Supply Chain Sustainability: a dairy industry case study

Sustainability has become an increasingly pressing issue in supply chain over the last few years. Rethinking and re-planning the activities of companies from a sustainable perspective is no longer a voluntary choice – they have become a duty – and companies are now called upon to question their environmental impact.

Sustainability is now a factor in all business decisions concerning supply chain activities and processes, and not just in terms of the environment. Commonly known as Sustainable Supply Chain (SSC), where transparency and sustainability are keywords and fundamental components of new business strategies. This new direction carries a twofold advantage for companies: it allows them to structure and manage a sustainable, efficient, and responsive supply chain, as demanded by customers, and it ensures a resilient supply chain network.

As evidence of the rapid evolution of a market-oriented towards sustainability, in just a few years, numerous international and national guidelines have been defined and implemented for measuring environmental performance: the ISO 14001 standard, the EMAS scheme, and the GRI 4.1 guidelines, to name a few.

The role of simulation in supply chain environmental sustainability

Rapid changes in the business environment push managers to study competitors and defend market share. These changes, such as those regarding sustainability and social responsibility, increase complexity in company systems and the wider environment. In this regard, the use of simulation provides a systematic approach to typical supply chains challenges.

Simulation is different to traditional analytical tools and methods such as spreadsheets and linear programming. It is dynamic and provides greater opportunities for supply chain network design, analysis, and optimization. A supply chain simulation represents the logical rules of a network and, by allowing them to execute and interact over time, gives a dynamic representation of the supply chain network full of detail about the relationships between each element of supply chain network. The method can capture more detail and give deeper and more easily understood insights .

In this case, supply chain simulation allows the consideration of both traditional performance indicators and new objectives oriented towards sustainability. The approach models reality according to the desired level of detail using different variables. Specifically, simulation succeeds in describing how these variables behave and interact over time, giving insight into their causal relations.

As an example, the following are some action areas in which simulation can be applied effectively in the sustainability field:

• Production: designing and implementing new production paradigms based on the principles of the circular economy, such as reducing the amount of raw materials, re-using waste products, and using alternative materials with reduced environmental impact;
• Inventory: modifying inventory policies to leverage stock replenishment parameters with the result of optimizing transportation resource utilization while taking into consideration the costs and emissions deriving from the loading and unloading processes;
• Transportation: determining optimal volumes for transportation and which routes and means of transport best reduce CO₂ emissions;
• Distribution: designing the distribution network to increase supply chain environmental sustainability.

Several advantages come from employing simulation for analyzing supply chain environmental sustainability, including:

• Better representation of business reality, thanks to the introduction of variables with stochastic behavior that can describe processes subject to great variability;
• In-depth analysis of risks and opportunities linked to modifications of existing parameters or the introduction of new paradigms, enabled by the development of benchmarks between different models that can support decision-making processes;
• Optimization of relevant parameters to achieve optimal solutions valid only in the given context – that is, ‘ad-hoc’ solutions;
• Systems view of the network - allowing the capture of changes in business performance relating to changes in the supply chain.

Introduction to a dairy industry sustainability case study

In Italy, the food sector, which includes agriculture, the food industry, and distribution (including HORECA), is one of the country’s leading economic sectors with revenues over 500 billion euros. At the same time, it is also one of the most polluting. Estimates suggest that, overall, the sector is responsible for a quarter of the total CO₂ equivalent emissions produced by human activity, of which more than half comes from meat production. In addition, the agri-food sector also causes several other environmental issues:

• Soil depletion and erosion (caused by intensive farming and monoculture);
• Deterioration of water resources (caused by the use of pesticides and fertilizers, as well as inefficient ploughing and pasturing);
• Food waste and loss: in 2019, FAO has estimated a Food Loss Index of 14% worldwide, with serious environmental, economic, social, and ethical consequences.

Action is necessary, as demonstrated by the European Commission itself by launching the Farm to Fork (F2F) strategy. The goal is to turn the eurozone, including its food sector, into a model of sustainability. In this respect, this blog highlights possible improvements in the environmental performance of companies by acting on a company’s business strategy and showing the importance of supply chain sustainability.

More specifically, the case study focuses on the yogurt sector, which since 2020 has been giving increased attention to sustainable development, focusing mainly on the recyclability of the packaging used.

The methodological approach for increasing supply chain sustainability

The approach used in the case study is based on research and on the formulation of hypotheses necessary to create an initial scenario and subsequent improvement intervention scenarios. These scenarios are the result of development undertaken in supply chain simulation software anyLogistix.

For supply chain sustainability, software tools offer many possibilities. The starting case accounted for the following items:

• Distribution of customer demand and facilities (suppliers, factories, and warehouses) on the Italian territory;
• Production and inventory policies typical of the yogurt supply chain;
• Supply, distribution, and transportation logic;
• Economic dimensions (prices and costs) for the analyzed supply chain;
• Environmental footprint parameters of each process, such as consumption of resources (water and energy) and harmful emissions (measured in terms of equivalent kilos of CO₂).

The improvement strategies streamline the supply chain—replacing the materials used for primary and secondary packaging, and implementing production interventions that reduce the consumption of energy, water, and raw materials.

The improvements achieved with the alternative scenarios may not be valid globally; none of the proposed strategies should be considered the only viable solution. On the contrary, the results demonstrate how sustainability decisions must often consider all other impacted performance areas. With such an approach, the role of simulation clearly emerges as the most suitable.

