The 2023 Sustainable Manufacturing Outlook

Key Takeaways:

• Manufacturers face mandated sustainability reporting, shifting demand, and more
• Execs address challenges including why LCAs are wrong for product design

The Full Article:

The window for sustainability planning and experimentation is closing quickly as manufacturers face critical challenges across the global economy that require bold decisions and rapid execution. To that end, 87% of executive leaders plan to increase their sustainability investments during the next two years, according to Gartner.

And as we’re hearing from innovative manufacturers, there’s also a significant opportunity to use sustainability as a catalyst for growth. As you work to reduce your carbon footprint and navigate market complexity, read our insights to address four key sustainability requirements for 2023 and beyond:

1. Bolster Design for Sustainability (and Why LCAs Aren’t the Right Tool)
2. Address Carbon Tariffs and Sustainability Incentives
3. Brace for More Sustainability Reporting Mandates
4. Accelerate Supply Chain Sustainability

1) Bolster Design for Sustainability (and Why LCAs Aren’t the Right Tool)

The product design phase accounts for more than 80% of a product’s environmental impact, according to the EU Joint Research Centre. Reducing CO₂e during early development requires cross-functional collaboration among product engineering, procurement, ESG, and manufacturing teams. And it also requires the ability to iterate and compare design alternatives quickly for cost, carbon, and manufacturability. But companies typically don’t have these insights during development.

For example, Life Cycle Assessment (LCA) software provides a detailed “cradle-to-grave” assessment of a product’s overall environmental impact. This includes material extraction, production, and manufacturing; shipping/transportation; water and air pollution; the amount of fuel used during operation; and end-of-life disposal (e.g., percent of the product recycled, incinerated, etc.). In other words, LCAs measure CO₂e emissions of a product’s life cycle once the product is designed and produced.

But LCAs don’t provide the rapid sustainability analysis that product development teams require during the early design stage. In fact, manufacturing stakeholders wait at least two weeks for LCA sustainability feedback. (Some teams don’t get a carbon analysis of their new product designs due to limited internal LCA expertise.) And the LCA data typically isn’t used in a feedback loop to refine product designs. The multi-week delay from LCA teams is untenable for design teams under deadline to evaluate myriad scenarios for cost, performance, manufacturability, and sustainability.

Additionally, LCAs use industry average values that aren’t always accurate, such as calculating the CO₂e of a manufacturing process based on finish mass. Making an evaluation based on rough mass is more accurate because it includes the total amount of material required to make the product – including waste. CNC milling, for example, produces more waste than other manufacturing processes. And a poor design that requires additional cuts will produce more waste. However, LCAs don’t account for material waste, which can cause LCAs to underreport actual carbon emissions.

Industry Outlook

Innovative manufacturers simulate the product design and manufacturing process early in the development stage. Using this approach, companies optimize product development designs for cost, sustainability, and manufacturability quickly and confidently.

Using manufacturing insights, manufacturers can iterate rapidly and improve the design. This can include refining the 3D CAD design, comparing materials, and assessing multiple factory locations to achieve product goals. This is especially important because a product’s early design determines 80% of its environmental impact throughout the lifecycle.

Products like aPriori can deliver results in minutes rather than weeks to help you to mitigate CO₂e emissions earlier. And we enable product development teams to compare different product development options to help you make the right decision rapidly to reduce CO₂e during the product development cycle.

And by using digital twin capabilities, early product design data can be used by LCAs to develop an accurate measurement of a product’s full cradle-to-grave emissions impact.

Learn how to evaluate cost, carbon, and manufacturability trade-offs with aPriori.

2) Address Carbon Tariffs and Sustainability Incentives

Political leaders are implementing legislation that has a direct financial impact on corporate sustainability to encourage manufacturers to help achieve the Paris Agreement’s climate change goals. Here’s a snapshot of recent “carrot and stick” approaches to promote sustainability best practices.

Green Tax Incentives (Carrots)

The U.S. Inflation Reduction Act (IRA) of 2022 features a mix of tax credits and grants to encourage renewable energy investments, reduce CO₂e throughout the supply chain, and increase the sustainability of federal buildings and other infrastructure. IRA sustainability incentives for manufacturers include billions in tax credits, grants, and loans to help U.S. manufacturers accelerate the production of wind turbines, electric vehicles (EVs), and other green technologies; and increase processing capabilities for critical minerals.

American consumers also have new reasons to purchase goods that meet sustainability criteria. In one example, the U.S. federal government is providing a $7,500 tax incentive to buy American-made EVs under $55,000. Tesla responded by reducing the price of its Model Y EV to qualify for the U.S. tax credit. (Tesla also cut the cost of other models due to increased competition.)

CO₂e Tariffs (Sticks)

A growing number of countries are levying taxes on carbon emissions required to produce goods and services. This tax can apply to carbon and other greenhouse gas emissions (GHGs) that affect global warming – including methane and nitrogen oxide. Japan, Mexico, Canada, and other countries either have or are implementing carbon taxes, according to the World Bank.

