Finding the balance between costs and sustainability in a supply chain can be a challenge. This CEO explains how it works.
Philip Ashton is the CEO and Co-Founder of 7bridges, an AI-powered logistics platform which helps companies be more sustainable. Here he explains how businesses can balance sustainability and commercial objectives using the ‘Green Ratio’, and how the supply chain is one of the biggest contributors to our carbon footprint.
Pressure from climate-conscious consumers and net-zero deadlines set by regulators have created an urgent need to make supply chains much more sustainable. But most businesses have a long way to go when it comes to cutting carbon emissions and meeting their green targets.
Efforts are often hampered by the need to meet commercial objectives and the uncertainty around what ‘going green’ will actually cost. Without being able to accurately balance these apparently competing priorities, businesses understandably feel limited to adopting passive policies such as carbon offsetting schemes (the impact of which is highly contested) as a short-term fix, rather than tackle the problem at the source.
But the stakes are high: with more than 80 per cent of a business’ greenhouse gas emissions coming from its supply chain, business leaders and supply chain managers have a real opportunity to effect change.
The ‘Green Ratio’ – optimising for cost and sustainability
The ‘Green Ratio’ is a term that describes the ideal balance between happy shareholders - cost optimisation - happy customers and happy regulators - whilst optimising for sustainability.
At 7bridges, businesses use AI intelligence platform to focus on optimising for cost, operational efficiencies and risk reduction; leveraging data to refine the decision-making process and create a resilient supply chain that allows a business to forecast demand, implement dynamic carrier switching, and intelligent dispatch and routing.
This means the business can rapidly adapt to unplanned disruptions, as well as seasonal changes in supply and demand.
To calculate the ‘Green Ratio’, we created a fictional business.
We used our AI to run two simulated supply chain models using anonymised data from our clients in the pharma space. The first simulation was to determine the effects of optimising for cost, and the second was optimised for sustainability. We then ran a third simulation to uncover the point at which commercial and environmental goals could be optimised for both, equally.
When setting up the supply chain to operate at the lowest cost, we were able to see a saving of 23 per cent on the baseline price, with no effect on carbon emissions. When optimised purely for sustainability, it was possible to immediately reduce carbon emissions by 23 per cent in the simulated supply chain, albeit with a 4 per cent increase in baseline costs.
So you might have to pay a little more, but it’s worth it for the carbon savings.
If the business were to work with providers that deployed a ‘green’ fleet of electric vehicles (which would take more time), this would reduce the carbon emissions by a total of 51 per cent.
The third simulation demonstrated that it's possible to optimise for both factors. Our simulation showed that the business can cut costs by 19 per cent and cut carbon emissions by 19 per cent. During this third simulation, we also determined that the ‘Green Ratio’ for the fictional pharma business was 129 kgCO2e : £1000 (€1,178).
That means for every thousand pounds that the company spends, its carbon emissions should be limited to 129 kilograms of carbon dioxide equivalents. This number is a perfect starting point for any business looking to strike an equal balance between sustainability and profitability.
While running the simulations, 7bridges’ AI considered data and the influence of multiple factors that can impact the overall carbon footprint in a supply chain. It identified fulfilment location - which houses inventory - as the most powerful lever in reducing carbon emissions.
Choosing the right fulfilment location has the potential to reduce a business’ carbon footprint by almost 30 per cent, and it has a huge influence over other factors too, the most obvious being that storing the right products or services closer to the end-user means less distance travelled for delivery vehicles.
This is significantly more important than more obvious ‘fixes’ such as simply picking a carrier with the greenest fleet, which has only a 7 per cent impact on overall emissions.
What can businesses do now?
AI technology has a crucial role to play in helping supply chain managers tackle the complexity of supply chains. It offers granularity that helps businesses to identify the most powerful levers when it comes to reducing their carbon footprint.
Typically, business leaders have been forced to make a choice between making short-term changes that are less impactful (e.g. carbon offsetting), or longer-term adjustments (such as investing in greener transportation) that have greater efficacy but don’t have immediate benefits. But there is now a third, tech-based option to address the problem immediately, while still getting long-term results.
AI can help organisations leverage the power of both historical and real-time data, to make optimal decisions throughout their operations.
The rising cost of carbon and why we must act now
As emissions monitoring technology improves and climate regulations tighten, it is likely that the cost of carbon emissions will continue to rise, and this will become a significant problem for businesses and individuals who are heavily reliant on fossil fuels.
Since 2018, the costs of carbon emissions have increased almost four-fold, reaching an all-time high of nearly £84 (€98) per tonne of CO2e in 2022.
If business leaders continue to take a passive stance when it comes to sustainability in their supply chains, it’s not just their eco-credentials that will take a hit, it is also their bottom line. The time to act is now.