Kaan Katircioglu, Ph.D. Supply Chain Sustainability Research Lead

1. Supply Chain Sustainability Management:Solutions & Lessons Learned from ImplementationsCan Green and Lean Go Together?Reducing Costs in International Supply Chains and Trade LogisticsWorld Bank Workshop, December 13, 2010, Washington DC Kaan Katircioglu, Ph.D. Supply Chain Sustainability Research Lead Business Analytics & Mathematical Sciences Department IBM T.J. Watson Research Center, Yorktown Heights, NY 10598 kaan@us.ibm.com

2. Pawan Chowdhary Solution Architect, IBM Research (Watson) Supply Chain Sustainability Research & Solution Team Mary Helander, Transportation Analytics Lead, RRM for CP IBM Research (Watson) Kaan Katircioglu, Solution & Client Relations Lead, IBM Research (Watson) Lin Li Inventory Simulation Lead, IBM Research (Watson) Karthik Sourirajan Analytics Lead, IBM Research (Watson) Youssef Drissi Sustainability Lead, Dashboard IBM Research (Watson) Karthik Subbian Solution DB Operations Management & ESRI Lead, IBM Research (Watson) Marvin Qiu Network Analytics Lead, IBM Research (China Research Lab) Takashi Yonezawa Vehicle Routing Problem Lead, IBM Research (Tokyo Research Lab) Pitipong Veerakamolmal Project Manager, GBS

3. In order to achieve UN CO2 target by 2050, we will need cars that can travel 250 miles per gallon Only transportation by itself will emit 3 times the UN target in 2050 World economic growth = 227% (at 2.5% annual rate 2050 98 billion tons of CO2 2007 30 billion tons of CO2 UN recommends 70% CO2 reduction 2050 9 billion tons of CO2

4. There is a need for a comprehensive carbon management solution for supply chains with an end-to-end view. • Supply options • Substitutable component choices • Sourcing choices • Location choices • Supplier consolidation • Inventory policy options • Safety stocks • Lot sizes • Planning frequency • Replenishment programs (e.g. JIT, VMI) • Inventory policy options • Packaging options • Energy options • Process options Suppliers • Component options • Inventory policy options • Packaging options • Energy options • Process options Component Supply • Packaging options • Package size options • Package recycling options • Corrugated box • Styrofoam • Plastic • Paper work / manuals Levers $ CO2 • Process Options • Order fulfillment process • Manufacturing process • Shipment process • Quality control process • Organizational management process • Demand/supply planning • Shipment Routing • Transportation options • Energy options Assembly Manufacturing • Inventory policy options • Packaging options • Energy options • Process options $ CO2 Levers Distribution • Shipment Routing • Transportation options • Energy options $ CO2 • Energy options • Oil • Diesel • Hybrid • Ethanol • Natural gas • Other • Transportation options • Modes • Shipment frequency • Load consolidation • Vehicle routing • Shipment Routing • Transportation options • Energy options Customers

5. As fuel efficiency of automobiles increases, supply chain emissions will gain more importance Supply chain carbon can surpass total life time driving emissions Note: Assuming a car travels 12,000 miles per year at 30 miles per gallon efficiency

6. Comprehensive Carbon Accounting & Compliance • How to generate credible carbon data to help product design? • How to integrate product design and supply chain planning for carbon optimality? • How to trade-off carbon with other supply chain costs? • How to measure carbon and participate in carbon exchanges? • Green-Based Sourcing & Transportation Strategies • What is the carbon footprint of each component? • How much does each component travel? • How do alternative sources differ in their carbon efficiency? • Supply Network Design • How to optimize supply networks when carbon costs are significant? • How to trade-off manufacturing and transportation related carbon? • How to get accurate carbon data to help redesign supply networks? • Supply Chain Risk Assessment and Management • How to assess a supply chain’s risk exposure to climate change and regulations? • How to manage/control risk? • How to ensure compliance with future possible different types of regulations? Supply Chain Carbon Management Problems

7. Solution 1: IBM Global Logistics Carbon Management Solution

8. We developed a web-based solution to measure and manage our logistics CO2 and cost INPUT Data includes: • Order transaction level data • Shipments • all plants • all customers • all geographies • Carrier and mode information • Committed dates for calculating SLA performance • Shipment and product weights for CO2 calculation • Freight charge for cost calculation OUTPUT Data includes: • Freight Cost • CO2 emissions • Weight transported • KmTons travelled • Transportation cost efficiency ($/ton) • CO2 efficiency (kg/kmton) • Ability to drill up and down by carrier, customer, site, product, lane, transportation mode, etc.

9. AMER to EMEA shipments account for the largest CO2 emissions followed by AP to AMER and AP to EMEA shipments

10. Every 5% package weight reduction gives 0.7% savings and the largest total savings come from SPD and pSeries products, Guadalajara and ISTC sites 25% package reduction can reduce transportation CO2 emissions by 3.5% (5800 tons), and cut costs by 3.6%

11. If replacing air shipments by ocean shipments were acceptable this would reduce freight cost by 66% and CO2 by 93%

12. Using trucks with low CO2 fuel cannot achieve any significant CO2 reduction since air shipments are by far the major contributor to the total emissions < 0.5% CO2 reduction

13. Voluntary carbon exchanges do not have prices high enough to make large carbon reduction investments economical (yet) • Chicago Carbon Exchange has much lower prices than European Exchange • Even at European prices, carbon cost is only 3% of total cost of transportation + carbon • In many cases, making big investments to reduce carbon may not be economical given the option of purchasing certificates on the exchanges • Any significant government regulation dictating strict quotas can be expected to drive the carbon prices multiple times higher.

