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Author's profile photo Timm Hemmert

How to establish the Net Zero Supply Chain with SAP Solutions?

Situation

Today reducing carbon emissions to zero is one of the top priorities for most customers and organisations around the globe.

Becoming aware there is no planet B, ever more customers ask for products with a net zero carbon footprint. Global governmental initiatives, like Paris Agreement or COP26 drive global commitments. Lastly also the capital market shifts its focus to sustainable business models.

Reliable and timely carbon information in business processes is crucial but scarce

Responding to these trends, many companies currently aim to effectively reduce their carbon footprint – both on corporate and on product level.

Most organisations aim towards net zero carbon emissions over the next decades. Net-zero is a state in which the greenhouse gases going into the atmosphere are balanced by removal out of the atmosphere. It has gained significant traction, with net-zero pledges covering 16% of the global economy in 2019 and recently growing to nearly 80% committed to net-zero by 2050.

“To reach a state of net zero emissions for companies implies two conditions:

  • To achieve a scale of value-chain emission reductions consistent with the depth of abatement achieved in pathways that limit warming to 1.5°C with no or limited overshoot and;
  • To neutralise the impact of any source of residual emissions that remains unfeasible to be eliminated by permanently removing an equivalent amount of atmospheric carbon dioxide.”

(Source: https://sciencebasedtargets.org/)

 

Carbon emissions are commonly segmented in three scopes:

(Source: GHGProtocol.org)

  • Scope 1: all carbon emissions from own operations, like factories and intra logistics.
  • Scope 2: all carbon emissions related to purchased energy
  • Scope 3: all external emissions:
    • 1: upstream emissions related to all procured goods and services
    • 2: downstream emissions, related to lifecycle emissions of finished products

In this blog post we focus on scope 3.1 carbon, as here the supply chain and procurement functions claim a major lever to drive improvements through their sourcing decisions and supplier collaboration.

In some industries, like Chemicals, the upstream scope 3.1 carbon emissions relate to 70-80% of the overall corporate carbon profile.

It’s not easy for companies though to calculate their corporate carbon footprint. While it is already challenging to calculate the own carbon footprint (scope 1 and 2), it is even more difficult to calculate the carbon footprint of purchased goods and services. (scope 3.1).

A lack of globally harmonized carbon reporting standards and audit procedures leave companies with large ambiguity to interpret the carbon emissions reported by suppliers. Even more challenging is the lack of solutions to efficiently exchange carbon data across multiple supplier tiers on a product level in a secure way.

This leaves many companies currently with the pragmatic approach to calculate the scope 3 carbon profile, multiplying material spend or material quantities with category-specific carbon emission factors, procured from Lifecycle Carbon Assessment (LCA) Databases, like EcoInvent, GABY or CDP, and report them in an external carbon accounting solution.

While this helps to get a first estimate on the scope 3 carbon footprint, this is often not enough to effectively manage an intelligent enterprise towards net zero carbon.

There are two underlying issues:

  1. The carbon data, based on historic performance and benchmark values, usually does not reflect the exact carbon profile for a specific purchased product from a specific supplier at a specific point in time. This makes it difficult to measure, how collaborative carbon-reduction efforts with suppliers materialize in lower carbon results.
  2. To drive business decisions towards lower carbon options, accurate and relevant carbon product data needs to be seamlessly available within the business process context and part of the decision driving analyses.

How to address these challenges in a pragmatic manner?

How SAPs solution suite can help to run net zero carbon supply chains

For a few years now, SAP has been establishing a major focus on sustainable enterprise solutions.

The core idea is to enable SAP customers, to run their core processes in order to deliver on their goals for top line, bottom line and green line. Accordingly, at critical business process decision points, relevant carbon-related data is weaved into many SAP Intelligent Enterprise and Business Network solutions.

While much information has been shared already about the business value and capabilities of the various sustainability solutions in SAPs portfolio, in this blog post I’d like to take an initial stab to highlight how our solution suite modules can work together towards this objective.

