Supply Chain Frontiers issue #12. Read all articles in this issue
Environmental regulations are changing the way supply chains are designed and managed. The problem is that the sheer number of regulations, other influences such as changing consumer sentiment, and the complexity of global trade, makes it difficult for companies to decide exactly how they should respond to these pressures. Research underway by the MIT Supply Chain 2020 (SC2020) project will help supply chain managers decide what "green" means for them.
The green supply chain research project, led by MIT's Professor Randy Kirchain, carried out a survey of supply chain decision makers who are responsible for addressing environmental issues. A critical finding is that they regard regulation as only one force for change in the environmental field. Others include customer demand, the availability of raw materials, and growing pressure for enterprises to be good corporate citizens.
Still, the regulatory challenge is, in many ways, the most visible. First, there are disparities between the various national approaches to regulation. Over recent years the United States has favored a voluntary approach. "While this shift may be preferable for supporting a market-oriented response, it is likely that the more stringent regulations coming out of Europe and East Asia will set the standard for performances in all countries for better or worse," said Julie Paquette, MIT Engineering Systems Division, in her discussion paper "The Supply Chain Response to Environmental Pressures" published this June as part of the SC2020 project.
A second consideration is that "product-focused regulatory directives raise the stakes for industry, because they assign chief responsibility for environmental improvement to the most visible players in the production chain: the final manufacturers," said Paquette. Requiring that products be designed to comply with green directives has implications that ripple back through the supply chain, all the way to manufacturing operations that may be located in countries where such controls are relatively lax.
Paquette makes a third observation: that adapting supply chains to environmental mandates is difficult given the complexity of global production systems and the fact that the regulatory frameworks are still evolving. For example, it is unclear whether extended producer responsibility legislation--that puts financial responsibility on manufacturers for the collection and disposal of end-of-life product--is intended primarily to minimize waste, reduce its toxicity, encourage alternative disposal methods, or a combination of all these purposes, she points out.
Even so, the greening of supply chains is having an impact on business operations. An example cited by Paquette is efforts to conserve scarce natural resources. "For example, both Pepsi and Coca-Cola lost their licenses to use local groundwater at bottling plants in Kerala, India, following a local drought," she states.
Environmental concerns are also having an impact on the operation and planning of supply chains. These implications were discussed at the Fall 2005 meeting of SC2020's European Advisory Council in Frankfurt, Germany. As one EAC member noted, companies not only have to monitor their own compliance policies, but those of their suppliers as well. The cost of meeting green directives is becoming more visible. When making plant location decisions one member company includes internal-rate-of-return calculations for compliance costs that include the cost of recycling.
The members suggested that companies need to be aware of three types of regulatory dynamics. Material content policy is one, and includes the 2006 implementation of European Union restrictions on hazardous substances. A second dynamic, product take-back policy, encompasses end-of-life policies for electronics, automobiles, and packaging that are being re-examined by the EU for possible inclusion in a major piece of legislation. Finally, food safety laws are becoming stricter and require more investment in systems for supply chain monitoring and information exchange.
Beginning this fall, the SC2020 project has broadened its research on these implications. It is looking at a wider cross section of industries, cataloging regulations that have a specific impact on supply chain activities, and developing hypothetical case models that explore the effects of changing regulations.
For more information on SC2020 research, and on joining the SC2020 community, email Larry Lapide, Research Director. For information on the green supply chain research project email Randy Kirchain.