A recent McKinsey article, entitled ‘a devilish duality’, asked ‘how CEOs can square resilience with net-zero promises’. This question is particularly relevant to the management of supply chains, where resilience and decarbonisation are now major priorities. Are they in conflict or are there synergies to be exploited?
At a fundamental level, cutting carbon emissions today will help to reduce the future disruptive effects of climate change on supply chains, but this is a long-term, planetary-level relationship. Companies are more interested in the inter-connections between short-to-medium-term strategies to enhance resilience and reduce emissions.
Two initiatives will unquestionably yield both resilience and environmental benefits. Improvements to supply chain visibility, which ESG investors and government regulators are increasingly requiring, will involve greater sharing of risk and emission data. Closer collaboration across supply networks, often initiated for commercial reasons, can also foster joint efforts to make logistical systems more robust and lower-carbon.
The combined impact of other options is more nuanced. Take, for example, the shortening of supply chains by more localised sourcing. This may appear to tick both risk- and emission-reduction boxes, but it is debatable how much added resilience ‘reshoring’ actually brings, while minimising emissions on a life-cycle basis often means acquiring goods from low-carbon producers even over long distances.
Relaxation of the just-in-time principle has been recently been advocated as a de-risking measure. JIT has also been criticised on environmental grounds for the under-loading of freight vehicles and over-use of airfreight services. So on this issue there may be an alignment of resilience and decarbonisation objectives, but possibly only with respect to freight transport. JIT, after all, is not just a method of delivery scheduling; it is a whole business philosophy designed to minimise waste in manufacturing systems, including energy losses. Easing JIT pressures can increase the carbon intensity of production and warehousing operations, offsetting transport emission savings.
A company can also spread risk and increase resilience by diversifying its supply base and carrier pool. It is difficult to generalise about the environmental impact of this strategy, though two points are worth raising.
First, shifting freight to lower-carbon transport modes, one of the main ways of decarbonising logistics, can carry a supply chain risk if these modes have a poorer record of reliability. There is much anecdotal evidence about service failures by particular modes but, to my knowledge, no systematic, cross-modal comparisons of the frequency and seriousness of disruptions. So the ‘jury is out’ on this one.
Second, transitioning to a new generation of low carbon freight vehicles will be fraught with risk. As 56% of battery-grade cobalt currently comes from the Democratic Republic of Congo, 80% of it is processed in China and two Chinese firms make half of all electric vehicle batteries, the repowering of logistics with low carbon electricity looks fairly precarious, at least in geopolitical terms. The heavy dependence of net-zero strategies on the switch to renewable energy will undoubtedly pose significant supply chain resilience challenges over the next few decades.