Greening the supply chain one business model at a time

Back to Research@SMU Issue 45

By Rebecca Tan

SMU Office of Research & Tech Transfer – Just think about the bunch of bananas in your home. To reach your fruit bowl, the bananas had to make a trip through the supply chain, going from the plantation to packing stations and refrigerated cargo ships waiting in the harbours of exporting countries. After a journey across the seas to their destination country, they are sent to ripening centres before being shipped to distribution points and finally to individual retail outlets.

All that transportation and storage generates greenhouse gasses, contributing up to 67 percent of the carbon footprint of each banana, according to an analysis by the Food and Agriculture Organisation of the United Nations. Thus, streamlining the supply chain – not just for agricultural produce but for everything consumers buy – is a particularly attractive way to reduce the environmental impact of human activities.

The question for many businesses is not so much about whether they should become more sustainable, but how. Making the supply chain more sustainable often requires a radical rethink of existing business models, shifting from sales to rental or re-negotiating relationships with retailers, for example.

In her research on sustainable supply chain management, Assistant Professor Buket Avci of the Singapore Management University (SMU) Lee Kong Chian School of Business (LKCSB) models the impact of innovative business models to help policy-makers decide on the right way to incentivise sustainable practices.

“Traditionally, supply chain management has been more about lowering cost, ensuring on-time delivery and reducing risks. Due to rising environmental costs and growing consumer pressure for eco-friendly products, there is a growing need to integrate environmentally responsible decisions into supply chain management,” says Professor Avci.

A victim of its own success

Becoming more sustainable, however, is not a straightforward process and can sometimes have unexpected results, she explains. A case in point is her research into whether using battery switching stations would promote the use of electric cars and thereby reduce both carbon emissions and dependence on oil.

“Almost 25 percent of all emissions come from ground transportation, but supply chain management has often overlooked the greenhouse impact of transport decisions,” Professor Avci says. “We wanted to see what impact the switching station business model would have on the environment.”

The switching station model, she explained, simultaneously overcomes two hurdles to electric vehicle adoption: the high cost of batteries and range anxiety. Costing around US$15,000 each, batteries make electric vehicles much more expensive than conventional gasoline-driven cars. In addition, with a range of about 100 miles per charge and a charging time of several hours, drivers face the prospect of running out of battery before reaching their destination, a concern termed ‘range anxiety’.

In theory, switching stations are a great idea. Unlike individual car owners, service providers renting out the batteries are able to benefit from economies of scale which help to lower the cost of batteries. Furthermore, having stations where drivers can simply replace their depleted batteries would also take the sting out of range anxiety.

However, the data tell a different story. Professor Avci’s model showed that while switching stations would indeed increase the adoption of electric vehicles and reduce the dependence on oil, they would not necessarily benefit the environment.

“This happens because the service provider, which is ultimately a profit maximising operator, eventually increases the adoption of electric vehicles to the point where it reduces the marginal cost of driving, making it very cheap to drive,” she explains.

“When we calibrated our model with actual data from the US, we found that using switching stations would make driving an electric vehicle cost just three cents per mile compared to ten cents per mile for conventional vehicles. This increased the demand for electricity, and depending on the source of electricity, could actually be more harmful to the environment.”

These counterintuitive findings were published in Management Science and also won Professor Avci second prize in the 2012 Production and Operations Management Society College of Supply Chain Management Student Paper competition.

The cost of risk

More recently, Professor Avci has turned her attention to how farm-to-table business models could make agriculture more sustainable. Together with her PhD student, Professor Avci has studied community-supported agriculture, where customers can subscribe to receive either a fixed amount or percentage of a farm’s output delivered to their homes.

“We modelled consumer choice about fresh food depending on the price and type of contract, either specified weight or proportion contracts. We also modelled the farmers’ decisions based on the type of contracts used,” says Professor Avci.

Just as the switching station model shifts the risk of running out of battery from the driver to the service provider, produce subscription services shift the risk of crop failure from the farmer on to the consumer. The model showed that because farmers on specified weight contracts still faced risks in fulfilling the orders, those types of contracts tend to cost more for consumers.

Making every drop count

In addition to calibrating the farming contract model with real-world data, Professor Avci is also working with LKCSB colleague Associate Professor Onur Boyabatli on Singapore’s integrated approach to urban water management, developing analytical models to find more sustainable sources of water and minimise costs.

“By investigating these different business models, we can find different ways to help suppliers invest in sustainability initiatives,” says Professor Avci. “Our research helps to develop tools to measure and allocate the gains and costs of sustainable practices, thereby helping policy-makers find the appropriate incentives to align sustainability initiatives across the whole supply chain.”

“When it comes to sustainable operations, we need to look beyond reverse logistics or re-manufacturing of returned products. We should keep our perspectives open and look at different players in the whole supply chain.”

Back to Research@SMU Issue 45