How can manufacturers be successful with sustainability, transparency, and authenticity?
Some of the questions we covered in the interview with Colin Elkins:
- Why manufacturers all of a sudden talk about sustainability, traceability, and authenticity.
- Whether legislation will force businesses to change?
- Some good and bad examples across various industries.
- How these developments affect the supply chain?
- How technologies such as an ERP can help food and beverage companies overcome challenges such as traceability.
- What makes IFS Applications different than other ERP vendors and products.
Question: So why are manufacturers suddenly talking about sustainability, traceability, and authenticity?
Those topics have been around them for many years, but one of the things that brought it to the fore is this pandemic that we have gone through. I think the first time, people have seen the effects of not driving vehicles, they have seen the effects of not traveling to work in traffic jams. Some examples in New York during the height pandemic, where we saw the air quality improve by 30% globally, across most of the major cities there was a 50% reduction in nitrous oxide.
My favorite story of all of them probably is in northern India, the pollution levels dropped so much that in the northern part of India they could see the Himalayas for the first time in 25 years. Imagine waking up one morning and seeing the Himalayas that you have never seen before, all you have seen is a misty fog.
I think the millennials are also driving the agenda. The millennials and the Z generations that are now coming into their 30s 35s. They are now taking management roles, they are investing, and they have always had this passion for sustainability, traceability, authenticity. There are a lot of examples of millennials saying that 75% of them are willing to pay extra for sustainable products.
These are not my figures, these are figures generated by various surveys and, we have also got legislation coming in, a lot of the retailers are now demanding sustainable products. There is a roundtable for the sustainability of palm oil where you cannot manufacture products unless you are using sustainable palm oils. A lot of the retailers are also very demanding of their customers. Walmart, for example, has various schemes going and I think the whole industry is starting to say: “yes we’ve got a part to play.”
Question: What about legislation, will businesses be forced to change?
Legislation is playing its part, certainly in some industries like the food industry, where you have to demonstrate some sustainability. Otherwise, a lot of the retailers will not take you seriously and I think we have all started to recognize that everybody has a part to play. We have seen the single-use plastics; we have seen some of the destruction that has been caused. Manufacturers need to think about their raw materials, sources of raw materials, and supply chains, because we have seen how volatile and difficult things can be when suddenly something like a pandemic happens.
We see that manufacturers are starting to take it seriously, and it is almost like a big supply chain. When somebody like a retailer demands something, then the supplier reacts, if the supplier reacts, then their suppliers react, then the grower reacts. It is a full chain through the whole manufacturing scale that people are starting to take it seriously and believing that we can make a difference.
More importantly, it generates more profitable businesses, which is the main reason for doing it. It is not all about being an eco-warrior and not cutting down the wet rain forest, it is about being a more profitable, sustainable business that people will want to invest in.
6 key pillars on why to embrace sustainability
I describe this renewed thinking and perspective towards sustainability as having 6 key pillars. All pillars are ultimately about saving costs and being more efficient, not about being an eco-warrior. There are many studies and examples that show that sustainable initiatives actually reduce costs, increase efficiency and profits.
Efficiency and cost savings
So, if you take a manufacturer today and start on this road of sustainability. It is very much like starting on the lean manufacturing principles that we had 10 / 15 years ago. The first thing it does is driving you to look at all your processes and products you are manufacturing. It drives you to maybe re-engineer those products such that you can bring some of the components back and you can recycle them. Which is saving you costs instead of taking virgin materials and converting them.
For example, if you look at the steam that is going out the side of the factory, you could ask yourself: “Well, why am I doing that? What else could I do with that? could I use it to reduce my heating bill”?
Shareholders and investment
The third pillar is the shareholders. If we look at the Investment in Environmental Social Governance, ESG funds as they are called, have gone up by 48% in the last few years. that is a significant amount. This also becomes evident if you look at the millennials who are investing; 9 out of 11 are saying they only want to invest in ESG funds.
Attracting and engaging employees
Your employees will want to work for a sustainable company. If you look at the Googles of this world, they do not find it difficult to get people to go and sign up to work for them. Many studies have been done on this. One at an American University, where they had three fictitious companies that the students could supposedly go and work for. 95% of them chose the one that had the most sustainable, ethics. It also boosts employee morale and reduces turnover, thus saving costs.
But also, you have this whole consumer public pull towards sustainability, that is pulling these customers or manufacturers to create these sustainable products.
