Chapter 2 Developing a Sustainable Supply Chain Strategy

Chapter 2 Deveoping a Sustainabe Suppy Chain Strategy Bakan Cetinkaya Learning Goas. By reading this chapter you wi: Know the basics of competitive strategy and suppy chain strategy and understand their interreations Understand the need for a sustainabe suppy chain strategy Understand the ingredients of a sustainabe suppy chain strategy Appy a generic, iterative approach to deveop your sustainabe suppy chain strategy Appy a baanced scorecard to impement your sustainabe suppy chain strategy 2.1 Introduction: The Starting Point Long-term trends pose chaenges for suppy chain managers and make increasing requirements on the strategic management expertise of today s companies. These trends incude ongoing gobaisation and the increasing intensity of competition, the growing demands of security, environmenta protection and resource scarcity and, ast but not east, the need for reiabe, fexibe and cost-efficient business systems capabe of supporting customer differentiation. More than ever, modern suppy chain managers are confronted with dynamic and compex suppy chains and therefore with trends and deveopments that are hard to predict. In years to come, suppy chain management wi therefore take on additiona strategic tasks that extend beyond its current more operationa scope of activity. In order to respond to these changes and remain competitive, suppy chain managers need to be abe to identify and understand new sustainabiity issues in their company and business environment. This cas, especiay in respect of goba, internationa, and fragmented suppy chains, not ony for highy efficient suppy chain operations, but aso for networking skis that must continuousy adapt to sustainabiity demands to create sustainabe, C. Tyssen et a., Sustainabe Suppy Chain Management, DOI 10.1007/978-3-642-12023-7_2, # Springer-Verag Berin Heideberg 2011 17

18 2 Deveoping a Sustainabe Suppy Chain Strategy Structure of this chapter Chapter 2.2: The Suppy Chain Strategy a critica success factor for sustainabiity Strategy: What, Why, and Which? Link between Corporate Strategy and Suppy Chain Strategy bestlog: Need for a Sustainabe Suppy Chain Strategy Chapter 2.3: Ingredients of a sustainabe suppy chain strategy Strategic and hoistic approach Recognising and assessment of trends Impementation of economica, ecoogica, and socia objectives Baancing economica, ecoogica, and socia objectives Chapter 2.4: Iterative approach for deveoping your sustainabe suppy chain strategy Designing the sustainabe suppy chain strategy Step 1: Assess suppy chain Step 2: Assess environment Step 3: Evauate Step 4: Adjust SC Strategy Who are we? What is changing? How do we fit? How shoud we fit? Integrating the sustainabe suppy chain strategy Step 6: Impementation How do we get there? Step 5: Operationaisation Fig. 2.1 Structure of this chapter ong-term customer-focused suppy chains. It cas for the deveopment of sustainabe suppy chain strategies which create a sustainabe competitive advantage. We wi focus in this chapter on how to deveop a suppy chain strategy for sustainabiity, and on how to integrate it into your existing suppy chain. Section 2.2 introduces the basics of competitive strategy and suppy chain strategy, the reationship between the two, and finay, their inks with sustainabiity. Section 2.3 describes the main ingredients of a sustainabe suppy chain strategy identified in the course of the bestlog project research. Section 2.4 describes a generic, iterative six-step approach to deveoping and impementing a sustainabe suppy chain strategy. The foowing figure iustrates the structure of this chapter (Fig. 2.1). 2.2 The Suppy Chain Strategy: A Critica Success Factor for Sustainabiity We mentioned earier the necessity for strategic management in today s suppy chains. We wi now briefy address the foowing questions: What does a competitive corporate strategy invove? What is a suppy chain strategy, and how is it inked

2.2 The Suppy Chain Strategy: A Critica Success Factor for Sustainabiity 19 Fig. 2.2 Three areas to integrate Competitive Strategy? Sustainabiity Suppy Chain Strategy to the competitive strategy? And where is the ink to sustainabiity? Figure 2.2 shows the three areas and their inks, which we wi try to understand in this section. The word strategy derives from the ancient Greek strategós which in turn derives from two words: stratos (army) and ago (eading). Today s definition of competitive strategy is a hoistic, ong-term pan for a company 1 to find a distinctive way of competing in order to guarantee profitabiity over a imited time span, considering the deveopment of its business environment. A competitive strategy is specified by a bunde of aims and objectives to estabish a competitive advantage, 2 which aows the company to outperform others in the same industry or market. One indicator for this outperforming capabiity is the company s profitabiity, compared to the industry average. According to Porter, there are two basic types of competitive advantage a company may pursue: ow cost, or differentiation. Porter combines these with the scope of activities that a company seeks to pursue and derives three generic strategies for achieving exceence and market success: cost eadership, differentiation, and focus. The focus strategy has two variants, cost focus and differentiation focus. 3 In cost eadership, a company aims to become the owest cost producer in its industry. The sources of cost advantage vary between industries. Usuay they incude economies of scae, proprietary technoogy, and preferentia access to raw materias. 4 With a differentiation strategy, a company seeks to deveop products and services that are perceived as unique in its industry, and which create a vaue advantage for its customers. This emphasizes the importance of focusing on one or more attributes that customers perceive as important, which usuay eads to higher cost eves. But customers of these strongy differentiated companies are oya to its 1 Strategy in diversified companies is many-faceted and may be defined at business unit or corporate or company-wide eves. Competitive strategy seeks to create competitive advantage in each of the fieds in which a company competes. Corporate strategy concerns two different questions: what business the corporation shoud be in, and how the corporation shoud manage an array of business units. See Porter (1987). 2 Porter (1985). 3 Porter (1985). 4 Porter (2008), p. 11.

20 2 Deveoping a Sustainabe Suppy Chain Strategy services and products, are ess price-sensitive, and reward the effort made by paying premium prices. In genera we can distinguish foowing markets and competition theory three decisive factors which determine the business environment and consequenty the strategy of a corporation: Demand (e.g. customers, target groups, etc.); Suppy (e.g. competitors, empoyees, suppiers, etc.); and the Genera Environment (e.g. reguations, society, natura resources, etc.). In today s business environment a these three factors are becoming increasingy compex, are changing over time, and together determine the behaviour of market payers. Hence a great chaenge for strategists is to satisfy on the one hand sharehoders, and on the other hand more and more other stakehoders; especiay with regard to the atest deveopments invoving sustainabiity, where certain stakehoders ike interest groups for CSR or environmenta protection (e.g. Greenpeace) are becoming more and more powerfu. A company s suppy chain now pays an important part in the aforementioned three decisive factors and therefore represents an essentia strategic resource in the achievement of the strategic goas. For exampe, customers increasingy recognise the vaue of suppy chain service and quaity and are ess ikey to seect products and services ony on price. Companies ike Appe, De, and Procter & Gambe, for exampe, increasingy outperform others in suppy chain exceence. 5 It is now recognised that not ony companies but rather, whoe suppy chains, are in competition. Both in theory and practice, we find two basic suppy chain types, having the potentia to assist competitive strategy in the achievement of both cost eadership and differentiation strategy: Lean, cost, efficiency-driven suppy chains, and in contrast agie, fast, service driven suppy chains. 6 A ean suppy chain fits we with a cost eadership strategy, and is particuary successfu, if tota ogistics costs represent a high proportion of the cost of goods sod, and if the suppy chain offers sufficient possibiities for reducing and controing these costs. An agie suppy chain strategy fits we with a differentiation strategy, particuary if customer-oriented differentiation is essentia and suppy chain soutions need to be segmented and diversified. Best practice companies do not focus on just one, fixed suppy chain strategy. There is an increasing need and competitive advantage foows to customise suppy chains individuay (with regard to different customers, countries, and products) and in consequence to impement mutipe suppy chain strategies and soutions; especiay where quite heterogeneous customer-product mixes need to be supported within the same goba suppy chains. The strategic chaenge for a suppy chain manager is to configure and deveop hoisticay a the muti-ayered fieds of a suppy chain aiming as a whoe a strong aignment with the competitive and corporate strategy. The bridge from corporate 5 O Marah and Hofman (2010). 6 Christopher (2005), Chopra and Meind (2004) and Fisher (1997).

