S02E14 - Planet - Ten questions for your suppliers on net zero (original script)

Welcome to The Supply Chain Dialogues, season two, episode 14. I am Daniel Helmig.

In a social science lab experiment a few years ago, participants were asked several questions about their concerns about global warming and climate change. They were asked on different days: On hot days and cold days, then with either the heating or the AC system cranked up.

Guess what: There was a highly statistically relevant result that people are more concerned with climate change when they felt warm. 

When asked later whether they think the temperature impacted their overall concern about climate change, nearly all participants negated any effect when answering the question.

So much for unconscious bias. 

And here I am, doing another podcast on GHG emission net zero in winter, at least in the northern hemisphere.

Australians, New Zealanders, and citizens of Florida, this one is especially for you. And for all the other listeners, just do not listen to your unconscious, right?!

So, here I am again talking, this time in winter, ignoring the science, but still hoping that you will join me when we look at just another angle of how to get to net zero in Scope 3 in the supply chain, called Subcategory 3.1. Whoah, I hear some of you thinking! There are sub-cateories? Yes, there are sub-categories in Scope 3, and let’s just list them quickly for information.

Aimee, my AI-generated co-host voice for the show, will do us the honours:

AIMEE

Daniel mentioned category 3.1, Purchased Goods and Services, which includes raw materials, components, and finished goods.
Category 3.2 is Capital Goods emissions associated with using capital goods, including buildings, infrastructure, and equipment, throughout their lifecycle, including construction, operations, and maintenance.

Fuel and Energy-Related Activities not included in Scope 1 or 2 are in category 3.3. This category includes emissions associated with the extraction, production, and transport of purchased electricity, heat, steam, and cooling, as well as direct emissions from non-energy fuels, such as lubricants and solvents.
Category 3.4 concerns Upstream Transportation and Distribution emissions associated with transporting and distributing raw materials, products, and waste to and from an organisation's facilities, including logistics, packaging, and freight transport. Usually, this is as well under Procurement and should be linked to 3.1
Waste Generated in Operations is 3.5. It includes emissions associated with waste management activities, such as waste treatment, disposal, and transportation to treatment facilities.

Business Travel category 3.6 covers emissions from employee travel for business purposes, including air travel, rail, road, and water transportation.
Many people think that employee commuting is outside of scope 3. This is incorrect since category 3.7 refers to emissions generated by employees' travel to and from their workplace, including commuting by car, public transportation, and other means.

3.8 is about upstream leased assets emissions associated with the extraction, production, and transport of goods and services utilised by an organisation leased or rented from a third party, such as your product warehouses or distributors.

Coming to the last three:

Downstream Transportation and Distribution is category 3.9. This category includes emissions of transporting and distributing products to end-users or consumers.

Category 3.10 covers Sold Products emissions from using products the organisation sells, such as energy consumption during product use or disposal methods.
Last, we have Category 3.1, End-of-Life Treatment of Sold Products. This category covers emissions associated with the end-of-life treatment of products sold by the organisation, including recycling, waste disposal, or other forms of treatment.

So, as often pointed out in this podcast, scope 3 is the elephant of all emissions in most companies. Scope 1 and 2 compare to most companies' sizes of cats and dogs. 

DANIEL

What is always amazing for me is that COP, governments, and many industry associations say: Let’s focus on Scope 1 and 2 because we can control it ourselves, while all the other stuff outside is too difficult.

Looking at the results of the efforts of most companies, I wonder whether this is true: I have always experienced it being much easier to change supplier requirements than get the whole company internally on the same page. I am talking about red tape and prioritisation issues. With the external side, it is much simpler: get to net zero, or I will stop sourcing from you in three to 5 years. That gets everyone's attention in the scope of 3 partner firms.

Many people, believing in the success of scope 1 and 2 focus, will point out: Look, let our external partners do their homework as we do ours, and then, voila, we will get naturally to a net zero in scope 3. 

If you belong to this group and still are interested in having their children live on a planet at least partially resembling the living conditions we have today, plus raising conditions for our fellow brothers and sisters in Asia, India, and Africa (the other 50 plus % of the world population), I put together a few questions you can pose to your large suppliers to get a feel for where they are, and whether you need to get involved with some tough love. Just test-run them with some of your large product suppliers. You will have a rude awakening, I am sure.