This mindset and approach to sustainability also makes you innovate the way you manufacture. With newer, faster, and more economical methods of manufacture. Examples of companies doing this are 3M and Nike, both of whom embedded sustainability into its innovation process. By switching materials and production methods; Nike was able to reduce waste by 80% with its 1 billion-plus Flyknit line.
Improve risk management
My favorite story of all, for a very good reason, for having a sustainable product, is risk mitigation. The famous story in 1992 is about Perrier, who were a famous water bottle water manufacturer. They recalled 116 million bottles of water from 120 countries at a cost of 250 million pounds, which reduced their share price by 37%. They had some benzene in their water and did not know which batch It was, so, all their products, globally were just taken off the shelves at their costs.
They were eventually bought by Nestle and that is just one example and goes to show you that if you cannot track and trace your products, which is what they could not do, it might result in really bad consequences. And that is just one of many stories. If you Google it today, “recalls”, in America there are about three recalls every single day of the week.
In the end, all these key pillars are about profitability, they are all about risk mitigation, they are all about cost reduction.
Question: So, are some industries taking a more sustainable approach than the others, and if so why?
If you go back and you look at the companies and industries you recognize as being sustainable, you would say food and beverages are a good example. But also, some of the petrochemicals and chemical companies, which see their resources getting reduced. However, nowadays most manufacturers are starting to realize that this sustainability message is important.
Volvo has appointed a sustainability director, and they have targets reducing the amount of non-recyclable plastic within their organizations and their vehicles. I think BMW has quoted one of their vehicles being 100% recyclable.
Another example of this is from the new Fiat 500 advertisement. If you think about the Fiat 500, a brand-new model that comes with a television advert that costs thousands to put on primetime television. What do you think their message would be? Their message is that their seats are manufactured from 100% recyclable ocean plastics. Not how fast the car goes, how much it costs, what it looks like, but the fact that seats are manufactured from 100% recyclable ocean plastics.
Now that tells us a lot in terms of how the big manufacturers are treating sustainability, it is right at the front of their marketing campaigns and their businesses. The way they manufacture cars, and that has rippled down through the industry, everywhere.
Question: How will these developments affect the entire supply chain?
If you take a pump manufacturer, to give a weird example. Why would a pump manufacturer be interested in sustainability? I think for a couple of reasons because the water treatment plants will want to demonstrate that they are sustainable and will need pumps that come from a sustainable source.
So, the manufacturers are going to now start thinking about making their products and how they can demonstrate their sustainability credentials. When they do they are going to find that they will be able to have products that are recyclable and see a reduction in costs. Before you know it, everyone will want in on it and their competitors will pick up too.
Question: We looked at Perrier and how they failed to trace their water bottles accurately. How could technologies such as an ERP have helped them, and other food and beverage companies overcome challenges such as traceability?
We used the Perrier example, but it is not just the Perrier example. Their issue was they could not track which batch or batches contained the benzene. They did not know. It turned out that a cleaner was responsible for tipping the benzene into a container of the water plant. The problem was that they knew it was there, but they did not know which batches in the supply chain and which batches stopped at the retailers, had the problem.
Now if you take any ERP product today like IFS Applications, we can track all the raw material coming in, and everywhere it went, we know which machines it went through. So, if there was contamination from the machine, we know which machine, we know exactly what day it was done on, we have batch numbers, lot numbers, and serial numbers going out on the product. So, therefore, when there is a problem in the market, it is very easy to go back and be able to pinpoint the precise time or the precise batches that are responsible.
And not only that, if you think about an ERP system and what do they do, they bring data together. So, things like managing waste of overproduction over purchases, better planning, being able to look at your machine footprint in terms of its cost to maintain, its cost to drive in terms of power and energy. You are looking at your employee footprints, how are they coming to work?
Would it be better if they are all working from home? For obvious reason, yes it would because that reduces your eco-footprint. But it is also offering the structure within which people can deploy these sustainable projects. Very much like the old Kaizen style and all the things that people did in the lean manufacturing. Where you find a project, deal with it, fix it, move on.
And I think a lot of manufacturers are doing that at the design stage, at the processing stage, at the distribution stage, looking where they can take cost out. A lot of those costs coming out are purely because they are looking a little bit more deeply around what they are doing, and sustainably just falls into that category. In the end, with all that lovely data, you have proof.
You know when you are being audited by a retailer or a governing body or whomever. You have got the data there to say, “Yep, this is the raw material that came in and this is the raw material that came out.”