2.2 The Suppy Chain Strategy: A Critica Success Factor for Sustainabiity 21 Socia, economic, and ecoogica effects infuence among other factors the Business environment factors ike Competitors, Products Customers Reguation Suppiers, Empoyees NGOs, Investors determine the Corporate and competitive strategy determine the Suppy chain strategy determine the SC Partners SC Structures SC Processes SC Systems defines the voume of Suppy chain operations ike transport, warehousing, production, etc. cause direct Socia, economic, and ecoogica effects ike Energy consumption Resource consumption Emissions Waste Sewage Fig. 2.3 Suppy chain strategy as a bridge between competitive strategy and sustainabiity and competitive strategy to suppy chain types is the suppy chain Strategy. The suppy chain Strategy determines the goas and the configuration of the suppy chain with regard to suppy chain partners, structures, processes, and systems (see Fig. 2.3). In detai these are: Regarding the suppy chain partners e.g. seection of partners, configuration of outsourcing modes and associated gain and cost sharing modes Regarding the suppy chain structures e.g. configuration of distribution or production network structures in terms of vertica and horizonta stratification Regarding the suppy chain processes e.g. configuration of procurement, production, and distribution processes with regard to costs, reiabiity, speed, and fexibiity

22 2 Deveoping a Sustainabe Suppy Chain Strategy Regarding the suppy chain systems e.g. configuration of eadership, information, reporting, controing, and incentive systems In accordance to the aforementioned three decisive factors which determine the strategy of a company, the criteria invoved in deveoping the right suppy chain strategy are often both in theory and practice demand or suppy characteristics of the suppy chain. Let s have a ook on some we-known concepts. For exampe, Christopher deveops the foowing matrix of possibe suppy chain strategies by specifying suppy characteristics according to the ead time of repenishment, and demand characteristics by the demand forecast of the products (see Fig. 2.4). As a further exampe, Chopra and Meind derive the suppy chain strategy through specifying demand characteristics by the demand uncertainty aong the whoe suppy chain (see Fig. 2.5). 7 As a ast exampe, Fisher specifies the suppy and demand characteristics with the foowing product aspects: the product ife cyce, demand predictabiity, product variety, and market standards for ead times and service. Accordingy, Fisher identifies two categories: products that are either primariy functiona, or primariy innovative. Fisher argues that each of these product categories requires a distincty different kind of suppy chain: Functiona products require an efficient process; innovative products, a responsive process. 8 (See Tabe 2.1). Suppy Characteristics Short Lead Times Long Lead Times Predictabe Lean Pan and Optimise Kanban Continuous Repenishment Demand Characteristics Hybrid De-Coupe through Postponement Agie Quick Response Unpredictabe Fig. 2.4 Matrix of generic suppy chain strategies (Christopher 2005) 7 Chopra (2004), p. 3. 8 Fisher (1997), p. 109.

2.2 The Suppy Chain Strategy: A Critica Success Factor for Sustainabiity 23 Responsive Suppy Chain Responsiveness Spectrum Zone of Strategic Fit Efficient Suppy Chain Certain Demand Impied Uncertainty Spectrum Uncertain Demand Fig. 2.5 Finding the zone of strategic fit (Chopra 2004) Having considered these concepts and further discussions with practitioners, bestlog reveas that today s suppy chain strategies concentrate more on suppy and demand characteristics rather than on suppy chain externa conditions, such as socia, technoogica, environmenta, and poitica conditions. And this is a main reason why today s suppy chains misjudge the reevance of sustainabiity in their strategies, athough the ink to sustainabiity is immense. As suggested in Fig. 2.3, the type of suppy chain and its strategic configuration determine the voume and the quantities of suppy chain operations such as transport, warehousing, production, and recycing. A simpe exampe: a European distribution network consisting of one centra warehouse combined with air freight has a different operations voume from a network consisting of seven regiona warehouses combined with rai and road freight. Therefore, the socia, economica, and energy and resource consumption eves wi distincty differ, in turn infuencing efficiency and cost aspects. Further differences wi be seen in the CO 2 emissions of the trucks and panes, or in packaging waste in the warehouses. And this is the main point here. The suppy chain, as a key to competitive advantage in many companies, significanty determines the socia, economic and environmenta impacts of your company, which in turn infuence more and more of your stakehoders and sharehoders. Hence a sustainabe suppy chain strategy representing one of the most important success factors for achieving sustainabe deveopment for your company must exhibit the foowing characteristics: It is aigned to the underying corporate and competitive strategy It considers demand, suppy, and in particuar other, wider genera conditions

24 2 Deveoping a Sustainabe Suppy Chain Strategy Tabe 2.1 Functiona versus innovative products: physicay efficient versus market-responsive suppy chains (Fisher 1997) Functiona (predictabe demand) Innovative (unpredictabe demand) Aspects of demand Product ife cyce More than 2 years 3 months to 1 year Contribution margin a 5 20% 20 60% Product variety Low (10 20 variants per category) High (often miions of variants per category) Average margin of error in the forecast 10% 40 100% at the time production is committed Average stockout rate 1 2% 10 40% Average forced end-of-season markdown 0% 10 25% as percentage of fu price Lead time required for made-to-order 6 months to 1 year 1 day to 2 weeks products Physicay efficient process Market-responsive process Primary purpose Suppy predictabe demand efficienty of the owest possibe cost Respond quicky to unpredictabe demand in order to minimize stockouts, forced markdowns, and obsoete inventory Depoy excess buffer capacity Manufacturing focus Maintain high average utiization rate Inventory strategy Generate high turns and Depoy significant buffer stocks of minimize inventory throughout parts or finished goods the chain Lead-time focus Shorten ead time as ong as it Invest aggressivey in ways to doesn t increase cost reduce ead time Approach to choosing seect primariy for cost and Seect primariy for speed, suppiers quaity fexibiity, and quaity Product-design strategy Maximize performance and Use moduar design in order to minimize cost postpone product differentiation for as ong as possibe a The contribution margin equas price minus variabe cost divided by price and is expressed as a percentage It incorporates environmenta, socia, and economic perspectives in a proposed actions It buids increased sharehoder and stakehoder vaue, especiay customer satisfaction A suppy chain strategy exhibiting these characteristics is sustainabe and represents the starting point of best practice companies to adapt their enabers for managing internas (see Chap. 4), managing externas (see Chap. 5), to adapt their performance measurement system (see Chap. 3), and to adapt their risk management (see Chap. 6). We wi now ook at the key ingredients of a sustainabe suppy chain strategy, which we have derived from our bestlog research.

2.3 Ingredients of a Sustainabe Suppy Chain Strategy 25 2.3 Ingredients of a Sustainabe Suppy Chain Strategy From our countess discussions with hands-on practitioners, industry experts, trade association representatives, academics, and poiticians, which we conducted in dedicated workshops, via the bestlog onine patform and in case study interviews in the course of the bestlog project, we have identified the distinctive ingredients of a sustainabe suppy chain strategy defined in the previous section. The foowing gives an overview of these ingredients. 2.3.1 Ingredient I: A Strategic and Hoistic Approach The bestlog research shows ceary that today s sustainabe practices, baancing environmenta, economica, and socia goas: Are extremey varied and arbitrary In arge corporations, are often impemented as isand soutions by individua business units and often with a regiona or specific customer scope Often ead to soutions which seem to be sustainabe at first gance if you ook ony at the particuar company, but not for the tota suppy chain, where suppiers or service providers are set unbaanced objectives. These faiings, we have found, are due to the absence of: Specific sustainabiity goas in the corporate vision and strategy Specific sustainabiity goas in the suppy chain strategy End-to-end responsibiity of responsibe ogistics and suppy chain managers Impementation experience and shared knowedge and Top management commitment Logistics and suppy chain managers are often mainy focused on measures that appear to ie within their natura scope of responsibiity. They have often impemented environmenta and socia poicies as a kind of aside; often without integrating them with the economic dimension. Sometimes to a greater and sometimes to a esser degree, they have not reay viewed or addressed economic, environmenta or socia responsibiity issues hoisticay. Define Sustainabiity As a Strategic Issue and Be Concrete Best practice companies show different characteristics: Sustainabiity is a strategic issue and is given top management commitment, with responsibiity for sustainabiity being assigned to management at board eve. Sustainabiity is integrated in the corporate poicy and strategy in the form of guiding principes and visions. Based on a topdown approach, sustainabiity is rooted in the suppy chain strategy and sustainabiity goas are defined in concrete suppy chain KPI systems.

26 2 Deveoping a Sustainabe Suppy Chain Strategy Case: INDITEX Pro-Kyoto Project INDITEX is deveoping a Strategic Environmenta Pan 2007 2010 at top management eve which is divided into five specific projects; one reated to ogistics. (See Case Coection in Part IV of this book) Enhance Learning and Transfer Knowedge from Existing Good and Especiay Worse Practices Our bestlog research showed that especiay arge and goba corporations ack transparency concerning their designed, panned, and impemented sustainabiity practices. As mentioned, many practices in such companies are deveoped by individua business units, and often with a regiona or specific customer scope. In contrast, best practice companies show transparency regarding a designed, panned, and impemented sustainabiity practices, even aong their end-to-end suppy chains. They are abe to use this information to understand their specific customer and market needs as we as the changing business environment. Best practice companies do not ony focus on successfu or best practices. Learnings from faied or worse cases can be as vauabe as good or best practices, or more so. The bestlog transferabiity research reveas that sustainabe practices have many generic simiarities and aow cross-functiona earnings, hence can cross organisationa cassifications and boundaries, e.g. business units, during the knowedge coection and earning phase. Broaden the Responsibiity of Your Suppy Chain Managers Suppy chain managers in best practice companies are invoved in the eary stages of product deveopment and product design. Chaenges tacked during the product deveopment process rarey concern ogistics, on the other hand changes in product deveopment are sometimes very sma, but may have a big impact on ogistics efficiency and finay, on eco-efficiency. How effective such simpe things can be is shown in the IKEA case study. BestLog research showed that best practice companies emphasise intra-organisationa communication and enarge the sphere of responsibiity of their suppy chain managers. Case: IKEA Air Hunting Competition It is interesting to see that a singe person at IKEA is entirey responsibe for the Teaight product suppy chain. The so-caed Need Panner has fu transparency aong the whoe end-to-end suppy chain. This enabed this individua to expore new efficiency potentias regarding the product s packaging and simpe product re-design. (See Case Coection in Part IV of this book)

