Minimizing Environmental Impacts and Improving the Bottom Line With Sustainable Supply Chains

JOSUE VELAZQUEZ-MARTINEZ: My name is Josue Velazquez-Martinez. I'm a research scientist at the MIT Center for Transportation and Logistics. I have two main roles. I am the executive director of the master's program in supply chain management, and I am the director of the sustainable logistics initiative.

I started working at MIT in 2016, January, so this is going to be five years, I believe, a little bit more than that. And everything started back in 2011. I was coming to MIT as a PhD student, visiting the Center for Transportation and Logistics. At that time, my advisor, Dr. Edgar Blanco, took me in and helped me develop the skills on carbon-efficient supply chains and sustainability.

Later, when he left MIT-- and actually, he's now leading, widely, sustainability at Amazon-- then they brought me in to actually replace him. I started working also with different projects on sustainability, leading the network of the Center for Latin America. And since then, I have been working very happily at MIT.

There are, in general, different dimensions to understanding the importance of sustainability, and how companies, consumers, and different stakeholders are paying more attention to it. The reason is there are different drivers. So from one side, you have those that really believe that we cannot succeed in a world that fails. Those are usually larger companies, CEOs, that are thinking what's going to happen in the next 10, 20 years.

If all this research on climate change, global warming, is actually real, which 96% of the scientific community agrees on this, then therefore it's putting at risk everything that they have built their whole lives. So there are risks on this. Then they also drive pressure to other type of companies. I can give you some examples. For instance, the CEO of L'Oreal has a strong drive for sustainability and ambitious goals for the next years. And because there are plenty of companies that are providers of L'Oreal, they also are sharing the same vision. Otherwise, they cannot serve this company. So this is the first driver.

Other drivers are regulations. So for instance, if you look at what is happening in Europe or for the last years, or in the US in California, the government, the policies are really driving companies to measure the environmental impacts, and also define goals to reduce them. And if you want to operate in those markets, that means you also have commitments to comply in order to really be serving those markets, those consumers.

You also have just the natural vision of focusing on environmental impacts or sustainability in general, because also sustainability is, in a way, reflected because of the energy consumption. So in other words, the more efficient you are to create your value for the customers with less energy, that also brings less environmental impact, or a better effect on the environment. And this also drives companies to focus on this, because this is going to bring also reductions in costs, in a way, or make the company better overall.

The fourth driver or stakeholder in this topic is, of course, the consumers. We have observed in the last years plenty of research discussing the impact that the green generation is going to have in businesses. I'm referring mainly to the millennials. There are a lot of studies, research that argues also that when they are surveyed, many of these consumers claim that they will be willing to actually pay even higher prices for products and services if companies will be willing to provide more environmentally friendly products or services.

Now, there is a lot of discussion on this, because the people claim this is what they say. But at the moment that they go to the moment of purchase, they usually go for the cheapest. The way that I see it, is that the millennial generation is just at this point kicking off really in the market.

Many of them were still starting at that time, and growing their careers. They didn't have really the purchasing power. But now, in the next years, it seems that this generation is going to really drive the economy in the world. And therefore, this may really put at risk companies that are not really paying attention to sustainability. So this is another incentive to do it.

So all this is for, that I explained, actually shifting the market towards more green consumers, green products, green services. There is a lot of room for improvement for companies to really achieve their goals, not just in service and customer market penetration, but at the same time, in the way that they achieve those markets by improving the efficiency of their logistics operations.

Now, again, when we look at the environmental impacts of the world, a lot is explained because of business and logistics operations. So companies that are manufacturing, extracting, transporting, delivering, there are plenty of different roles in the supply chain that actually drive a lot of energy, and therefore a lot of environmental impacts.

Now, if companies can look at these problems from the sustainability perspective by focusing on reducing, for instance, fuel consumption energy consumption, everything related to the generation of that energy associated with their businesses, what we call the corporate footprint, then they actually can achieve plenty of reductions in terms of costs. So some of the projects that we have conducted in the sustainable logistics initiative are actually focusing on that objective. The aim is helping companies improve their logistics operation to make them smarter by focusing on these sustainability criteria.

