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Case Problem 17.2–From a Different Perspective

Case Problem 17.2–From a Different Perspective

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Chapter

PART II

Supply Chain Management
Web resources for
this chapter include
Animated Demo Problems
Internet Exercises
Online Practice Quizzes
Lecture Slides in
PowerPoint
Virtual Tours
Company and Resource
Weblinks

Supply Chain
Management
Strategy and
Design

10

www.wiley.com/college/russell
In this chapter, you will learn about . . .
Supply Chains
The Management of Supply Chains
“Green” Supply Chains
Information Technology: A Supply
Chain Enabler
Supply Chain Integration
Supply Chain Management (SCM)
Software
Measuring Supply Chain Performance

Supply Chain Management
Strategy and Design AT MARS
reating a “sustainable” global supply chain has become an important
goal of most major companies. The United Nations has defined
sustainability as “development that meets the needs of the present
without compromising the ability of future generations to meet their own
needs.” Mars views sustainability as a source of innovation and a business
opportunity, enabling the company to gain competitive advantage, increase
revenue, and add long-term value, while also making the world a better place
by making a difference. Two of its five guiding principles, “responsibility”
and, in particular, “mutuality,” relate directly to sustainability. Mars seeks to
achieve mutual benefit among all parties involved with its business, with
a goal to consider at every point the social, environmental, and economic
impact of their business decisions from the local level to the global level.

C

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As an example of its commitment to sustainability, Mars supports good
farming practices in cocoa-growing regions and equitable labor practices along
the cocoa supply chain, which places it as an industry leader in the pursuit of
socially responsible cocoa production. Mars is one of the world’s largest users
of cocoa, which is the primary agricultural export of West African countries like
Cote d’Ivoire, Ghana, Nigeria, and Cameroon. It is estimated that throughout
West Africa there are more than 2 million small cocoa farms and those affected
by cocoa farming may be as many as 10 million people. Aging trees, outdated
farming techniques, and plant disease diminish annual crop yields by as much
as 35%. Overcoming these problems is essential to the economic sustainability
of this region, and sustaining a critical part of Mars’ supply chain. Mars is
addressing these problems by engaging in research projects in pest
management techniques and breeding disease-resistant cocoa trees. Mars is a
founding member of the World Cocoa Foundation and partners with them to
deliver practical farming knowledge directly to farmers, including the
Sustainable Tree Crops Program in West Africa. Mars was a key signatory to
the Harkin-Engel protocol that brings together national governments and the
global cocoa and chocolate industry to improve working conditions and labor
practices on cocoa farms along the cocoa supply chain.
Mars was the first global chocolate company to commit to certifying its
entire cocoa supply as being produced in a sustainable manner by 2020. It has
committed to source 100,000 tons of Rainforest Alliance-certified cocoa by
2020, and has contracted the first UTZ certified cocoa beans. UTZ is a global
certification program that has developed a meaningful, practical, and inclusive
code of conduct that reflects minimum requirements for sustainable global
cocoa production.
In this chapter we will learn about supply chains and the key role supply
chain management plays in successfully integrating a company like Mars’
different operations management functions and processes.
Source: Mars, Incorporated, www.mars.com

SUPPLY CHAINS
Globalization and the evolution of information technology have provided the catalysts for supply
chain management to become the strategic means for companies to manage quality, satisfy customers, and remain competitive. A supply chain encompasses all activities associated with the flow
and transformation of goods and services from the raw materials stage to the end user (customer),
as well as the associated information flows. In essence, it is all the assets, information, and
processes that provide “supply.” It is made up of many interrelated members, starting with raw
material suppliers, and including parts and components suppliers, subassembly suppliers, the
product or service producer, and distributors, and ending with the end-use customer.
Figure 10.1 illustrates the stages, facilities, and physical movement of products and services in
a supply chain. The supply chain begins with suppliers, which can be as basic as raw material
providers. These suppliers are referred to as upstream supply chain members, while the distributors, warehouses, and eventual end-use customers are referred to as downstream supply chain
members. The stream at the bottom of the figure denotes the flow of goods and services (i.e., demand) as the supply chain moves downstream. Notice that the stream is very rough at the upstream end and gets smoother as it moves downstream, a characteristic we will discuss in greater
detail later. Also note that “information” is at the center of Figure 10.1; it is the “heart and brains”
of the supply chain, another characteristic we will talk more about later.

