For companies moving goods around the world, rethinking inventory strategy is one of the keys to unlocking significant progress towards Scope 3 targets.

Why do we hold inventory, and how much should we hold? Its a question that companies have battled with forever. For brick-and-mortar stores, inventory is critical because consumers expect to leave the store with their purchase. However, for online purchases, does the consumer really care about where the stock is coming from? Probably not. They are more interested in the cost, including delivery, and how long it will take to arrive.

Inventory is a drain on the company’s balance sheet. It’s a working capital item that is hard to finance and carries an array of risks, from shrinkage and damage to loss of value.

While inventory cannot be avoided, how and where it is stored is an area worth exploring by a team made up of sales, procurement, supply chain managers, logistics, and finance.

To bring this to life, below is a real case study of how a company procures and fulfils an order.

The company is a challenger apparel brand based in the US, started in 2018, and hit US$100m of revenue after a couple of years. It started selling domestically and then went global. It is expanding its product range quickly. It’s a positive story of a successful startup.

The order

An order was placed online for tee shirts for delivery in Hong Kong. The waybill details showed the product taking the following route:

The goods originated in Erlanger (Kentucky, US), from a location very close to the DHL facility at Cincinnati Airport. This airport has direct routes to Hong Kong International. This is quite a rare situation where the point of origination is close to the international departure hub. In many cases, the package makes several short hops before it gets to the right place.

The total transportation carbon produced by this journey was 8.5kg. The package weighed 1.23kg.

Supplier Involvement

The product label showed it was manufactured in Vietnam. Given we already know the fulfilment originated in the US, there is a transportation leg that needs to be considered between the supplier in Vietnam and the fulfilment warehouse in Erlanger.

We don’t have the exact details on where the supplier is or how the goods are sent to the US, but we can make some educated assumptions. Much of the recent movement of Chinese output into Vietnam has been in Hanoi, which has an airport with comprehensive routes. On that basis, we will assume the factory is in Hanoi and the goods are transported to Erlanger via airfreight.

Below is the route that many logistic providers are recommending:

This route produces 17.4kg of carbon for the 1.23kg package. This means that the package produced a total of 25.9kg of transportation carbon to get from supplier to customer. This doesn’t consider any of the raw material inputs as we have no data to suggest where these items come from. Nor does it include any power emissions from equipment used using the value add process. This analysis could be expanded later on if this data was made available.

An obvious question that comes up at this point is how is the supplier to buyer segment 17.4kg but the buyer to customer segment is only 8.5kg?

The answer lies in the routing. The buyer fulfilment involves a direct flight between Cincinnati and Hong Kong where as the the supplier route involves one long haul flight, one short haul flight and one ultra short haul. Each flight type has a different carbon calculation as a large proportion of the carbon is in the take off and landing so the shorter the flight, the higher the carbon per kilometer metric becomes.

It highlights the importance of understanding the routing and not just the distance when using air freight. It should also help to inform supplier selection decisions in the future, favouring those that are local to airports with direct connections to the destination you require. This is something that is rarely, if ever, considered as part of todays supplier selection criteria but must be considered in a Net Zero world.

The question also comes up as to why the supplier route is very different to the buyer route. Vietnam is close to Hong Kong, so why do the goods not take one short haul hop to Hong Kong then a long haul hop to Cincinnati? It would remove one flight and cut the total flight distance by nearly 1,500 km. It doesn’t appear that one logitics provider operates on this route, so the goods would need an off take agent in Hong Kong to manage the transfer onward to Cincinnati. This is a common problem and one that the logistsics companies will need to think about in the future as companies look to obtain the most effective carbon route available. Again, this is something that is not generally considered by companies today but must be in the future.

So, what have we discovered so far?

The company appears to operate a centralized distribution centre in the US. All the supplier output gets sent there, where orders are fulfilled and sent out. This model may work well if the sales are domestic, but the company operates a global footprint.

What would be the impact if the supplier sent the goods directly to the Hong Kong customer? While the supplier may not agree to take on the fulfilment role, it’s useful to understand what the impact would be.

The route would be:

The carbon impact of this route drops significantly from 25.9kg to 1.4kg.

Implementing an Asia Distribution Centre

A smarter distribution strategy in Asia would reduce carbon significantly. The major hubs in Asia are Singapore and Hong Kong, but we shouldn’t discount Hanoi as a location. The airport has extensive direct links and is very close to the supplier.

