Sustainability in Warehousing and Inventory Management

Sustainability has increased in prominence due to increased environmental impact of warehousing and inventory management.

Sustainable Warehouse

Sustainable warehouse is about integrating, balancing and managing the economic, environmental and social inputs and outputs of the warehouse operations. Sustainability is a core value to many businesses but they find it hard to implement in their current business setting especially when they use third party logistics management system like warehousing and distribution in their supply chain business network.

With the implementation of a more aerodynamic trailer, DHL realized fuel and CO2 savings of up to 12%. Companies who brought down their carbon footprints saw a direct increase in profitability as a result. The report shows carbon gas reduction between 13-22% uplifted revenue by 5-20%. Brand value also increased an average of 15-30%.

Manish Bapna, Executive Vice President and Managing Director of the World Resources Institute, says there are three driving factors pushing companies toward sustainability, but profitability isn’t actually one of them. In a Forbes article, Bapna lists reputation, risk and opportunity as the drivers.

Reputation is due to the growing scrutiny companies are under from customers, investors and the media. People want to see sustainability efforts and are willing to spend their hard-earned dollars with companies that prove they care. Risk is a result of environmental factors that could impact supply chains – things like the increase in natural disasters and other recent extreme weather events, which can cause millions of dollars in lost productivity if operations are suddenly shut down. Opportunity comes in the form of uncovering hidden efficiency and cost savings. Just look at the revenue boost those 25 multinationals experienced when cutting their carbon footprints.

LEED Certification

LEED certification, which is focused on buildings, is the sustainability initiative most applicable to warehouse services. The sustainability categories, with a brief listing of a few of things contained in that category, include:

• Location And Transportation – Is the warehouse near public transportation? Is it located in such a way that it does not damage endangered species?
• Sustainable Sites – During construction, was vegetation is maintained in its natural state? Are there rain water mitigation programs in place? Has the building minimized heat island effects (for example, by not having too much pavement)?
• Water Efficiency – Has irrigation for landscaping purposes been minimized? Is water being used efficiently inside the building?
• Energy and Atmosphere – Is the warehouse using energy efficient equipment? Minimizing energy demand? Using sustainable energy?
• Materials And Resources – Were renewable materials use to build a facility? In an existing building, is the warehouse purchasing cardboard with recycled content for packaging?  Is it purchasing materials for ongoing operations, like light bulbs, that are energy efficient?
• Indoor Environmental Quality – Is this a comfortable environment for employees to work in?

LEED certification can apply to buildings that are being newly constructed or existing buildings.  There are different criteria for the two different situations, Corey believes both paths to certification are equally stringent.  However, my search of the site showed large 3PLs were much more likely to have version 3 certification for new construction, and these sites tended to be in warm climates where presumably energy efficiency has a higher ROI.

To achieve the lowest level of certification a company must score 40 points.  Corey pointed out that this involves tradeoffs.  For example, a warehouse in a hot and humid climate could be using fans to attempt to cool the warehouse on some of the hottest days of the year.  This would improve their Energy and Atmosphere score.  But it would adversely impact their Indoor Environmental Quality score.

If a shipper’s procurement team did value LEED certification, but what they most cared about was energy efficiency, they could examine how many of the 40 points were based on the Energy and Atmosphere category.

But, based on the fact that no major 3PL is undergoing this certification, one possible explanation would be that few procurement professionals are aware that the newest LEED certification schema has created a category for warehouses that makes this process easier.

Sustainable Inventory Management

Over the past decades, inventory management has become a well-studied area from an economic point of view. While inventory systems are optimised to reduce costs, the social and environmental impacts of inventory systems are ignored. However, in the last few years, growing pressure from customers as well as governments leads inventory systems to address sustainability issues. In fact, being more sustainable is a crucial issue in inventory systems. Optimising an inventory system by considering the triple bottom line (TBL) (i.e. financial, environmental, and social) is a challenge from both academic and applied point of views.

Managing inventories, and thereby material flows, is of key importance for achieving efficient and sustainable supply chains. Green inventory management is characterized by complementing the traditional economic (cost) focus with environmental (emissions) considerations. It involves categorizing the costs and emissions of operating an inventory system into those associated with: ordering and transporting items, holding items in stock, and not satisfying customer demand on time.

From a short term perspective, the upfront expense of sustainable products appears to be more than traditional materials. Although this initial investment seems daunting, the lifecycle cost of sustainable building outweighs the initial cost from a long-term perspective. These buildings are more efficient and on average save 30 percent annually on energy and water usage. Home owners or facility managers can use these savings to quickly replace the funds needed for the upfront costs. The longevity of these products, especially for a commercial or public space, provides an economic advantage because they are less expensive to maintain and repair.

While the market for these products becomes more competitive, the price will begin to level out with traditional products. As consumers begin to identify more with green products, developers are recognizing the commercial value of sustainable buildings and answering this demand by investing in sustainable products. In return, green buildings have higher resale worth and drive consumer interest because they are built with a sustainable thought process in mind.

The supply, options and cost of sustainable products are only a few of the benefits that green building offers developers and consumers. While consumers grow more willing to adopt this new construction movement, suppliers are expected to put more emphasis on embracing the changes in inventory management to satisfy the demand from customers.

Closed Loop Inventory Systems – In an open-loop system, there is no feedback. Inputs are calculated based on desired outcome only. An example of open loop management in high-tech operations is setting inventory levels, production schedules, and supply chain plans based on just sales forecasts and orders. A closed-loop system, on the other hand, is one that is controlled based on both desired outcomes and feedback from the system. Applying this principle to the former example, would mean that inventory levels, production schedules, and supply chain plans are determined not just by sales forecast and orders, but also feedback from ongoing operations.

Having a closed loop system provides the following advantages over an open loop system:

• Disturbance adjustment (such as actual yields and cycle-time)
• Guaranteed performance even with model uncertainties (No supply-chain planning model matches the real supply-chain perfectly)
• Reduced sensitivity to communication errors (developing the plan is one thing, but errors can develop when communicating it, especially to trading partners)
• Improved reference tracking to plan

The study of returned item inventory management in a closed-loop supply chain system has become an important issue in recent years. So far, investigations about inventory decision making in a closed-loop supply chain system have been confined to traditional forward and reverse oriented material flow supply chain.