Supply chain:
the facilities, functions, and
activities involved in producing and
delivering a product or service from
suppliers (and their suppliers) to
customers (and their customers).

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The supply chain is also an
integrated group of processes
to “source,” “make,” and
“deliver” products.

procurement:
purchasing goods and services
from suppliers.

The supply chain in Figure 10.1 can represent a single producer directly linked to one level of
suppliers and one set of end-use customers. A grocery store that gets food products like milk,
eggs, or vegetables directly from a farmer (and not through a distributor), and sells them directly
to the customer who consumes them reflects this basic level of supply chain. However, supply
chains are more typically a series of linked suppliers and customers; every customer is in turn a
supplier to the next, up to the final end user of the product or service. For example, Figure 10.2
shows the supply chain for denim jeans, a straightforward manufacturing process with a distinct
set of suppliers. Notice that the jeans manufacturer has suppliers that produce denim who in turn
have suppliers who produce cotton and dye.
As Figures 10.1 and 10.2 show, the delivery of a product or service to a customer is a complex
process, encompassing many different interrelated processes and activities. First, demand for a
product or service is forecast, and plans and schedules are made to meet demand within a time
frame. The product or service can require multiple suppliers (who have their own suppliers) who
prepare and then ship parts and materials to manufacturing or service sites. A large manufacturer
like General Electric or Hewlett-Packard, has thousands of suppliers including first-tier suppliers
that supply it directly, second-tier suppliers that supply those suppliers, third-tier suppliers that
supply second-tier suppliers, and so on. Parts and materials are transformed into final products or
services. These products may then be stored at a distribution center or warehouse. Finally, these
products are transported by carriers to external or internal customers. However, this may not be
the final step at all, as these customers may transform the product or service further and ship it on
to their customers. All of this is part of the supply chain—that is, the flow of goods and services
from the materials stage to the end user.
The supply chain is also an integrated group of business processes and activities with the
same goal—providing customer satisfaction. As shown in Figure 10.3, these processes include the
procurement of services, materials, and components from suppliers; production of the products and
services; and distribution of products to the customer including taking and filling orders. Information and information technology tie these processes together; it is what “integrates” them into a
supply chain.

SUPPLY CHAINS FOR SERVICE PROVIDERS
Supply chains for services are sometimes not as easily defined as supply chains for manufacturing
operations. Since the supply chain of a service provider does not always provide the customer with
a physical good, its supply chain does not focus as much on the flow of physical items (material,
parts, and subassemblies) through the supply chain. It instead may focus more on the human resources and support services necessary to provide its own service. The supply chain of a service
provider also tends to be more compact and less extended than a manufacturing supply chain. It
generally does not have as many tiers of suppliers, and its distribution network is smaller or nonexistent. However, supply chains of service companies are definable and can be effectively managed
using many of the same principles. Service companies and organizations have suppliers (who have
suppliers), and they distribute their products to customers (who may have their own customers).
Although a hospital and HMO do not provide actual goods to its customers, they nevertheless purchase equipment, computers, drugs, and medical supplies from suppliers (who have suppliers).
They also contract for services (such as food preparation or laundry); hire doctors, nurses, accountants, administrators, and staff; and provide health care. They have quality-management issues
throughout their supply chain. They also encounter the same problems and inefficiencies as a manufacturing-based supply chain. Other service-oriented companies, like McDonald’s, do, in fact,
provide a physical product, and thus have a more discernible supply chain with distribution, transportation and inventory like a manufacturing company.

