plan and any plan revisions

Supply Chain Strategy:
Making Tradeoffs

Traditional Focus: Balance Customer Responsiveness
with Cost Efficiency

A firm’s supply chain strategy must fit its overall competitive
First, consider the customer needs and product attributes.
 If product is more like a commodity, price may be the driver,
necessitating a cost-effective supply chain
 High level of product differentiation may require greater levels
of customer responsiveness
 Example: iPhone verses laundry detergent


Sustainability: the Third Dimension
of Supply Chain Strategy

Sustainability is an emotionally charged word that means
different things to many people

Sustainable: “Able to keep in existence, maintain” (Webster’s

Our definition: A sustainable firm is one that is able to
produce and deliver its goods or services for the
foreseeable future without causing degradation

An effective supply chain strategy must explicitly address

Triple Bottom Line (3BL)
1) Social Responsibility

Does the firm provide a safe working environment, with appropriate
compensation and benefits?
Does the firm avoid child labor, forced labor or discrimination in hiring or
Does the firm make a positive contribution to the communities in which it is

2) Environmental Stewardship

Can the firm avoid depleting resources, prevent pollution, or otherwise
reduce its ecological footprint?
How is the product able to be reused, recycled or ultimately disposed of?
Can the total cost of ownership be reduced?

3) Economic Viability

Is the firm profitable?
Can the firm be expected to grow and prosper, providing returns to

A firm deficient in any of these three facets is ultimately not sustainable13

Measuring Sustainability:

There is no one universally acknowledged path to

Mainstream discussion of sustainability in businesses is
relatively recent, in both the classroom and the

The following slides present some different frameworks
for considering facets of sustainability


Total Cost of Ownership (TCO)

The estimated sum of all costs: procurement,
manufacture, distribution and usage (operation) to
disposal and even beyond ….
 Popularized in the 1980’s for information technology
investments, predating much of the current
sustainability movement
 Frame must be set:

Example: cradle-to-grave or cradle-to-cradle?


Life Cycle Assessment (LCA)

An analysis of the environmental aspects and potential
impacts associated with a product, process, or service
Despite the inclusion of environmental management
standards in ISO14000, no single universal standard
exists for the impact categories evaluated:

Typically included: global warming, acidification, smog, ozone
layer depletion, eutrophication, toxin release, habitat destruction,
desertification, land use issues, resource depletion
Some categories are more relevant for certain firms than others
Occasionally has a social component

Again, frame must be defined and appropriate for the
situation: cradle-to-gate vs. cradle-to-grave

Ecological Footprint

Quantifies the land and water area a population requires
to produce the resources it consumes and to absorb its

Similar to LCA, except with a focus on consumers, not

Earth’s “carrying capacity” is currently being exceeded

Measures water usage, resource depletion, etc
Carbon Footprint is the largest component (over half)

A U.N. study shows that development and footprint are
highly correlated, but some countries with a High
Development Index have a lower footprint than others

Footprint of the “average” American is approximately twice than
of a Swiss

Carbon Footprint

Component of LCAs and Ecological Footprints

Other greenhouse gasses (methane, nitrous oxide) often
included to provide a single aggregate measure: CO2
equivalents, CO2e

One of the larger impacts, so often considered alone

95% of greenhouse gas emissions are CO2

Points of Confusion

Tons (US) vs. Tonnes (Rest of World)
Is it carbon emitted or CO2 emitted? (only 30% of CO2 by weight
is carbon)
Scope 1, Scope 2 or Scope 3?
Include Radiative forcing for airplane emissions?

Food Miles

Distance between the production source and retail store

Proponents of reducing food miles share many ideas
with the Slow Foods Movement

Support neighboring farms
Access to fresher, less processed foods
Encourage pride in regional cuisine, sense of terroir

Businesses are responding to consumer interest

Simple calculation: the further food travels, the more energy and
emissions result
On average, domestically produced food items travel over 1000
miles before reaching the US consumer
Reliance on imported produce is growing

More farmers’ markets
UK supermarket chain Tesco provides food mile information
Safeway estimates up to 30% of produce is local in many stores

A controversial measure that we will discuss later


Certification and Labels

As previously mentioned, sustainability is a relatively new
concept for mainstream society and no one single
approach dominates
Lots of labels

Food: industry estimate- over 300+ eco-labels
West Coast Wine: 5 different 3rd party certifications and labels

Third party certifications hold more weight and recognition
than company-created labels or other self-assessments

May lessen risk of “greenwashing”


Sustainability Certification and Labels
What Does It All Mean?

In order to make sense from this confusion, we must able
to critically understand and analyze
The next section will give us the background we need for
making such analyses


Modeling Fundamentals

Our Goal: analyze a supply chain in order to assess
current performance and make decisions that will
improve sustainability
 Typically we model the supply chain and measure
aspects of it

Before we start rolling up our sleeves and building
models, let us review some fundamentals of modeling,
including defining the frame, and establishing metrics,
information and assumptions


Review: What is a Model?

