Redesign the value chain and source strategies

In late October 2023, WBCSD and BCG conducted a masterclass on this topic. This document summarizes the key learnings that were presented and surfaced via rich discussion among company participants under Chatham House rules.

Innovating and transforming value chains is key to decarbonize at the scale needed to achieve net zero and ensure long-term value creation. However, most companies are focusing on decarbonizing existing processes which will only reduce around 30-40% of emissions (i). To reduce the remaining emissions to achieve net zero, companies need to innovate their business models, transform their value chains, and incorporate sustainability as a core component of their organizational operations and processes.

Companies can innovate their business models and transform their value chains in multiple ways to accelerate decarbonization. Some of these innovation types are outlined below. To ensure robust and diversified long-term impact, companies could go beyond one type and pursue a combination of the following opportunities:

• Use “greener” sourced materials:

  • How to implement: Increase the sustainability of production inputs, products, or services (e.g., using regenerative agriculture, cleaner energy, or green mining).

  • Example: PepsiCo (1) procures many raw materials (e.g., sugar, wheat, etc.) for its food product manufacturing and works with suppliers who use precision agriculture (measuring and responding to in-field crop variability) and regenerative agriculture management techniques (farming approach that focuses on improving soil health and biodiversity) to ensure that these raw material inputs meet sustainability requirements.

• Decarbonize operations:

  • How to implement: Transform operations to increase efficiency and reduce emissions by implementing energy efficiency measures, renewable energy procurement, and deeper technological changes to material and process-related emissions.

  • Example: Cemex (2) is actively decarbonizing its cement production processes through several avenues. They are increasing energy efficiency in factories and sourcing energy from renewable sources. Additionally, Cemex is implementing more advanced technological measures, such as injecting hydrogen during the cement-making process, to enable better thermal efficiency and utilization of low-carbon fuel sources other than coal.

• Manage the full product life cycle:

  • How to implement: Take responsibility for the whole product usage cycle from creation to end-of-life (e.g., via recycling and circularity measures).

  • Example: Samsung (3) undertakes circularity efforts in its business by collecting used products from its customers and recycling the components to prevent hazardous substance pollution. These efforts also allow Samsung to repair damaged or old products that can be resold, as well as recover recyclable plastics and metals that can be used to make future products.

• Re-localize and regionalize the value chain:

  • How to implement: Shorten and reconfigure global value chains to be closer to the markets they serve (e.g., working with local farmers, sustainable transport of goods).

  • Example: Hindustan Unilever (4) works with ~10,000 entrepreneurial women farmers in India through its Project Shakti initiative on sustainable farming practices. Over 93% of the tomatoes used in Unilever’s local ketchup brand, Kissan Ketchup, come from these local farmers, rather than from other, more distant tomato-growing locations.

• Extend the value chain:

  • How to implement: Integrate vertically within the same or an adjacent industry to extend decarbonization impacts (e.g., companies can use waste byproducts as an input to another related value chain or acquire a piece of the value chain to control its emissions).

  • Example: Although traditionally a food equipment manufacturer, Bühler (5) leveraged its expertise in food processing, as well as adjacent competencies in insect rearing, to expand its scope to not only producing equipment, but also producing low-carbon alternative feed sources.

• Expand portfolio of sustainable offerings:

  • How to implement: Develop new low-carbon products and services that capture value in pricing, market share, and customer loyalty. For example, an automobile manufacturer could develop more models of efficient or electric vehicles.

  • Example: Sysco (6) is continuously improving its product offerings in line with health, wellness, and sustainability trends. It uses its Cutting Edge Solutions platform (CES) to evaluate and launch innovative products across its business units. For example, in 2022, Sysco released 14 new product offerings through CES, such as a 100% recycled fiber cup. Additionally, 25% of the suppliers participating in the CES platform prioritize plant-based food solutions.

  • Example: Schneider Electric (7) has moved beyond its hardware energy solutions to develop and pay-for-performance energy management solutions. Using the EcoStruxure platform, SE provides customers with both visibility into their energy consumption and tools to reduce carbon emissions. EcoStruxure leverages a unique combination of digital, IoT, analytics and applications to deliver powerful insights to customers and becomes “smarter” as data and machine learning collects over time.

• Leverage “green” brand to transform:

  • How to implement: Engage with customers in novel ways to shape preferences and monetize the full value of low-carbon products and services (e.g., through digitization or brand value proposition).

  • Example: Allbirds (8) has built its footwear brand with sustainability as the core ethos by focusing on natural and recyclable materials in all its shoes. To accelerate the scale of sustainable footwear production across the entire industry, Allbirds discloses its supplier list, the science behind its SweetFoam material, and shares an open-source carbon footprinting tool with competitors.