AImee will go through the questions, and I will give some subtext of what to look out for in the answers:

AIMEE

Who is leading your company's GHG emission net zero strategy? 

DANIEL

Suppose the CEO does not give the direction, kick behinds, and take names. In that case, it will be tough for that company's people in sales, manufacturing, R&D, and supply chain to put net zero on the agenda besides all their other competing targets.

If the answer is: Our sustainability department, finance, real estate or manufacturing, be advised that they do not have a chance. Their leadership deals with topics like the blind people who stand around an elevator. And yes, this is an elephant-heavy episode, no pun intended. 

Depending on what they touch, they say: it is a tree, a snake, a rope, a spear, a fan, or a wall.  

AIMEE

Do you know your GHG emission levels for Scope 1,2 and 3? If not now, when will you know? What is the plan?

DANIEL

There will be few to no suppliers who will know their total emissions of scopes 1, 2. And Scope 3, no way. If anyone claims differently, get the evidence. Either you have a unicorn supplier (then check as well for rainbows and leprechauns), or a company you should not trust. 

Truthful suppliers will point out that they are not there yet, and then it will be interesting to see whether they have a clear plan to close this gap.  No plan, expect no results in the foreseeable future. And additionally, that is just the start, right? Like with the Anonymous alcoholics, you first need to understand that you have a problem before you can do something about it. So, suppose they only plan to get a good understanding of the emissions by, say, five years. In that case, you need another 5 to 10 years before they will be net zero - assuming this is being prioritised by their CEO…which is highly unlikely if they do not have a plan today.

AIMEE

On what is your reporting methodology based? How many standards do you follow?

DANIEL

Again, you look for an educated answer. Here are some of the indications that they might not have a good handle on this:

too many different standards and not one leading standard. Especially difficult is the fact that they have only a national standard they comply with.

AIMEE

What software do you use to report and track?

DANIEL

Different systems for internal and external measurements and reporting is are warning sign. Also, they need top-notch software to track and change. Here, while I do not get paid by them, I recommend carbmee to look into - in my view one of the best tracking and reporting companies for GHG emissions for scope 3, and as well, scope 1 and 2. 

AIMEE

What are your top three requiring change areas in Scope 3?  What is the reduction potential vs. your overall GHG emission volume? How do you address suppliers producing in a country with mainly fossil fuel electricity and heating processes?

DANIEL

These questions belong together and are building on each other to some extent.

If the business partner can not name the three biggest areas of emissions in Scope 3, and how they relate overall to the total emissions, they are not really engaged in transformative change. Year, they can work on business travel, or EV cars for management, but the real question is: how do you deal with suppliers and transportation with high emission levels? What is your game plan. Whether it is working with the supplier, changing suppliers, changing material design, or moving manufacturing to countries with less fossil fuel heavy electricity creation (like Canada, France, Switzerland, Sweden, etc). What are they doing after breakfast? Or do they just hope for the best?

AIMEE

Is it possible to get to net zero by 2030 or earlier?

DANIEL

This is to some extent a trick question. This podcast is produced in January 2024. So there are still 6 years until the decade is behind us. There is not one sourcing category or transportation process that could not be changed to net zero in the next 6 years, in most fields it takes even less. All it takes is relentless dedication to net zero while adding cost and quality to the change: this equation is solvable for every category. Even those that might take a bit longer like steel or sea transportation, can be offset easily by carbon capture technology (again, my plug for Climeworks, who have a mechanical engineering solution to extract CO2 out of the atmosphere and put it back into the ground, where it mostly originated from in the first place.

So, you are testing their resolve! 

AIMEE

How do you communicate, update, and engage with groups like suppliers, company employees, senior management, and investors? What is the role of research and development, market intelligence, strategy department, sales, finance, and the divisions or individual businesses?

DANIEL

Like customer, quality and cost focus, net zero focus is all encompassing. Every stakeholder should be engaged, or at least be informed. Why is this important? Because it is better to have thousands of people working on a solution, than just a department. And, it keeps each other eyes on the task. 

