Green Supply Chain as a competitive advantage enabler in the FMCG sector

Subhajit Mazumder, Consultant in a Management Consulting Firm Anand Chatterjee, Head, Center of Excellence of SCM and SRM in an IT Services Firm

Synopsis The paper briefly discusses how supply chain plays a pivotal role in any FMCG companys competitive advantage in the market and how traditionally companies have been focusing on building highly efficient supply chains to achieve the same. However in a broader context, companies need to recognize other more impactful forces pertaining to protecting our environment that are gaining prominence globally and especially now in the Indian scenario. Organizations are taking steps to become environment friendly and going green within the boundaries of their business objectives. Initiatives to minimize carbon footprint across the supply chain, is even more significant, where pricing is extremely competitive and the shelf price increases further in certain countries which impose additional taxes for large carbon footprint.

For the FMCG industry where supply chain is a key driver for attaining competitive advantage, this paper discusses key aspects of greening the supply chain including best practices, approach to going green which strikes balance between social goals and business goals and case studies highlighting some of the initiatives taken up by leading FMCG companies. The experiences and insights of the authors gathered from industry and consulting experiences is brought forth in the paper.

Disclaimer: The views express in the paper do not represent the views of the organization that the authors work in. They are personal.

Key words: Green Supply Chain, Sustainability

In India, the way FMCG companies have evolved over the last two decades can only be defined as game changing. From supplying products that would cater to the basic needs of the consumer, to aspiring to satisfy the self-esteem and self-actualization needs of the consumer, is indeed a paradigm shift. This change has reflected and adapted with the changing social and economic landscape of India over the years.

With the continuous transformation, some of the key imperatives of the FMCG companies to compete in the market have been to:

Speed: from understanding customer need to new product development to launch Efficiency: leveraging economies of scale to optimize costs and pass on the value to the end consumer Marketing: enhancing market coverage and reach and addressing the needs of different customer segments from different strata of society R&D and innovation: to develop new and enhanced products to cater to evolving needs of the Indian consumers to suit changing lifestyles Network: strong backward (supply) and forward (distribution) networks which ensure high service levels, greater reach and are cost effective

The traditional strategy to achieving competitive advantage

Most of the FMCG companies have traditionally strived to be more and more efficient in the way their supply chain performs. The sector has primarily been pivoted on the generic strategy of cost.

The cost strategy

FMCG companies have traditionally played on the cost driver for achieving competitive advantage. The reasons were:

Indian consumers were more sensitive about price in their buying behaviour, coming from an era of limited economic liberation Income levels of more than 60% of the Indian population was moderate to low and a significant % of the population were poor, who never the less needed to use some of the products for health and hygiene Indian consumers were grappling more with basic necessities and passing on the cost advantage was perceived attractive

The cost strategy looked at minimizing costs wherever possible along the supply chain:

Low cost sourcing options Efficient manufacturing in the factories Mass distribution mechanisms with moderate reach Uniform ATL marketing communication Lesser number of SKUs and variants Competitive pricing

The low cost advantage was expected to spur demand for the products and the company would expect to gain in terms of volumes (and market share) and thus gain competitive advantage.

Evolving strategy

With time the competition became even more aggressive. Companies adopted focus-cost strategies to further improve supply chain efficiency and embed methodologies such as lean supply chain, vendor managed inventory, TQM and TPM to churn out the maximum value for cost for the consumer.

New paradigms to achieve competitive advantage

Recent times have seen a shift in the way business performance is measured. Businesses not only need to be profitable and return value to its stakeholders, but must do this in a sustainable manner such that the sensitivities of the environment are considered. It is clear that consumers, in tandem with governments and even investors, expect companies to become more environmentally conscious.

A recent survey conducted by the Economist Intelligence Unit, was designed to show the increased level of awareness as well as the operational changes taking place as more companies go green. According to the survey, 52% of the companies report that they are implementing some form of green-minded supplier qualification. An additional 39% say that they have plans in the near future. [1]

Some evidences of this global trend:

A leading global retailer announces that this year, it will begin using a green scorecard as a key element of supplier selection and will begin providing consumers green ratings on products

A major foods company begins using spent coffee grounds and biogas from wastewater to fuel its boilers and enlists its entire supply chain to reduce energy consumption and cost within a global logistics initiative Household name consumer electronics companies begin implementing supplier certification programs that include significant green standards for power consumption, waste products, hazardous materials, shipping characteristics and packaging

Understanding the Green Supply Chain and how to manage it

Green supply chain management recognizes the disproportionate impact of supply chain processes of an organization and attempts to balance the contradicting forces.

Green supply chain management (GSCM) leverages the role of the environment in supply chain value creation. Organizations may define and undertake various greening initiatives and programs within its boundaries and across its extended supply chain partners resulting in:

Adoption of technology with lesser counter-impact Improved strategic alliances for downstream and upstream activities Better sustainability of the immediate environment Reputation of business practices being socially responsible Satisfied customers

This in turn will lead to:

 Greater stakeholder satisfaction Enhance environmental sustainability Ensuring comparable quality of life for future generations And a greater supply chain value delivered.

Green supply chain helps mitigate risks for the company, leads the company to establish innovative process and adopt continuous improvement for better alignment of processes with principles.

Evolving Green Supply Chain Strategy

Organizations follow the green path for a variety of reasons. The first and foremost is to comply with government rules and regulations. Some of them are also looking toward green and sustainable supply chain form the risk mitigation perspective.

Some organizations are looking towards sustainability to improve their corporate image and project themselves as a responsible organization. There is growing preference of customers and consumers for green products and hence this can help organizations to increase their revenue. Green supply chain is also in focus as some organizations want to reduce costs by bringing in improvements at the tactical/operational level efficiencies.