• Partner across sectors:

  • How to implement: Leverage existing or create new partnerships and ecosystems (e.g., alliances between chemicals manufacturers and textile manufacturers to produce low-carbon textiles). For more information, refer to ‘Building partnerships through alliances and co-investments’.

  • Example: The First Movers Coalition (FMC) (9) is an alliance that uses the collective purchasing power of its member companies globally to signal demand and scale up critical emerging technologies essential to the net zero transition. It is the only buying group across the full spectrum of hard-to-abate sectors, including aluminum, aviation, CO2 removal, cement and concrete, shipping, steel, and trucking.

Key innovation considerations:

To decarbonize effectively, companies should coordinate and collaborate between multiple departments within the organization (e.g., operations, engineering, R&D, finance, procurement. Well-defined roles, shared responsibilities, and incentives are key to mobilizing companies towards sustainability transformation.

It is also critical that procurement functions play a more strategic role to decarbonize at the scale needed going forward. Procurement teams have always held the budget and decision-making power for supply chains. However, given the importance of supply chain decarbonization, procurement should also take on a new, strategic role in implementing effective decarbonization programs by partnering with other internal departments, suppliers, and peer organizations.

Many companies are implementing holistic transformational approaches to scale decarbonization and ensure long-term value creation.

Schaeffler, a manufacturer of rolling element bearings for automotive, aerospace, and industrial uses, has implemented several types of innovation into its business to decarbonize by:

• Using “greener” sourced materials: Schaeffler uses ~1 Eiffel Tower’s worth of steel per day (~7000 tons), therefore reducing emissions from this input is a top priority for the company. Schaeffler recently established a partnership with a green steel start-up that uses hydrogen in the production of steel instead of emissions-intensive fuels like coal.

  • How they implement: The partnership works in three ways: by providing €100M in equity funding, by guaranteeing demand through long-term purchasing agreements, and by co-developing green steel technologies. This effort will help address the crux of Schaeffler’s supply chain emissions by systematically decarbonizing its most used raw material to have 95% lower carbon emissions than conventional steel (10).

• Managing the full product life cycle: Schaeffler leverages a network approach to its decarbonization efforts. By focusing on the three pillars of Green Purchasing, Green Production, and Green Products, Schaeffler instills an innovative mindset throughout the entire company, as well as its network of suppliers, to support the decarbonization journey.

  • How they implement: For example, to make “green” ball bearings, Schaeffler designs the product with green steel in mind, sources the green steel, produces it through energy efficient and low-waste processes, and ensures the bearings have longevity to prevent frequent replacements. The company has also fostered supplier engagement through setting up a Sustainability Summit for its suppliers. In doing so, Schaeffler is highlighting the value for supply chain transformation by including suppliers themselves as partners and active participants in the decarbonization journey.

• Expanding portfolio of sustainable offerings: Schaeffler is also taking on other strategies to redesign its value chain, such as by supporting the deployment of electric vehicle (EV) technologies by using its expertise in automotive manufacturing to develop both electric and hybrid drive systems. The company also seeks to complement these efforts by working on hydrogen fuel cells and electrolyzers.

  • How they implement: By insightfully forecasting sustainability trends, Schaeffler is able to capture early advantage from developing EV technologies. The company also has leveraged this foresight to think about innovative service options for repairing and refurbishing its products.

Apple is another example of a technology company showcasing holistic value chain redesign by:

• Decarbonizing operations: Apple is investing in more traditional approaches to decarbonize its supply chain and operations by using recycled materials, implementing energy efficiency programs, and procuring renewable energy.

  • How they implement: In China, where much of its supply chain operates, Apple has invested in >650 megawatts of renewable power via its China Clean Energy Fund since 2018 (11).

• Managing the full product life cycle: Apple emphasizes its low-carbon services and technologies, such as recycling and repair initiatives that allow mobile phone parts to be reused.

  • How they implement: Apple incentivizes consumers to participate in circularity programs by offering take-back services with credits toward a new purchases. Not only does this resonate with many Apple customers who seek upgrades to the most advanced, most trendy device, but it also facilitates emissions reduction by owning the product life cycle from cradle-to-grave. To note, given recent pushback on the negative emissions and waste from frequent device replacements, Apple is also grappling with how to incentivize its recycling program while encouraging thoughtful consumption. In addition, to further support the value chain, Apple has a Material Recovery Lab that fosters innovation to maximize the recovery of precious materials during recycling.

• Using “greener” sourced materials: Having reached ~100% renewable energy procurement, Apple has pivoted toward making its products themselves more sustainable.

