Sustainable Sourcing Examples

Ryan Flavelle: Hello, everyone, and welcome to our session, Sustainable Sourcing, a Path to Profitability and Purpose. My name is Ryan Flavelle, and I’m an Associate Product Manager at aPriori and the Product Manager of the Sustainability Team. Today, I’ll be giving you an overview of some of the challenges we are seeing with Sustainable Sourcing and a synopsis of some of the Sustainability Reporting Regulations that are in place or proposed. I’m joined by my colleague, Rodney Burns. He’s a Senior Solutions Engineer at aPriori. He’ll be taking you through a real sourcing example, and showing how aPriori can help you overcome Sustainable Sourcing challenges.

Social Responsibility and Sustainability Goals

We’re faced with a global problem. The race is on for the limit of global warming to prevent the worst effects of climate change. The Paris Agreement had world governments committed to limit global temperature rise to 1.5 degrees Celsius. However, in a recent release, the Intergovernmental Panel on Climate Change, or the IPCC, sees that the world is already 1.1 degrees above pre-industrial levels because of more than the century of burning fossil fuels, resulting in more frequent and more intense extreme weather events. To avoid the most catastrophic impacts of climate change, greenhouse gas emissions must drop to net zero by 2050. Manufacturing plays a significant role in reducing these emissions, with the World Economic Forum estimating that 20% of the world’s carbon emissions come from the manufacturing production sectors, which represents 54% of the world’s energy consumption. It’s a race against time, and actions taken in the next decade will be all important to the future of our planet.

Supply Chain Management and Sustainable Practices

I’ve just outlined the global problem facing the planet and the role that manufacturing plays. To tackle these issues, we are seeing more and more focus placed on the supply chain. But why should you focus on your supply chain? Well, according to the US Environmental Protection Agency, 92% of total emissions can be attributed to the supply chain. CDP, or the Carbon Disclosure Project, estimates that supply chain emissions are on average 11.4 times larger than operating emissions.

These statistics will obviously vary from business to business, but I think it’s safe to say that supply chain emissions will make up the majority of emissions in most manufacturing businesses. In a recent survey of OEMs and suppliers conducted by aPriori, 80% of respondents cited that sustainable sourcing and sustainable procurement is extremely or very important to their business. This is only expected to increase in pressures from regulations and pressures from consumers. And we are seeing a change in end consumer habits, with a report from The Economist detailed that 85% of consumers will buy from a company with a reputation if prices were equal, and change in consumer habits that is only expected to increase.

Sustainable Supply Chain Challenges

So what are some of the key sustainable sourcing challenges? These are some of the biggest pain points we’re hearing from customers, prospects and some general industry trends. One of the biggest challenges when trying to sustainably source is a lack of knowledge and understanding of sustainability within the procurement process. We’re regularly hearing from our customers stating that the procurement team that understand the dollar impact in sourcing decisions, but have much more trouble understanding the impact or risk of carbon exposure on their business and supply decisions, making the selection of suppliers much more uncertain. Another common challenge we’re hearing is increased costs. Sustainable sourcing often requires significant investments in technology, processes and training and these costs can be difficult to justify in the short term. However, while sustainable sourcing may be more expensive initially, it can absolutely lead to long term cost savings through reduced waste, increased efficiency and cost avoidance by avoiding the cost and negative impacts of non-compliance.

Most believe that any gap in low cost procurement and sustainability is closing, and most if not all upfront investments can be recovered in the longer term. One of the biggest challenges when looking to improve sustainability initiatives and source more sustainably can be the lack of transparency or engagement within your supply chains. This can arise due to a product having multiple different suppliers for materials or specific parts within the product, meaning that you can end up dealing with hundreds or even thousands of suppliers that you require large amounts of data from. A difficulty can also arise from a lack of alignment and responsibility across the supply chain, particularly in parts of the world that do not have strict carbon targets and goals, making transparency and ensuring those suppliers have proven and documented environmental data difficult. Some suppliers are slow to understand the importance of sustainability, and the final challenge regulatory and reporting pressure may be the drive that stakeholders need.