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JOSUE VELAZQUEZ-MARTINEZ: Absolutely, so one of the biggest challenges that companies are facing in this time is mainly related to the growth of e-commerce. So there are more companies are offering in these platforms. And this was just triggered even more as a consequence of the pandemic, as a consequence of COVID-19. Now delivering online, serving online and delivering to the homes, has a challenge that now a couple of giants have claimed to be able to deliver within one day, you know, sometimes within hours.

That means the fast shipping growth is becoming like the basic of their basket of goods for any company that really wants to offer e-commerce services. Now this brings the challenge, now how do you offer this? What is the new configuration of the supply chain? How you shall manage your inventory? How much you should invest to locate more facilities closer to the consumer, and then it becomes really a huge investment that makes it very hard when you see other companies that are doing it, you know, like Amazon, Walmart, Target, and many others.

So now there is another counterargument into that. The first assumption in this business model is assuming that consumers want everything very fast, which actually seems normal. Everybody wants the products, goods, extremely fast. But what we argue here is that there are ways to actually drive consumers to wait for the deliveries, once you provide, in a transparent fashion, information related to the sustainability impacts.

So what we study is, we launched this project that we call the Green button. And in this project, what we did is, first understand, what are the drivers of consumers, to delay their deliveries, because the concept is as follows. When you have more time to deliver to the consumer as a company, you have a better way to optimize the deliveries. For instance, if I know that I'm going to receive orders the whole week to deliver to a specific neighborhood here in Cambridge, and say here in East Cambridge, I can actually just delay that process and deliver until the final day, when I receive all the packages, so that I can actually go on delivering just one run to multiple people in the same neighborhood.

However, if the deliveries, they need to be done next day, then it's very likely I'm going to be traveling through two or three times in the week, to the same neighborhood, with lower utilization in the trucks, which means an increase, not just in the cost, but also in the combustion of fuel and the CO2 emissions. So now, how do we drive this behavior?

So we went to this project also with the same company, and what we did is we partnered at that time, with Copol and a local University in Mexico. And we went in conducting almost 1,000 surveys during the home delivery operation. Then we would ask incentives. The first one will be, just in general, you'll receive the product now. A question, would you have been willing to wait longer for the product, just to understand what's your incentive.

Well, the vast majority will say no, right? I want it fast. Others will say, yeah, actually it came faster than I expected. Then the next question will be, OK, what if I told you that, for every day that you wait, I'm going to give you $6 of gift card in the company. How many days would you be willing, will you have been willing to wait? And then we got again, 70% actually said, absolutely I would wait.

Well, they say, I will wait, and it depends. Usually depends means, yes, just give me sufficient money. And then the other was, no, I'm not willing to wait. But then the third layer of questions was related to sustainability. And then for the same neighborhood, we came and said, what if I told you that for every day that you wait, I'm actually able to save 35 trees for being destroyed, because of the combustion of fuel.

And this is just an analogy, right? This is the amount of trees that probably you need to offset the emissions that are captured in the atmosphere. So when we portrayed information in terms of trees, or the amount of garbage that I can recycle, or the amount of houses in your neighborhood that I can provide with electricity, that becomes a better way to really translate those abstract numbers of global warming potentials into something that makes sense for the consumer.

So we tested in the same neighborhood different drivers. And we actually observed something extremely insightful. Just in the surveys, 70% of the consumers, exactly the same number that was willing to wait with economic incentives, 70% claim that they were willing to wait with environmental incentives, when we provided information in terms of trees. Now, at that time again, this is what consumer says. But are they going to do it?

So we actually conducted this experiment, in two cities, Monterrey and Mexico City. And in these two cities we actually had the consumer buying something and then we gave the option of the green delivery. So we said, OK, so choose your option. And once they would choose, we will just display the information of the environmental impact.

That choice, that is fast shipping, actually has this environmental impact, in terms of trees. This is equivalent to killing 50 trees. Now, would you be willing to consider more environmentally friendly options? And they say, yes, and then we would show different options. Out of the experiment that we run, we got a striking number of 52% of consumers that actually changed their original decision.