  • How they implement: To this end, Apple has established a joint venture with Rio Tinto and Alcoa to produce low-carbon aluminum, which is the key structural component of most Apple devices. Although this new green aluminum has higher costs initially, Apple expects to leverage its brand and influence to achieve scale and lower the cost. It is also worthwhile to note that, while parts of low carbon aluminum technology have been around for many years, an industry driver like Apple was needed to bring this solution to market. This example highlights the value of partnerships in driving decarbonization action as well as the emerging trend of allowing greater inter-company, cross-industry collaboration on sustainability (For more information, refer to ‘Building partnerships through alliances and co-investments’).

• Leveraging “green” brand to transform: Apple is engaging its customers to make more sustainable choices by providing carbon footprint and other environmental information for each of its products, targeting carbon neutrality by 2030.

  • How they implement: Recently, Apple announced the carbon-neutral Apple Watch to support its 2030 goal to make every product carbon neutral by the end of the decade, including the entire global supply chain and the lifetime use of every device Apple makes.

Climate impact

Targeted emissions sources

Transforming the value chain through sustainable business model transformation can facilitate emissions reductions primarily in:

Scope 1 (of suppliers): emissions from heating

Scope 2 (of suppliers): emissions from electricity

Scope 3 (of purchasing company, primarily in these upstream categories, and for the supplier):

• Category 1: (Purchased Goods and Services)

• Category 2: (Capital Goods)

• Category 3: (Fuel- and Energy-Related Activities)

• Category 4: (Transportation and Distribution)

• Category 5: (Waste Generated in Operations)

Decarbonization impact

The decarbonization impact of helping suppliers reduce emissions varies by sector, based on the proportion of Scope 3 emissions, and rethinking the value chain represents a crucial component of addressing GHG emissions for most industries. Industries that are closer to the consumer will often have a higher proportion of Scope 3 (upstream and downstream) emissions than manufacturers and others further upstream in the value chain. Examples of these industries include:

• Apparel: ~85%+ Scope 3 emissions

• Biotech: ~75%+ Scope 3 emissions

• Food & Beverage: ~85%+ Scope 3 emissions

• Retail: ~90%+ Scope 3 emissions

Ultimately, all upstream Scope 3 emissions consist of the operational (Scope 1 and 2) emissions of a supplier somewhere in the value chain.

Business impact

Benefits

Beyond meeting decarbonization goals, effectively transforming value chains offers companies the following additional opportunities:

• Driving higher profitability and market valuations: In certain sectors, companies can achieve up to 50% of emissions reductions at low/no cost, while also capturing margin premiums that lead to higher profits (12). On top of this, companies that make value chain redesign a core business advantage can capture a ~10% valuation premium (13).

• Fueling market expansion and new business fields: Today, many consumers are willing to pay a premium for sustainable goods, so companies can experience growth outperformance for sustainable versus non-sustainable products. Further, companies acting early on low-carbon product and service offerings can likely capture the greatest benefit, which includes securing a larger market share, establishing brand loyalty among eco-conscious consumers, and setting industry standards that competitors may find challenging to match.

• Securing financing opportunities: Companies that pursue innovative low-carbon solutions can secure lower cost-financing and backing from investors aligned with longer-term sustainable strategies. Accordingly, companies may unlock new funding paths (e.g., green bonds, ESG-linked debt) to de-risk their value chain and facilitate innovative sustainable business model transformations.

• Reducing risks: Transforming value chains to become more sustainable helps companies reduce regulatory threats and ensure their license to operate.

• Attracting talent: Companies can attract top talent, given that millennials and Gen Z use corporate ESG considerations as a factor when selecting a job.

Costs

Cost is top of mind for many companies when thinking about innovative business models and transforming the value chain. The approaches below can help companies navigate any upfront costs to maximize value from the innovation transformations described above.

• Understanding the business case: Some emissions reduction measures, such as low-carbon product R&D and developing next-generation technologies, have an upfront cost that generate savings over time. However, corporate executives and board members generally operate on short 2 to 3 year timelines. To fully capture the value of low-carbon investments, companies must clearly understand positive business externalities of value chain transformation. Additionally, companies should shift their decision-making approach to enable early buy-in, rapid deployment, and higher return on investment, over a longer time horizon.

• Making well-rounded procurement decisions: Companies make procurement decisions based on value, not just price. For example, companies have traditionally considered quality, service level, safety, and ethical labor. Therefore, companies should not dismiss sustainable procurement options with a higher cost without comprehensively considering the added value it offers.

• Capitalizing on clear advantages: In many cases, sustainable supply chain offerings can be cheaper than their conventional counterparts. For example, using reduced packaging or smarter packaging can be both sustainable and lower-cost. The same can be said for optimizing transport networks, which can yield enormous cost and emissions savings.