Let’s discuss the process top down to understand the flow of scope 3 carbon information through the core processes and related SAP solutions from suppliers to customers.

 

(Source: SAP)

1.Suppliers

There are multiple ways to gather scope 3 carbon data from the supply market as well as to share with customers. LCA databases are a good fallback data source and triangulation point to validate supplier-provided primary carbon data.

SAP Business Network provides multiple options for digital carbon data exchange, depending on spend category and required capabilities:

 

SAP Network Solution Spend Categories Carbon Exchange Capabilities
SAP Business Network for Procurement All Exchange carbon attributes in RfX, ASN, Invoices down to material level
Concur Travel Exchange carbon profile of booked journeys
SAP Business Network for Logistics, Freight Collaboration Transportation Gather carbon per unit of material, related to utilized transportation capacity, mode and distance
SAP Business Network for Logistics,  Material Traceability All n-tier anonymized and secured carbon/certificate exchange on material level, using open communication standards, capable of batch handling; leverages distributed ledger technology.
Greentoken for carbon data exchange All (mainly Chemicals/ Food/ Automotive) n-level anonymized and secured carbon/ certificate exchange on material level by using principles of mass balance and tokenization; leverages distributed ledger technology; enables chain of custody and end to end provenance to trace bulk raw materials

 

This variety of data sharing options allows for category and industry specific use cases to exchange carbon information with value chain partners in a completely digital way, just as an additional attribute in transactional documents.

It appears obvious, that beyond carbon also further product specific information can be shared through these networks, for example to provide evidence of product origins, like certificates, or to show compliance with other sustainability objectives, such as human rights (refering to the Lieferkettensorgfaltspflichtengesetz in Germany).

2. Spend Management

The spend management (Source to Pay) process is the natural scope 3 carbon data ingestion channel for an organisation. Already today it is possible to digitally gather carbon data from suppliers within the RfX process in SAP Strategic  Sourcing Suite or SAP Product Sourcing (future functionality), down to material level, if needed. Further data ingestion points within advanced shipping notification (ASN) or invoice documents allow for revised and accurate carbon data later in the process. SAPs purchase to pay process (i.e. in SAP S/4HANA or SAP Ariba catalogues) also may offer carbon transparency on material & supplier level to the buyer to influence buying decisions, and actively reducing the corporate carbon footprint. From here, carbon information is transferred to subsequent processes and solutions, i.e. to calculate the corporate and product carbon footprint.

3.Corporate Footprint Management

Many companies  disclose their scope 1 and 2 carbon emissions on a corporate level to the capital markets already for many years. In future, this reporting requirement is likely to be expanded to scope 3 emissions as well within the SAP EHS Environment Management solution.

4.Product Footprint Management

Increasingly customers ask for specific carbon footprints of their purchased products and services.  The high media attention on the carbon backpack of electric vehicles is a case in point. Customers trust can only be achieved through full transparency on the specific carbon profile of a particular product. This however requires very high quality of scope 3 carbon data from the supply base, as well as sophisticated carbon allocation and accounting capabilities within the organization.

SAP Product Footprint Management solution has been developed for this purpose. The calculated data can be fed into a corporate carbon reporting solution, as well as shared with customers on product level, as input for their procurement process and carbon calculation.

While this approach might appear feasible for certain industries as of today, for others, such as specialty chemicals, it may still take some time to get to product specific carbon footprints, due to complex production processes, and related carbon allocation challenges to overcome.

5.Product Development

The product development function maintains not only a powerful lever to reduce costs through adjusted design and specifications, but also reducing the carbon footprint by diligently selecting the most suitable materials/components with the lowest carbon profile or adjusting recipes or bills of material (BoM). High innovation pace leads to many product variants and frequent cross-functional alignments in short time. To keep all parties working on the most current version of the product design, seamless process collaboration and data exchange of recipes and  BoMs between SAP Product Lifecycle Management (PLM) and SAP Intelligent Spend Management solutions is crucial.

