Q&A: how should procurement tackle net zero?

Will Green is news editor of Supply Management
26 January 2022

Raising inventories and diversifying suppliers are among the investments companies may have to make in order to reach net zero ambitions, according to a report.

The wide-ranging report on the challenge of achieving net zero, by McKinsey, said work to limit the global temperature rise to 1.5C would increase costs and firms would have to employ strategies including partnering with suppliers to address this.

McKinsey has calculated it will require global capital spending on physical assets and land-use systems of about $275tn between 2021 and 2050 to reach net zero.

For companies the challenge could involve redesigning products, building new low-emissions businesses, revamping production processes, adjusting supply chains, and forming new partnerships.

“Building out supply chains to support the kind of step change in deployment needed requires not only significant capital and the right capabilities but also extensive coordination,” said the report.

“To produce low-carbon technologies at a cost that permits their broad uptake, companies may need to develop capabilities through partnerships that are not part of existing value chains or through new business ecosystems.”

It added: “More broadly, new partnerships with innovators and suppliers will be crucial to securing new forms of low-emissions inputs and driving innovation.”

Companies will need to identify opportunities to pass cost increases along the value chain, including partnering with suppliers to lower costs and charging customers a “green premium”.

“Government and business would need to act together with singular unity, resolve, and ingenuity, and extend their planning and investment horizons even as they take immediate actions to manage risks and capture opportunities,” said McKinsey.

1. What performance indicators should a company use to track and manage operations?

  Emissions indicators may need to be established as operating metrics, in addition to traditional metrics.

  New data sources and measurement techniques may need to be instituted to track emissions across all operational activities (scopes one, two, and three).

 

2. How can a company achieve efficient and cost-effective operations?

•  Own operations may need to be transformed to reduce emissions.

•  Operating costs, including input costs, may change as a result of decarbonisation efforts by the company and its suppliers.

 

3. How can a company make its own operations and supply chain more resilient?

 Business operation and supply chain volatility may increase as a result of physical climate risks, and from the climate transition (eg, shortages of key mineral resources, production capacity that may be insufficient to meet rising demand).

  Investments may be needed to make own operations and supply chains more resilient to these shocks (eg, raising inventory levels, diversifying suppliers).

 

4. What should a company’s sourcing strategy be? How should it interact with suppliers?

•  Manufacturing low-emissions products may create a need to work with new suppliers.

•  Closer collaboration with suppliers may become necessary to lower a company’s supply chain emissions.

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