Canadian Supply Chains and Managing Environmental Risks -- and Opportunities?

1. Canadian Supply Chains and Managing Environmental Risks -- and Opportunities? JLI Conference Calgary June 10, 2008 Glen Hodgson, Senior Vice-President & Chief Economist hodgson@conferenceboard.ca

2. Supply Chains and the Environment www.conferenceboard.ca • Growing awareness among Canadian leaders of : • Supply chains: • Increased dis-aggregation of production outside the firm and across borders • FDI a key driver • Era of “Integrative Trade”

3. Supply Chains and the Environment (cont.) www.conferenceboard.ca • The environment and sustainability • Firms are becoming aware of disruption risk from environmental impacts • Policies in flux: carbon tax, cap and trade and regulation now all part of the CO2 debate • But still early days in putting the two concepts together -- “Sustainable supply / value chains”

4. www.conferenceboard.ca Measuring Canada’s Fit into Global and Regional Supply Chains • Original Conference Board analysis just published • Estimates country supply chains from buyer’s perspective – recuts trade data by entry level, intermediate and final goods • Measures international trade in real terms – price increases eliminated • Top 25 goods exports and imports, by region • Services not included due to data problems

5. What Did We Find? www.conferenceboard.ca • Trade integration took off after FTA, until 2000 • But we are now stuck in neutral • Real trade volumes have declined with the U.S. since 2000 • Share of trade in inputs has not progressed • Some progress still being made with emerging markets • Huge increase in imported parts from Asia

6. Canada’s Exports to the World Top 25 Goods Share (%) Volumes (billions of 2002$) Source: Calculations from Industry Canada Trade Data Online.

7. Canada’s Imports from the World Top 25 Goods Share (%) Volumes (billions of 2002$) Source: Calculations from Industry Canada Trade Data Online.

8. Canada’s Exports to the U.S. Top 25 Goods Volumes (billions of 2002$) Share (%) Source: Calculations from Industry Canada Trade Data Online.

9. Canada’s Imports from the U.S. Top 25 Goods Share (%) Volumes (billions of 2002$) Source: Calculations from Industry Canada Trade Data Online.

10. Canada’s Exports to Europe Top 25 Goods Share (%) Volumes (billions of 2002$) Source: Calculations from Industry Canada Trade Data Online.

11. Canada’s Imports from Europe Top 25 Goods Share (%) Volumes (billions of 2002$) Source: Calculations from Industry Canada Trade Data Online.

12. Canada’s Exports to Asia Top 25 Goods Share (%) Volumes (billions of 2002$) Source: Calculations from Industry Canada Trade Data Online.

13. Canada’s Imports from Asia Top 25 Goods Share (%) Volumes (billions of 2002$) Source: Calculations from Industry Canada Trade Data Online.

14. Integrative Trade Trends: Canadian Exports to Asia ($ CND billions) Source: The Conference Board of Canada, Statistics Canada, UN Comtrade.

15. www.conferenceboard.ca www.conferenceboard.ca From Supply Chains to Value Chains • Business literature is now drawing a sharper difference between “supply” chains and “value” chains • Supply chain: linear process where parts and inputs are formed into a final product brought to market • Value chain: circular process involving the creation, development, production and distribution of a product, creating value at each step -- regular feedback from suppliers and buyers about the value they are deriving

16. www.conferenceboard.ca www.conferenceboard.ca Adding the Environmental Dimension • Environmental effects can subtract from, or add value to, the production process • The environment represents an important sources of disruption and reputation risk; but also opportunities • Environmental disruptions / opportunities can arise from: • within the firm • with its suppliers • the sector or jurisdiction • from an external source

17. What Does Our Supply Chain Research Suggest re: Environmental Impacts? www.conferenceboard.ca • Trade integration in North America is both deep and stalled • Need for clear North American regulatory standards • Huge increase in imported parts from Asia and from other emerging markets • Translates into enhanced disruption risk • Points to need for greater clarity on global environmental standards and impact assessment for these inputs