It is as well, as pointed out before, quite revealing, if the topic of net zero is a corporate, rather than a product and business topic: 

Becoming net zero means in a lot of areas transformative change. Solutions can propel your company to new levels of competitiveness if done holistically. Or they are just seen as additional cost drivers and a nuisance put in place by regulators. Then you will see a small department trying to make a difference, frustrated because the rest of the grown ups are not interested.

AIMEE

These are all the questions we selected.

DANIEL

Thank you AImee. As I said at the beginning, try some or all of the questions out with some of your most important suppliers. 

You can also do a back flip here, and check how your own company is set up here - as well a good indicator to keep us honest.

After doing the rounds with your supplier partners (and 4 to 10 interviews are enough), look at your results.

And then ask yourself: We already have blown past the targets set in the Paris Accord of max 1.5 degrees.. But we can reduce the onslaught of the impact for generations to come by turning back the CO2 emissions with smart technological and supply chain measures. In the end, this whole situation just unfolded in the last thirty years, so who says we can not put the genie back into the bottle? 

But to do this, we need the strongest force of the business universe: competition combined with one of the strongest incentives of humans: greed. Set realistic targets for net zero to your supply base, and open the door to competition. Whoever gets theirs first at a competitive cost will get your orders. And then there you have the greed factor: everyone likes to have more revenue and hates to inform their superiors about another account lost due to indecisiveness with regard to something that is not that difficult to manage cost-wise. 

I’ve done a lot of cost estimating and bill of material analysis with my teams: energy costs are in most products you buy only up to 5% of the overall cost, often more in the 1-2% range. There is no reason why this can not be managed by most companies in a better way. 

Lastly, while I sure, that scope 3 net zero can be reached much before 2050 in the interest of our children and grandchildren, we still have to use change management with our partners to get there. Just setting thresholds is not good enough, you as well have to help some of your suppliers to get started. Educate them, train them, help them, engage with their leadership. To do this, however, it means as well that you need to be trained, educated and have the backing of your leadership.

Become a net zero hero in your company, and for your family, by being a motor for change. If not you, then who?

If you plan to get going, and wonder what to do first, second, etc on this journey, here a quick and dirty plan. If you like more, either listen to some of the other podcasts we have on this topic, or give us a call.

So here is the quick and dirty game plan:

1. setting up a team led by CPO OR COO with full-time project lead and 3-5 full-time employees

2. Doing your homework (with all stakeholders)

3. Educational board/EXB meeting to define the art of the possible

4. Set ambitious targets & communicate them

5. Change rules of the game (Code of conduct, templates, selection criteria, statement of work - all aligned with your set of net zero categorizations like CDP, ISO, etc)

6. Build up a Supplier Net-zero Assistance team or define players who do this (difficult)

7. Change Management Plan

1. by Pareto scope 3 subcategory

2. By sourcing category grouping / by difficulty of change (time) / by  GHG BOM estimating

3. Update job roles & competency definitions

4. Build Digitalization & Automation around the game plan

5. build in emission pricing in all aspects of the company cost structure

8. Report regularly in- and externally

9. Finally: Celebrate being net zero before your competition in this decade

10. Sell the hell out of this accomplishment

It is easy, right? Well not exactly, but it is very much like everything else you do when the need to change arises. 

So, let’s just do it.

Unsung Heroes
We talked about unsung heroes when we did an episode without an interview partner. People that helped me in my career. Each stands for many people who do similar things for all of us on our way through the game we call work. Based on the feedback we received from you, I think that the message we were sending was received. Hence we will not do individuals any longer, besides this one.

This is a thank you to Shankar Vedantam, the author of the book Hidden Brain and the podcast with the same name. He operationalised this concept of unsung heroes in his podcast and made me realise how many people are linked to your success and just to making your life liveable. Shankar, you are a true inspiration for all podcasters, and I can only recommend the podcast “Hidden Brain” to anyone interested in the human condition. Over the 300-plus episodes, I have learned more about social sciences and myself than I ever believed possible. Thank you, Shankar, and all the unsung heroes who helped you do what you did.

I hope you enjoyed this episode of “The Supply Chain Dialogues”. If you did, please subscribe if not already done before. Share it with a colleague, friend, or any decision-makers you know in your company. 

Stay safe, be bold and see you two weeks - and look out for the elephants in the room…

These are “The Supply Chain Dialogues”, produced and copyrighted by helmig advisory AG in 2024.