VALUE CHAINS
In recent years, terms such as value chain and demand chain have been used instead of, or interchangeably with, supply chain. Are there any differences between the two terms? Originally, a
value chain was thought to have a broader focus than a supply chain. A value chain included every
step from raw materials to the eventual end user, whereas a supply chain focused more narrowly
on the activities that get raw materials and subassemblies into the manufacturing operation, that
is, supply. In this context, the ultimate goal of a value chain is the delivery of maximum value to

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Figure 10.1
the end user. However, we have already indicated that the general perception of a supply chain is
that it also encompasses this same broad focus, from raw material to end user. Alternatively, a demand chain has been referred to as a network of trading partners that extends from manufacturers
to end-use consumers. The objective of demand chain management is to increase value for any
part or all of the chain. This perhaps is a somewhat more narrowly defined perspective then a supply chain or value chain. However, in reality all of these terms have come to mean approximately
the same thing to most people, and the terms are frequently used interchangeably.
A common thread among these perceptions of supply, value, and demand chains is that of value.
Value to the customer is good quality, a fair price, and fast and accurate delivery. To achieve value
for the customer, the members of the supply chain must act as partners to systematically create value
at every stage of the supply chain. Thus, companies not only look for ways to create value internally
in their own production processes, but they also look to their supply chain partners to create value by
improving product design and quality, enhancing supply chain performance and speed, and lowering
costs. To accomplish these value enhancers, supply chain members must often collaborate with each
other and integrate their processes, topics that we will continually return to in this chapter.

THE MANAGEMENT OF SUPPLY CHAINS
Supply chain management (SCM) focuses on integrating and managing the flow of goods and services and information through the supply chain in order to make it responsive to customer
needs while lowering total costs. Traditionally, each segment of the supply chain was managed
as a separate (stand-alone) entity focused on its own goals. However, to compete in today’s

The Supply Chain

Value:
the creation of value for the
customer is an important aspect
of supply chain management.

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Produce

Schedule

Grow

Figure 10.2

The Supply Chain
for Denim Jeans
Supply chain management
(SCM):
requires managing the flow of
information through the supply
chain in order to attain the level of
synchronization that will make it
more responsive to customer needs
while lowering costs.
Keys to effective supply chain
management are information,
communication, cooperation,
and trust.

global marketplace a company has to count on the combined and coordinated effort of all members of the supply chain.
Supply chains require close collaboration, cooperation, and communication among members to be
effective. Suppliers, and their customers must share information. It is the rapid flow of information
among customers, suppliers, distributors, and producers that characterizes today’s supply chain management. Suppliers and customers must also have the same goals. They need to be able to trust each
other: Customers need to be able to count on the quality and timeliness of the products and services of
their suppliers. Furthermore, suppliers and customers must participate together in the design of the supply chain to achieve their shared goals and to facilitate communication and the flow of information.

SUPPLY CHAIN UNCERTAINTY AND INVENTORY
One of a company’s main objectives in managing its supply chain is to synchronize the upstream
flow of incoming materials, parts, subassemblies, and services with production and distribution
downstream so that it can respond to uncertainty in customer demand without creating costly excess inventory. Examples of factors that contribute to uncertainty, and hence variability, in the
supply chain are inaccurate demand forecasting, long variable lead times for orders, late deliveries, incomplete shipments, product changes, batch ordering, price fluctuations and discounts, and
inflated orders. The primary negative effects of supply chain uncertainty and variability are lateness and incomplete orders. If deliveries from suppliers are late or incomplete, they slow down the

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Shipping

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Inventory

Demand

Figure 10.2
flow of goods and services through the supply chain, ultimately resulting in poor-quality customer
service. Companies cope with this uncertainty and try to avoid delays with their own form of “insurance,” inventory.
Supply chain members carry buffer (or extra) inventory at various stages of the supply chain
to minimize the negative effects of uncertainty and to keep goods and services flowing smoothly
from suppliers to customers. For example, if a parts order arrives late (or does not arrive at all)

(continued)
Inventory:
insurance against supply chain
uncertainty.

Figure 10.3

Supply Chain
Processes

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from a supplier, the producer is able to continue production and maintain its delivery schedule to
its customers by using parts it has stored in inventory for just such an occurrence.
Companies also accumulate inventory because they may order in large batches in order to
keep down order and transportation costs or to receive a discount or special price from a supplier.
However, inventory is very costly. Products sitting on a shelf or in a warehouse are just like
money sitting there not being used when it could be used for something else. It is estimated that
the cost of carrying a retail product in inventory for one year is over 25% of what the item cost.
Inventory-carrying costs are over $300 billion per year in the United States. As such, suppliers
and customers would like to minimize or eliminate it.