If the same package (1.23kg) is delivered to the following cities:

• Hong Kong
• Beijing
• Taipei
• Delhi
• Jakarta
• Bangkok
• Sydney
• Tokyo
• London
• Madrid
• Paris
• Frankfurt
• Turkiye
• Cairo
• Sao Paulo

Using the current model of distribution centre in the US, the map looks like:

It produces a total of 387.1kg of carbon. The average carbon per gram of product is 20.98 grams, with a minimum of 17.56 grams and a maximum of 25.36 grams.

If we then remodel using Hanoi as the distribution centre, the map looks like:

This model reduces carbon production by 306kg to 81.1kg. The average carbon per gram of product falls to 4.39 grams, with a minimum of 1.13 grams and a maximum of 9.26 grams.

If we ignore the supplier outbound leg (Vietnam to Erlanger) and just consider the order fulfilment leg, there are only 5 of 15 cities that are better served by the US. Those being London, Paris, Madrid, Frankfurt, and Sao Paulo.

If we consider the outbound leg (as we should), then all the cities are better served from Hanoi when compared to Erlanger. The average carbon saving across all cities is 20.4kg.

Consumer Education

The whole topic of Net Zero remains at risk unless we do more globally to educate consumers and pull them along with us. Most supply chains only exist to serve a consumer requirement at some point.

If we cannot influence the consumer to make better purchasing decisions, the work done in the background will not get the anticipated benefits.

The consumer is not currently engaged for two main reasons. Firstly, companies do not have the data to show the consumer the environmental impact of the products they are considering. Secondly, data that is presented to the consumer is not credible when challenged.

If we present credible options to the consumer at the point of sale, we could further maximize the benefits. For example, when the customer is considering delivery, we know that airfreight between Hanoi and Hong Kong will create 1.4kg of carbon. The delivery time is probably around 3 days. If we offer sea shipment as an alternative, whilst the delivery time will be extended to maybe 10 days, the carbon impact drops to 32 grams.

We need to present these options to the customer in a way they can visualize. Air freight would require a mature tree 51 days to clean the impact of the carbon produced. Sea freight would require the tree 1 day to fix.

And this is just one order. The company is claiming on it’s website that it has sold more than 30 million units of its t-shirts, which is one of its core products. If we assume that they all came from the Hanoi supplier and were delivered to the Erlanger distribution centre, it produces a carbon to weight ratio of 14.1 times.

Assuming that the produce weighs 250 grams, the total carbon produced by the supplier airfrieghting the goods is 105,750,000 kg of carbon. This would take 10.6 million mature trees a whole year to clean. This is equivalent to a 26,500 acre forest which is roughly the land size of Orlando, Florida.

Sometimes in isolation, these numbers don’t mean much. But when you start to visualize the scale of the impact, it becomes very real.

Costs Under Pressure

A common early objection is creating a distribution centre in Asia will be too expensive. Before we jump to this conclusion we need to factor in the total cost to serve in the current model and what that would look like in the future. The costs of shipping the goods to the US has been removed, and the fulfilment leg has been proven to be more efficient in many cases. This will reduce the cost to serve considerably.

The new inventory holdings should be lower as the products are closer to the customer which should reduce the working capital locked up.

And whilst we probably dont consider it today, we will in the future, and that is the cost of carbon mitigation. We have reduced our average carbon per gram of product from 20.98 grams to 4.39 grams, a reduction of 16.59 grams. If we scale this up to the 30 million units sold, we have significantly reduced our carbon impact and therefore our financial exposure to carbon mitigation.

This isn’t the only consideration. The company should be looking at nearshoring suppliers closer to the point of consumption across all regions. Reliance on one supplier or one country will not provide the resiliance and agility supply chains will need in the future. The company should be considering North Africa or Turkiye to serve Europe, Vietnam to serve Asia and Mexico to serve North America. Vietnam could also be utilized as a global supplier if its goods are seafreighted - this will allow economies of scale for stock that is not time critical.

This will further reduce the carbon produced but also provide an opportunity to migrate from air to sea for the final stage of fulfilment to the customer.

Conclusion

Delivering Scope 3 reductions is not just a sustainability objective. While the target is to reduce carbon produced within the supply chain, we must be realistic that we cannot fully eliminate carbon. Carbon will be produced, and the objective is to ensure we identify and optimize any areas where unnecessary carbon is identified.

Smarter distribution of goods is an area rich in opportunity for most companies.

Global logistical operators have solutions in this space, meaning it’s not something that companies need to tackle on their own.

The analysis contained within this article has been produced using Zero Pro, a dedicated collaboration, data management, and analytics platform supporting companies transitioning legacy supply chains to agile and responsive models fit for purpose in the modern business world.

To find out how Zero Pro can reduce your operational costs and improve time to value, email us at hello@zeropro.co.