Now the even more interesting part of this is that there are consumers that didn't want to wait, other consumers that even with economic incentive, didn't want to wait, but once you provide an environmental incentive, they wanted to wait. 30% of them that didn't want, not even the economic incentive, 30% were actually sensitive to the environmental incentive. And this is a market that is not captured by anyone, because no Amazon providing also the incentives or other companies are actually torching what really drives a consumer to really wait for the delivery.

Now, this brings other challenges, for first is what the company is going to do with the savings. And the expectation is, OK, so you get savings, now use part of that money to either plant more trees, or offset the environmental impact you're causing. Second, in order to implement this, companies need to be very much aware of what is the environment. What are there environmental impacts.

So the carbon footprinting of the whole operation, understanding how much they can gain by consolidating, informing transparently to the consumers, and then what you're going to do later with the gains.

JOSUE VELAZQUEZ-MARTINEZ: When we observe what drives the economy in the world then, of course, companies explain everything, but we have different sizes of the companies. And as people have noticed, the majority of the companies are always called the SMEs-- small and medium sized enterprises. Now when I say the majority is because they are almost 95%, more than 95% of the companies in the world.

But the interesting part is that out of this segment of companies, micro and small firms, and I am referring companies that have less than 50 and less than 10 employees. These companies actually represent for developing countries, 99% of all the companies. So now why the regions are not growing the same? What actually explains why one economy is doing better than the other? A lot has to do with it.

Now a lot has to do with how micro and small firms are actually managing the economic shocks, the crisis, and in general, just operating in the economy. Now when we look at this more closely, it turns out that there are huge gaps. You observe, for instance, companies and I will say the example of Germany, which is usually benchmark for how they operate micro, and small, and medium sized enterprises. When we take as a baseline the productivity measure as GDP per employee per product, but you can say let's say in this case GDP per employee.

So you take the large enterprises. So this is the 100%. When we observe, what is the productivity of a medium sized enterprise with respect to the large one? So while the largest 100%, then the medium is usually 80%. Now 80% is not bad at all, right? Considering that the large still has better economies of scale. Now you observe the small firms. The small firm is 70%. A company that has less than 50 employees compares with a company that has thousands of employees, 80% the productivity of the large firm.

And then the micro-firm firms, which is less than 10 employees. It turns out that this one has 68%, almost 70. So this is interesting. These are numbers reported by the OECD. Now 60 70% of the micro-firm, when we look at-- let me just take the example of Peru-- Peru in Latin America. In Peru, if you compare the large firm, which is 100%. And then you say what is the medium size? The medium size has approximately 50%. OK. So now there is a huge gap, but you say 50%.

But then you observe what is the small and the micro? It turns out that the micro is not even 10% of the productivity of the large firm. Now if you take 10%, and the smallest 15%, so it turns out that my-- those are 99% of the companies in Peru that drives the economy. So you may have large companies in regions like Latin America, as I'm saying, that actually are doing great. Growing even better than companies in the developing world. That's awesome.

But the other side, the other tale in this novel, it turns out that micro and small firms are the ones that are disappearing. Sometimes one out of four, one out of five disappears per month. Others appear because the barrier of entry is very low, and these changes actually just really creates a mess with all the economy. And of course, with the businesses, because it turns out that we look at the supply chain, the global supply chains, all of them are full of micro and small firms.

So for instance, if I mentioned the example of typical problem in the last mile of larger slippages. If you look at any company, and I'm going to talk about Latin America, but this is also equivalent to regions like India, China, or the other regions. But I will say in Latin America, in companies like Coca-Cola, PepsiCo, Unilever, many CPG companies, they actually deliver their products to something I would call the nano-stores. It's a terminal that they develop also here at City. They like it, but it refers to the mom and pop stores. So very small retailers.

These smaller retailers represent for these businesses depending on the country in Latin America, from 40% to 70% of all the sales. This is huge. They are actually bigger than delivering to Walmart or other large retailers in Latin America. Now when we look at this even closely, it turns out that these micro-firms, these nano-stores, some of them in many regions disappear 10% per month. But there are 11% that appear per month.

So now actually the market is growing, but it's not the same. So every time now imagine that every month you have new companies appearing and those are disappearing. So every month you are actually having a different operation so you need to send someone for from sales trying to look for the new ones, updating this portfolio, and then again, delivering. And every change may cause that you don't know again where to park, you probably need to create a relationship again with the nano-store, you need to deliver and recollect the cash multiple times.