THE BULLWHIP EFFECT

Bullwhip effect:
occurs when slight demand
variability is magnified as
information moves back upstream.

Figure 10.4

The Bullwhip
Effect

Distorted information or the lack of information, such as inaccurate demand data or forecasts,
from the customer end can ripple back upstream through the supply chain and magnify demand
variability at each stage. This can result in high buffer inventories, poor customer service, missed
production schedules, wrong capacity plans, inefficient shipping, and high costs. This phenomenon, which has been observed across different industries, is known as the bullwhip effect. It occurs
when slight to moderate demand variability becomes magnified as demand information is transmitted back upstream in the supply chain. In Figure 10.1 the stream at the bottom of the figure reflects this occurrence; the flow is greater (and the waters more turbulent) further upstream. Figure
10.4 presents a detailed perspective of the bullwhip effect.
The bullwhip effect is created when supply chain members make ordering decisions with an
eye to their own self-interest and/or they do not have accurate demand information from the adjacent supply chain members. If each supply chain member is uncertain and not confident about
what the actual demand is for the succeeding member it supplies and is making its own demand
forecast, then it will stockpile extra inventory to compensate for the uncertainty. In other words,
they create a security blanket of inventory. As shown in Figure 10.4, demand for the end user is
relatively stable and the inventory is small. However, if slight changes in demand occur, and the
distributor does not know why this change occurred, then the distributor will tend to overreact and
increase its own demand, or conversely reduce its own demand too much if demand from its customer unexpectedly drops. This creates an even greater overreaction by the manufacturer who

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supplies the distributor and the suppliers who supply the manufacturer. One way to cope with the
bullwhip effect is for supply chain members to share information, especially demand forecasts.
If the supply chain exhibits transparency, then members can have access to each other’s information, which reduces or eliminates uncertainty.

RISK POOLING
When supply chains stretch over long distances and include multiple parts, services, and products,
uncertainty increases. In “lean” supply chains there is little redundancy and slack (i.e, inventory),
so when disruptions occur, the effects can cascade through the supply chain hindering normal operations. For example, a labor strike at an automobile plant can cause downstream assembly
plants to reduce or stop production, which, in turn, can result in a lack of autos on dealer lots.
Parts shortages, customer order changes, production problems and quality problems are the types
of things that can disrupt a supply chain. As we have suggested, one way to offset this uncertainty
is by carrying extra inventory at various stages along the supply chain, (i.e., the bullwhip effect).
However, another way to reduce uncertainty is called risk pooling.
In risk pooling, risks are aggregated to reduce the impact of individual risks. As this implies,
there are several ways to pool supply chain risks. One way is to combine the inventories from
multiple locations into one location, like a warehouse or distribution center. It is well known (and
can be shown mathematically) that it is more economical to hold inventory at one central location
than dispersing it across several customer locations. Doing so reduces the overall inventory investment needed to achieve a target service level across all the customers the distribution center supplies (i.e., it’s more costly to meet variations in demand from several locations than from one),
which in effect, reduces demand variability. Adding a distribution center between the supplier and
the end-use customers can also shorten the lead time between the supplier and customer, which is

A L O N G T H E S U P P LY C H A I N
Eliminating the Bullwhip Effect
at Philips Electronics
Philips Electronics is one of the world’s largest electronics
companies with over 165,000 employees in more than 150
countries, and with sales in 2005 of over 30.4 billion Euros.
Philips Semiconductors, headquartered in Eindhoven, The
Netherlands, with over 33,000 employees, and Philips Optical Storage, with over 9,000 employees around the world are
subsidiaries of Philips Electronics. Philips Semiconductors
is one of the world’s largest semiconductor suppliers with
twenty manufacturing and assembly sites around the world,
while Philips Optical Storage manufactures optical storage
products including drives, subassemblies and components
for audio, video, data and gaming playback, and rewritable
CD and DVD consumer products. Within the Philips supply
chain Philips Semiconductor is the furthest upstream supplier of its downstream customer, Philips Optical Storage. In
2000 Philips Semiconductor recognized that it was suffering
from a substantial bullwhip effect and collaborated with
Philips Optical Storage on a project to reduce or eliminate it.
In order for Philips Optical Storage to assemble a DVD
drive, it requires a number of components and subassemblies, including printed circuit boards, which require integrated circuits to produce that can have long manufacturing
lead times. There are two steps in the process of manufacturing integrated circuits; wafer fabrication, which is a complex
process that also has long lead times, and assembly. Overall,

