With the U.S. average price of diesel at $4 per gallon, companies that move goods and have not planned for $5 diesel risk seeing profit margins disappear.
A new report written by Jason Mathers, Program Manager, Corporate Partnerships Program, in Environmental Defense Fund’s Boston office, offers laggard CEOs a template to save fuel in their supply chains. The report presents best practices of companies, including giants Nike, Wal-Mart, and IKEA, that are saving money and cutting carbon by devising creative ways to ship goods.
The goal of Smart Moves (PDF), Mathers told me, was “to collect a whole bunch of stories that have been told individually, and to pull them together to paint a collective picture of action that companies could be taking with their distribution and logistics networks that will cut costs and will cut emissions.”
Aside from the threat to earnings, any CEO concerned about his or her company’s carbon footprint must account for shipping’s growing contribution to climate change, from the introduction:
The global freight transportation and distribution system accounts for nearly three billion metric tons of heat-trapping carbon emissions each year. That’s equal to over 700 coal plants or the combined total global warming pollution from Japan, Germany, Canada and Mexico. Transportation accounts for 89 percent of the environmental footprint of supply chain logistics; warehousing and distribution take up the remaining 11 percent … In the United States alone, emissions from freight are projected to increase 74 percent from 2005 to 2035. China is expected to increase its use of freight transportation fuels by more than 320 percent from 2008 to 2035.
In the report, Mathers focuses not on freight carriers (long-haul cargo planes and container ships) but on shippers, which he describes as “companies that utilize logistics services to move products but are not primarily in the freight business.” For these firms, he said, the longer-term prospect of regional or global carbon pricing is not as significant as the bottom-line-busting price of diesel. Mathers mentioned the possibility of diesel hitting $5 per gallon this year, which “is a massive cost increase for these companies.”
“The driving factor in every one of these cases was cost reduction,” he said. “One of the really great aspects of the freight space, and one of the reasons we think that freight is particularly ripe for carbon reductions today, is that there is such good synergy between cost and carbon reductions.”
“By highlighting these through the sustainability lens,” he added, “what I hope to do is to get the sustainability teams at companies to look at what some of their competitors are doing.”
In the report, Mathers describes several broad categories of best practices: shifting cargo from planes to ships, or from trucks to trains; improving inventory management practices; optimizing distribution networks; leveraging partnerships, even with competitors, to collaboratively distribute goods; rethinking the goods and packaging that make up each shipment, or changing the mix of products to optimize for space and weight; and, last, improving the energy efficiency of warehouses and distribution centers.
Mathers also notes the carbon and monetary costs company logisticians must weigh when deciding among transport options. “Planes emit 47 times more carbon per ton mile than container ships; trucks emit six times more carbon per ton mile than trains. The more carbon intensive modes typically cost more as well,” he writes. “If just 10 percent of truck shipments shifted to utilizing an intermodal strategy, one billion gallons of fuel could be saved in the United States.”
Smart Moves abounds with examples of proven strategies to cut costs and carbon in shipping. Here is a sampling:
Nike and HP: Ocean over air
In 2003, Nike decided on a cargo shift. Most of the shipments from its manufacturing facilities in Asia would now arrive in North America via ocean container ship instead of by air. The move saved Nike $8 million in 2009 alone, and served as justification for a company goal to reduce carbon emissions from inbound logistics by 30% by 2020. HP saved $7,000 and avoided 900 tons of carbon per shipment by electing to send its Visual Collaboration Studio, a telepresence conferencing system, by ocean freighter over a cargo plane.
Baxter and Levi’s: Moving goods from trucks to rail
Medical supply company Baxter increased the share of its U.S. shipments using intermodal transport – where trains carry containers long distances and trucks take over to deliver goods to the final destination – by more than 30% from 2005 to 2010, slashing carbon emissions by 14,000 metric tons. Levi’s found that a switch to intermodal transportation cut CO2 emissions by 60% in some shipping lanes.
Kenco: Postponing the final assembly of goods
Logistics services company Kenco helped a client, a kitchen and bath industry manufacturer, cut its inbound freight costs nearly in half by developing a process whereby semi-finished goods are assembled at the regional distribution center rather than the factory.
Wal-Mart: Direct shipment
Wal-Mart worked with Minute Maid to eliminate one stop in the chain used to deliver Minute Maid’s Simply Orange Juice to Wal-Mart distribution centers. Now, the product moves directly from a production facility in Florida to Wal-Mart distribution centers. Eliminating delivery to Minute Maid’s own distribution centers slashed CO2 emissions by 1,500 metric tons annually and added six days to the shelf life of the orange juice.
IKEA and Cisco Systems: Getting the most out of each move
According to the report, more than a quarter of tractor trailers on U.S. highways are running empty, and, in 2009, $186 billion worth of merchandise (8% of all sales) was returned. Clearly more needs to be done to ensure that shipments make full use of the available space in planes, trucks, and trains. IKEA eliminated air and unused space from the packaging for its GLIMMA tealight candle. After the tweak, the number of tealight packs that fit in a standard European pallet increased by 40%, reducing carbon emissions by 21%. Cisco Systems has saved more than $24 million annually from packaging improvements. One example: the company stopped including hard-copy user guides with its IP phones, directing customers to online guides instead. Now three IP phones can fit in the same shipping space where two did before.
I asked Mathers if these strategies and others detailed in Smart Moves had buy-in from C-level executives. “None of this stuff that we see would be happening unless there was senior-level support,” he said. “Senior-level folks clearly see the driving factors of an incredibly competitive environment, the need to be bringing in constantly new and the best talent, increasing expectations from their customers and shareholders about environmental sustainability, and increasing energy costs.”
“We’ve entered into a phase where transportation costs are becoming more and more significant,” he said.