So there are many different challenges that actually affect the large firms logistics operation as well. So in a way, where we are in this study is paying attention to the micro and small firms actually helps not just the economy, not just the micro and small firms, but also larger players that also can gain because of the efficiency or survival of these micro firms. And this is what the genesis project is all about. Helping micro and small firms in developing countries improve productivity and survival rates via focusing on better practices, business practices, and supply chain management practices.

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JOSUE VELAZQUEZ-MARTINEZ: When we study micro and small firms, a clear problem has been identified for years is a lack of cash, the cash availability. When they lose the cash, run out of cash, immediately that means companies go to bankruptcy. And investments in these are always making the difference.

Companies, when they are small, they always wonder, should I invest in an ERP system? Should I invest in hiring another person? Should I focus more on sales? Should I buy another machine? And that decision makes a difference whether they stay or not in the business.

Now, plenty of the recommendations always come in the management of cash, like cost control practices. What are you doing there? Focusing a lot in the practices of growing the customer base. And this is typical. You go because also this comes from the entrepreneurship mindset. When you are building your business model, understanding the consumer, doing market validation, really growing the sales as much as you can makes a difference.

Now, what we have found out is that while this is still very relevant, it still is not at the top of the priority. The priority are two main practices, supply chain practices. One relates to managing quality and the other managing delivery. We call it a fill rate.

So let me explain this a little bit more. So when companies are in this stage, they have survived. They have at least been in the market at least two years and are operating, let's say, three, four years or even longer.

They start struggling. They say, OK, so what do I need to do to survive and keep my business? So first is companies that focus on growth have fives times more chances to survive. So they start growing. They say, OK, I need to grow.

So what are my chances to grow? So for instance, if I have just in Latin America a typical stand of tacos or whatever-- it's just in the street-- and then has people, they say, OK, so now I have collected sufficient money. And I want to buy or rent an establishment, a [? fair ?] establishment where I can actually have more customers and have them seated. So there is an investment in growing the capacity, so you [? see, ?] because that capacity is going to also help me grow my customer base.

So they make an investment. So first risk-- if you don't get the money back soon, you go to bankruptcy. So that risk, the investment, the return investment, and also the time that it takes to get it back. But let's say that you have calculated this. The second is now that you grow, it turns out that the question is how you're going to prepare the tacos. Before, it was only you. But now you need to have three, four cooks that are going to also do the same process and you need to guarantee that the tacos are the same.

And this sounds very silly. But it's actually key. Like, you hire another person. How do you guarantee that the quality is going to be the same? Because if the consumer comes, and tastes, and then says, this is not the one that I'm expecting, that's it.

Now, once you have the tacos and you say, well, I train all of them, and I pay attention to managing the quality of my tacos, now the delivery. Before, you will give it to me immediately. But now what if not? What if you actually take a different process and makes it cold? And then when they come cold, if you are Mexican, you hate the cold tacos.

But it's just to give you an example. This happens almost in any level. I'm talking about restaurants when they grow, but also the mom and pop stores, same thing-- understanding what the consumer wants, what are your consumers, how do you manage the quality, and how do you manage the delivery, the fill rate, of your product.

Once you can control that part, then the next stages are related to paying attention to the cost control and customer base. But these parts have explained plenty. We have studied for the last three years companies that have focused on practices of managing quality, managing fill rate. And it turns out that they have had a steady growth in the last three years.

What companies that neglected this have actually have a decrease in the last three years. So this explains a lot. Like, there are more practices related to keeping records, et cetera. But focusing on those things-- once you understand how to invest in the capacity of the customer base management or the cost control-- can make a difference of a company to really survive or not.

Now, this is just to give you a glimpse. There are plenty of other conditions in this research that are mainly affected by the business sector, in which part of the supply chain are you. Are you the [INAUDIBLE] focusing on services? Or you are in transformation and manufacturing. And you are in extraction. So different models work here. But this is part of the results that we have obtained with the research in the last three years for the Genesis Project.