Corporate Social Responsibility and Regulation Frameworks

For a company to reach carbon neutrality, indirect emissions must be considered. It’s not enough just to consider the direct emissions from your energy consumption. As a result, regulations and reporting frameworks are starting to ask companies to report on these indirect emissions. The importance of compliance on these reporting requirements and heading indirect emissions targets is only set to increase. We’re going to cover some of these regulations and reporting frameworks that are either active or coming very soon.

Scoped Emissions and How They Affect the Sourcing Process

However, before we do this, we’ll need to briefly talk on carbon accounting. Carbon emissions have been organized into three scopes by the greenhouse gas protocol and this has been widely accepted as the standard for carbon accountancy. As a result, scoped emissions are referenced throughout most of the standards as a global method to allocate these carbon emissions. So what are these scopes?

Scope One: These are direct greenhouse gas emissions from sources that are owned or controlled by your company. A good example of this are emissions from combustion and owned and controlled boilers and furnaces. Scope Two: these are indirect greenhouse gas emissions from purchased energy such as purchased electricity, heat or steam. Energy that is used by you but you’re not responsible for the combustion of the fuel to make the energy. Scope Three: In a sense scope three is everything else. It is all indirect downstream and upstream activities of your organization. When focusing on the supply chain, a good example of this is purchased goods and services. The first two scopes are relatively easy for an organization to understand and monitor. The issue is scope three, with the onus being on your supply chain to provide significant amount of data for bottom line decision making. And as discussed earlier, this is easier said than done.

Responsible Sourcing and Reporting

Given these definitions, when we are focusing on sourcing, we are concerned about scope three emissions and any regulations that have scope three reporting requirements. We mentioned regulatory and reporting pressures were the key challenges and discussed the principles of carbon accountancy. So we’re now ready to cover some examples of regulations and reporting standards that are either in place or coming very soon. This reporting landscape is rapidly changing, but the key takeaway should be that reporting on sustainability is coming and it’s coming very soon and you need to be ready.

EU Sustainability Reporting Regulations

We will start by focusing on the EU as it has the most mature set of regulations. Given our focus on the supply chain all the regulations covered will be focusing on scope three emissions reporting. The first regulation I want to cover is the corporate sustainability reporting directive. This is the standard by which nearly 50,000 EU companies will report climate and environmental impacts beginning in 2024. The regulation will also apply to non-EU companies if they have substantial activity in the EU. This does not need to include a physical presence.

The CSRD requires double materiality, which means that a business will not only have to disclose the risks that they face from a changing climate, but also the impacts that they may have on that climate. A very closely linked regulation is the sustainable finance disclosure regulation. This is focused on creating financial sector transparency for sustainable investments. It also helps prevent greenwashing and to increase transparency around sustainability claims made by financial sector participants. The CSRD and the SFDR are complementary regulations focused on enhancing transparency and accountability and they sit under the EU taxonomy framework. The final example I’d like to cover when focusing on the EU is the carbon border adjustment mechanism or CBAM. This is a landmark tool to put a fair price on carbon emitted during production of carbon-intensive goods that are entering the EU and to encourage cleaner industrial production in non-EU countries. This means that you will not only report, but for the first time, companies will be charged a carbon price on their scope-free emissions. This is going to be ruled out to limited commodities to begin with, but is set to expand as CBAM enters full force. This would mean goods imported into the EU from the US would be subject to CBAM.

Environmental Sustainability Reporting in the US

Winding the lens outside of the EU, here are some examples that apply in the US at a global level that all require scope three emissions reporting. The proposed SEC climate-related disclosure rule would be the first mandatory federal reporting requirement of its kind in the US. It would require companies to report on how climate change could impact their financial performance as well as how their own emissions contribute to global warming. This is currently undergoing review and a decision is set to be made in the near future. As part of this, there is a requirement to disclose greenhouse gas emissions from upstream and downstream activities in its value chain, if it’s the material energy sources, natural resources, or if the residence has set up for a greenhouse gas emissions target. The International Sustainability Standards Board, or ISSB, is developing a set of global standards that provide a baseline of sustainability disclosures. Two standards have been released so far, including IFRS 2, which requires companies to disclose gross greenhouse gas emissions measured in accordance with the greenhouse gas protocol. Unlike some of the other standards, the ISSB does not impose obligations on companies unless governments or specific regulators have adopted these standards and we’re seeing more and more countries start to adopt these standards going forwards.

