In view of increasing legal requirements, sanction regulations and heightened public interest, companies are strategically strengthening their focus on sustainability. Under the Supply Chain Act or the new EU CSR Directive, it is therefore not just a matter of a company’s direct environmental impact, but also of Scope 3, i.e. the indirect emissions along the supply chain. Hence, if companies seek to achieve a net-zero objective, their efforts to reduce emissions must also focus on Scope 3. We discuss how environmental aspects can be integrated into the SCM strategy in order to advance the decarbonization of the entire value creation process.
Scope emissions – three scopes for the greenhouse gas balance
Generally, scope emissions are divided into three different categories, which should make it easier for companies to identify their environmental impact and develop strategies for improving their carbon footprint in various areas:
- Scope 1 are the greenhouse gases caused directly by a company. Sources of emissions are, for example, company-owned vehicles, operating facilities or warehouses.
- Scope 2 includes indirect emissions caused by the production of externally procured energy. If companies purchase electricity for their offices or warehouses that may have been generated using fossil fuels, these emissions fall under Scope 2.
- Scope 3 includes all emissions from a company’s upstream and downstream supply chain activities. These are not generated by the company itself, but are associated with its business activities. Examples include the transportation of preliminary or end products or the disposal of goods.
A company can only succeed in reducing its ecological footprint if its sustainability efforts include not only its own business area, but also the entire supply chain. When preparing a greenhouse gas balance sheet, the recording of Scope 1 and Scope 2 emissions must be prioritized. However, in view of the requirements of the Corporate Sustainability Reporting Directive (CSRD) and the need to set sound climate targets, Scope 3 accounting has now also become essential.
Integration into SCM – identifying and reducing CO2 emissions
A methodologically sound CO2 tracking is crucial for comprehensive control of Scope 3 emissions along the supply chain. Achieving reliable results requires the greatest possible transparency of all processes and the use of a certified calculation methodology. This is where strategic Supply Chain Management (SCM) comes in: After an in-depth analysis of each individual supply chain section, a suitable catalog of measures can be drawn up to reduce CO2 emissions. With regard to Scope 3, for example, the following areas can be optimized and adapted:
- Supplier assessment, selection and engagement: An important key to improving Scope 3 emissions lies in selecting and working with the right suppliers. Utilizing their SCM, companies can integrate strict environmental criteria into their assessments and motivate suppliers to implement sustainable practices. Selecting and retaining suppliers with low emission profiles and environmentally friendly transportation options can contribute significantly to reducing emissions along the supply chain.
- Logistics optimization: With the help of an SCM platform, the selection of modes of transport and routes can be optimized in a way that they can be managed in accordance with sustainability criteria. This includes the use of environmentally friendly fleets, alternative fuels and the switch to low-emission transportation options. If those responsible have an insight into the carbon footprint of the individual logistics areas, they can exert a targeted influence on where improvements need to be made.
- Circular economy: Sustainable SCM helps to build and operate the infrastructure for a circular economy. This includes procurement and supplier management, the development of new networks, distribution and logistics as well as disposal, recycling, collaboration and transparency. Suppliers, manufacturers, transport and logistics service providers form a kind of ecosystem with various tasks and offers in order to extend the life cycle of a product and consequently save resources, waste and CO2 emissions. SCM creates the necessary platform to harmonize, monitor and optimize joint planning, actions and activities.
- Transparency and traceability: Digital technologies such as blockchain or SCM software help to ensure traceability and visibility. The systems provide a data-driven basis that makes it possible to document the flow of raw materials, materials and products from procurement to delivery. They facilitate the identification of quality issues and environmental impacts along the entire supply chain and provide the necessary information on Scope 3 emissions to take action for greater sustainability. For in-depth supply chain visibility, however, a high level of cooperation must be established between the players in a supply chain – once again demonstrating the importance of strategic supplier development.
- Reduction and compensation of emissions: Companies can anchor emission reduction targets in their SCM strategy that need to be achieved and which are constantly monitored and analyzed using special software. If results deviate significantly from the objectives, those responsible receive warnings via the system, so that they can take countermeasures at an early stage. In addition, they can support programs to offset CO2 emissions in order to achieve a net-zero effect. Further information can be found here: Reducing CO2 emissions – the 3-phase model for more sustainability
Digital twin helps with process optimization
The consistent further development of the digital supply chain with the objective of collaborative emissions tracking is essential for the reduction of Scope 3 emissions. It is helpful to implement a “digital twin” of the physical supply chain, from raw material extraction to disposal. By analyzing end-to-end data, low-energy and low-emission supply models can be calculated and developed that reduce the ecological footprint without having to intervene in ongoing processes on an experimental basis.
But what would this look like in practice? Let’s assume a retail company wants to reduce the environmental impact of its entire supply chain. By creating a digital twin, not only are the internal processes (Scope 1 and Scope 2) mapped, but the external activities (Scope 3) are also taken into account: Conseuently, data from all phases of the supply chain can be recorded and analyzed. This includes the procurement of products from suppliers, transport to distribution centers, warehousing, sales and even the disposal of packaging materials. By precisely monitoring and evaluating all information, inefficient transport routes can be identified, suppliers with lower emission profiles can be given preference and more sustainable packaging solutions can be sought.
Based on the results of the digital twin, it is therefore not only possible to precisely control logistics processes via SCM, but also to optimize production, resource usage and transport along the entire value chain.
However, as the results of the 19th Hermes Barometer show, many companies are still faced with the task of mapping their supply chain processes transparently: Only one in five logistics managers surveyed (20 percent) state that they already have a digital real-time supply chain.
A new approach to supply chains is needed to reduce Scope 3 emissions
The integration of environmental aspects into the SCM strategy requires a long-term commitment and close cooperation: the various players along the supply chain must cooperate in order to reduce Scope 3 emissions. After all, when looking at a company’s sustainability efforts and performance, is not just about the company’s own environmental impact, but also about the upstream and downstream processes along the supply chain. With the help of digital tools, strategic SCM provides the technological basis for monitoring and optimizing the complex task of joint planning and action. Supply chains need to be rethought, yet the effort is certainly worth it. The holistic approach not only reduces the ecological impact, but also improves the corporate image in terms of sustainability and social responsibility – and thus strengthens competitiveness in the long term.