2.3 Ingredients of a Sustainabe Suppy Chain Strategy 27 Estabish a Dedicated Organisation, Train and Motivate Peope New sustainabiity initiatives and projects aong the suppy chain may have a broad impact on severa operations, within and beyond individua companies. This may cause additiona compexity and more intra- and inter-company trade-offs, especiay due to knowedge being dispersed aong the suppy chain. Our research shows that in consequence some arge best practice companies have extended the scope of their existing heath, safety and environmenta protection (HSE) organisations to encompass suppy chain management issues. The roe of such a separate, centraised, cross-functiona, organisation for sustainabiity is to: (a) Report to top management (b) Consoidate issues and support impementation projects (c) Provide advice (d) Coect and disseminate earning and best practice (e) Represent a singe point of contact for externa entities and suppy chain partners (f) Organise and coordinate training (g) Consoidate R&D activities Another roe of this organisation is to train personne and to deveop toos and instruments for their day-to-day, as the impementation process for sustainabiity goas is the key to winning acceptance and achieving durabe sustainabiity soutions. The effectiveness of training and impementation toos can be enhanced by an incentive system. Incentives behind sustainabe soutions can be monetary, but may aso recognize achievements with awards or certificates. Monetary rewards can be inked to cost savings. Sustainabiity is an Opportunity. Invest in R&D Depending on your industry s structure, you may need to push for R&D activities with regard to sustainabiity. One reason may be a business s high dependency on natura resources; this appies in particuar to Logistics Service Providers (LSP). Natura resources are becoming increasingy scarce and expensive. This, together with the massive demographic changes afoot wordwide (popuation growth, urbanization) eads to huge opportunities, but aso serious risks. The bestlog research shows that best practice companies integrate sustainabiity with their R&D activities, focus on broader chaenges, are on the whoe optimistic, and see environmenta issues as providing an opportunity to reduce costs in the suppy chain and to open up new markets by deveoping environment-friendy products and services. Create Vaues, Knowedge, and Cuture with the Right Peope and the Right Image The bestlog research showed that good concepts behind best practice have often been deveoped from simpe ideas by the peope directy responsibe. The key ever to impement a sustainabe suppy chain with a common vision and cuture is the peope, the actors who make the decisions in the suppy chain. The vaues, awareness, and the mindsets of the peope in your suppy chain are fundamenta in determining your sustainabiity resuts. Deveopment begins with the seection of your suppy chain partners and your empoyees.

28 2 Deveoping a Sustainabe Suppy Chain Strategy In this context, the bestlog research shows that best practice companies put strong emphasis on sustainabiity at executive and senior management eve, as sustainabiity vaues are generay transferred top-down to empoyees. Another, associated finding was that best practice companies merge sustainabiity with their genera company image. One reason: empoyees tend to work in ine with the overa corporate image, which is communicated internay as we as externay. A good exampe is Quaity Thinking at Mercedes-Benz, a sogan which is strongy communicated by the company since its foundation, and firmy anchored in the behaviour of its empoyees. My beief is that a strong corporate cuture with an expicit vaue system wi (in the ong run) ead empoyees who do not foow these vaues to eave the company. And those who do vountariy espouse the corporate vaues wi transfer these vaues aong the suppy chain, and wi assess their suppy chain partners based on this vaue system. A strong sustainabiity cuture at company eve wi be transferred across the whoe suppy chain assuming the company concerned is the dominant partner in the suppy chain. The bestlog research aso indicates that best practice companies emphasise the creation of sustainabiity knowedge and the impementation of practica toos. Training and education pay key roes. Focus on specific training topics is used to estabish the vaue system. The organisation s vision and its vaues are incorporated within concrete competencies, actions, and instruments. 2.3.2 Ingredient II: Recognizing and Assessing Current and Future Trends Over-arching macroeconomic and socia trends, 9 gobaisation and increasing competition, onger and more fragmented suppy chains, and increasing stakehoder and sharehoder demands, a affect the compexity and dynamics of suppy chains. More than ever, today s suppy chain managers are confronted with dynamic and discontinuous change (e.g. oi prices), and the more dynamic they are, the harder trends are to forecast. Longer and increasingy fragmented vaue chains, together with totay new dimensions of objectives (e.g. CO 2 emissions reduction), extend the responsibiities and agendas of today s suppy chain managers. Future-oriented sustainabe strategies must be abe to adapt to nascent trends as eary as possibe, and ogistics goas must be geared towards these trends. This is 9 Changes in the business environment occur usuay as trends. Trends in a business environment are changes which take pace over time and affect companies in their competitive environment; for exampe, the current corporate socia responsibiity trend or the green SCM trend. Some such trends so-caed mega trends have a more goba and extended impact on the economic, business, and socia environment. Cimate change is an exampe of such a mega trend: It affects customers, reguations, society, the competition, investors, and the markets of a company.

2.3 Ingredients of a Sustainabe Suppy Chain Strategy 29 key to ensuring the ong-term success of a company. The chaenges for suppy chain managers in this context are (a) to identify the trends which are reevant to their compete suppy chain and (b) to assess and evauate their potentia negative and positive impacts. Scenario-Panning : Bring Suppy Chain Managers and Stakehoder Executives into the Process Eary Scenario panning is a traditiona too to pan and deveop different paths (¼sequences of different scenarios) for your business with regard to trends. Scenario panning is now a standard too in companies and is often appied successfuy, due to its simpicity. The bestlog research shows that today s uncertainties compicate scenario panning efforts: the number of variabes at pay and the range of pausibe outcomes have expoded in recent years, especiay in the context of goba suppy chains. Different outcomes for each of the suppy chain uncertainties may produce very different paths for the business. Best practices companies manage this chaenge differenty: their suppy chain strategists appy a demanding process of gathering information and exporing possibiities. Best practice companies bring suppy chain managers aong the suppy chain and stakehoder representatives into the panning process eary. This incusive approach incucates an appreciation of the threats the suppy chain faces and eads to a coective strategic response. Be Aware of Uncertainty Regarding Sustainabiity Issues in Your Suppy Chain The bestlog research shows that best practice companies recognise trends in their business environment earier than their competitors, and are better abe to assess their possibe impact. Hence, best practice companies embark on critica action, requiring ong ead times, earier; e.g. eary investments in given technoogies, the deveopment of strategic partnerships, or the deveopment of innovative products or services. Furthermore, best practice companies monitor trends in a systematic and hoistic manner, using indicator systems to observe and anayse a potentia deveopments in their business environment. Best practice companies are abe to sove the associated technica, structura, and organisationa issues, a capacity especiay reevant to goba suppy chains. And again, a key success factor in their suppy chains is their broad, end-to-end responsibiities. Understand Cause Effect Reations Between Trends and Your Suppy Chain The eary identification of trends is one thing: the next chaenge is to assess the potentia impacts of those trends on your suppy chain. Here are some exampes of quite difficut questions which best practice companies were abe to answer in our interviews: What is the tota cost effect for your suppy chain if the oi price doubes? What oi price justifies structura change in your suppy chain, e.g. regionaisation? How far coud the CO 2 emissions of your suppy chain be reduced compared to your company-wide CO 2 emissions? How much has your practice reduced your externa costs? We have seen that best practice companies try hard to understand the compex cause-and-effect reations between uncertain trends and their suppy chains.

30 2 Deveoping a Sustainabe Suppy Chain Strategy Case: Mercadona and Renfe Coaboration on Intermoda Distribution Mercadona has achieved an externa costs saving of 13.1 miion. (See Case Coection in Part IV of this book) 2.3.3 Ingredient III: Impementation of Economic, Environmenta, and Socia Objectives Impementation integrating objectives into operations pays an important roe in the adaptation of suppy chains to new suppy chain objectives such as environmenta or socia goas. Impementation is, put simpy, the transation of strategic, party generic, ong-term goas into operationa, specific, short-term goas. One resut of an impementation process is usuay a group of interreated KPIs, aso caed a KPI system. Such a KPI system is a kind of quantitative too used to impement strategic goas into company operations. Of course there are, besides a quantitative too, aso pretty important quaitative aspects infuencing a strategy impementation, e.g. good communication, high motivation, the right awareness, etc. We wi resume these aspects in the next section. The chaenge for suppy chain managers is to break down the strategic goas into the right KPIs and to define the specific target figures for a given reporting period. The chaenge in seecting the right KPIs is, of course, to seect those KPIs which measure and contro the right operationa processes. Another chaenge is that different operationa goas may be compementary, or may confict with each other; a KPI system must take potentia trade-offs into account. Environmenta and socia goas in particuar are in most cases new to many operations, and need to be integrated into their existing KPI system. One recent study on trends and strategies in ogistics showed that 43% of arge companies and ony 26% of SMEs had defined concrete environmenta and resource protection goas among their ogistics operations targets. 10 One reason is a ack of knowedge regarding the measurement and the assessment of environmenta and socia impact KPIs. Deveop KPI Systems Taking into Account New Kinds of Goa and Reated Trade-Offs The bestlog research shows that best practice companies tend to have the capabiity to transate new strategic goas 11 into the operations via an adaptive and inteigent KPI system. Such KPI systems consider trade-offs and compementarities between socia, environmenta, and economic goas. 12 One success factor is the strong top management commitment to these goas. Another 10 Straube and Pfoh (2008), p. 69. 11 New aso in terms of the dimension considered; socia and environmenta goas within a suppy chain strategy are in many companies new, or at east secondary. 12 We wi return to the topic of measurement and KPI systems again in Chap. 3.

