Sustainable Business Strategy with Data Analytics
Consensus means that everyone agrees to say collectively what no one believes individually.
This quote captures a critical issue many companies face during their strategic green transformation: aligning diverse objectives across teams and departments.
Sustainability Team: "We need to reduce emissions by 30%".
Imagine a hypothetical manufacturing company with, at the centre of its business strategy, an ambitious target of reducing CO2 emissions by 30%.
The sustainability team's challenge is to enforce process changes that may disrupt the activities of multiple departments along the value chain.
How do you secure the approval of multiple stakeholders, that potentially have conflicting interests?
In this article, we will use this company as an example to illustrate how analytics models can support sustainable business strategy.
How to Build a Sustainability Roadmap?
You are a Data Science Manager in the Supply Chain department of this international manufacturing group.
Under pressure from shareholders and European regulations, your CEO set ambitious targets for reducing the environmental footprint by 2030.
The sustainability department leads a cross-functional transformation program involving multiple departments working together to implement green initiatives.
Sustainable Supply Chain Network Optimization
To illustrate my point, I will focus on Supply Chain Network Optimization.
The objective is to redesign the network of factories to meet market demand while optimizing cost and environmental footprint.
The total demand is 48,950 units per month, spread across five markets: Japan, the USA, Germany, Brazil, and India.
Markets can be categorized based on customer purchasing power:
- High-price markets (USA, Japan and Germany) account for 93.8% of the demand but have elevated production costs.
- Low-price markets (Brazil and India) only account for 6.2% of the demand, but production costs are more competitive.
What do we want to achieve?
Meet the demand at the lowest cost with a reasonable environmental footprint.
We must decide where to open factories to balance cost and environmental impacts (CO2 Emissions, waste, water and energy usage).
Manufacturing CapacityIn each location, we can open low or high-capacity plants.
Fixed Production CostsHigh-capacity plants have elevated fixed costs but can achieve economies of scale.
A high-capacity plant in India has lower fixed costs than a low-capacity plant in the USA.
Fixed costs per unit are lower in an Indian high-capacity plant (used at full capacity) than in a US low-capacity factory.
Variable CostsVariable costs are mainly driven by labour costs, which will impact the competitiveness of a location.
However, we need to add freight delivery rates from the factory to the markets in addition to production costs.
If you move the production (for the North American market) from the USA to India, you will reduce production costs but incur additional freight costs.
What about the environmental impacts?
Manufacturing teams collected indicators from each plant to calculate the impact per unit produced.
- CO2 emissions of the freight are based on the distance between the plants and their markets.
- Environmental indicators include CO2 emissions, waste generated, water consumed and energy usage.
We take the average output per unit produced to simplify the problem.
For instance, producing a single unit in India requires 3,500 litres of water.
To summarize these four graphs, high-cost manufacturing locations are "greener" than low-cost locations.
You can sense the conflicting interests of reducing costs and minimizing environmental footprint.
What is the optimal footprint of factories to minimize CO2 Emissions?
Data-driven Supply Chain Network Design
If we aim to reduce the environmental impact of our production network, the trivial answer is to produce only in high-end "green" facilities.
Unfortunately, this may raise additional questions:
- Logistics Department: What about the CO2 emissions of transportation for countries that don't have green facilities?
- Finance Team: How much will the overall profitability be impacted if we move to costly facilities?
- Merchandising: If you move production to expensive "green" locations, what will happen to the cost of goods sold in India and Brazil?
These are questions that your steering committee may raise when the sustainability team pushes for a specific network design.
In the next section, we will simulate each initiative to measure the impact on these KPIs and give a complete picture to all stakeholders.