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JOSUE VELAZQUEZ-MARTINEZ: So we started last year, an extension of the genesis project to focus on the companies that have worked with us in Latin America and opening to new ones. But particularly, those that were or are still struggling with the COVID-19 pandemic. And that's key because, as is known by everyone, this is a segment that has struggled and suffered the most as a consequence of the shutdown and also the contact with people.

Now, what we did-- we outlined a project conveying three different research lines. From one side, focusing on the cash-- as I said earlier, cash is a key component that explains, not just the survival and efficiency of the micro to small firms, but is also the main component when we are in a crisis. So companies look at the cash and they start paying attention when they build their priority plan in any supply chain risk-management strategy.

So now, cash seems to be even more relevant for micro to small firms, so how to improve the cash availability by focusing on supply chain management logistics operations.

The second study had to do with the adoption of technology, specifically that technology and digitalization that helps micro to small firms offer products via different channels, like web pages, things that will allow, also, accessing to different types of customers, but at the same time delivering.

What are the challenges of delivering now via home delivery or using other systems or providers? But now how to reach out to customer becomes a challenge.

And the third one was related to the safety, in terms of the food industry. How you are guaranteeing that your product keeps the standards of safety, given now the conditions of the pandemic, and how you can communicate this to the consumer to get your product there during this time.

So we study all these three dimensions and we outlined a project that had more than 400 companies working with us. And we did everything online. We did a huge support of these universities, there were around 14 universities in six countries in Latin America taking part of this analysis. And the students-- they deserve all the credit of this analysis.

But imagine that at the end, we came up with very interesting insights. So for instance, the management of cash-- when you manage-- when the companies are managing cash, the cash is highly dependent on something that we call the cash conversion cycle, so the average amount of days in which you convert what you keep in inventory into cash. And that is highly dependent on how much you have of inventory.

But much more importantly, depends on what do you sell to the consumer and how fast you can get that cash from the consumer and also, how fast you need to pay to the provider.

So there are three main-- so when the provider-- you want the provider to allow you to pay later. You want the consumer, or the customer, to pay you immediately. And you want to manage your days of inventory very smart so that you keep the minimum and get the fast-- as fast as possible. So now, when we look at this, we came up with very interesting insights. For instance, if we will see how large companies-- large, really, retailers are putting pressure to suppliers.

A typical comment when you serve Walmart, one of the most important customers for almost any CPG, how many days does Walmart have to pay you back, to pay you the money for those deliveries? And usually, this varies but goes for 90, 120, 180 days.

Now, if this company delivers now to a smaller retailer, a microfirm-- so question, how many days do they have to pay you back? And the answer when we checked-- not-- I'm not talking about just the CPGs and the retailers, but we can look at restaurants, any company, particularly those that are in the service-- it turns out that the amount of days that they have to pay is minus five days.

So the majority pay one week in advance, which is striking, right? Because that means they actually funding the larger players. And then it seems counterintuitive. But it seems, yeah, if you want it faster, then the rate changes. Now it seems, just with analysis we observed, there were companies that actually were paying 40 days in advance, 40 days in advance. This is shocking.

Now, if you will just tell them, please, just charge me at the moment of the transaction, keeping the same amount, that already will increase the survival rate of the micro to small firm substantially. And this is part of why we are trying to mention here-- everybody wants these companies to survive because they are also part of the supply chain. You, as a larger player, are as strong as the weakest component of your chain. And this is something that we are trying to really understand.

There are actually models that we are studying at the moment. I am working with a master's student from the current supply chain management program course or class. And the analysis shows that it's possible to, actually, even change and charge at the moment of the transaction, increasing a little bit the rate, which, in turn, increases the shareholder value and it of the supplier, as well as the micro to small firm.

So there are alternatives that can actually improve that. And we are trying to better understand those with real data. So all the data we capture allows us to really understand relationship with SKUs, relationship of the cash conversion cycles, days for each of these SKU suppliers and customers. And then come up with better strategies how to manage relationships and help companies, microfirms, by focusing on these practices, improve their cash availability.

If you want to improve it, it doesn't mean go for it with sales, forget about sales. You want to improve cash, focus on your inventory and improve your relationships with your supplier. And this is part of this analysis, just to show an example of the type of research we are currently doing.