the total lead time for the supply chain was between 17 and
22 weeks. The planning process was decentralized with each
stage in the supply chain planning and operating independently. In addition, information about changes in demand
and orders often lagged and was distorted, and deliveries
downstream to Philips Optical Storage were unreliable. Individual stages safeguarded against the resulting uncertainty
by creating safety stocks. Philips developed a collaborative
planning process and supporting software that included a
new advanced scheduling system that supported weekly collaborative planning sessions. One of the most important aspects of the new supply chain management system is the
speed with which it is able to solve problems that arise. The
new system synchronized Philips supply chain, reduced
safety stocks, guaranteed order quantities and deliveries, and
effectively eliminated the bullwhip effect, resulting in savings of approximately $5 million per year.
Why do you think the “collaborative planning process and
supporting software” was a key factor in the ability of
Philips to eliminate the bullwhip effect along its supply
chain? What obstacles do you think might prevent a company from using a collaborative planning process?
Source: T. de Kok, F. Janssen, J. van Doremalen, E. van Wachem, M.
Clerkx, and W. Peeters, “Philips Electronics Synchronizes Its Supply
Chain to End the Bullwhip Effect,” Interfaces 35 (1; January–February
2005), pp. 37–48.

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another way to pool risks. When the demand forecast is closer to its actual occurrence (i.e.,
shorter lead time), then variability is reduced; it’s a lot easier to predict demand for next week
than for next month.
Another way to pool risks is to reduce parts and product variability, thereby reducing the number of product components, which allows a company to meet demand with fewer products. Common product components that can be used in a lot of different products enable a company to pool
its forecasts for the components demand, resulting in fewer forecasts. (The more forecasts there
are, the more chances for errors.) Reducing product variability can have the same effect. It’s easier
to forecast demand for a small number of product configurations than a larger number of configurations. This is why automobile companies like Honda offer packages of options rather than just a list
of add-ons. Yet another way to pool risks is by creating flexible capacity. It reduces the uncertainty
for the customer if its demand can be met by several different production facilities, which the supplier can achieve by increasing its production capacities at several different locations. The customer
can reduce its own risks by increasing the number of suppliers it uses.

“GREEN” SUPPLY CHAINS
sustainability:
meeting present needs without
compromising the ability of future
generations to meet their needs.

“Going green,” also referred to as achieving sustainability, has become one of the most visible recent trends in operations and supply chain management. Sustainability, according to the United
Nations, is “meeting present needs without compromising the ability of future generations to meet
their needs.” Implicit in this definition is not depleting or abusing our natural resources like air,
water, land, and energy in a way that’s going to harm current or future generations. For businesses
it also means sustaining human and social resources. However, to many companies, sustainability
means becoming environmentally friendly and socially conscious (i.e., “green”), at the expense of
competitiveness and higher costs. A common perception among many U.S. and European corporations is that requiring suppliers, especially in developing countries, to use green practices is not
feasible because they do not face the same governmental, cultural, and social pressures; that green
manufacturing will require costly new equipment and processes; and that the customer market for
products designed with green attributes is “soft.” As a result companies often view social and
environmental responsibility separately from business objectives.
However, there is a growing realization among many companies that the social and environmental benefits of developing sustainable products do not have to come at the expense of reduced
profits and competiveness. Sustainability can, in fact, be cost effective and profitable and provide
the impetus for product and process innovations. Green initiatives can lower costs because fewer
resources are used, and additional revenues can result from better products or new businesses.
Although Toyota realized huge costs in developing its hybrid Prius, it has created a whole new
successful and potentially profitable product and market just as gasoline prices were rising. Further, by designing products that can be recycled or reused, companies can reduce waste, thereby
lowering costs. Thus, while a commitment to green practices can create a better image for companies among consumers (and the government), they can also reduce costs and increase revenues.

