Sunday, March 28, 2010

Carbon Footprint: A Cost Management Driver and Product Differentiator - Twin benefits

In my recent studies on Carbon Footprinting of Supply Chain, it was interesting to note that the efforts towards reducing carbon footprint also resulted in cost savings. This is contrary to the popular notion that becoming Green comes at a cost. One might be tempted to believe that it is just a co-incidence, but is not so if one analyses in depth.

Once carbon footprint of whole supply chain is measured, its clearly visible that which areas are contributing more carbon emissions. Attacking these areas result in steps which also lower associated costs:
- lower fuel costs by switching to better fuel efficient transportation
- reduced electricity costs by using more energy efficient design
- decreased transportation costs by rationalisation of logistics routes
- reduced raw material costs by use of recycled material
- saving on packaging costs by reducing packaging material
There are many more with real life cases for each.

With so much evidence around, I am tempted to consider carbon footprint as a cost management parameter. Organisations are under continuous pressure to reduce costs and delegate this responsibility to functional heads. This approach does not take systemic view, department inter-relations and is unable to locate the high cost centres which should be prioritised first. ABC (Activity Based Costing) is a systemic approach but is costly and difficult to implement. Carbon footprint can be an alternate approach. Any area with high relative carbon footprint is indicative of high energy consumption, high wastage in that area. Once zeroed on priority area, one can then use various measures, implement 'Lean' (Refer my blog post 'Lean Is Green') etc.

However, during my recent conversation with an expert in the field of Carbon Footprint consulting, I was told that cost savings go hand in hand with reduction on carbon footprint only up to a point. After a certain stage, any further reduction in carbon footprint involves major overhaul in operations and product which results in increased costs. Now we come to the second use of Carbon Footprint as the product differentiator in marketing.

As awareness of climate change grows, consumers would prefer environment friendly products and will be ready to pay a premium for it. Companies can get return on their investments by marketing their products as 'Green'. That day is not far off when a count of Carbon Footprint will be printed on a product similar to the Price or Calorie count. And consumers along-with looking at price, will also look at carbon footprint count before deciding to buy a product. Promoting consumer awareness and Green differentiation can incentivise companies to go that extra mile beyond cost savings.

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