2.3 Ingredients of a Sustainabe Suppy Chain Strategy 31 success factor is that the suppy chain managers of best practice companies are abe to describe cause-and-effect reations in their suppy chain with regard to socia, economic, and environmenta issues. 2.3.4 Cash Fow Matters: Link Socia and Ecoogic Goas with Financia Figures A green strategy or a socia strategy is not a strategy for sustainabiity. True sustainabiity must give equa weight to the economic dimension. Sustainabe suppy chain practices must be financed and provide pay back within a reasonabe time span. In bestlog we have seen ogistics practices which were abandoned during the economic crisis in 2008 due to their economic disadvantages. An exampe was Mercadona s intermoda transport practice in Spain, which caused cear negative cash fow, having not reached critica transport mass. The chaenge is to assess the economic, in particuar financia, aspect of a practice. Best practice companies are capabe of this. They have extended their suppy chain KPI systems to incude socia and environmenta measures and can ink this whoe operationa KPI system with their financia measurement systems. The Sustainabe Suppy Chain (SSC-)Scorecard in Sect. 2.4 wi provide a generic tempate to appy this approach in your company. 2.3.5 Ingredient IV: Baancing Economic, Environmenta, and Socia Objectives Part I has shown the genera reevance and importance of baancing socia, environmenta and economic objectives in companies sustainabe deveopment. The centra chaenge here is that baancing economic, environmenta and socia objectives requires first of a an understanding of the conficting and compementary reationships between them. The strategic chaenge is than to estabish reaistic and baanced targets in different operations in a three dimensions. And each of the three dimensions must be aigned to the overa corporate strategic goas and vision, regardess of possibe specific trade-offs. Provide Incentives and Motivate Peope The bestlog research shows that best practice companies fufi a necessary condition of impementing baanced goas in an organisation: they provide incentives and motivate the peope invoved in order to change their attitudes and to redirect their business systems towards these baanced goas. So a sustainabe suppy chain strategy must rethink existing intra- and inter-company incentive systems in order to tacke unbaanced objectives. An important strategic question which we discussed severa times in bestlog was: Do

32 2 Deveoping a Sustainabe Suppy Chain Strategy the current business modes appied by suppy chain partners motivate and reward a baance of sustainabiity goas? The answer was quite cear: not in the majority; suppy chain managers are usuay driven by traditiona cost- and service reated measures. Achieving socia and environmenta objectives, athough they might be compementary to other objectives, is in most cases not directy rewarded. Case: IKEA Air Hunting Competition The interesting earning of this case is that IKEA started an interna competition motivating a peope to find highest amount of air in their transport processes. The competition itsef was a highy motivating factor. (See Case Coection in Part IV of this book) Make Peope Aware of the Long-Term Benefits Further, the bestlog research reveaed that making peope aware of the ong-term benefits of change and impementing best practice into day-to-day work is an important strategic chaenge, addressing different strategic management evers such as branding, communication, cuture, knowedge management, knowedge deveopment, trust and coaboration, as we as the transparency of cause-and-effect reations. The next section takes these chaenges and ingredients of success, and describes a genera, iterative approach with a number of toos and frameworks to support you in the deveopment of your sustainabe suppy chain strategy. 2.4 An Iterative Approach to Deveoping Your Sustainabe Suppy Chain Strategy The ingredients of a sustainabe strategy were identified in our bestlog project research. The foowing describes briefy an iterative six-step process approach to integrating these principes into your existing suppy chain. A sustainabe suppy chain invoves more than the impementation of popuar practices most of them are just buiding bocks. Rather, individua practices must be assembed to integrate meaningfu ong-term sustainabiity principes, aong the endto-end suppy chain. A systematic approach to strategy design and integration can hep companies deveoping a sustainabe suppy chain to create a vaue proposition. The foowing five questions define the road map to a sustainabe suppy chain (see Fig. 2.6), heping to change or redesign your current suppy chain strategy. The action pan wi be derived from the risks and opportunities your suppy chain faces in the present business environment, and wi face in future. The approach ends with a Sustainabe Suppy Chain (SSC-)Scorecard, which serves aid in the impementation of a strategy for sustainabiity into your existing suppy chain.

2.4 An Iterative Approach to Deveoping Your Sustainabe Suppy Chain Strategy 33 This iterative six-step approach has to be seen as a cyce which shoud be executed reguary in your suppy chain, since reevant conditions may change quite quicky and sometimes radicay see, for exampe, the oi price spike of 2008. Step 1 aims to take stock of the current state of company- and suppy chainspecific characteristics regarding strategy, resources, and current and panned practices. It is mainy concerned with interna factors and considers eements which are usuay within the contro of a company. Step 2 aims to identify current and forecast potentia future deveopments and trends, focusing on externa factors infuencing the suppy chain. It considers factors which are usuay not under the direct infuence of a company. Step 3 aims to evauate the risks and opportunities derived from these interna and externa factors. It serves to define company- and suppy chain-specific sensitivity. Step 4 takes this anaysis to the existing suppy chain strategy, and institutes a strategy change or redesign process with regard to the sensitivity identified. Step 5 focuses on impementation issues in order to baance socia, economic, and environmenta objectives, with the aid of a nove Sustainabe Suppy Chain Scorecard concept. Step 6 focuses on the key ingredients required to successfuy impement the sustainabe suppy chain strategy in the reevant organisations. The sustainabe suppy chain road map Who are we? What is changing? How do we fit? How shoud we fit? Designing the sustainabe suppy chain strategy Step 1: Assess suppy chain Current state of your suppy chain Assess -Strategies -Practices -Resources and capabiities Step 2: Assess environment State of your environment Assess stakehoders and suppy chain input Resources Scenario Panning - derive different scenarios Step 3: Evauate Evauate the impact of the scenarios on your current suppy chain strategy Step 4: Adjust SC Strategy Strategic program: 1.Compiance 2.Process-Optimization 3.Redesign 4.Innovation 5.Progression Impementation eve: 1.Own suppy chain 2.End-to-end suppy chain 3.(Secondary) Stakehoder How do we get there? Step 5: Operationaisation Integrating the sustainabe suppy chain strategy Step 6: Impementation Sustainabe Suppy Chain Scorecard 1.Financia Perspective 2.Sustainabiity Perspective 3.Suppy Chain Perspective 4.Learning and Growth Perspective Fig. 2.6 Towards a sustainabe suppy chain strategy from principes to practice

34 2 Deveoping a Sustainabe Suppy Chain Strategy 2.4.1 Step 1. Stocktaking: The Current State of Your Suppy Chain The as-is anaysis in this step 1 is focused on the strategies, the sustainabiity practices and the associated resources and capabiities in your suppy chain. The assessment of these attributes wi hep ater in step 3 to identify the risks and opportunities you are facing, and to derive the appropriate extension or re-design of your existing suppy chain strategy in step 4. Strategies. Aiming to match the strategic and hoistic approach of best practice companies (see Sect. 2.3.1) requires an understanding of the existing strategies and the associated strategic goas within your own company and aong your suppy chain. The integration of a sustainabe suppy chain strategy is usuay not a greenfied deveopment, and wi most ikey not ead to a compete re-engineering of your suppy chain and strategy. Rather, step-by-step adaptation is preferabe, uness your company and its suppy chain are urgenty threatened by the changing business environment. So, take stock of: The existing corporate and competitive strategies The sustainabiity strategies (if sustainabiity is not aready part of the corporate strategy) The company-specific suppy chain strategies, and finay The cross-company suppy chain and coaboration strategy 13. A simpe resut of such a strategy review is shown in the foowing iustration (Fig. 2.7). Exampes of those basic strategy types are isted in the foowing tabe. We wi not focus here on any one of them pease see the Bibiography section for more information about them (Tabe 2.2). The most important resut of such an Cross- company Suppy Chain and Coaboration Strategy Corporate Strategy SC Strategy Sustainabiity Strategy Corporate Strategy SC Strategy Sustainabiity Strategy Corporate Strategy SC Strategy Sustainabiity Strategy Corporate Strategy SC Strategy Sustainabiity Strategy Suppier OEM Whoesaer Retaier Fig. 2.7 Strategies aong a simpe suppy chain 13 For the sake of competeness we shoud mention that the company-specific suppy chain strategy of many OEMs determines substantiay the cross-company suppy chain strategy of the whoe suppy chain.