18. www.conferenceboard.ca www.conferenceboard.ca Specific Environmental Risk Elements • Management failure or compliance failure by suppliers • Ongoing impacts: e.g. CO2 and other airborne emissions, water pollution, soil contamination, etc • A catastrophic environmental event: e.g. chemical spill, flood • Changes to policy: • Externality pricing via green taxes • Green tariffs on imports? • Regulation – approvals, processes, standards • New technologies • Lack of policy coherence across borders

19. www.conferenceboard.ca www.conferenceboard.ca Environmental Opportunities in Supply / Value Chains • Environmental technologies and services • Energy savings, emissions reductions, etc • Alternative service delivery • Use of info technology to deliver more efficiently or even virtually • Green branding and products • e.g. Walmart has created green product mandates, less packaging that may also cut costs

20. www.conferenceboard.ca www.conferenceboard.ca Managing a Sustainable Supply Chain: The Search for Good Practice • Full engagement and transparency of suppliers and buyers • Clarity on standards and expectations across supply chain • Feedback mechanisms and use of certification • Alternatives / competition among suppliers • Crisis management plans

21. www.conferenceboard.ca www.conferenceboard.ca Managing a Sustainable Supply Chain: Recent Business Research • Business is starting to define good practice in sustainable supply chain management • e.g. Global Commerce Initiative (GCI) and Capgemini, website “Future Supply Chain 2016” • e.g. IBM Institute for Business Value, recent work on “mastering carbon management”

22. www.conferenceboard.ca www.conferenceboard.ca Managing a Sustainable Supply Chain: GCI / Capgemini Guidance on Retail • Seven solution areas identified for retail supply chains: • In-store logistics – improvements to display, shelf-ready products • Collaborative physical logistics – design and sharing of physical infrastructure in shipping and warehousing • Reverse logistics – packaging , product recycling, etc • Demand fluctuation management • Identification and labeling – e.g. barcodes use • Efficient assets – modify buildings, equipment • Joint scorecard and business plan

23. www.conferenceboard.ca www.conferenceboard.ca Managing a Sustainable Supply Chain: IBM Model for CO2 • IBM proposes a trade-off model where businesses must balance transportation, process and inventory policies to minimize total CO2 emissions • IBM suggests a five step approach to manage CO2 across a supply chain: • Diagnose and assess • Implement asset management and realize point solutions • Address emissions in supply chain functions • Find the optimal solution for integrating across functions • Collaborate with supply chain partners to realize overall potential

24. www.conferenceboard.ca www.conferenceboard.ca Managing CO2: Big Policy Options • Carbon tax on producers / consumers • Regulatory limits – major emitters, vehicles • Cap and trade – sets regulatory limit on CO2 produced, and uses prices to reallocate the limits • Investment incentives – green bonds, enviro tax credits

25. www.conferenceboard.ca www.conferenceboard.ca Making It Real: Some Examples • Cattle: Due to BSE, producers now track an animal through its life to monitor contamination risk • Retail: • Rona and Home Depot have introduced “sustainable wood sourcing” (must be CSA approved) • Tesco (U.K.) has introduced carbon labeling for its products-- domestic only so far, since the supplier needs to be able to track CO2 across the entire supply chain

26. www.conferenceboard.ca www.conferenceboard.ca Making It Real: Energy Examples • Energy: California and U.S. Feds / DoD have introduced a “low carbon fuel standard” -- requires refiners to meet a given carbon emission standard (that heavy oil feedstocks can’t currently meet) • Energy industry examining carbon capture and storage (CCS) and its economic viability • Pricing carbon will change the incentives and create new business opportunities in the value chain

27. www.conferenceboard.ca www.conferenceboard.ca Conclusion • Still early days for the concept of “sustainable supply / value chains” • But the idea is catching on with retailers, producers and service-providers • A risk management / new opportunity approach should capture the interest of business and policy leaders alike • And “sustainable value chain” management will create opportunities for stronger brands and new lines of business

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