Philip Ashton is the CEO and co-founder of 7bridges, an AI-powered logistics platform that helps businesses be more sustainable. Here he explains how companies can balance sustainability and commercial objectives using the ‘Green Ratio’, and how the supply chain is one of the biggest contributors to our carbon footprint.
Pressure from climate-conscious consumers and net-zero deadlines set by regulators has created an urgent need to make supply chains much more sustainable. But most companies still have a long way to go when it comes to reducing CO2 emissions and achieving their green goals.
Efforts are often hampered by the need to meet commercial targets and the uncertainty about exactly what ‘going green’ will cost. Without being able to strike a precise balance between these seemingly competing priorities, companies understandably feel limited to adoption passive policies such as carbon offsetting schemes (the impact of which is highly controversial) as a short-term solution, rather than tackling the problem at the source.
But the stakes are high: With more than 80 percent of a company’s greenhouse gas emissions coming from its supply chain, business leaders and supply chain managers have a real opportunity to drive change.
The ‘Green Ratio’ – optimizing for costs and sustainability
The ‘Green Ratio’ is a term that describes the ideal balance between satisfied shareholders – cost optimization – satisfied customers and satisfied regulators – and optimization for sustainability.
At 7bridges, companies use the AI intelligence platform to focus on optimizing costs, operational efficiency and risk reduction; leveraging data to fine-tune the decision-making process and create a resilient supply chain that enables a business to forecast demand, implement dynamic carrier switching, and intelligent shipping and routing.
This means the company can quickly adapt to unplanned disruptions and seasonal changes in supply and demand.
To calculate the ‘Green Ratio’, we created a fictitious company.
We used our AI to run two simulated supply chain models using anonymized data from our customers in the pharmaceutical space. The first simulation was to determine the effects of optimization on cost, and the second was optimized for sustainability. We then ran a third simulation to discover the point where commercial and environmental targets can be equally optimized for both.
When setting up the supply chain to operate at the lowest cost, we were able to see a 23 percent savings on the base price, with no impact on CO2 emissions. When optimized purely for sustainability, it was possible to immediately reduce CO2 emissions by 23 percent in the simulated supply chain, albeit with a 4 percent increase in base costs.
So you may have to pay a little more, but it’s worth it for the CO2 savings.
If the company were to partner with providers that deploy a ‘green’ fleet of electric vehicles (which would take more time), it would reduce CO2 emissions by a total of 51 percent.
The third simulation showed that it is possible to optimize for both factors. Our simulation showed that the company can reduce costs by 19 percent and CO2 emissions by 19 percent. During this third simulation, we also determined that the ‘Green Ratio’ for the fictitious pharma business was 129 kg CO2e: £1000 (€1,178).
That means that for every thousand pounds the company spends, CO2 emissions must be limited to 129 kilograms of carbon dioxide equivalents. This issue is a perfect starting point for any business looking to strike an equal balance between sustainability and profitability.
While running the simulations, 7bridges AI took into account data and the influence of multiple factors that could affect the overall carbon footprint in a supply chain. It identified the fulfillment site — which houses the inventory — as the most powerful lever to reduce carbon emissions.
Choosing the right fulfillment location has the potential to reduce a company’s carbon footprint by nearly 30 percent, and it also has a huge impact on other factors, the most obvious of which is stocking the right products or services. services closer to the end user means less distance traveled for vans.
This is significantly more important than more obvious ‘solutions’, such as simply choosing a carrier with the greenest fleet, which has a mere 7 percent impact on total emissions.
What can companies do now?
AI technology plays a vital role in helping supply chain managers tackle the complexity of supply chains. It provides granularity that helps companies identify the most powerful levers when it comes to reducing their carbon footprint.
Typically, business leaders are forced to choose between short-term changes that have less impact (e.g. carbon offsets), or longer-term changes (such as investing in greener transportation) that are more effective but not immediately rewarding. But there is now a third technology-based option to tackle the problem immediately and still get long-term results.
AI can help organizations harness the power of both historical and real-time data to make optimal decisions throughout their operations.
The Rising Cost of Carbon and Why We Need to Act Now
As emissions monitoring technology improves and climate regulations become stricter, it is likely that the cost of carbon emissions will continue to rise, becoming a major problem for companies and individuals heavily dependent on fossil fuels.
Since 2018, the cost of carbon emissions has nearly quadrupled, reaching a record high of almost £84 (€98) per tonne of CO2e in 2022.
If business leaders continue to adopt a passive stance when it comes to sustainability in their supply chains, it’s not just their eco credentials that will take a hit, but their profits as well. Now is the time to act.