2.4 An Iterative Approach to Deveoping Your Sustainabe Suppy Chain Strategy 35 Tabe 2.2 Strategies aong a simpe suppy chain Strategy eve Strategy type Strategy type Competitive strategy Cost eader Differentiation strategy Suppy chain strategy Lean, cost- and efficiency driven Agie, service- and speed-driven Cross-company Hierarcha contro Heterarcha contro coaboration strategy Long-term partnership Short-term partnership Company s own sustainabiity strategy Horizontay integrated networks Defensive Verticay integrated networks Offensive anaysis of the status quo is the understanding of potentia intra- and inter-organisationa goa conficts. It seeks to discover whether there is a common strategic aignment, and whether the goas of each strategy eement are integrated, aigned, and compementary. A company s own suppy chain strategy which is not aigned to the corporate and cross-company suppy chain strategy cannot per se be sustainabe. Potentia short- and ong-term goa conficts can rapidy become serious barriers to impementing a sustainabe suppy chain aong its members; especiay if the suppy chain is required to adapt quicky to change. The anaysis wi aso show if top management commitment is given within the individua companies and the suppy chain. The section on the Ingredients of a Sustainabe Suppy Chain Strategy showed that the ack of top management commitment is the most common cause of isand soutions. A hoistic understanding of the existing business modes and their goa reations in such a system wi aso aow a better baancing of economic, environmenta and socia objectives, which may aso resut in a change of existing business modes between suppy chain partners. Practices, Resources, and Capabiities. With regard to best practice companies your stocktaking anaysis shoud aso serve to increase transparency, reveaing existing, panned, and faied sustainabiity practices; particuary aong the endto-end suppy chain. This aows you to understand on the one hand the trends in your suppy chain regarding your customers requirements and the market s needs, and on the other, to see where skis and resources may be acking. Step one ends with an as-is anaysis of the current state of company- and suppy chain-specific characteristics. The next step aims to identify current and forecast potentia future deveopments and trends emerging from externa factors infuencing the suppy chain. It is an externa view, and considers aspects which are usuay not under the direct infuence of a company. 2.4.2 Step 2. Your Environment: Current, Potentia, and Future Impact Factors The second step in our approach is inked to Ingredient II and deas primariy with what is changing in the business environment, what kind of scenarios your company wi face in the medium and ong term, and finay, what the main driver of change

36 2 Deveoping a Sustainabe Suppy Chain Strategy may be. This wi ead, together with the as-is anaysis from step 1, to the definition of potentia risks and opportunities for your suppy chain strategy in step 3. The most important topics to be considered in this step are suppy chain input resources, such as fue and energy, stakehoders, and sharehoders. 14 We have devoted a separate chapter to the topic of suppy chain stakehoder management, in recognition of its reevance to sustainabe suppy chain management. 15 The key task detais wi be discussed in this ater chapter is to identify the right stakehoders and their stakes in your suppy chain in order to get a precise assessment of their risk and opportunity factors for your suppy chain now and in future. The potentia stakehoders in a suppy chain are shown on the foowing iustration (Fig. 2.8). Sharehoders Consumers Media Secondary SC Stakehoder Governments Suppiers Service Providers (Logistics, Recycing, Disposers, etc.) Primary SC Stakehoder Investors and Financia Institutions Competitors Your Suppy Network Customers (party Consumers) Empoyees Loca community Management Board (Corporation and Business Unit) Infrastructure Operators Interest groups Society at Large NGOs Scientific community Fig. 2.8 Primary and secondary suppy chain stakehoders 14 Some stakehoder theories consider sharehoders aso as stakehoders. I do so, too. See Chap. 6. 15 See Chap. 5.

2.4 An Iterative Approach to Deveoping Your Sustainabe Suppy Chain Strategy 37 Suppy chain input resources such as fue, energy, and natura resources nowadays deserve cose attention in suppy chain management ogistics. The trend of rising prices and increasing scarcity make input resources major risk management factors in an economic perspective, especiay if you run cost- and energy-sensitive suppy chains, such as the commodity micro chip industry with its internationa production and transport fows for exampe. Understanding and forecasting input resource-reated information heps in deveoping your sustainabe suppy chain strategy. One we known and usefu too to use in step 2 is Scenario Panning. This is a method of medium- and ong-term panning, simuation, and of forecasting probabe future deveopments based on the continuous observation of indicators. Scenarios aow suppy chain managers to gain a better understanding of the possibe business environments they wi need to tacke in the future. The first step in determining the scenarios is to expore the drivers that are most ikey to shape the future of your suppy chain. These are primariy, as mentioned earier, the stakehoders and the suppy chain input resources. For practica reasons, the number of possibe basic scenarios is usuay imited to the foowing three types: optimistic, pessimistic, and most ikey. The anaysis of existing practices during step 1 may hep to determine some of the drivers and trends. In a highy uncertain business environment as described earier, it makes sense to anayse the drivers according to two criteria: first, their predictabiity, and second, their impact on your suppy chain (see Fig. 2.9). Step 2 ends with a set of current, potentia, and future requirements for different stakehoders and input resources. These feed into the next step, where they wi be assessed together with the status quo of the suppy chain. High predictabiity Low impact Increasing Education eve Increasing security requirements Carbon Emission Trading for road freight Ageing Urbanization High impact Offsetting Oi price Insourcing Low predictabiity Fig. 2.9 Custering scenario drivers exampes

38 2 Deveoping a Sustainabe Suppy Chain Strategy 2.4.3 Step 3. Evauation: Identifying Potentia Risks and Opportunities Based on the assessment of your suppy chain and of your business environment, you can now identify potentia risks and opportunities. These wi serve in step 4 to change or re-design your existing suppy chain strategy. We have given a separate chapter to the topic of risk management, as increasing compexity, acceerating change and uncertainty are posing growing chaenges for suppy chain managers on the way to a sustainabe suppy chain. 16 The foowing evauation framework aows you to assess your suppy chain capabiities in the context of the scenarios you have prioritised from step 2. The assessment then serves to determine your suppy chain specific Threat-Opportunity- Profie (see Fig. 2.10). You need to understand the cause-and-effect reationships between potentia success factors to undertake this evauation. For exampe, you shoud be abe to estimate that the regionaization of procurement structures in response to an oi price increase woud be ikey to reduce your transport costs by x %. Ony an effective understanding of the reevant evers in your suppy chain and of their potentia impact on the panning scenarios permit precise anaysis of strengths and weaknesses and finay the right definition of risks and opportunities. Customer Oi price Your changing environment Driver Prioritised scenario for + 5 years Logistics and SCM success factor 1 2 3 4 5 Demanding green products with Carbon Emission abes > 100 USD / Barre + 30 % increase of transport costs < 100 USD / Barre Your strengths and weaknesses (context driven) Design for Logistics Product Life Cyce Anaysis Regionaization of procurement Transport optimisation capabiities Government / Reguation Carbon Emission Trading for freight road transport Increasing to prices for oder feets Carbon Emission Measurement (toos and processes) Feet age etc. etc. Yes etc. Does the scenario fits to a strength? No 1: very weak 5: very strong Threat-Opportunity Anaysis Opportunity Logistics and SCM success factor Threat Carbon Emission Measurement Transport optimisation Fig. 2.10 Threat-Opportunity-Profies for the sustainabe suppy chain strategy 16 See Chap. 5.

2.4 An Iterative Approach to Deveoping Your Sustainabe Suppy Chain Strategy 39 2.4.4 Step 4. Action Pan: Extend or Re-design the Suppy Chain Strategy Based on the Threat-Opportunity-Profie, you can now define strategic gaps on the route to a sustainabe suppy chain; gaps between your current suppy chain strategy and the changing business environment. The greater and more reevant the potentia risks and opportunities, the arger wi be the gaps, and the greater the need to act and make strategy changes. As mentioned earier, the integration of sustainabiity principes into the suppy chain is usuay not a greenfied deveopment; it has to be a step-by-step approach. The scope of this suppy chain review can vary. The arger the gaps, the broader the impications for impementing change, and the more aggressive the strategic programme and the associated action pan must be. The extension or the re-design of your existing suppy chain strategy shoud be precisey defined. Of course, this is a strongy context-driven process, and based primariy on the resuts you have now obtained from this six-step approach. Let s have a detaied ook at foowing Fig. 2.11. The impementation eve determines who you invove in the impementation of initiatives. These actors coud be the members of your own suppy chain, which you infuence directy; they coud extend further to scope 1 externas from the end-to-end suppy chain (primary suppy chain stakehoders), or yet further to scope 1 and 2 (secondary) stakehoders. The impementation eve invoves more than the parties invoved; it is aso defined by the time horizon you consider in your program. The impementation eve shoud not be mixed up with the driving forces you take into account when deveoping your pans. For exampe, the compiance program naturay requires a good understanding of governmenta and reguatory Strategic SSCprogram Progression Scope 3 Innovation Scope 2 Re-Design Process- Optimisation Scope 1 Compiance Own suppy chain End-to-end suppy Chain Stakehoder Who? Fig. 2.11 Scope of sustainabe suppy chain strategy impementation

40 2 Deveoping a Sustainabe Suppy Chain Strategy requirements, but you wi not aim to deveop and impement compiance soutions proactivey together with poicy makers. The strategic sustainabe suppy chain program (SSC-program) determines the set of actions/initiatives needed to cose the gap and to create your customized sustainabe suppy chain on the ong-term; customized because it fits your gap precisey. The foowing strategic programs can be distinguished: 1. Compiance 2. Process-Re-engineering 3. Restructuring 4. Innovation 5. Progression Again, the strategic program does not represent a new suppy chain strategy, rather a program to extend or re-design the existing strategy. And again, the bigger the gap, the stronger and more aggressive wi be the action that needs to be taken. The first two programs are essentiay defensive and focus mainy on the company s own suppy chain. The ast three programs are more aggressive and require an extended impementation eve beyond the company s own suppy chain. Beow we wi take a brief ook at each of these strategic programs, together with some exampes and case study references: Strategic SSC-Program: Compiance Suppy chain managers shoud foow the Compiance program to obtain the benefit and competitive vaue of Reducing and managing risk, which represents a precautionary response to stakehoders, sharehoders, owners, and empoyees in particuar. This program is mainy driven by the compiance requirements of stakehoders such as governments, customers, and specia interest groups. Suppy chain managers satisfy their stakehoders concrete requirements and monitor deveopments in the reguatory arena. Some exampes of program actions, described in part in the bestlog case studies, incude: Certification of adherence to mandatory standards Certification of adherence to customer-specific standards Monitoring of panned new reguations Strategic SSC-Program: Process Optimisation Suppy chain managers shoud foow the Process Optimisation program to obtain the benefit and competitive vaue of improving productivity and efficiency and in consequence, of reduced suppy chain costs, increased resource productivity, and reduced environmenta impacts. This program is mainy driven by additiona suppy chain and ogistics costs, due to e.g. increasing resource prices or increasing reguation compiance costs. Actions taken to improve efficiency do not aim to change existing structures; rather try to improve the existing system itsef, based on optimisation and improved panning. The overa goa is to invest in improvements showing a positive net present vaue in the short term; this is difficut in many cases of current, existing green