The Cost of Carbon

And the final set of standards I’d like to discuss is science-based targets. Science-based targets are a voluntary organization that provides companies with a clearly defined path to reduce emissions in line with the Paris Agreement. More than 4,000 businesses around the world are already working with a science-based targets initiative, and scope-free targets are a requirement under the science-based targets net zero standard. The cost of carbon. One of the key considerations when understanding challenges and opportunities is trying to quantify the cost of carbon. What does a kilogram or a ton of CO2e actually mean for my business?

One option is to assign an internal carbon price. This is typically a cost per ton of CO2e that allows you to directly quantify what emissions mean to your business. A CDP report detailed that nearly half of the top 500 companies by market share reach in the concept of internal carbon price in their business today. But what are some of the benefits of using an internal carbon price? Well, you can directly link emissions to financial decisions. You don’t need to compare two metrics against each other to make cost versus carbon decisions. This can be done in one metric. You can make long-term sourcing decisions, including a carbon cost exposure risk, reducing the overall risk on your business, and making sure that you’re sustainably sourcing. And finally, it is a great way to incentivize low-carbon sourcing. It’s a great internal tool to make sure that your procurement team and sourcing engineers understand what carbon means to your business.

There’s many different ways to set an internal carbon price. You can link it to externally published sources, or you can even link it to the social cost of carbon. In reality what we’re seeing is many businesses are taking multiple impacts into determining their internal carbon price, and it will be specific to their business. This finishes my overview of sustainable sourcing regulations and some of the challenges that we are seeing. I’m now going to hand you over to Rodney, who’s going to take you through a real example of how you can use aPriori to overcome some of the sustainable sourcing challenges. Thanks very much. Over to you, Rodney.

Business Practice: Sustainability Maturity

Rodney: Thank you very much, Ryan. So first of all, to put this in context, we want to understand the stages of sustainability maturity. So there’s different stages throughout a company’s understanding of CO2. And the first stage is creating a baseline. And for scope three it’s very difficult to do. Traditional methods use a very holistic top-down approach but we read the geometry and CAD and take a bottom-up approach. We can then move into sustainable sourcing for the reasons that Ryan has mentioned. It has a significant impact. This is the next logical step as we need to engage with our suppliers and understand the cradle-to-grave approach of sustainability. The next stage then is we haven’t changed any designs, but we can move into sustainable cost engineering. So this would be typical VAVE type engineering. We would look at different materials, et cetera, and small changes to the process to try and make the process more energy efficient with the ideal goal to move to sustainable design.

Sustainable Sourcing Practices: aPriori Demo

So looking at sustainability and carbon footprint from the outset of new product introduction. But the area we’re going to focus on today is creating that baseline and sustainable sourcing. So how can we have that impact and understanding the variables that we need to look at to have that impact? So the baseline itself, I’m going to take this steel bracket, for example a typical sort of component we would have to source, and I’m going to use my existing region here, which is South Mexico. My material is a cold steel 1020, my annual volume, and it’s going to be in production for 85 years. I need to baseline this process because my end goal is a sustainable product. So with aPriori, I want to understand that. And it’s quite simple and quick to get to this. So I’m going to open this part in my CAD and input these first variables required. So we need to understand the primary process. In this case, it’s a sheet metal. I’m going to then input the region of manufacture. This takes into account the sustainability variables for that region. So the electricity mix and the material carbon for material sourced from that region. You can see in here, it’s got all the variables and the different names as they vary from region to region and the terminology used for the various materials.