14. General Recommendations for Transportation CO2 Management • Analyze internal and external shipment transactions regularly and look for valuable business insights. • Identify opportunities to avoid air shipments • Use levers to shift to slower, cheaper & low CO2 modes • Use local inventory to compensate for longer lead times • Negotiate less strict delivery requirements with your customers • Think about ways to improve your carrier’s “load factor” • Consolidate shipments from nearby sites and across departments • Consider consolidating shipments with neighboring companies

15. Solution 2: Supply Chain Sustainability Management Solution

16. A New Supply Chain Challenge! • Operational / Financial Challenges • Supply chains are getting more complex • Need for faster access to more accurate information is every increasing • Supply chain optimization needs to span all supply chain operations • Tight integration with suppliers and customers is needed for better planning and execution • Existing software solutions are not completely integrated • Global slow down made cost minimization a matter of survival • Uncertainty in energy costs make it difficult to meet P & L targets • Environmental Challenges • Consumers are becoming more green conscious • Government regulations are becoming more stringent • Cost of not being green is increasing due to competitive moves • GHG emissions measurement standards are young and evolving • Existing software solutions are rudimentary • Understanding and quantifying the impacts of supply chain operations on sustainability is a new and ongoing science • There is a need for an end-to-end model of supply chain that can quantify trade-offs between environmental and financial metrics and optimize policy decisions

17. SEEDS has an enterprise data model & connected analytics to quantify trade-offs of end-to-end metrics How can I reduce my CO2 emissions? How can we reduce our costs? What if?... What if?... What if?... What if?... Operations Managers Director of Sustainability CFO Office Cost-to-serve By vendor, customer, site, SKU, product group, process, geo etc. Sustainability Metrics By site, operation, SKU, product group, geo, etc. Supply Analytics Transportation Analytics ANALYTICS Sustainability Analytics Cost Analytics Common Data Model A N A L Y T I C S A N A L Y T I C S P&L – Revenue Analysis By vendor, customer, site, SKU, product group, geo, etc. Inventory Metrics By site, SKU, product group, geo, etc. Inventory Analytics Revenue Management Analytics ANALYTICS Customer Analytics Procurement Analytics What if?... What if?... How can I increase inventory turns? How can we improve our P & L? Supply Chain Ops What if?... CEO Office What if?... Operations Managers

18. A pilot implementation with McKesson, a Fortune 20 Company Vendors McKesson’s supply chain > 30 sites > 25,000 customer locations > 2,000 suppliers > 30,000 products > $100B revenue > $8B inventory > $1B profit Solution Objectives • Link operational decisions to “Board Room” view (P&L impact estimation) • Model sustainability in broader sense (operational, financial, environmental) • Integrate key supply chain planning areas in one model (inventory, network, routing) • Create an inventory of all energy using equipment and quantify energy use in relation to supply chain decisions • Provide extensive “what-if” analysis to help establish cost effective sustainability policies Regional DC Regional DC Executive Policy P&L Impact Energy & CO2 optimization Network optimization National Whole Sale Warehouses Inventory optimization Vehicle routing optimization Local DC Local DC Operational Metrics Operational actions Others Independent Retailer Large Customers National Whole Sale Stores Customer clusters

19. Examples of sustainability questions our solution can address • What is my carbon and cost by operation, by site, by product, by customer, etc? • How can I optimize my supply network structure, inventory policies, truck routes from cost and CO2 perspective? • How can I benchmark energy and cost efficiency across sites / operations / products etc.? • What is the impact of making changes such as the following on costs and CO2 • supply chainflow for selected products • inventory policies for selected products • sourcingfor selected products • network structure • mode of transportation • alternative fuels in the fleet • solar panels ona selected warehouses • Upgraded forklifts, conveyer belts, or refrigerators inselected warehouses

22. The solution offers state of the map based reports (ESRI + SpotOn + Cognos Technology)

25. General Recommendations for Combined Transportation/Warehousing CO2 Management • Understand and quantify cost and CO2 implications of your supply network structure and operational policy choices • Look for warehouse locations where clean energy is available without prohibitive cost implications • Quantify and optimize cost and CO2 trade-offs between carrying inventory and transportation • Air shipments may be not be so bad from CO2 perspective if they provide significant opportunity for centralizing inventory (risk pooling) and therefore eliminating local warehouse use • Help your customers understand the cost and CO2 implications of stringent service requirements

26. Lessons Learned • Including CO2 costs in the optimization problems will generally fail to result in meaningfully different solutions since CO2 exchange prices are too low • Under current circumstances, social responsibility has to be the driving force behind CO2 emission reduction efforts! • Any CO2 reduction initiative must be an end-to-end supply chain affair • “Genuine” collaboration is an absolute requirement amongst the supply chain partners • A well established CO2 accounting methodology is a must for quantitative models to be helpful

27. Thank you!Q & A