2.4 An Iterative Approach to Deveoping Your Sustainabe Suppy Chain Strategy 41 technoogies, for exampe. The scope of such activities starts within the company and shoud be extended to the whoe suppy chain. The first activities shoud focus on the ow-hanging fruit and on the areas in which suppy chain managers aready operate and respond to change, e.g. transport panning. Some exampes of program actions, some of them described in the bestlog case studies, incude: Training of truck drivers Simpe re-design of packaging or optimised packaging processes Impementation of environmenta management systems, to standardise processes and to reduce unnecessary compexity costs. Consoidation of materia fows by re-scheduing Route optimisation and transport panning Business process optimisation to reduce ead times, which enabe onger panning cyces, which in turn create more consoidation possibiities Appying intermoda transport Appying feet management systems Energy management in warehouses Shift from Defensive to Aggressive Strategic SSC-Programs These first two strategic SSC-programs fit very we for companies and suppy chains with cost eadership strategies and efficient suppy chain processes. Successfu impementation of these programs can satisfy competitive requirements, if the reguatory and cost risks defined by the Threat-Opportunity-Profie remain ony potentia and do not affect ong-term competitiveness. But one common finding in the iterature and within the bestlog practitioner community is that cost advantages based on efficiency and productivity concepts do not ead to a ong-term, sustainabe competitive advantage; this is because (a) competitors wi most probaby have the same opportunities to emuate such cost advantages and (b) efficiency and productivity improvements fai, if the concepts do not achieve the required critica mass of throughput: for exampe, during the 2008 goba economic crisis. And in addition to that: The high investment demands of ogistics-reated technoogies (e.g. regenerative energy, aternative-fue engines, teematics, etc.), have often ong payback periods and ead to higher ogistics costs, which such companies wi most ikey pass to the customers or partners, if they stick to the mentioned cost eader strategy. This means that cost eader companies with cost-efficient suppy chain strategies face big chaenges in aigning efficiency strategies with sustainabiity principes in the ong run. In concusion, the stand-aone integration of the Process-Optimisation and Compiance SSC-programs wi not necessariy ead to competitive advantages, if the strategic gap in the context under consideration is arge and very diverse, and aong the main suppy chain; in more concrete terms, you shoud shift to more aggressive strategies and extend programs to further impementation eves when stakehoders create strong direct and indirect pressure on the suppy chain, or when sustainabiity drivers such as, for exampe, rising resource prices impact forcefuy on current and future suppy chain performance.

42 2 Deveoping a Sustainabe Suppy Chain Strategy Strategic SSC-Program: Re-design Suppy chain managers shoud foow the Re-design program to obtain the benefit and competitive vaue of the ong term and cardina improvement of effectiveness and eary prevention of risk. This program is mainy driven by additiona suppy chain and ogistics costs resuting from rapidy increasing resource prices and reguatory costs which affect a company s competitive position. The actions around Re-design aim to change existing structures and processes. The scope of activities covers the whoe suppy chain. Hence, a coaborative approach is one key success factor. The decision making processes needs to be quantified as much as possibe, in order to draw up and assess severa scenarios, since re-design actions are mosty inked to high costs and investments, and are often irreversibe. Some exampes of program actions, some of them described in the bestlog case studies incude: Regionaization of procurement and production structures Hub strategies in the distribution network Cosed-oop suppy chain management Re-assessment and substitution of suppiers and ogistics service providers Business Process Reengineering (BPR) Strategic SSC-Program: Innovation Suppy chain managers shoud foow the Innovation program to obtain the benefit and competitive vaue of differentiation. This program is mainy driven by externa stakehoders: customers, consumers, NGOs and suppiers who demand new soutions, products, and services. The actions around Innovation aim to change existing business modes, to break existing mindsets in the suppy chain, and to achieve a sustainabe 17 image, which, in the end, wi increase the credibiity of a company. The scope of activities is mainy intra-organisationa, e.g. between R&D, SCM, manufacturing, and saes as we as inter-organisationa in the end-to-end suppy chain. Hence, communication and awareness are key success factors; top management commitment throughout the key suppy chain payers is a must. Some exampes of program actions, some described in the bestlog case studies, incude: Innovation management for new products and suppy chain services Price differentiation for premium, sustainabe suppy chain services and products Design for ogistics (product and packaging) Training and education Incentive systems for empoyees and partners Profit-sharing modes for suppier and ogistics service provider Remanufacturing Knowedge and best practice patforms Carbon footprint abes on products and services Strategic SSC-Program: Progression Suppy chain managers shoud foow the Progression strategy to obtain the benefit and competitive vaue of 17 Not just strong communication and marketing, rather a structura interna change.

2.4 An Iterative Approach to Deveoping Your Sustainabe Suppy Chain Strategy 43 differentiation, first mover advantage, and estabishing market entry barriers. The main drivers in the reevant industry, and even society as a whoe are: a ack of standards, of knowedge, and of reguations, highy deveoped corporate socia responsibiity, and a ack of common market direction. The actions around Progression do not have a direct, measurabe payback for a given time period. The benefits are more ong-term and quaitative, and go aong with reputation and image. The reach of activities is wide spread mainy found in the reevant sector, at governmenta institutions, at associations, and in different countries. Hence, a focused approach with concrete miestones is a key success factors, top-management commitment aong the key suppy chain payers is a must. Some exampes of actions, some described in the bestlog case studies, incude: Investing money and time in estabishing new standards in the market, e.g. a CO 2 emission measurement standard in the transport sector. Funding research institutions and research projects and surveys. Funding of reevant NGOs Active invovement in associations Estabishing knowedge exchange patforms Communication, discussion, and consuting with poitics and reguation. 2.4.5 Step 5. Impementation with the Sustainabe Suppy Chain (SSC-)Scorecard What is the status of our iterative six-step approach with respect to the identified main ingredients of a sustainabe suppy chain strategy? Ideay, we wi have seected the appropriate scope of strategic vision and determined the right reated actions to aign your suppy chain strategy to the changing business environment. Most future trends and scenarios have been considered and taken into account. Finay, these findings have been incorporated into the reformuation or re-design of your existing suppy chain strategy and the associated objectives. The next question is, How to get there? We are sti facing the chaenges of making strategy ready to put into operation, and of baancing economic, environmenta and socia objectives. Potentia tradeoffs aong the suppy chain are sti not visibe. The ack of cause-and-effect understanding is ikey to ead to an imbaance in these three dimensions of sustainabiity. The capabiity to transate the new strategy eements into a structured KPI system, expaining cause-and-effect reationships and justifying impemented practices, remains a chaenge ahead of us. Step 5 wi address these issues. One we known too/concept for transating strategic goas into operations is the Baanced Scorecard deveoped by Kapan and Norton from 1990. The Baanced Scorecard is a (performance) management system providing a framework to transate a strategy into baanced operationa terms via objectives and measures,

44 2 Deveoping a Sustainabe Suppy Chain Strategy Financia To succeed financiay how shoud we appear to our sharehoders? Customer To achieve our vision how shoud we appear to our customers? Vision and Strategy Interna Business Process To satisfy our sharehoders and customers what business processes must we exce at? Learning and Growth To achieve our vision how wi we sustain our abiity to change and imrove? Fig. 2.12 The Kapan/Norton Baanced Scorecard organised into four different perspectives: financia, customer, interna business process, and earning and growth (see Fig. 2.12). The Baanced Scorecard expands the set of business unit objectives beyond summary financia measures. Corporate executives can measure how their business units create vaue for current and future customers and how they must enhance interna capabiities and the investment in peope, systems, and procedures necessary to improve future performance. 18 The measures represent a baance (Kapan and Norton (1996), p. 9) Between externa measures for sharehoders and customers, and interna measures of critica business processes, innovation, and earning and growth, Between the outcome measures the resut from past efforts- and the measures that drive future performance, and Between objective, easiy quantified outcome measures and subjective, somewhat judgmenta, performance drivers of the outcome measures. These characteristics fit ideay with our ingredients of a sustainabe strategy and justify the use of this genera concept, but not as a pure performance measurement system. Many peope think of measurement as a too to contro behaviour and to evauate past performance. The measures on a Baanced Scorecard are used in a different way to articuate the strategy of the business, to communicate the strategy of the business, and to hep aign individua, organisationa, and cross-departmenta initiatives to achieve a common goa. Used in this way, the scorecard does not strive to keep individuas and organisationa units in compiance with a pre-estabished 18 Kapan and Norton (1996), p. 8.