This blog is exploratory, descriptive, and explanatory. The strategy and the approach used can be repeated for other interventions of the same type and need adaptation only according to the sector considered and the desired performance objectives.

Case study: the yogurt supply chain

Initial situation

The supply chain in the case study is structured based on examples from the most important companies in the Italian dairy sector, with features appropriately adapted to the simulation context.

Figure 1 — Logical scheme of the yogurt supply chain considered in the study.

The main characteristics of the supply chain model are:

• Upstream in the production chain, there are two suppliers: one for supplying the raw materials (milk and powdered milk) used to produce yogurt, while the second supplies materials for primary packaging (jars), secondary packaging (cartons/trays), and tertiary packaging (plastic film for palletization);
• Six distribution centers serve the Italian territory. They receive pallets from the factory supply retailers;
• Downstream in the supply chain, the end customers (retailers) receive pallets with packaged yogurt, ready to be placed in stores and sold;
• In addition, a disposal station for products that reach their expiration date or are no longer sellable;
• All transport is considered and takes into account the best trucking routes.

Figure 2 — Supply chain modeling with anyLogistix simulation software.

The simulations carried out on the supply chain model highlighted critical areas for improvement regarding sustainability:

• Waste equal to 6.4% of total consumable yogurt production and expired yogurt production equal to about 0.3% of total production;
• High consumption of water and energy throughout the supply chain;
• High CO₂ emissions in production from the use of packaging materials with a high environmental impact.

Supply chain sustainability improvement opportunities

Five sustainability-oriented strategies identified in the development of the ultimate scenarios:

• Strategy 1: Cogeneration Plant, establish a cogeneration plant to increase the efficiency of energy consumption, reducing the energy used in production;
• Strategy 2: Primary packaging, two alternative scenarios involving the replacement of plastic jars with paper or glass jars. Both scenarios assume an FTL type procurement policy is applied as well;
• Strategy 3: Secondary Packaging, the replacement of the cardboard trays that contain three packages of finished yogurt with a cardboard box that can contain six packages of finished yogurt; in this case, an FTL type procurement policy is applied as well;
• Strategy 4: Tertiary Packaging, using an innovative spray glue to fix cardboard boxes on pallets, completely replacing plastic film;
• Strategy 5: Inventory Policies, modifying inventory policies to reduce warehouse stock, stock concentration in the factory warehouse, and a reduction in warehouse days of coverage.

Lastly, a final overall 5-year scenario progressively included all the strategies to observe the overall contribution of the individual strategies over time. In particular, the order of implementation of the strategies is as follows:

• Year 1: Secondary and Tertiary Packaging;
• Year 2: Primary Packaging (excluding jars scenario);
• Year 3: No implementations (results monitoring);
• Year 4: Cogeneration Plant;
• Year 5: Inventory Policies.

Simulation results for different supply chain sustainability improvement scenarios

Analysis of the individual scenarios highlights the improvement in environmental performance derived from implementing the strategies described above.

Figure 3 — Benchmark of the principal performance derived from the simulation runs.

In summary, the main findings for supply chain sustainability are:

• The Cogeneration Plant strategy showed a reduction of almost 30% in energy consumption compared to the baseline scenario;
• The Primary Packaging (paper) scenario shows a significant reduction in water and energy consumption for the packaging supplier, as well as a reduction in CO₂ emissions at the level of individual supplier and, consequently, also at the final production level (due mainly to the replacement of plastic with paper in primary packaging). Finally, given the transportation FTL policy, there was a decrease by 15% in supply transport shipments;
• Secondary and tertiary packaging strategies show an almost 50% reduction in secondary packaging and a decrease in supply chain losses. Finally, in the scenario where glue is employed, the use of plastic in tertiary packaging is eliminated;
• The Inventory Policies strategy shows a significant reduction in inventories throughout the supply chain, resulting in a decrease of nearly 50% in product losses within the supply chain.

Each strategy applied individually leads to significant improvements in performance and a more sustainability-oriented supply chain. But, the progressive implementation of strategies over five years gives the best reduction in CO₂ emissions, water, and energy consumption.

Figure 4 — Evolution of sustainability and competitiveness performance over time.

In particular, after decreasing over the years, in the fifth year, the synthetic indicator that links total emissions with profitability is 20% lower. This is due to a reduction in emissions linked to production at the manufacturer and the packaging supplier, as well as a reduction in supply shipments.

Figure 5 — Detail of some sustainability-related indicators derived from simulation runs.

Achieving supply chain sustainability

This case study demonstrates that improvements in sustainability are possible without the need for a major project. That even minor interventions, organized in line with a sustainability strategy, can lead to satisfactory outcomes in the medium to long term. As shown in the different scenarios, a crucial requirement for success is coordinating company strategy and sustainability goals. Once the strategic and environmental sustainability visions are aligned, improving one or more sustainability KPIs, such as reducing CO₂ levels or the energy required for processes, can lead to widespread benefits.

Finding and realizing the benefits of these sustainability strategies required a supply chain simulation model. The model allowed accurate assessment of the strategies and their interactions across the supply chain. It showed how it is necessary to adopt a systematic approach to improving a supply chain because the effects of a decision can occur in areas outside those in focus.

Simulation is an increasingly common tool for analyzing and designing supply chain changes. To learn more about how it provides a valuable addition to traditional analytical approaches, download our Supply Chain Simulation and Optimization Overview.