The better the question.
How can supply chain efficiency help tackle China’s pollution challenges?
GE wanted to help its suppliers to build a greener supply chain
China is assuming an increasingly prominent role as a global leader of anti-pollution efforts, and is setting an example with its domestic approach, too. Its 13th Five-Year Plan puts the environment front and center, with targets for 2020 including:
- A commitment to ensure “good” or “excellent” air standards 80% of the time
- A reduction of heavy air particles by 18%
- A 15% reduction in nitrogen oxide and sulphur dioxide emissions
These commitments come with an expanded suite of enforcement powers for regulatory officials. In total, the 13th Five-Year Plan aims to reduce China’s total carbon emissions by 251 million tons of carbon equivalent (tce). However, in a country of nearly 1.4 billion people, and in which regional governments still have considerable autonomy, centralized policy has limited reach. Increasingly, the state needs the help of the private sector to meet environmental targets.
Could a small solution solve a big problem?
Any solution begins with a better understanding of the problem. Unfortunately, many businesses have little visibility into exactly how they are consuming energy, water or raw materials, and what that consumption is costing them. This is unsurprising. Big manufacturing and industrial operations can have tens of thousands of energy-intensive pieces of equipment. How many of them are consuming electricity while idle? How efficiently are they operating? How much energy is being used per unit of productivity?
Answering these questions is difficult but not knowing the answer, and therefore the actual losses, could be significant. For example:
- Heating facilities account for 12% of energy use in manufacturing industries.
- An air compressor left powered on, but not operational, still uses about 70% of its power.
- Faulty door seals can increase the rate at which industrial refrigerator units use power by 11%.
The good news is that with the proliferation of smart technology, today’s managers have an expanding toolset at their disposal to understand how their facilities are operating. This new stream of data can help managers optimize their operations with new technology and digitized processes. Often, that means the installation of energy efficient systems for everything from lighting to a manufacturing assembly line. As business guru Peter Drucker famously said: “What gets measured, gets managed.”
Building a green business supply chain
But there’s a catch. These solutions often require significant expertise and upfront capital to successfully implement. It can cost millions to install energy efficient distribution systems, and these might not start delivering returns on that investment for years. This means that, for many small- to medium-sized enterprises (SMEs), such solutions remain out of reach.
This is certainly true for China’s 11 million small and medium-sized factories, despite the Chinese government’s proactive stance on pollution reduction. These businesses consume 60% of the country’s energy output, and they want to respond to the Chinese Government’s push for greater energy efficiency, while also taking tangible steps to reduce their operational costs and grow their businesses. But they often lack the management experience, technical know-how and access to financing to retrofit energy efficiency initiatives, and get the corresponding benefits.
GE wanted to remedy this. The company works with several thousand suppliers in China, many of whom operate these smaller factories. But rather than phasing out the most energy inefficient suppliers, GE instead asked us to investigate how it could help these SMEs build better supplier chains, thereby improving the GE supply chain, and helping the Chinese government hit its energy reduction targets?
The better the answer
A collaborative ecosystem
With EY’s help GE devised and launched the Green Supplier Initiative (GSI)”
GE realized it could not provide a total solution on its own, one that would address all the technical and financial obstacles facing its suppliers. So, in 2015, the Green Supplier Initiative (GSI) was launched to facilitate energy efficiency initiatives among its Chinese suppliers.
To design this, GE sought the help of like-minded organizations, with interests in improving business efficiency and sustainability. GSI was the result of a series of workshops, we designed and ran in collaboration with the Lawrence Berkeley Institute and the GE Asia Sustainability Team. The team developed a business and program model that could bring together the necessary stakeholders into a single ecosystem – that gives small suppliers access to the technical, financial and governmental network and resources they need to pursue energy efficiency solutions.
“It’s an ecosystem that brings together government officials, finance institutions, energy experts, GE and GE’s suppliers to help expand China’s energy efficiency market,” says Hamish Gilder, a leader in our China Supply Chain Practice. “In our pilot, we selected three of GE’s suppliers and analyzed what solutions would work best for them, whether that meant upgrading the lighting systems, installing solar systems or digitizing the manufacturing process.”
In addition to helping build the ecosystem, we also undertook data modelling work which assessed what the impact of efficiency drives would be on GE supplier operations, and on China’s carbon reduction efforts as a whole as the program expanded. It also looked at whether advising on and implementing these solutions for other businesses could become a new revenue stream for GE.
How EY can help
ESG and sustainability
Integrate ESG and sustainability into business strategy, and improve and communicate performance to stakeholders with help from EY teams.Read more
The better the world works
A less polluted world
GSI is showing that business can help China hit its emissions targets
No single organization can confront industrial pollution by itself. Only through the collective action of multiple organizations and individuals, each making small steps toward a shared goal, can such problems be overcome. But getting this process going requires commitment from both private and public interests, alongside access to the systems, network and infrastructure that can enable its success.
The GSI showed that the will and the ability to hit these targets exists. By bringing together relevant stakeholders into a single, total business model solution, we enabled hitting these targets to become a reality.
“The GSI is driving the future of green manufacturing in many ways,” says Qin ZhiGang of GE Corporate. “It’s enabling innovation within a Chinese policy framework. It's building resilient networks between the Government and enterprises, between upstream and downstream industries. And finally, it’s helping all its businesses embrace the possibilities of the era of connectivity and big data.”
Businesses need to access a complex ecosystem of knowledge and expertise for China to make the emissions savings to realize its 2020 targets.