2.4 An Iterative Approach to Deveoping Your Sustainabe Suppy Chain Strategy 45 Finance perspective Sustainabiity perspective Sustainabe Suppy Chain Strategy Suppy chain perspective Learning and growth perspective Fig. 2.13 The Sustainabe Suppy Chain (SSC-)Scorecard Perspectives pan, the traditiona contro system objective. The Baanced Scorecard is used as a communication, informing, and earning system, not a controing system. 19 The Baanced Scorecard is in use in many companies wordwide. Its success ed to the appication of the concept to other areas such as marketing, environmenta management, production or suppy chain management. Indeed, severa sustainabiity scorecards and suppy chain management scorecards have been deveoped, but separatey. Literature anaysis on we known scorecards shows that none of them integrate both perspectives. The foowing iustrations show such an integrated Sustainabe Suppy Chain (SSC-)Scorecard and the reations between its four perspectives (Fig.2.13 and 2.14). As sustainabiity basis on and impies a baance, the word baanced was taken out of the designation. The comparison of the SSC-Scorecard with the traditiona Baanced Scorecard of Kapan and Norton shows the structura simiarities. The four perspectives, Finance, Customers, Processes, and Learning and Growth, are retained, and are extended by severa other aspects regarding suppy chains and sustainabiity. The main reason to stick with the traditiona four perspectives is to aow an easier integration and pug-in to a company s existing used of a traditiona Baanced Scorecard. Let s have a detaied ook on the SSC-Scorecard on Fig. 2.14. 19 Kapan and Norton (1996), p. 25.

46 2 Deveoping a Sustainabe Suppy Chain Strategy Financia Perspective Eco-Efficiency Socio-Efficiency Finance Sustainabiity Perspective Environment Customer Socia Suppy Chain Perspective Processes Panning and Structures Interna Products and Services Externas and Cooperation Learning and Growth Perspective Peope Cooperation & Communication Information Systems Technoogy Infrastructure and Resources Fig. 2.14 Sustainabe Suppy Chain (SSC-)Scorecard reations of the perspectives 2.4.6 SSC-Scorecard: The Financia Perspective Actions into principe: Assess socia and ecoogic activities accuratey from the economic point of view. The SSC-Scorecard retains the financia perspective of the traditiona version, since financia measures are vauabe in summarizing the consequences of actions aready undertaken (Fig. 2.15). Furthermore, sustainabe financia resuts are the key objectives of a companies, and justify their existence in today s business environment. 20 This is aso why this perspective forms the target framework for a other perspectives. The SSC-Scorecard extends the traditiona financia perspective with a further dimension reated to environmenta and socia impacts: The (socio- and eco-) efficiency dimension. The idea behind this new dimension is to ink the financia perspective with the other two sustainabiity dimensions. The aim is to assess socia 20 Except non-profit organisations.

2.4 An Iterative Approach to Deveoping Your Sustainabe Suppy Chain Strategy 47 Financia Perspective Eco-Efficiency Socio-Efficiency Finance Fig. 2.15 The financia perspective of the SSC-Scorecard and environmenta activities from an economic point of view. Profitabiity and efficiency issues arise at the beginning and end of a activities invoved in creating a sustainabe suppy chain, simpy because activities must be financed and must provide a pay back after a specified time. Bjorn Stigson, President of Word Business Counci for Sustainabe Deveopment (WBCSD), puts it this way: This is what eco-efficiency is a about: combining the goas of business exceence and environmenta exceence, and creating the ink through which corporate behavior can support sustainabe deveopment. 21 This is one fundamenta step to achieve the desired baance between economic, environmenta, and socia objectives, because compromises wi ony be offered or accepted by the peope invoved if the activity shows a high eve of improvement whie baancing environmenta, economic, and socia concerns. The traditiona measures for the financia perspective incude Return on Capita Empoyed, Return on Investment, Return on Assets, Sharehoder Vaue, Economic Vaue Added, and Market Vaue Added. Financia ratios infuenced by suppy chain management and ogistics incude Working Capita Efficiency, Operating Cost Reduction, and Fixed Capita Efficiency. The basic cacuation of the eco- and socio-efficiency measure is according to WBCSD: = Product or Service Vaue / Environmenta or Socia Infuence Using this basic equation, companies can cacuate eco-efficiency in a number of ways. The choice of indicators wi depend on the needs of individua decision makers: A pant manager may wish to focus on the number of products shipped per kiojoue of energy consumed during manufacturing. A financia anayst may instead focus on the economic vaue of products sod per kiojoue. The WBCSD therefore has deveoped a common framework for eco-efficiency indicators, with terminoogy consistent with the ISO 14000 series and the Goba Reporting Initiative (GRI). 22 21 WBCSD (2005), p. 3. 22 WBCSD (2005)

48 2 Deveoping a Sustainabe Suppy Chain Strategy 2.4.7 SSC-Scorecard: The Sustainabiity Perspective Actions into principe: Link financia figures with customer needs. Extend this ink by the environmenta and socia perspective. The SSC-Scorecard retains a sustainabiity perspective, incuding the customer perspective of the traditiona BSC (Fig. 2.16). In the customer perspective of the Baanced Scorecard, managers identify the customer and market segments in which the business unit wi compete and the measures of the business unit s performance in these targeted segments. This perspective typicay incudes severa core or generic measures of the successfu outcomes from a we-formuated and impemented strategy. The core outcome measures incude customer satisfaction, customer retention, new customer acquisition, customer profitabiity, and market and account share in targeted segments. But the customer perspective shoud aso incude specific measures of the vaue propositions that the company wi deiver to customers in targeted market segments. 23 The sustainabiity perspective of the SSC-Scorecard extends the customer perspective into the environmenta and socia performance dimensions. Both serve to measure the impact of your reevant suppy chain on environmenta and socia performance KPIs. We have given performance measurement a separate chapter in this book, in which severa such KPIs are described in detai. One reason to put these two new eements into a singe perspective together with the customer perspective is their potentiay strong inks. Customer and market segments of some industries, e.g. the retai sector, create direct environmenta and socia pressure. Hence, environmenta and socia responsibiity performance may infuence traditiona core outcome measures such as customer satisfaction or new customer acquisition. Hence, the ink serves to understand the impact of your sustainabiity performance on the competition from the customer perspective. Another reason to join these two eements within this second 24 perspective is to construct a causa reationship between the suppy chain and the financia perspective. In both theory and practice it is desirabe to measure the vaue proposition of a Sustainabiity Perspective Environment Customer Socia Fig. 2.16 The sustainabiity perspective of the SSC-scorecard 23 Kapan and Norton (1996). 24 The perspectives are sorted in a sequence shown on Fig. 2.14, which represent the cause-effect reationships of the different perspectives. Hence, the sustainabiity perspective represents the second perspective.

2.4 An Iterative Approach to Deveoping Your Sustainabe Suppy Chain Strategy 49 suppy chain at the company eve, ideay in monetary terms. Some concepts do this very we, but ony in financia terms, e.g. the Economic-vaue-added (EVA) mode. The sustainabiity perspective between the financia and suppy chain perspective extends these concepts by measuring the vaue proposition in environmenta, socia and economic terms, ideay inked to different suppy chain resources (a fourth perspective ). 2.4.8 SSC-Scorecard: The Suppy Chain Perspective Actions into principe: Incorporate tactica and strategic decisions aong the endto-end suppy chain. Coaborate with your saes and product deveopment departments and partners. The SSC-Scorecard retains a suppy chain perspective, incuding the internabusiness-process perspective known from the traditiona BSC. In the suppy chain perspective, suppy chain managers identify and improve the critica and key factors in which the suppy chain must exce. Kapan and Norton emphasize that ony those process objectives shoud be estabished which serve to attract and retain the identified customers and which serve to achieve the defined financia goas. 25 The same requirement is vaid for the SSC-Scorecard: Focus ony on those suppy chain factors that wi have the greatest impact on customer, environmenta and socia goas, and consequenty, on the defined financia goas. Therefore the SSC-Scorecard extends the interna process viewpoint of Kapan by another view, particuary reevant to suppy chains: The Externa and Cooperation viewpoint. The justification for this is simpe: Externa parties such as suppiers and ogistics service providers affect (a) the interna processes of your company in terms of process capabiity and process reiabiity and (b) affect the sustainabiity performance of the whoe suppy chain; the suppy chain you are part of or maybe, as an OEM, to which you respond from a stakehoder point of view. This differentiation in the SSC-Scorecard aows you to ink the sustainabiity perspective and its associated sustainabiity performance indicators to interna and externa infuence factors in the suppy chain perspective. But what factors in a suppy chain infuence its sustainabiity performance? Let us ook to the customer in the sustainabiity perspective. The customer judges the quaity and service of a company based on the products and the service it gets; in ogistics terms, for exampe, a ate deivery. The environmenta performance of a company is simiary the resut of the physica operations of a company; in ogistics terms, for exampe, the CO 2 emissions or the fue consumption of a truck. Simiary with socia performance, when we tak about traffic accidents, for exampe. Hence we can see that sustainabiity performance is directy infuenced by operationa processes in the suppy chain perspective. This cear cause-effect reationship is 25 Kapan and Norton (1996), p. 26 ff.