But I’ll find the material that’s relevant here, and this holds the carbon data for that material as well. So this takes into account those economic variables. So now I simply put in my production volumes and years of manufacture, and this will allow me to run a base simulation. But if there’s secondary processes which are often overlooked. I can start to add these into my equation as well. So in this case, it’s a simple wet coat paint surface. So now I can run my simulation to understand where my baselines are. I’m going to cover a few different variables here as part of this simulation. So you can see we’re running the optimized routing for the manufacturing process here. And we’ll default to that as a standard, but we can look at other variables. We get to see the process overview in detail. So this is selected the surface treatment and progressive dye stamping for manufacture. So we understand the manufacturing process required.

All the information I’m going to cover now is done with the same simulation. So we get to see the material utilization, the nestability of the part. And this is all important when we look here for example, that material is one of the biggest contributors to the process here and utilization is only 52%. So the more manufacturable a part is, no surprise the more cost effective it is. But generally, that goes hand in hand with sustainability. So you can see here from a design guidance perspective, we’re looking at issues that could cause errors in the part or scrappings in the part as well. So all these things impact sustainability. But again, all of this comes through from the one simulation. So in procurement we want to see our cost and we see it broken down into the capital investment potentially required. But we also get to see, for example, the piece part cost and the variable cost. But also, we get to look and see the sustainability. So we can see the big three here, the material logistics and the process as well.

So different people have different methods of logistics. But one of the things we also take into account is the scrap and the material, the actual data surrounding the material itself. So it’s not just the process it’s the raw material form. And we can start to look at other more effective materials. But fundamentally, we get to see where our baseline is. And you can see at the summary at the bottom, we can look to see where our carbon and electricity usage is, but also our consumables or our secondary materials, such as, for example, wet coat paint. But fundamentally we get our baseline there with our carbon. So now we can see we have our baseline summary. So we have our cost, we have our rough mass and our finish mass. This is something that’s very important when it comes to taxation or carbon charges associated because we need to look at not the finish mass but the rough mass that’s used throughout that process. So it’s not just the finishing material but also the starting material.

And we get to see our part carbon and our annual carbon. This allows us to make strategic decisions when we come to source our parts and our sustainable sourcing strategy. But how do we then look at sourcing carbon with a potential supplier using aPriori? So as I said, we want to look at those different energy and factory mixes and material mixes of different regions to sort of look at sourcing potential and options. So these are some of our standard regions that we want to investigate here for supply chain sustainability. And you’ll see, for example, there’s Eastern Europe and Western Europe. So we may want to look at a larger region and get some initial feedback before we then focus efforts more in specific regions because it can vary greatly from region to region. So we’re going to run an analysis here just to see how that looks.

So here’s my sheet metal part that I have now baselined. And I can utilize a tool with an aPriori called Matrix Costing. What Matrix Costing allows me to do very effectively and efficiently is to select all the regions and run multiple pieces of analysis simultaneously without myself or whoever the user is having to do each of the inputs individually. So Think almost like an auto-fill feature that you would have in say Excel, for example. So This is going to create that matrix for the assessment that I want to do. So I’ve now selected my regions that I want to select and my annual volumes. And you’ll see that this will create a little matrix grid on the right-hand side and I can now run that. And what this does is it creates that bulk form of inputs to run those multiple pieces of analysis for me. And you can see this information is displayed in our bulk analysis tool. So we can see the date and timestamp of the matrix cost and we can also see here the digital factories or the regions of the world that we want to look at from a sourcing perspective.

And then we simply click the simulation button. We run the costing. And this allows us to run those simulations in the background and let us get on with our other day-to-day work. So you don’t have to manually set and process these things. It’s all about speed to value and speed to information. So when the process is run you get a feedback that the analysis is complete. And what we can now do is we can start to create roll-ups. If you want to do this with a singular part or multiple parts, this can be done. But in this case, I’m going to run this roll-up with a singular part. I just want to review this singular bracket. So you can see here, I’m going to select this and it’s easy to find the information. I can select all the simulations that I have just run and I’ve now got an easy referenceable table with the information I need. And I can now use that in multiple ways. So you can see here, I can see the information from my regions and I can see my fully burdened cost and capital investments.