A L O N G T H E S U P P LY C H A I N
Going Green at Walmart
With more than 100,000 suppliers and almost 8,000 retail
locations around the world Walmart has the opportunity to
make a significant “green” impact, which they have chosen
to do. It has made a commitment to be an environmentally
sustainable retailer; to make a difference for the environment
and communities around the world. It has established
sustainability goals “to be supplied 100% by renewable

energy, create zero waste, and sell products that sustain our
resources and the environment.” To achieve these goals,
Walmart has developed a number of sustainability initiatives,
including setting a goal to design stores that are 30% more
efficient and produce 30% fewer greenhouse gas emissions;
creating a solar power program for stores in California and
Hawaii that will produce more than 18 million kWh of clean,
renewable energy and reduce greenhouse gas emissions
(Continued)

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by as much as 8,000 metric tons per year; and using over
225 million kWh of wind energy annually for stores in
Texas. Other initiatives include making its distribution fleet
25% more efficient by working with suppliers to use fuelsaving technologies, load trucks more efficiently and improve routing, and using alternatively fueled trucks. It has
committed to sending zero waste to U.S. landfills by 2025
and it is achieving this goal in part by using process called
“super sandwich baling.” In this process recyclable items are
compressed between layers of cardboard creating bales,
which are sent to recyclers. It has a goal of reducing plastic
shopping bag waste at its stores around the world by 33% by
2013, which translates to as much as 135 million pounds,
and will potentially eliminate 290,000 metric tons of greenhouse gases and the use of 678,000 barrels of oil annually.
Walmart sells only concentrated liquid laundry detergent in
all it U.S. stores which will save more than 125 million tons
of cardboard, 80 million pounds. of plastic resin, and 430 million gallons of water, and will also save diesel fuel used to
transport the detergent products. It is working with its suppliers to reduce packaging throughout its supply chain by
5% by 2013 with an estimated reduction of 667,000 metric
tons of carbon dioxide, which is equal to taking 213,000
trucks off the road each year, eliminating the use of 324,000

429

tons of coal, or almost 67 million gallons of diesel fuel. Walmart has given a directive to over 1,000 suppliers in China to
(among other things) increase the energy efficiency of products it sells to Walmart by 25% by 2011; to completely eliminate product returns as a result of defects by 2012; and to
cut water use in all of its stores by half. In order to evaluate
the effectiveness of its green initiatives, Walmart provides a
survey to each of its 100,000 suppliers with questions in four
areas: energy and climate, natural resources, material efficiency, and people and community. The survey results in a
“product sustainability index” that will provide a global information database on the “Lifecycle” of products—from
raw materials to disposal—in order to see where sustainability is possible. Walmart’s commitment to sustainability not
only makes it a good global corporate citizen but it is also
good business.
General Electric is another large global corporation that has
made a strong commitment to sustainability. Go to their Web
site at www.ge.com and discuss what green activities they
are involved in.

Source: The Walmart Web site at www.walmartstores.com

The impetus for, and commitment to, sustainability generally comes from downstream in the
supply chain and moves back upstream to include suppliers. Companies have found that suppliers
can account for as much as 80% of the resources consumed in a product’s supply chain. Companies must work with and guide suppliers to reduce the inefficient use of resources, reduce the use
of raw materials, reduce waste, and recycle. Suppliers can be coerced into using green practices
by threats, demands, or incentives, or a combination.