• Viewing cost holistically: Many companies are focused only on upfront cost rather than looking at total cost of ownership (TCO). At present, when looking at TCO, many options that are sustainable may also cost less over their lifetimes (e.g., electric vehicles, including medium-duty). Therefore, procurement should consider TCO in its supplier decisions today.

• Using a shadow carbon price: Strategically, a shadow carbon price allows a company to operationalize its sustainability vision and level the playing field when making decisions internally.

• Resource scarcity and cost growth: As sustainable resources are becoming increasingly scarce, delaying sustainability decisions can lead to escalating costs. Therefore, companies should plan strategically when integrating climate into sourcing decisions.

Risks

• Supply chain disruption: Re-evaluating a company’s value chain strategy (e.g., by working with new low-carbon suppliers), can disrupt product availability and quality, delivery timelines, and customer satisfaction. These risks must be managed carefully.

• First mover risk: Being the first to innovate can introduce risks from uncertainty in technology or market feasibility, which may in turn generate organizational friction to adoption. There is, however, significant potential business advantage to be captured (e.g., by being the first to deliver sustainable products with high demand, and perhaps at a price premium). For companies to truly capitalize on these opportunities, they must exhibit a robust organizational commitment, fostering a culture that not only champions innovation but also ensures its seamless integration and execution.

• Concentrated costs along the value chain: Today, the cost of sustainable products is generally only ~2% more than current overall cost, and these costs are expected to decline further over time. However, these costs are highly concentrated in certain parts of the supply chain (e.g., green steel for automobiles). Consequently, procurement teams focused on these specific parts of the value chain need to think strategically and creatively about how to share these costs upstream and downstream (e.g., to customers), and well as among peers and competitors to overcome these cost barriers.

• To tackle the risks listed above, companies should consider opportunities to partner with other supply chain players. For example, companies can partner with their peers to share the technology development risks and costs, and set shared requirements for suppliers (see 'Building partnerships through alliances and co-investments').

To be successful at business model transformations and value chain redesign for sustainability, companies should consider:

• Creating great products first. As companies look to make their offerings and value chains more sustainable, they should make great products that are sustainable, rather than sustainable products for their own sake – sustainability needs to be an “and” not an “or”. First and foremost, customers want great performing products and services. Therefore, customers usually prioritize products that fit their needs that are also sustainable, rather than less sustainable ones. In the food industry, for example, customers may be most satisfied with a product that has top-notch health and nutrition qualities while also being sustainable. Popular and functional agave straw made from byproducts of tequila production is another great example of such products.

• Demonstrating value to suppliers: Innovative ideas can sometimes come from unlikely places. Companies can look to leverage suppliers’ experience and scale their ideas, rather than imposing ideas and recommendations on them. Not only does this unlock the potential for new ideas, but it also motivates suppliers by giving them agency in decarbonization. Additionally, to help instill a sense of ambition, companies can educate suppliers on why sustainability is important, frame the value of sustainability for suppliers (e.g., via cost savings), and share success stories that may inspire additional action and innovative ideas. (For more information on engaging suppliers effectively, see ‘Designing a supplier engagement program’).

• Approaching with foresight: To transform value chains effectively, companies should insightfully forecast industry, market, sustainability, and technology trends. Many basic extrapolatory forecasts can be incorrect and unhelpful, especially in fast-moving markets, such as sustainability, with multiple drivers. For example, as described by Harvard Business Review, younger generations are quickly gaining the most purchasing power within the US. Their purchasing behavior, and business outcomes by default, are highly driven by trust and values. As sustainability becomes top of mind for younger generations of consumers, companies must innovate with foresight to appeal to these demands. With an understanding of how markets may evolve, companies can identify synergies and common needs across companies and industries to develop solutions that can help secure business advantage.

• Adopting an innovation mindset: Companies should recognize that transforming the value chain and transforming the business model requires experimentation and testing to stay on track. Companies should adopt an innovation mindset, by trialing extensively and failing fast and often, to ensure the most effective approaches can be identified and implemented. In fact, the top 5% of successful companies excel with “agile” operating models and innovation-driven cultures (14).

• Embracing digitalization: 67% of companies cite the lack of access to relevant data as one of their key decarbonization challenges (ii). To create data transparency in the broader ecosystem and support long-term sustainability decision-making, companies can deploy AI and digital technologies (e.g., virtual sourcing, digital consumer diagnostics) that can help rapidly scale decarbonization action.

Footnotes:

(i) Note: BCG emissions reduction project experience

(ii) Note: BCG Global Survey on Retail Sustainability Maturity, N=150 respondents from 37 companies, March 2022