The RSPO for example, which is the roundtable for sustainability in palm oil. It requires you to demonstrate how much certified and non-certified oil you used. Moreover, the retailers will also demand a certain level. You need to be able to prove and track which products have certain ingredients in it that you are selling, but also how much, where, and when they were used.
Now, if you do not know these things, then you cannot prove it. And if you cannot prove it, you cannot certify it. If you cannot certify it, you will fail an audit, and if you fail an audit. You may miss a range review with a retailer, which means that you are not selling the product.
Question: IFS is not the only platform out there. What makes IFS Applications different than other ERP vendors and products.
IFS as an ERP product is different in a few ways. One, it is a complete solution, so it is on a single platform. So, it has HCM, it has finance, it has document management, and it has quality. It has all the modules, that perhaps if bought from another vendor, would not be coming from the same source. So, you are having to knit the data together, whereas with the IFS platform you do not.
Plus, the fact as a business and as an organization, we kind of take sustainability pretty seriously. We have a scheme running in Sri Lanka, which is more corporate social responsibility, where we are helping people in that country. We are building toilet blocks for them, we are painting schools, and we are doing that all because, as an organization, we take our responsibility seriously.
And I’m not saying all the other vendors out there do not do that, but I think IFS as an organization is very much geared around a working environment that is sustainable and has a responsibility to the rest of the population and its customers.
Question: We promised that we would be covering three topics, sustainability, traceability, and authenticity. We learned that traceability and sustainability are important, but what about transparency and authenticity? Can you share your thoughts on that?
Authenticity and transparency kind of go together in some respects. There are synergies between the two of them. If you take transparency, for example, recent research shows that 94% of consumers think that authenticity is important.
They want to know where their products are coming from. They want to know whether they are coming from a sustainable source. It is equally important from the manufacturer’s perspective, to be able to demonstrate that to the public who are purchasing. I can give you an example of Unilever, where its Sustainable Living brands grew 64% faster than their other brands.
So just by having that capability of transparency of their information to the public, they were able to grow their brands 64% more. It is about being able to demonstrate this proof of authenticity and transparency to the consumer. There are a lot of examples out there of how manufacturers can demonstrate this to users, whether it is on the label or whether it is on a QR code that they are scanning.
Authenticity is slightly different because there is a lot of product out there that is counterfeit. There are some interesting stats in the alcohol industry. It is said that 12% of all alcoholic drinks are counterfeit.
That is about a $1 billion worth of alcohol out there that is not coming from the primary manufacturer. So what manufacturers are doing about this? There are whiskey companies, specialist wine companies, and champagne companies, that are putting technologies like Near Field Communications (NFC) into the label. So that when you get close to one of these products with your mobile phone, a window pops up that tells you all about that product and where it came from. And these guarantee the fact that it’s an authentic product.
It has happened in the medicines industry in Europe, where every single packet now when it is manufactured it submits a specific serial number to a European database. When the pharmacy sells that product, the screen flashes up, showing whether that product has been sold before it has been sold. So, there are a lot of schemes going on to stop counterfeit products, because it is a big business.
It is also said that by 2026, at least 5.5 billion closures, that is closures on bottles, will have Near Field Communication. This will benefit the manufacturers, because not only are they demonstrating their products’ transparency, its sustainability, and its authenticity, but they have you on a mobile phone now. Meaning, they can then start pushing other information to you like, “If you’ve just bought this product, why not buy this product”?
So, there is this whole brand building, cross-selling type capability that you are getting from this authenticity that you can demonstrate. But it all comes down to whether you have the right data to back it up because that data is only going to be coming from your business systems.
Is there any other advice you want to leave us with?
Yes, I think there is just one, which is the fact that many manufacturers out there are just waiting for legislation. They’re waiting for somebody to say: “Right, unless you do this, we’re going to put the costs up or we’re going to fine you or put the legislation in place to make you do it.” The reality is it is highly unlikely that will ever happen.
Manufacturing is so diverse that to legislate against sustainability will be very difficult to do. Moreover, there is no evidence of this yet, but you may well find that there will be benefits in tax reductions or reductions in corporation tax if you can demonstrate a sustainable business.
So, I would advise not to wait until the law is changed because most likely it will not. In contrast, there are some big benefits to be gained when embarking on this journey.
Think about those 6 key pillars and all those cost reductions, all those schemes that make your brand and your business far more attractive to your customers and your consumers.