SUSTAINABILITY AND QUALITY MANAGEMENT
Many companies already have quality improvement programs in place that require suppliers to
adhere to continuous improvement goals of eliminating returned products, thus reducing waste;
poor quality translates to wasted resources. The same quality management focus on reducing
waste can work to achieve sustainability goals. As we discussed in Chapter 2, the cost of poor
quality can have a significant impact on a company’s profitability and competitiveness, and quality costs may often come from suppliers along the supply chain, including the cost of materials,
labor, and resources for reworking defective products; the cost of shipping delays and customer
service errors; and the cost of product replacement and waste.
Improving fuel efficiency in a distribution fleet, having employees telecommute, using ecofriendly packaging materials, building energy efficient facilities, reducing the use of wooden pallets, and even turning the thermostat up in summer and down in winter are initiatives that improve
processes and reduce costs, and also achieve sustainability goals. For example, FedEx, which has
a fleet of 700 aircraft and 44,000 vehicles that consume an estimated 4 million gallons of fuel per
day, is replacing old aircraft with new larger more fuel-efficient Boeing aircraft that will reduce its
fuel consumption by over 50% and increase capacity by 20%; it uses hybrid vans that are over
40% more fuel efficient and has replaced over 25% of its fleet with more fuel-efficient vehicles; it
has developed new software that will optimize aircraft routes and schedules; and it has developed
more energy-efficient solar systems at distribution hubs in California and Germany. FedEx has
also started a consulting firm to sell the energy expertise it has gained through it own sustainability
initiatives.

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A L O N G T H E S U P P LY C H A I N
Achieving Sustainability While Reducing Costs
and Increasing Profits
FedEx has a fleet of 700 aircraft and 44,000 vehicles that
consume an estimated 4 million gallons of fuel per day. As
part of its sustainability efforts it is replacing old aircraft
with new larger, more fuel-efficient Boeing aircraft that will
reduce its fuel consumption by over 50% and increase shipping capacity by 20%; it uses hybrid vans that are over 40%
more fuel efficient and has replaced over 25% of its fleet
with more fuel-efficient vehicles; it has developed new software that will optimize aircraft routes and schedules; and it
has developed more energy-efficient solar systems at distribution hubs in California and Germany. FedEx has also
started a consulting firm to sell the energy expertise it has
gained through it own sustainability initiatives.
Twenty-five percent of IBM’s 320,000 employees telecommute, saving the company $700 million in real estate costs
each year, and AT&T annually saves $550 million with
telecommuting. Cisco Systems established a business unit
for recycling that increased the reuse of equipment from 5%
to 45% and reduced recycling costs by 40% in a four-year
period; overall the unit became a profit center that earned
Cisco over $100 million in one year. Proctor and Gamble
estimated that if U.S. households switched to cold-water
clothes washing instead of heating water we would save
80 billion kWh of electricity and reduce carbon dioxide
emissions by 34 million tons. As a result they developed new
cold-water detergents, Tide Coldwater in the United States

and Ariel Cool Clean in Europe. More popular in Europe
than the states, cold-water washing rose from 2% to 21% in
the United Kingdom, and in Holland it rose from 5 to 52%.
Upon discovering that household cleaning products are the
second biggest environmental concern in the United States
next to cars and that up to 35% of consumers consider environmental benefits when making purchases, Clorox spent
three years and $20 million to develop its nonsynthetic
Green Works line of cleaning products. Endorsed by the
Sierra Club, in one year Green Works grew the natural
cleaner market in the United States by 100%, and Clorox
garnered a 40% share of the $200 million market; and then it
introduced biodegradable cleaning wipes and nonsynthetic
detergents that compete directly with P&G products. Waste
Management, a $14 billion garbage disposal company, estimated that it was hauling $9 billion worth of reusable waste
to landfills and set up a new business unit, “Green Squad,” to
partner with companies in the United States to turn waste
into profits; for example, working with Sony to collect electronic waste for recycling.
Look on the Internet and identify other green initiatives
that companies have taken that reduce costs or increase
profits.

Source: Ram Nidumolu, C.K. Prahalad and M.R. Rangaswami,
“Why Sustainability is Now the Key Driver of Sustainability,” Harvard
Business Review, vol. 87 (9: September 2009), pp. 57–64.

Clorox’s Green Works line of
environmentally-friendly
household cleaning products
made with natural,
biodegradable nonpetroleum-based materials is
among a wave of new
products that many
companies are introducing to
tap into potentially profitable
“sustainable” consumer
markets.

© Michael Maloney/San Francisco Chronicle/©Corbis