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Designing for Sustainability: Optimizing Supply Chains for Cost and Carbon
Published Sep 2024
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The Paris Agreement
The UN’s Intergovernmental Panel on Climate Change warns that surpassing the 1.5°C temperature threshold could lead to significantly more severe climate impacts, such as increased frequency and intensity of droughts, heatwaves, and heavy rainfall.
To keep global warming within the 1.5°C limit, greenhouse gas emissions need to peak no later than 2025 and drop by 43% by 2030.
The Paris Agreement is a pivotal moment in the global fight against climate change, as it represents the first binding accord that unites all nations to take action in reducing emissions and adapting to its effects.
As the effects of climate change become more evident and societal commitments to sustainability become essential, businesses are increasingly challenged to balance economic objectives with environmental goals. One of the most critical areas where this balance can be achieved is in supply chain management. Designing an optimized supply chain network that minimizes both costs and carbon emissions can lead to not only a healthier bottom line but also a significant reduction in environmental impact.
Why Carbon Emissions in the Supply Chain Matter?
Contrary to popular belief, the cost of delivering a parcel doesn’t increase proportionally with distance. Factors like traffic congestion, delivery density, and service requirements create a non-linear relationship between the number of deliveries and the total cost.
The supply chain is often a major contributor to a company’s overall carbon footprint. From the transportation of raw materials to the distribution of finished products, carbon emissions are generated at multiple stages:
- Transportation: Moving goods between suppliers, warehouses, and customers.
- Production: Energy used in manufacturing processes.
- Warehousing: Energy required to operate storage facilities.
With increased consumer awareness and tighter regulations around carbon emissions, companies are being pushed to adopt greener practices. However, reducing emissions while keeping costs low is a complex optimization problem that requires a strategic approach. This is where advanced supply chain optimization techniques/software come into play.
Balancing Service level and Carbon Emissions: The Trade-Off
Traditionally, supply chain network design has focused on minimizing costs—finding the least expensive way to meet demand. But when carbon emissions are added to the equation, companies must rethink how they allocate resources, choose transportation methods, and configure their supply chain networks.
The primary challenge lies in the trade-off between service levels and carbon emissions. For example, transporting goods via air might be the fastest, but it’s also the most carbon intensive. On the other hand, using rail or sea freight might reduce emissions but increase delivery times.
Multi-Objective Optimization: A Mathematical Approach to Sustainability
To accomplish this dual mandate, supply chain managers can use multi-objective optimization. This approach allows for the simultaneous minimization of both costs and carbon emissions, resulting in a more balanced and sustainable supply chain design.
In a typical multi-objective optimization model, there are two key objectives:
- Minimize Total Cost: This includes transportation costs, production costs, warehousing costs, and any facility opening/closing costs.
- Minimize Carbon Emissions: This accounts for emissions generated during transportation, production, and warehousing.
The optimization problem can be formulated as:
Minimize: α×Total Cost+β×Total Carbon Emissions
Here, α and β are weights that determine the relative importance of cost and carbon reduction. By adjusting these weights, companies can find the right balance that meets their financial goals while reducing their environmental impact.
Key Considerations for Optimizing Carbon and Cost
- Transportation Modes: Different modes of transport have varying costs and carbon footprints. For instance, road transportation may be more flexible but carbon-heavy, while rail and sea freight can reduce emissions but increase transit times. Optimizing the transportation mix is crucial for reducing the overall carbon footprint.
- Facility Location: The location of manufacturing plants, warehouses, and distribution centres can have a significant impact on both costs and emissions. Facilities closer to demand centres can reduce transportation emissions, but this must be weighed against higher facility costs in urban areas.
- Energy Sources: Production emissions vary based on energy usage. Factories using renewable energy sources (e.g., wind or solar) have lower emissions than those relying on fossil fuels. Optimizing the use of low-emission production facilities is key to achieving sustainability goals.
- Carbon Pricing: With many governments introducing carbon pricing schemes, companies need to factor in the cost of carbon emissions when making decisions. By incorporating carbon prices into the optimization model, companies can prepare for future regulatory changes and avoid penalties.
- Inventory Management: Efficient inventory policies can reduce both costs and emissions. Overstocking can lead to increased holding costs and higher emissions from warehousing operations, while understocking can increase the need for expedited shipping, which is often more carbon intensive.
Constraints and Real-World Scenarios
In real-world applications, companies may impose certain constraints on their optimization models to reflect practical limitations. These constraints can include:
- Carbon Caps: Many organizations have set internal or regulatory limits on their allowable carbon emissions. In this case, the optimization problem becomes one of minimizing costs while ensuring that emissions remain below a given threshold.
- Service Level Requirements: Companies need to maintain customer satisfaction by meeting specific delivery times. Faster delivery methods often have higher emissions, but optimization can find a balance that maintains service levels while reducing environmental impact.
Implementing Carbon-Optimized Supply Chain Networks
Here’s how businesses can implement carbon and cost optimization in their supply chains:
1. Data Collection
- Gather detailed data on transportation costs, emissions per transportation mode, production costs, facility emissions, and demand forecasts.
- Incorporate carbon emissions factors for each aspect of the supply chain (e.g., transport modes, energy sources at production sites).
2. Modelling and Optimization
- Use Network Design optimization software (e.g., Optiflow) to build a model that includes both cost and emissions as objective functions.
- Input relevant constraints such as demand satisfaction, facility capacities, and carbon caps.
3. Scenario Analysis
- Run multiple scenarios by adjusting the weights of cost and emissions to explore suitable balance between cost and emissions.
- Evaluate the impact of carbon pricing or regulatory changes on the optimal supply chain configuration.
4. Sensitivity Analysis
- Test how sensitive the solution is to changes in demand, fuel prices, or emission regulations. This helps in preparing for uncertainties and future-proofing the supply chain.
A Win-Win for Businesses and the Environment
By using optimization techniques to design a supply chain network that balances both cost and carbon emissions, companies can achieve both sustainability and profitability. The benefits of adopting such an approach include:
- Cost Savings: Optimizing transportation routes, energy usage, and facility locations leads to significant reductions in overall supply chain costs.
- Environmental Impact: Reduced carbon emissions align with corporate social responsibility (CSR) goals and help companies meet regulatory requirements.
- Future Readiness: With increasing carbon regulations and the rise of carbon pricing, having a carbon-efficient supply chain helps companies stay ahead of the curve and can avoid future costs.
Is your Supply Chain Carbon conscious?
Contact us today to discover how our Network Optimization strategies powered by Optiflow can propel your business towards lasting success and environmental responsibility.
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