Models are quantitative, simplified representations of
real world complex systems
 These systems often have decisions that must be

Models represent critical characteristics of the decision
 ignore the irrelevant details in favor of simplicity
 require data and assumptions

Modeling is a process…


The Real World and the Model World




Revision or


— translation
— communication





Important Model Components

Inputs: Parameters (e.g. fuel usage rates) and Data
(locations of facilities, distances between them )

If we do not have exact knowledge of these we may have to
make approximations

Decision variables: Possible choices or actions to take
(e.g. What type of transport to use)

Must be something we have some control over

Output: Consequences of the decisions (e.g. costs
incurred, total energy used, emissions resulting)

Structure: Logic and relationships that link the elements
(inputs, decision variables, output) of the model together

Setting the Frame

Multiple dimensions: geographic, temporal, and
structural boundaries
Inside the frame we have visibility and perhaps some
ability to affect change
Anything outside the frame is exogenous

beyond our control, at least for our current decision process

Example: a Manufacturing and Distribution analysis






Framing Considerations

Direct Control verses Influence

Monitoring and enforcement for supply chain partners

Wal-Mart owns less than 10% of their supply chain, but exerts a
huge influence over channel partners
Independent retailers?

Nike and IKEA’s use of foreign manufacturers- child labor issues

Crucial to assessing sustainability impacts

LCAs: When is cradle-to-cradle better than cradle-to-grave?
What if we only have control over our distribution processes?


Frame: Big or Small?

Too large a frame:

Too small a frame:

we will be swamped with details
risk falling into “analysis paralysis” because the problem seems
too big to solve
Temptation to set the frame to include only the parts for which
we have firm data
Can lead to sub-optimal decisions, “silos”
May miss real opportunities, lose the “big picture”

Compromise may be necessary

Pilot studies may address a fraction of the supply chain. It is
easier to start with a simple model
After a successful pilot, then expand model to include more
detail or to broaden the scope.


Are needed to translate performance into numbers and
benchmark to a standard.

Traditional Supply Chain Management: The Supply
Chain Council has defined the SCOR reference model:

The more widely used a metric, the more authority it carries

150+ performance indicators
Depending on the supply chain strategy, some metrics may be
more important to a firm than others
 Perfect Order Fulfillment vs. COGS

The latest iteration of SCOR has incorporated some
environmental and risk-management measurements
However, there is not yet one universally adopted
approach to measuring sustainability

Metrics: Think Beyond the Numbers

Food miles is an easily understood metric, measuring
distance traveled from “Farm to Fork”
Underlying idea: the less food has to travel, the less energy
wasted in transit
Food for thought:

What about the energy used to transport supplies to the farm from
any processing or storage?

Example: Grass-fed lamb from New Zealand vs. Feed-lot “local” lamb

Transport modes such as ocean shipping and rail are efficient on a
per-weight basis, even over long distances
Many African and South American farmers derive their livelihood on
servicing export markets

Simple metrics may be misleading, especially when used in

Model Conclusions: Consider the
Level of Enforcement
1) Mandatory Regulation

Oversight and enforcement by governmental agency
Failure to comply: fines or worse

Example: CARB: California Air Resource Board. What happens if
your car fails Smog Check?

2) Voluntary Participation

Certification programs: LEED, EnergyStar, SmartWay etc

Typical benefits- logo, directory listing
Failure to comply: certification revoked

Often industry-initiated and run. Example: California Sustainable
Winegrowing Alliance (CSWA)

3) Internal Initiatives

Companies define their own goals and measures of success
Efforts may or may not be published

More Thoughts on Enforcement

Validating compliance by an external agent important for
maintaining credibility

Inability to meet standard must have consequences
Important for Mandatory Regulation or Voluntary Certification
Not typical for internal initiatives

Point of open consideration: What level of enforcement is

Example: toxic waste disposal
Newer technologies, products or markets may need time to
develop and mature. Example: should the US enforce a
minimum percentage level of post-consumer recycled material for
use in packaging?
Are companies or government agencies better able to innovate
cost-effective solutions?
Evolution: Individual company initiatives may lead to industrydefined guidelines, which may eventually be codified into

Logistics, Energy and CO2 Emissions

Paraphrasing, logistics involves “the
management of the flow of goods, services and related
information between the point of origin and the point of
consumption, in order to meet customer requirements”
Succinctly, logistics entails the movement and storage
functions of the supply chain

The amount of energy used in transport and in climate control
for storage is often substantial
US transportation CO2 emissions In 2007 surpassed 2.0 billion
tonnes -1/3 of national total
Yet a survey of Fortune 500 companies found that under 10% of
them have addressed the environmental impacts of
transportation, and even fewer are actively implementing

The focus of the rest of this module is on logistics and its
requisite energy usage, and hence, resultant carbon

Who is Doing What?