50 2 Deveoping a Sustainabe Suppy Chain Strategy Suppy Chain Perspective Processes Panning and Structures Interna Products and Services Externas and Cooperation Fig. 2.17 The suppy chain perspective of the SSC-Scorecard Concerned subject Decision eves Hierarchica impact A products End-to-end suppy chain Product Structure Organisation Limited decision making freedom Corporate Organisations Panning & Management Singe orders and processes Operations Fig. 2.18 Decision pyramid in suppy chain management reason enough to put the process dimension into the suppy chain perspective within the SC-scorecard (see Fig. 2.17). But shoud the suppy chain perspective end at this point? Definitey not, because the impact of processes on the sustainabiity dimensions is mosty determined by previous suppy chain panning and suppy chain design decisions; and even by product design decisions (see Fig. 2.18). The shown four decision eves are different with regard to the time frame, scope, impications and depoyment of capita and resources. Hence, the eves form a hierarchy and infuence each other sequentiay. Decisions at one eve define the eeway for action with regard to further decision on the foowing eves, as decisions at a higher eve curtai decision-making freedom at ower eves. Here is an exampe with regard to the environmenta performance: A company decides to create a centra warehouse strategy for its distribution operations. This structura decision constitutes a fixed parameter on the process eve and has a key infuence on the number of transport

2.4 An Iterative Approach to Deveoping Your Sustainabe Suppy Chain Strategy 51 kiometres within the suppy network; this in turn has a major effect on the voume of fue required, or CO 2 emissions, by the company in question. Companies can obviousy reduce overa fue costs or CO 2 emissions by impementing optimisation poicies at the process eves by using route panning software, feet contro systems or aternative fues, for exampe. But the decision with the broader scope and wider impications wi have aready been taken at the suppy chain design eve. Again, this cear cause effect reationship is reason enough to put the panning and structures dimension into the suppy chain perspective within the SC-scorecard (see Figs. 2.14 and 2.17). Again the question: shoud the suppy chain perspective end at this point? And again: No. According to the funne-ike ogic shown in Fig. 2.18 a strategic and tactica decisions regarding panning and structures are, or rather shoud be, aigned to the products they suppy, in particuar with regard to product demand characteristics and, as aready mentioned, with regard to product design. You wi remember from Sect. 2.2 on suppy chain strategies that different demand characteristics at product eve impose distinctive suppy chain panning and suppy chain design requirements. Again, this cear causa reationship is reason enough to put the product dimension into the suppy chain perspective within the SC-scorecard (see Figs. 2.14 and 2.17). I wi cose this section with a fina exampe showing the importance of these three interinked dimensions within the suppy chain perspective. The stipuated packaging dimensions of a product define the voume and the weight of the product and consequenty the maximum number of products per oad carrier say per container oad. This means that the decision on product design eve infuences the maximum theoretica utiisation of the space in a container, and therefore the capacity utiisation of a singe transport vehice, which woud be assigned to the process eve. The effects on the environment in the form of CO 2 emissions per transported unit of the product are therefore argey dependent on the decision on packaging dimensions at product design eve. Actions on the panning and process eves such as route optimisation may naturay aso have an impact on CO 2 emissions, but they have to be based on the fixed parameters of voume and weight and are therefore of esser significance to environmenta and resource protection. 2.4.9 SSC-Scorecard: The Learning and Growth Perspective Actions into principe: Drive suppy chain wide earning The fourth and fina perspective on the SSC-Scorecard aims to drive earning and growth in the suppy chain. The SSC-Scorecard is in this respect firmy based on the traditiona Baanced Scorecard of Kapan and Norton. They postuate that objectives in this perspective enabe the objectives and drive exceent outcomes in

52 2 Deveoping a Sustainabe Suppy Chain Strategy Learning and Growth Perspective Peope Cooperation & Communication Information Systems Technoogy Infrastructure and Resources Fig. 2.19 The earning and growth perspective of the SSC-scorecard the first three scorecard perspectives. Kapan and Norton have defined three principa categories for the earning and growth perspective: 1. Empoyee capabiities 2. Information systems capabiities 3. Motivation, empowerment, and aignment 26 These three categories are ceary aso vaid for sustainabe suppy chain deveopment. However a sustainabe suppy chain strategy must extend the view aong the whoe suppy chain and even beyond it. The earning and growth perspective of the SSC-Scorecards therefore comprises the foowing five principa categories (Fig. 2.19): 1. Peope capabiities 2. Cooperation and Communication: Trust, motivation, empowerment, and aignment 3. Information systems capabiities 4. Technoogy capabiities 5. Infrastructure and energy resources The SSC-Scorecards extends the empoyee category of Kapan and Norton, because the capabiities of peope among your suppiers or service providers and even your customers deserve attention in a sustainabe suppy chain. Effective communication and cooperation based on trust and aignment of interests and objectives are essentia to sustainabe suppy chains in the ong term. Furthermore, a sustainabe suppy chain strategy must pay attention to the deveopment of technoogies, infrastructure, and energy resources aong the suppy chain. Hence, the SSC-Scorecard extends the categories of Kapan and Norton by the foowing: (a) Technoogy capabiities: Technoogy pays an important roe in today s suppy chains and ogistics. Transportation, warehousing, packaging, identification, and handing are increasingy impacted by technoogica deveopments. Interestingy many recent innovations in this area are about environmenta protection, resource protection, socia, and safety topics a key ingredients of the sustainabe deveopment we are aiming for. Some technoogy exampes 26 Kapan and Norton (1996), p. 127.

2.4 An Iterative Approach to Deveoping Your Sustainabe Suppy Chain Strategy 53 incude: aternative fues, hybrid powertrains, ane departure warning and automatic distance maintenance assist for trucks, renewabe energy for warehouses, etc. (b) Infrastructure and Energy Resources: Logistics and transport use infrastructure such as roads and energy resources such as fue to operate. The SSC-Scorecard aims to monitor infrastructure- and energy resource-reated data, which may affect the objectives of the three other SSC-Scorecard perspectives. For exampe, if a company aims to have reduced transport costs in its transport-intensive operations, the monitoring of fue price and to charges wi deserve cose attention. Exampes of infrastructure and resource data incude: infrastructure charging (e.g. tos), speed and driver rest poicies, oi prices, the price of emission certificates, infrastructure operator charges, the services and prices of service providers (e.g. a new intermoda connection from A to B), etc. It is important in this scorecard-group not to create too many KPIs. The purpose of the infrastructure and energy resource grouping is to identify and then monitor those eements which may have a critica effect on the objectives of the foowing three perspectives. This Scorecard group is not intended support day-to-day operations as an information system. The earning and growth perspective of the SSC-perspective feeds directy into the suppy chain perspective, which is divided into an interna and an externa perspective. Assignments spit between the externa and interna perspectives aow you to derive separate activities and to adjust your suppy chain coaboration and business mode according to the resources and capabiities avaiabe. The earning and growth perspective is the ast perspective of the SSC-Scorecard. The four perspectives and a their sub-groups represent a tempate. They are not carved in stone; rather, they are intended to serve as a generic mode, to be adjusted to fit your own distinctive industry, company, and regiona factors. To continue our six-step approach: Take your re-designed or new suppy chain strategy, take this SSC-Scorecard, take the KPIs from Chap. 3, take the cases shown in this book onto the best practice patform, and start to put your new suppy chain strategy into operation. Bear in mind that the SSC-Scorecard is more than a tactica and operationa measurement system. It serves as a strategic management system, to hep you manage the strategy over the ong run. 27 The next, fina step is to impement the strategy and the SSC-Scorecard at a strategic eve. You can focus on the ingredients and action items aready mentioned in the previous section. The strategy deveopment and integration approach ends with step 6. Nevertheess, the need for eary adaptation of the suppy chain to dynamic changes in the business environment requires an iterative appication of this approach. 27 According to Kapan and Norton (1996), p. 10.

54 2 Deveoping a Sustainabe Suppy Chain Strategy 2.5 Principes into Practice The foowing are some summary concusions derived from the content of this chapter and from the bestlog research. 1. Be aware of goa conficts in impementing, pre-define them, and communicate them to your team and your executive board. 2. Monitor your stakehoders and your suppy chain input resources and the risks and chances associated with them. 3. Foow an hoistic approach to define strategic gaps. 4. Drive suppy chain-wide earning. 5. Link financia measures with customer needs. Extend this ink by the environmenta and socia perspective. 6. Extend the responsibiity of your suppy chain managers (cross-company and cross-functiona). 7. Consider sustainabiity as an opportunity and not ony as a risk. 8. Communicate your pans, successes and sometimes, your faiures internay and externay. 9. Get commitment from your top management. 10. Deveop your own customised Sustainabe Suppy Chain (baanced) Scorecard. 11. Deveop reaistic targets for your SSC-Scorecard. 12. Carify and transate the strategy and vision. 13. Enabe feedback and earning circes in your organisation. 14. Estabish an appropriate organisationa framework and training resources. 15. Create an appropriate cuture and awareness aong your suppy chain. Tasks: 1) Can you write down, without checking company documents, the mission, strategy and suppy chain strategy of your chosen organisation? Can you ist any organisationa strategic goas? 2) Is sustainabiity incuded into your chosen company strategy and/or suppy chain strategy? Discuss how company actions at the strategic eve infuence sustainabiity (for exampe by: choice of suppy chain design, seection of transportation mode, sourcing). 3) How does your chosen organisation communicate strategic goas to its empoyees and stakehoders? 4) Using exampe companies, anayse products shown in Tabe 2.1. What is their key characteristic: primary, functiona, or innovative? How does this infuence suppy chain design? 5) Using Tabe 2.2 as an exampe, anayse the strategy of your chosen organisation at different eves. Are they interinked? Discuss any contradicting goas and how you can manage such conficts?

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