Additionally, the EU’s Carbon Border Adjustment Mechanism (CBAM) is designed to even the playing field between EU companies governed by strict environmental rules and foreign businesses with lower sustainability requirements.

The EU carbon tariff is scheduled to take effect in January 2026. And it could boost select material import costs by 15%-30% from countries reliant on fossil fuel energy sources such as China, Russia, and India. And the EU’s carbon border tax is likely to have broader implications on international trade – especially for the U.S. and other countries that don’t have set carbon emissions pricing.

Industry Outlook

Navigating sustainability enticements and hurdles across the globe exacerbates strategic planning complexity. Before evaluating these options, establish a baseline of the total manufacturing costs to produce specific products in different regions. This includes gathering and analyzing:

• Regional data (labor rates, direct and indirect overhead rates, and tool shop rates to determine hourly rates to operate each machine by region)
• Variances in the “green energy” mix by region (e.g., China’s power grid generates more CO₂ per kWh than Western Europe)
• The unique capabilities for each factory under consideration (e.g., a supplier in India with additional tooling capabilities)

With this granular manufacturing cost baseline, manufacturers can evaluate the most appropriate production location. Then, executives can investigate additional risks and opportunities associated with longer-term tax credits, grants, and loans designed to secure new or expanded manufacturing capabilities designed to help address global warming.

Need better insights to evaluate where to manufacture your product? Get our Digital Factory Guide and see how to compare costs based on regional overhead rates, manufacturing process costs, and other variables. 

3) Brace for More Sustainability Reporting Mandates

Manufacturers globally face new sustainability reporting mandates in 2023 and new levels of scrutiny regarding their role in reducing GHG. Under the current European Union’s EU Taxonomy, ~11,700 EU-based companies are required to report their sustainability progress via the Non-Financial Reporting Directive (NFRD).

But beginning January 1, 2024, that number will increase to ~49,000 companies as the EU Taxonomy transitions to its Corporate Sustainability Reporting Directive (CSRD). The EU Taxonomy CSRD will likely affect some multinational companies that will need to collect EU Taxonomy-aligned data from non-EU undertakings, according to Greenomy.

For more information, read our blog post on preparing for the new EU Taxonomy CSRD requirements.

A growing number of countries, from the United Kingdom to Columbia, have similar “green taxonomies.” And Reuters reports that the United States will implement climate change disclosure requirements in spring 2023.

Industry Outlook

The spotlight is shining on manufacturers and their suppliers to provide accurate sustainability reporting along with defined timelines for future improvements. And companies are increasingly using environmental product declarations (EDPs) for self-reporting and third-party eco-labels.

Watch our Sustainability Insights webinar to see how aPriori supports sustainability reporting by measuring your product’s carbon footprint.

4) Accelerate Supply Chain Sustainability

Companies are increasingly prioritizing sustainable sourcing to help reach their business objectives. Our report with IndustryWeek, “The State of Manufacturing Procurement”, uncovers trends regarding sustainable procurement and more.

Specifically, 81% of the respondents cite sustainable sourcing as extremely or very important to their businesses today. In fact, 80% report that sustainability has a very or extremely significant impact on their procurement priorities. Additionally, 40% of respondents expect sustainability requirements to affect their sourcing priorities within the next 12 months, while another 26% say it will impact sourcing within the next 1-2 years.

Asked how they are addressing sustainability sourcing efforts, respondents most commonly cite working with suppliers to reach CO₂e reduction targets, followed by selecting partners based on their carbon footprint, and sourcing alternative materials.

Industry Outlook

Although manufacturing brands and suppliers are interested in increased collaboration, there are divergent views on achieving this goal. Nearly one-quarter of suppliers want to ensure that cost isn’t the only factor in a manufacturing OEM’s decision-making.

Collaboration around sustainability can be an opportunity for manufacturers and their suppliers to collaborate more closely, and focus on value, not just cost. Understandably, some suppliers are hesitant to share their carbon footprint information without clarification regarding opportunities for additional orders. Additionally, some manufacturers are supporting their supplier’s efforts to verify the CO₂e of their suppliers’ suppliers to increase the accuracy of their Scope 3 emissions.

Read “The State of Manufacturing Procurement” from IndustryWeek and aPriori for additional sourcing trends.

Harness Digital Transformation to Spur ESG Progress

Successful manufacturers are incorporating sustainability into their overall business processes using digitalization (digital twins). By centralizing teams, product data, and manufacturing process information via digital twins, manufacturers can quickly gauge a product’s CO₂e impact during early design phases. Importantly, teams can also assess design alternatives in minutes to meet carbon emissions, cost, and performance targets.

Net-zero initiatives are achievable. But this requires a clear vision and collaboration to unite all corporate manufacturing departments and the associated value chain. By using digital twins, manufacturers are well-positioned to unify teams, data, and insights throughout an organization to achieve sustainable manufacturing.