Carrier: transports the product


Shipper: initiates the movement of the product forward
into the supply chain


Consignee: receives the shipment

These parties may all be different entities
Third Party Logistics Providers (3PLs)- carriers,
warehouse owners, or coordinators who arrange for
transport or storage services


à la Transport Mode

Within the developed world, the four most common
modes to ship large quantities of packaged products:
1. Barge/Ship
2. Rail
3. Truck
4. Air
In the US, trucking dominates

Over 75% freight transit bill
Many configurations possible
 3PL providers vs. Own Fleet
 Variety of truck sizes
 TL vs. LTL

Motorcycles are not one of the
predominant ways to ship cargo

Transport Modes: a Moving History
Transport mode usage has shifted over time
 Inland water (River/Canal) replaced animal caravans
 Mid 1800’s Railroads displaced inland water
 Mid 1900’s Truck displaced rail
 Air cargo small but growing

Popular for short life-cycle products like flowers, luxury food
9% of US transportation fuel usage is for air

Interestingly, water has started to make a comeback

Inland-water: In the UK, Tesco uses barge transport for many
beverage products
Short Sea Shipping, using ocean-going vessels for domestic
cargo, is popular in Europe and holds promise in the US

Transport Modes:
Energy and Emissions

Definition: 1 tonne-km as moving 1 metric ton of cargo 1 km
Transport modes vary in energy and emissions profiles
International watercontainer
Inland water


kg CO2e per t-km

* May depend on whether diesel or electric power is used
** Depends on size and type of truck, power source
*** Includes effects from radiative forcing

Caveats abound for exact figures, but what do you notice?

Intermodal Transport

Definition: using more than one mode to move a
shipment between two points (e.g. Water to Rail to Truck)
Intermodal became practical with containerization


reduced unloading time at ports, boosting cost-efficiency of
international trade
Products stay in container through entire journey
Containerization itself made possible through global
standardization of containers (
Utilize more efficient modes for major transport corridors, then
unload to trucks for transport to more remote destinations
Shippers can use a 3PL to oversee the complete service


Complexity of coordination, requires greater IT support
Movement of empty containers
Potential security issues: Theft? Terrorism? (C-TPAT)


Utilization and Backhaul

Two considerations often overlooked

Utilization: How highly vehicles are utilized?
Backhaul: Is the return journey made while carrying freight?

Fully laden vehicles use more fuel than nearly empty
ones, but much of the energy used in a trip is for
transporting the vehicle itself
Consider weight and volume limits
 All but the lightest, bulkiest cargo

“weighs out” rather than “cubes out”


Climate Control

A need for climate control may also increase energy
usage and resultant emissions

Foods often require cooling, refrigeration or even freezing in

Can significantly increase the energy usage associated
with warehouse storage
Even the location of facilities within the supply chain can
effect emissions

Processing and storage facilities in countries where more
electricity is generated from renewable fuels or cleaner energy
sources will generate fewer emissions


Analyzing our Supply Chain’s
Energy and Emissions

Now that we have reviewed some basics about Supply
Chains (especially logistics), sustainability and model
building we are ready to use some web-based software
and come up with a definitive answer to “How much
carbon does our supply chain emit?”
Or are we?


First, a Cautionary Tale

Let’s say that you planned to take a trip flight to New
York and wanted to purchase offsets for your round trip

The web has free online carbon calculators, many with
links to donations for offsetting one’s carbon footprint


A Comparison of Carbon

For a SFO->JFK round trip (~ 5100 miles / 8200km)
adding radiative forcing)
via Jetblue
via Virgin
via United Airlines

tons recommended implied $
per ton
9.34 $
25.22 $



















Bonneville Education Foundation






Carbon Calculator Confusion!

A well-defined trip had great variety in emissions estimates,
translating to wildly divergent offset recommendations

Results vary for reasons both logical (radiative forcing included) and
obscure (JetBlue vs. United?!)
We didn’t even consider other factors like plane age and model,
weather, utilization, backhaul….

Even for the same amount of emissions, the websites
recommended different carbon prices
Lessons Learned?

Expecting high accuracy for emissions may be beside the point
Be consistent, do not compare situations using different tools,
frames or assumptions
Calculations and assumptions should be sensible and transparent
In making recommendations, consider the audience

CargoScope: Our Modeling Tool

Given these caveats, we now begin modeling
A full walk-through with navigation help is available in a
separate document, Wii-CaseStudy.doc


Our Example Supply Chain

The Nintendo Wii: The push view from the Manufacturer
downstream to the Consumer
Port of Shenzhen


Best Buy DC


Best Buy Retail Store
Port of Long Beach

The Supply Chain in CargoScope

We instead use a “pull” view: starting from the consumer,
looking upstream towards the point of manufacture

Easier to analyze the energy and emissions impact of a single unit
(1 Wii console) rather than the entire truckload of Wiis


Formulating the Model

We define nodes as storage or processing functions
We define intra-node links by distance, transport type,
temperature control, utilization, backhaul


Analysis and Results

Once we have defined the supply chain structure and
provided estimates for parameters and data, CargoScope will
calculate energy usage and emissions in total and by stage



The Wii Case Study can serve as both an introduction on
how to use CargoScope and also an example how to
formulate a model, interpret results, and make
Consider the following:

The stages of the supply chain that are included in the frame and
not included, with any justifications
Underlying documentation of the model data (including quality of
Clearness and reasonableness of assumptions where data is not
How results are presented and interpreted
The differences that result from any alternative scenarios
The quality of the recommendations – are they relevant and
likely to be both effective and feasible?