But as I mentioned, there’s two ways I can use that. I can use this and export it into standardized reporting if I want to look at the analysis at a higher level overview. This exports it into Excel, which is easy for a lot of people to understand. But now I can quickly start to look at my regions of supply against my costs and also my carbon. So I can start to look at all those aspects together in a singular table form and make decisions. If I want to make life easier for myself I can actually export this particular tool into our reporting tool. And this is a customized chart I created here. And I want to review this bracket across the different regions around the world. So I’ve expanded this to a larger subset of regions. And We can tailor these to include things such as if you want to apply an ICP, for example this is just looking at the carbon for an entity cost of the part at this point in time. But it’s a visual representation to help me understand those trade-offs that we want to look at.

So based on that, we can start to now look at the part we’ve just baselined. I’m going to start to look at make strategic decisions there. So we can see here in this chart we’re looking at our cost and our carbon together and we’re looking for optimal trade-off points. It’s visually digestible and we can start to look at plots and trends. So Let’s add a bit more layer to that. So this was that sourcing assessment. So before engaging with a supplier in a specific region we can expand our global and look at all the parts of the regions of the world if we want to. But what does that mean? Here is our current supplier, but I can see my cost and my carbon mixed together. But if I’m looking for potential, I can now see that I have potentially new suppliers in this region in Hungary or Slovakia that has a better carbon versus cost mix. Okay. But what if, so the question is, we know the carbon is going to effectively be a currency so whether taxation, taxonomy, whatever it is, a lot of companies have set that internal carbon price for carbon tax.

So If we apply that, what happens to the dynamic of that chart? So now we add that to the actual cost of the component based on the region sensitivity and we can now look at our mix of our current location. So we can see there’s a better carbon cost but there’s a lot of taxonomy against that carbon ICP. But now if we will look at a new region we see a new region here for the Czech Republic, for example. It’s changed the dynamic of where we want to potentially source from by applying that almost as a currency. It’s a live currency now to be utilized and understood. So deeper use cases. So How could this be used strategically in procurement and how can this support auditing and reporting? So we have a high degree of detail from the bottom-up costing. So we can review how we got to those calculations in a very detailed manner with reporting, et cetera. But we want to apply that to real terms. So a common topic that we look at for sourcing would be economic batch sizing. So we want to source at the right quantities to optimize our costs for logistics but also storage, for example.

And this is the case of that looking at different batch sizes. And this is simply a plot that tells me where my optimal point is when I look at my logistics costs in combination with the piece-part costs as we’re buying at volumes. But what complexity happens if we start to apply carbon cost into the equation? So we have to look at the lighting and the heating for the storage, et cetera at our facilities and not just the cost. So We apply that to the matrix. But now we find if we apply that to the red line here we looked at where our original batch size was. We now find that it changes the dynamic of where we need to revise or optimize batch because we’re now applying a cost to our energy usage in relation to carbon. I’ll hand back to Ryan now for a summary of what we just covered there as part of the sustainable sourcing challenges.

Thanks very much, Rodney. As you can see with that demonstration, you’re able to rapidly do some sustainable sourcing investigations and help to overcome the challenges. These are the challenges that we outlined earlier in the presentation. And as you can see, we’re able to overcome them all. So first of all, lack of knowledge, we have insights into the carbon drivers of a product at the click of a button. And we can do that on a wide range of different locations throughout the world. Increased costs, we’re able to automate and massively reduce the speed of assessment to reduce the demand on your resources. Supply chain engagement, you have reduced lead times for information through transparent engagement and dialogue and high fidelity secondary information built into the aPriori software. And you’re able to overcome regulatory and reporting challenges. As you have clear and reportable calculation view on your carbon assessments. Thanks very much for listening to our session. If you have any further questions, please feel free to reach out.