Depleting natural resources are also pushing organizations to look for green substitutes.

Governments are seriously contemplation imposing carbon tax on companies who import from not so eco-friendly countries / organizations. This would mean that they seriously need to relook into sourcing and producing options: from where to procure and where to produce as this is bound to change the cost effectiveness of the supply chain which is so very important especially in the FMCG sector.

The four stages of the evolving Green Supply Chain maturity cycle are depicted:

Green Supply Chain Best Practices in the FMCG sector

Given the context of the efficient supply chain on which the FMCG sector depends to achieve competitive advantage in the market, it would seem that Green Supply Chain Management would lead the FMCG companies to incur unnecessary overheads and make them less agile. The best practice to implement a Green Supply Chain would revolve around the following pivots:

Alignment of Green Supply Chain goals with overall goals Evaluate supply chain as a single life cycle system Use green supply chain as a catalyst for innovation Focus on source reduction to reduce waste

Alignment of Green Supply Chain goals with overall goals

Greening the supply chain in a manner that doesnt help the FMCG business will not help in achieving any business objectives. For example, if a FMCG company decides to use biodegradable packaging for its products that costs 25% more than traditional packaging, this goes against the businesses goals of reducing costs, which as seen is a primary lever for the FMCG sector for competitive advantage. A company should look at its overall business goals and identify how a transition to a green supply chain can help achieve those goals. For example if a FMCG company wants to reduce its energy costs it should start by looking at the consumption to see if a reduction can be made by using more energy efficient and greener equipment.

Some green supply chain initiatives taken by FMCG companies in India:

A paper and packaging conglomerate has taken a step further wherein they have been engaging local communities to grow trees according to the demands of the local ecosystem which they later consume in their paper and packing plants

Evaluate supply chain as a single life cycle system

Often companies tend to look at different parts of its supply chain in silos and attempts to suboptimize these supply chain pieces. For example, it is not only sufficient to ensure cost reduction with greener equipments within the company but also see logistics aspects such as contract warehousing and outsourced transportation.

Some green supply chain initiatives taken by a FMCG companies in India:

On the warehousing front the warehouse contractors are advised to work on better insulations of walls of the warehouse so that it leads to less energy consumption Replacing the lighting systems with energy efficient lights. LEDs, smart and movement sensing lighting systems can lead up to energy savings of 90%

Since transportation is a major cost component in the overall logistics cost of a FMCG company, organizations are working on improving the fuel efficiency of the trucks. They are trying to reduce the idling time of trucks on transit. They are working on pickup strategies of trucks while delivery.

Thus, when the company would optimize the whole supply chain and not some its parts, the value delivery of the supply chain will be greatly enhanced in terms of tangible and intangible (social and environmental) benefits.

Use green supply chain as a catalyst for innovation

Businesses that want to transition to a green supply chain should take the opportunity to review all their business processes to identify areas where adopting a greener outlook can actually improve their business.

Companies should review each process along the supply chain to identify if a more environmentally sound approach will help cure the inefficiencies that occur.

Some green supply chain initiatives taken by FMCG companies in India:

Innovation in product packaging materials to reduce its harmful impact when the packing is disposed at the time of usage of the product Increasing customer service quality by introducing innovative product buyback / exchange schemes. This is more prevalent in consumer white goods industry than typical FMCG

Focus on source reduction to reduce waste

Most of the FMCG products manufacturing is process based which leads to creation and disposal of wastes at various stages in the supply chain.

Responsible waste management is a key greening initiative and one that prevents adverse impact on the environment in an immediate and tangible manner. In the industrial era of mass production, the businesses focus was only on achieving production targets and high capacity

utilization. Industrial waste was disposed in ad-hoc and easy approaches available to the company.

With maturing green supply chain management concepts, there is increased focus on reduction of waste at source which maximizes sustainability. The following pyramid of waste prevention management highlights this:

Some green supply chain initiatives taken by FMCG companies in India:

A paper and packaging conglomerate (mentioned earlier) has started small recycling packing material plants near to each of the large cities Reverse logistics have gain momentum, with a leading FMCG (beverages) company taking back the bottles in which it sells its drinks. This helps in prevention of misuse of the bottles (e.g. local re-filling), avoidance of generation of plastic and glass waste and cost reduction in sourcing new bottles

Conclusion

While more and more companies are treading the path of greening their supply chains, the adoption is still in its initial phases. Companies in the FMCG sector need to understand the key role that environment plays in their businesses (e.g. cost reduction / risk mitigation / product differentiation) and then identify select initiatives that are in line with their business strategy and

objectives. The success of these greening programs become leading indicators of business success and endows competitive advantage to the organization.

In the next decade where the marketplace will be extremely challenging to compete, FMCG companies that have forayed into different green supply chain management initiatives will be better placed to win goodwill of the consumer and be a game-changer in the Industry.

About the Author:

Subhajit Mazumder, CSCP Subhajit has done his MBA in Operations Management from IIT Kharagpur. He is currently working in the strategy and operations consulting practice of a Big 4 firm in the Industrial & Consumer Products Industry Vertical. Prior to this has worked with KPMG, PricewaterhouseCoopers and IBM in India in consulting. Anand Chatterjee Anand has done his post graduation in Management from "Indian Institute of Management, Calcutta" (IIM, C). He is presently working as Head, Center of Excellence for SCM and SRM with an Indian IT services company. Previously he was with ITC Infotech, SAP, PricewaterhouseCoopers (P) Ltd, Tata Research Development and Design Centre and GECIS (now Genpact).