6.Integrated Business Planning

The production process is another major contributor to the corporate carbon profile. How helpful would it be, to allocate customer orders toplants, not only optimized on time and cost dimension, but also incorporating the carbon perspective? Supply Chain Planners could take informed decisions, incorporating production process carbon as well as emissions, related to transportation modes and distances for certain planning scenarios, with the help of SAP Integrated Business Planning (IBP).

7.Sustainability Control Tower

Finally, with help of the SAP Sustainability Control Tower a company can manage all sustainability objectives and measures in one place.  Preconfigured reporting templates, compliant with external reporting requirements, allow to swiftly manage the organization in a sustainable way, chasing to zero for emissions, waste and inequality.

Some of the mentioned functionalities and interfaces to share carbon information between these solutions are still in development, others are already available for use today. Subsequent blog posts from SAP may shed more light on industry specific variants as well as the architectural setup options and roadmaps.

 

What is the transformation path to get to net zero carbon?

(Source: SAP)

1) Reporting on 1,2,3 scope emissions across an enterprise’s activities remains the foundation for all corporate climate strategies. Demands on data disclosure continue to increase, with regulations requiring carbon content disclosures (for example CBAM). With regards to scope 3.1 emissions, it helps to start with solid data transparency on the carbon baseline for key spend categories. On this basis the areas with the greatest improvement potential and lowest carbon abatement costs can be identified. Feasible objectives and measures are derived. While many companies often start with LCA benchmark data for most categories, they gradually evolve to increase the share of primary carbon data sources for strategic categories, depending on the supply markets and respective reporting standard maturity to share this information.

2) Interventions are needed to reduce emissions effectively. Companies must avoid creating new emissions, reduce their existing emissions, and potentially compensate those they cannot avoid or reduce. Operational measures to improve process emissions as well as recipe/BoM improvements to reduce structural product carbon emissions, and finally optimized logistical flows usually unlock the majority of carbon reduction potential.

3) Net Zero will be met through offsetting emissions in the external carbon market. Carbon as a traded asset is an increasingly fungible commodity in value chains – if assured and credible. Offsets are integral part of climate action, requiring certification and assurance in addition to a marketplace.

4) The global energy system is under pressure to decarbonize, transitioning from carbon-based to carbon-free power generation. For some carbon intensive industries, mitigation of emissions is not enough. The only way to survive in a low carbon world is reinvention of products, services and underlying business models.

5) Resilience will be both financial, as the external cost of carbon is increasingly priced, and physical. Physical resilience will be essential to avoid disruptions to operations and supply chains. The location of company assets and activities will be increasingly important to maintain business continuity and insurance.

 

Suggested next steps:

We understand that reaching towards net zero carbon is a continuous journey over many years. Most important is it to get started with a high-level but overarching approach, while increasing granularity and confidence levels of calculation approaches over time, until most of the spend base is covered.

It’s time to act now to capture opportunities and minimize risk with transparency on your emissions with a systematic approach.

In a first step, determine status quo for scope 1-3 emission, establish a cross-functional taskforce comprised of procurement, supply chain, sustainability, IT and finance. Engage in leading practice conversations with peers and thought leaders to get inspired to formulate and refine the own net zero carbon vision.

To get started, please feel free to view our webinar recording with Delf Bintakies, Head of SSHE Environment at Bayer AG about his experiences on the journey to net-zero carbon supply chains.

Should you have further questions about this topic please feel free to raise them in the SAP Community or contact the author.

Reference to further solution information:

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      2 Comments
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      Author's profile photo James Veale
      James Veale

      Thanks for the call out Timm - we are working hard at GreenToken to build that n-tier level of carbon and other GHG emission chain of custody, transparency and audit-ability. But as your article points out, we're just one piece in the puzzle and SAP is well placed to add value to our 400,000 customers, all of whom need to now or at sometime in the near future, be accountable for their emissions. James Veale - CoFounder    - GreenToken by SAP

      Author's profile photo Timm Hemmert
      Timm Hemmert
      Blog Post Author

      James, I totally agree and I am more than happy to see, how innovations like GreenToken provide the digital glue to build sustainable, transparent and protected value networks.